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Key Determinants of Corporate Governance in Financial Institutions: Evidence from South Africa

Author

Listed:
  • Floyd Khoza

    (School of Development Studies, Mbombela Campus, University of Mpumalanga, Mbombela 1200, South Africa)

  • Daniel Makina

    (Department of Finance, Risk Management and Banking, Muckleneuk Campus, University of South Africa, Pretoria 0002, South Africa)

  • Patricia Lindelwa Makoni

    (Department of Finance, Risk Management and Banking, Muckleneuk Campus, University of South Africa, Pretoria 0002, South Africa)

Abstract

The purpose of this study was to examine the key determinants of corporate governance in selected financial institutions. Using South African financial institutions as a unit of analysis, namely insurance companies and banks, the study employed a panel generalised method of moments (GMM) model using a data set for the period from 2007 to 2020, to assess key determinants of corporate governance proxies identified for the study. The study sampled 21 South African financial institutions composed of Johannesburg Securities Exchange (JSE) listed and unlisted banks and insurance companies. To measure corporate governance, the study developed a composite index employing the principal components analysis (PCA) method. The findings revealed a positive and significant association between the corporate governance index and its lagged variables. Furthermore, a significant and positive link was found between the efficiency ratio and corporate governance index and capital adequacy ratio (CAR); corporate governance index and firm size; corporate governance index and leverage ratio (LEV); and corporate governance index and return on assets (ROA). However, a negative and significant correlation was found between financial stability and the corporate governance index. The link between return on equity (ROE) and corporate governance was insignificant. A small cohort of financial institutions was excluded because it was challenging to obtain complete annual reports to extract the required data. The study was limited to only five corporate governance measures, namely board diversity, board size, board composition (independent non-executive directors and non-executive directors), and board remuneration. The findings are anticipated to persuade developing countries to pay special attention to how corporate governance is measured.

Suggested Citation

  • Floyd Khoza & Daniel Makina & Patricia Lindelwa Makoni, 2024. "Key Determinants of Corporate Governance in Financial Institutions: Evidence from South Africa," Risks, MDPI, vol. 12(6), pages 1-13, May.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:6:p:90-:d:1405170
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    References listed on IDEAS

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    1. Benjamin Mwanzia Mulili & Dr. Peter Wong, 2011. "Corporate Governance Practices in Developing Countries: The Case for Kenya," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 2(1), pages 14-27, February.
    2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    3. Nazim Hussain & Ugo Rigoni & René P. Orij, 2018. "Corporate Governance and Sustainability Performance: Analysis of Triple Bottom Line Performance," Journal of Business Ethics, Springer, vol. 149(2), pages 411-432, May.
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