Corporate governance effectiveness and operational risk of banks

Abstract

This paper examines the impact of corporate governance mechanisms on the risk-taking behaviour of commercial banks in Ghana. In this context, risk-taking is defined based on the operational risk faced by the banks. The study employs the two-step system generalised method of moments (2SYS-GMM) estimation technique, using a panel dataset of 14 commercial banks in Ghana from 2010 to 2022. The corporate governance variables considered include board size, board independence, board meetings, and financial expertise on the board, with firm growth included as a control variable. This study shows that board meetings have a positive and significant relationship with operational risk in banks. Conversely, board size is negatively and significantly associated with operational risk. However, board independence and financial expertise on the board do not have any impact on operational risk. Additionally, firm growth is found to have an inverse relationship with bank risk. The paper highlights the risk-taking behaviour of boards in commercial banks in Ghana, specifically showing that larger board size reduces the level of risk, supporting the principles of agency theory. The findings offer valuable insights for regulators and policymakers to enhance internal corporate governance mechanisms to safeguard banks during financial distress. Additionally, these findings can boost shareholder and stakeholder confidence in the effectiveness of governance reforms, promoting long-term benefits.