Corporate governance can be defined as the process and structure used to manage organizations, and it

can be referred to as how those organizations are directed and controlled; how policies and laws are
designed; and how the control environment affects the overall performance of entrepreneurial activities
in an economy.

Corporate governance answers the question of how the business of the bank is governed and helps to
define relationships between the bank’s management, its board, its shareholders, and other
stakeholders.

It helps to set corporate objectives and a bank’s risk profile, aligning

corporate activities and behaviors with the expectation that
management will operate the bank in a safe and sound manner and
run day-to-day operations within an established risk profile and in
compliance with applicable laws and regulations (Kim & Rasiah,
2010).
The principles or standards of corporate governance set the nature of the relationship among
shareholders, members of the board of directors, managers, employees, and other corporations and
persons with whom the company has business links.

It mainly protects the rights of the company and its participant groups and specifies their obligations.

the study examined the current corporate governance practices of

private commercial banks in Ethiopia in comparison with
international best practices of OECD principles, Basel committee
guidelines on banking supervision and local commercial laws and
National Bank of Ethiopia directives.
Thus, the focus of this paper is on the major dimensions of the
corporate governance system, which are shareholders, the board of
directors, executives, supervisory organs and other stakeholders, risk
management and internal control, and disclosure and transparency.
Based on those factors, the study comprehensively assessed the
corporate governance practices of privately owned commercial banks
in the country in light of OECD principles and Basel committee
banking supervision guidelines.
this paper tried to assess the broad range of corporate governance practices based on the directives,
laws, and principles laid down by the NBE, the government of Ethiopia, and international organizations
such as the Basel Committee and OECD. This will help the banks to take lessons from the assessment to
strengthen theire best practices, improve on the gaps identified, and also point out areas that need
further study.

• GeneralObjective
The general objective of this paper is to assess the level of corporate governance practices in
private banks in Ethiopia against the requirements set by the government, the supervisory
authority (NBE), and recommendations forwarded by internationally accepted organizations
(OECD, the Basel committee, and other major multinational organizations).

• SpecificObjective

Keeping the general objective in mind, the study will try to address
the following specific objectives:
• To assess how sound the practice of the owner is to good
corporate governance;
• To investigate if there is a level playing field or fair competition
between the
private bank practice
• To investigate the practice of the bank’s BoD characteristics
(nomination, size, composition, responsibilities, and
qualifications) with respect to the governing rules and guiding
principles;
• To assess the risk management and internal control practices of
private banks,
• To assess the disclosure and transparency practices of the bank,
• To investigate the role of employees of private banks in achieving
sound corporate governance practice.
• To evaluate the results from the study and make
recommendations to the management of private banks on how to
improve the extent of the application of the good corporate.
• Research Questioner
To what extent are corporate governance principles from international best practices like OECD
Principles and Basic Committee guidelines on Banking Supervision and NBE practiced in private
commercial banks in Ethiopia?
• What is the overall corporate governance practice of private commercial banks?
• What factors contribute to good corporate governance practice in the workplace?
• What is the use of corporate governance practice in the general activity of the bank?
• How can we handle rules and regulations to create a conducive environment to practice
 corporate governance?
• Significance of theStudy
Research studies are mainly conducted either to solve practical social problems and/or add valid
knowledge to the existing ones .The issue of corporate governance is very critical for an
organization, especially service-giving organizations like commercial banks.

• Scope of theStudy

This study was limited to private commercial banks operating in

Ethiopia. and the real nature of agency theory is hardly observed in
government banks. Major corporate governance stakeholders are not
found in government banks either. are no public shareholders in
government banks, all shares are owned by the government; this
indicates a lack of agency in the governance structure. As a result,
government banks will be excluded from the study..
• Limitation of theStudy

The main problem during the survey period was a shortage of data. This is primarily due to the fact that
the board chairmans and other board members were mostly unwilling to provide the necessary
information, and some were absent or had difficulty contacting the board chairmans and other board
members. T

Agency theory

corporate governance mechanisms such as boards of directors and

audit committees enable shareholders to closely monitor the activities
of managers. Board structure (such as: board size, board gender
diversity, educational qualification of board members, general and
industry-specific experience of board members, and audit committee
size as considered in this research) has relied heavily on the concepts
of agency theory, focusing on the controlling function of the board
(Habbash, 2010).

the focus of stewardship theory is on structures that facilitate and

empower rather than monitor and control (Davis, Schoorman, &
Donaldson, 1997). the board of directors plays an advisory and
supportive role instead of controlling the managerial opportunities
(Davis et al.1997).

• Resource Dependency Theory

According to this theory the primary function of board of directors is

to provide resources to the firm and they are viewed as an important
resource to the firm. Directors are considered as a provider of
resources to the firm, such as information, skills, business expertise,
access to key constituents such as suppliers, buyers, public policy
makers, social groups as well as legitimacy.

