Corporate Governance, Performance and Liquidity Risk: Insights From WAEMU Banks

Abstract

Over the past two decades, several corporates collapses and scandals led to track down any deficiencies of the traditional corporate governance mechanisms. These collapses and scandals include Enron (2001) and WorldCom (2002) in USA, Vivendi (2001) and Vinci (2006) in France, Parmalat (2003) in Italy, and most recently, Ecobank Transnational Incorporated’s boardroom battle (2013) in West African Context. This chapter examines the relation between corporate governance mechanisms and operating performance and liquidity risk within the specific environment of West African Economic and Monetary Union (WAEMU) banks. The implementation of well-known western corporate governance mechanisms in emerging markets, which mostly focus on unsophisticated financial services, is likely to act more as operating constraints than value-creation factors. Based on a sample drawn from 100 commercial banks over the period 2006–2010, we document the following four main findings: dual structure and board size are negatively and significantly associated with banks’ performance as proxied by Return on Assets (ROA) and Return on Equity (ROE), board size, board diversity and nature of ownership exhibit a negative and significant relation with banks’ liquidity risk, the presence of CEO in the directors’ board appears to be the only corporate governance mechanism efficiently associated with banks’ liquidity risk, overall, the effects of the WAEMU’s banks corporate governance mechanisms on their operating performance and liquidity risk are significantly different if bank is in joint or single auditing setting (proxy for audit quality). This finding supports the view that audit quality is complementary to corporate governance mechanisms under the WAEMU context.

Keywords: Corporate Governance, Financial Institutions, Operating Performance, Liquidity Risk, WAEMU

JEL Classification: G21, G32, G34, G38