CORPORATE GOVERNANCE REFORM WITHIN THE UK BANKING INDUSTRY AND ITS EFFECT ON FIRM PERFORMANCE

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Abstract

Using a corporate governance scorecard (Corp-Gov Score) measuring twenty-six areas of corporate governance best practices in four UK banks, this study examined whether improved levels of corporate governance led to higher levels of firm performance within the UK banking industry over the time period 1999-2006. The twenty-six measures were split into four sub-sector areas of Corp-Gov Score comprising Board of Directors, Remuneration Policies, Auditing Policies, and Transparency/Disclosure Policies. Using both correlation and regression analysis on the information extracted from the Annual Reports, the study provides evidence about the extent to which UK banks have complied with recent corporate governance reforms post Enron. The results indicate that improvements in corporate governance can enhance the performance of UK banks when measuring using Return on Equity. The biggest sub-sector driver of this improvement is in the area of the Board of Directors. Our results further indicate that large boards within UK banks can have a negative impact on firm performance, and that increases in directors’ remuneration does not lead to increased levels of firm performance. Evidence is given that corporate governance within UK banks plays an important role, but how it affects firm performance is open to debate.

Keywords: Corporate Governance, Firm Performance, Corp-Gov Score, Return on Assets, Return on Equity, Board Size, Directors’ Remuneration

How to cite this paper: Okike, E. & Turton, A. (2009). Corporate governance reform within the UK banking industry and its effect on firm performance. Corporate Ownership & Control, 7(1-4), 456-470. https://doi.org/10.22495/cocv7i1c4p3