Therefore, the agency theory concentrates on the monitoring and

controlling role of the board of directors, whereas the resource
dependency theory focuses on the advisory and
The directors' role in firm management whilst stakeholder theory
focuses on relationships with many groups for individual benefits,
resource dependency theory concentrates on the role of board
directors in providing access to resources needed by the firm

• Corporate Governance and the Special Nature of Banks

Banks' assets and activities are opaque, which results in the difficulty
of monitoring them. Banks are also a ready source of fiscal revenue.
At the extreme, governments own banks. Actually, banking is not the
only regulated industry, and governments own other types of firms as
well. However, even countries that intervene little in other sectors
tend to impose extensive regulations on the banking industry (Levine,
2003).
Corporate governance for the banking industry is of even greater
importance to the international financial system and merits the
attention of stakeholders and countries due to the important financial
intermediation role of banks in an economy and their high degree of
sensitivity to potential difficulties arising from ineffective corporate
governance and the need to safeguard depositors’ funds. governance
Corporate practices are critical to achieving and maintaining public
trust and confidence in the banking system, which is critical to the
proper operation of the banking sector and the economy as a whole
(Basel Committee on Banking Supervision, 2006).
Therefore, the unique nature of the banking firm, whether in the
developed or developing world, requires sound corporate governance,
which encapsulates both shareholders and

be adopted for banks. This led to government intervention in order to

control the opportunistic behavior of bank management (Arun &
Turner, 2004).

• Board Composition and Performance

As it is known, the board of directors is in charge of representing

shareholders’ interests by ensuring that shareholders have reliable
information regarding corporate performance, risks, and prospects
and that management undertakes activities that enhance shareholders'
interests (Keasey, 2005). Thus, it is the official first line of defense
against managers who would act contrary to shareholders’ interests.
Most "best codes of practices" suggest that the typical corporate board
is composed of 8 to 16 directors. Larger, more mature companies tend
toward the higher end of the range, while smaller, growing companies
lean toward the lower end with appropriate board compositions. The
purpose is to have a breadth of expertise in order to deal effectively
with the issues confronting business.

• CEO Duality

The existence of duality gives the chief executive officer of an

organization a chance to manipulate the agenda on the table.
According to Kaen (2003), a very real threat to the exercise of
 independent judgment by the BODs is the dual role of the CEO as
board chairperson. This gives the top management official of the
corporation the opportunity to simultaneously serve as the chairperson
of the board, who is in charge of monitoring and evaluating the same
top management. This dual role would seem to suggest a certain
conflict of interest. Recent studies state that the roles of chairman and
CEO should be split, with the division of responsibility between them
clearly agreed and set in writing.

operations. Primarily, the bank has four major committees composed of the audit, nominating,
risk and compensation committees.

• Nomination/Appointment Committee

The nominations committee oversees the appointment of board members and ensures that the
process is formalized and transparent

• Audit Committees

The three main objectives of audit-committees are to increase public

confidence in financial information; assist directors (particularly non-
executive directors—NEDs) in meeting their responsibilities in
respect of financial reporting; and strengthen the independence
position of a company’s external auditor by providing an additional
channel of communication.

• The Risk Management Committee

The main responsibilities and duties of the risk committee are to

advise the full board on risk management; emphasize and demonstrate
the benefits of a risk-based approach to internal control; and reinforce
control consciousness by setting appropriate internal control policies;
seeking regular assurance that the system is functioning; reviewing
the effectiveness of internal control; and providing disclosures on
 internal controls in annual reports and accounts.
In banking organizations, the risk committee monitors the principal risks that the bank is facing,
including those that management may not be aware of or may be underestimating

• Corporate Governance Principles

• Basel Committee on Banking Supervision- Principles

external auditors, as well as other control functions, in recognition of

their critical contribution to sound corporate governance.
Principle 6.Ensuring that compensation policies and practices are
consistent with the bank’s ethical values, objectives, strategy and
control environment
Principle 7. Conducting corporate governance in a transparent manner

Principle 8. Maintaining and understanding of the bank’s operational structure, including

operating jurisdictions, or through structures that impede transparency

• OECD Principles of Corporate Governance

The Principles of Corporate Governance of the Organization for

Economic Cooperation and Development (OECD) were originally
developed in response to a call by OECD Ministers in 1999 to
develop a set of corporate governance standards and guidelines.Since
then, it has become an international benchmark for policymakers,
investors, corporations and other stakeholders worldwide. The
principles are intended to assist governments in their effort to evaluate
and improve the legal, institutional, and regulatory framework in their
countries. The OECD has identified the following corporate
governance principles based on some common elements.
• Ensuring the Basis for an Effective Corporate Governance
Framework
• The Rights of Shareholders and Key Ownership Functions
• The Equitable Treatment of Shareholders.
The Role of Stakeholders
 • The Rights of Shareholders and Key Ownership Functions
• The Equitable Treatment of Shareholders.
• The Role of Stakeholders in Corporate Governance
• Disclosure and Transparency
• The Responsibilities of the Board

• Conceptual Framework

Based on the overall review of related literature, the following

conceptual framework in which this specific study was governed has
been developed. In this study, CG was taken as a dependent variable
while board characteristics (size, composition, qualifications,
committees and responsibilities), audit independence, senior
management, supervisory authority, stakeholders, disclosure and
transparency, risk management, and internal control functions were
taken as independent variables. The relationship of the variables for
this study is presented as follows.

