Study On The Relationship Between Corporate Governance And Performance Of Chinese Listed Banks

The corporate governance of commercial banks has gradually been a universaltopic since mid-1990s, along with the Asian financial crisis in1997and the globalfinancial crisis triggered by the sub-prime mortgage crisis in2008. This issue hasbecome a key factor which related to economic stability and development of a nationand even the whole world. Though China’s banking system performed well in thefinancial crisis in2008, there are still many problems in their corporate governance tosettle, such as high proportion of state-owned equity and independence insufficiency ofthe Board, etc. These problems need ongoing investigations. However, on one hand,general corporate governance conclusion does not apply to the banking industry forbanking business has many particularities. On the other hand, foreign banking studyingachievement does not apply to Chinese banking industry because China’s economicenvironment and system is different from those of the other countries. Therefore,learned from foreign theories and methods, an empirical study of China’s commercialbanks’ corporate governance on a full analysis on the particularities is necessary.This paper focus on the effect of corporate governance on performance of Chineselisted banks. Start from theoretical basis of corporate governance, this article researchinto the governance particularities of banks from the internal and external governancestructure, and carry out a theoretical analysis about the effect of governance structure onbank performance which lay the foundation for the following empirical design. Then,the article analyze the status of China’s listed banks’ governance from the ownershipstructure, the board governance, the supervisory board governance and executiveincentive base on the data found from annual report of2011, and dig out their problemsto complement the following empirical analysis. Finally, the paper analyzes empiricallyusing the mixed data of2007-2011to find the relationship between bank corporategovernance and its performance in real practice through statistical models, and putforward improvement suggestions. As theoretical analysis shows that externalgovernance mechanism does not play an effective role, there is only internal governancevariables put in the empirical analysis.Through theoretical and empirical analysis, this paper draws the followingconclusions:(1) in the respect of ownership property, the state-owned shares restrict thebanks’ risk control ability and profitability, but the shares are positively correlated withliquidity. This shows that state-owned shares also have some positive effects. we should promote the diversification of the equity structure rather than blindly reducingstate-owned shares. In the respect of equity structure, the largest shareholding ratio isonly has positive correlation with profitability, and the proportion of the top tenshareholders has no significant impact on the performance. The largest shareholder onlyconcerned with their own interests, and other large shareholders pay scant attention tobank performance. This kind of ownership structure does not really adapt to bank’scharacteristics of high leverage and high debt.(2) the size of the board and theproportion of independent directors does not exert an influence to the bank’sperformance, the board of directors does not really play a role in risk control, liquiditycontrol and profit increase so far.(3) The scale of supervisory board is positivelycorrelated with the risk control ability, negatively correlated with liquidity, and has noeffect on profitability. The board of supervisors exert well effect to its coreresponsibilities, but supervision mechanism with supervisory board at the core is notbeen established yet.(4) The executive pay does not have significant relationship withprofitability and risk control ability, but negatively correlated with liquidity. Theincentive system of listed banks does not play an active role, but restrict the bank’soperating performance. The listed banks need to explore more effective compensationincentives.According to the conclusions，the article makes several suggestions to improvebanks’ corporate governance:(l) adjust ownership structure and encourage ownershipdiffusion,(2) strengthen board independence and control size,(3) clarify the duty andstrengthen the power of supervisory board,(4) adjust salary structure and emphasize theexecutive’s long-term incentives.