Corporate Governance Background

(Board Characteristics Nomination, Size, Composition, Qualifications, Committees,
Responsibilities)

Disclosure& Transparency Senior Management

Corporate Governance
Shareholders

Risk
Management &
Internal Control
Functions

Figure 2.1 Conceptual Frame work

• Empirical Literature Review
 • Corporate Governance Practical Review

Good governance reduces the waste of resources and improves firm

performance. Jensen and Meckling (1976) define value-decreasing
activities as managerial perquisite consumption, corporate resource
theft, and inefficient investment. Corporate governance plays an
important role in enhancing firm value by reducing such activities.
Shleifer and Vishny (1997) show that better-governed firms are more
likely to invest in profitable projects, resulting in more efficient
operations and higher expected future cash flows. The theory predicts
that better-governed firms deliver higher shareholder value. As a
measure of firm performance, many recent empirical works use firm
value (usually proxied by Tobins Q or market-to-book value),
operating performance (usually proxied by ROA), or stock returns.
These findings are generally consistent with the prediction of a
positive association between corporate governance and firm
performance.
On the other hand, a great number of studies reviewed the relationship
between corporate governance variables and the performance of firms
in various economic contexts, but the results from these studies have
been found to be inconsistent. In spite of the generally accepted
notion that effective corporate governance enhances firm
performance, other studies have reported negative relationships
between corporate governance and firm performance (Bathala and
Rao, 1995; Hutchinson, 2002), or have not found any relationship to
address some of the aforementioned problems; it is recommended to
look at corporate governance and its correlation with firm
performance. From these studies, conceptual and empirical evidence
on corporate governance mechanisms such as board size (Park and
Shin, 2003; Prevost et al., 2002; Singh and Davidson, 2003; Young,
2003) meetings, audit committee, board composition, and board
compensation are summarized and discussed below in relation to firm
performance.

• Audit committee
An audit committee is an important corporate governance mechanism
in firms to protect the interests of shareholders and oversee financial
reporting (Mallin, 2007). Chan and Li (2008) find a significant
positive relationship between Tobin's Q and audit committee
independence. Hamdan, Sarea, and Reyad (2013) examine the
relationship between audit committee independence and firm
performance of 106 financial firms listed on the Amman Stock
Exchange Market from 2008 to 2009, finding that audit committee
independence has a significant influence on firm performance.
Nevertheless, Al-Matari et al. (2012) argue that although a positive
relationship between audit committee independence and firm
performance is expected and that an independent audit committee can
reduce agency problems, there is no relationship between audit
committee independence and marketing performance. The results
reveal that audit committee composition has no effect on firm
performance in the selected sample..
• Board activity intensity
The effect of the activity of a board yields either proactive or reactive
results. The nature of the association between board activity intensity
and firm performance is not clear. Some contend that board meetings
are beneficial to shareholders. For instance, Lipton and Lorsch (1992)
suggest that "the most widely shared problem directors face is a lack
of time to carry out their duties". In a similar argument, Conger et al.
(1998) suggest that board meeting time is an important resource for
improving the effectiveness of a corporate board. Ntim and Osei
(2011) found that there is a significant and positive association.
There is a relationship between the frequency of corporate board
meetings and corporate performance, implying that boards that meet
more frequently tend to generate higher financial performance. By
contrast According to an early empirical investigation on board
meetings by Vafeas (1999), he found an increase in the level of board
activity through board meetings following poor firm performance, and
this subsequently led to an improvement in the firm’s performance.
• Board’s efficiency
The role of a board is the internal corporate governance of a firm
(Fama, 1980). A board is also a control system in a business (Fama
and Jensen, 1983). A board of directors that efficiently supervises
management decisions will improve the firm's performance. The
board members are educationally qualified and very experienced.
Doing so requires each board member to be fully equipped with
management knowledge such as finance, accounting, marketing,
information systems, legal issues, and other related areas to the
decision-making process. This requirement implies that the quality of
each board member will contribute significantly and positively to
management decisions, which are then translated into the firm’s
performance (Nicholson and Kiel, 2004; Fairchild and Li, 2005;
Adams and Ferreira, 2007).
• Board Independence
Jo John and Senbet (1998) argue that a board is more independent if it
has more non-executive directors. Empirical results have been
inconclusive as to how this relates to firm performance. In one breath,
 it is asserted that executive (inside) directors are more familiar with a
firm’s activities and, therefore, are in a better position to monitor top
management. On the other hand, it is contended that non-executive
directors may act as "professional referees" to ensure that competition
among insiders stimulates actions consistent with shareholder value
maximization. (Fama, 1980).

CHAPTER THREE
• Research Design and Methodology
• Background of the Study Area
In this study, the researcher used non-probability sampling techniques and purposive sampling
techniques to select the study area, and four banks were selected from private-owned banks. The
selection considers their seniority and the financial performance of the years 2021–2020 G.C.