Análisis estadístico

This subsection discusses the relevant theoretical review that provides a link between bank risk, corporate governance and bank performance. Previous studies have used different theories that provide a link between corporate governance characteristics, bank risk and financial performance. Some of the popular theories used by previous studies include signalling theory, agency theory, stewardship theory, corporate legitimacy theory and resource dependency theory. For the purpose of this work, the main theories which are used and discussed are the agency theory, stewardship theory and resource dependency theory.

3.1.1 Agency theory

The first theoretical underpinnings of the research are enshrined in the popular agency theory in business. Jensen & Meckling (1976) define agency theory as the theory that addresses the relationship where in a contract ‘one or more persons (the principal (s)) engage another person (the agent) to perform some services on their behalf which involves delegating some decision making authority to the agent. The theory looks at how to ensure that agents (executives, managers) act in the best interests of the principals (owners, shareholders) of an organisation. According to Jensen & Meckling (1976), there is tangible reason to accept that the best interests of the principal will always not be acted in by the agent if the two parties to the relationship are utility maximizers. In this case, how to write contracts so that an agent’s performance can be measured and incentivized so that they act with the interest of the principal in mind is the main concern of agency theory as proposed by Jensen and Meckling (1976). Agency theory is concerned about two main problems, how to align the conflicting interests between managers and owners and

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how to make sure that agents carry out in the way that the principals want then to (Al-Saidi & Al-Shammari, 2013). The problems can arise when managers make self- interested decisions and manipulate performance information, for example by moving numbers around to create good performance picture. The answer to the problems is by making managers part owners of the firm and to make sure that managers act in the best interest of the owners (Bendickson et al, 2016, Eisenhardt, 1989).

From the point of view of agency theory, the implication for corporate governance is, that adequate monitoring is required to apply to protect and minimise the conflict of interest that exist between management and shareholders, between shareholders, and between debt-holders and firms such as conflict leads to agency cost (Fama & Jensen, 1983; Al-Saidi & Al-Shammari, 2013). Jensen and Meckling (1976) posit that the principal can minimise divergences from his interest through creating suitable incentives for the agent and through incurring cost of monitoring intended to limit the deviant activities of the agent. This is to make sure that the agent makes the best decisions from the point of view of the principal (Jensen & Meckling, 1976). By doing this the principal incurs some cost often known as monitoring cost. Also, in certain circumstances principal may require the agent to use resources (bonding cost) to make sure that certain actions which will harm the principal will not be taken by the agent (Jensen and Meckling, 1976). Again, according to Jensen and Meckling (1976), there is a divergence between the agent’s decisions and decisions that miximise the principal’s welfare. The dollar value of the decrease in the principal’s welfare as a result of this divergence is also part of the cost to the agency relationship which is known as residual loss (Jensen and Meckling, 1976). Therefore, the sum of the monitoring expenditures by the principal, the bonding expenditures by the agent, and the residual loss is the agency cost (Jensen and Meckling, 1976).

Corporate governance mechanisms affect bank risk and bank performance in various ways. This means that if bank managers, CEOs and directors of Africa banks who are described as agents, according to this theory, are to do their work well, they should be able to manage and reduce the bank risk of the banks in Africa which will reflect on the performance of these banks by increasing their profitability. However, agency theory faces some criticisms. Nyberg et al. (2010) argue that the incentive alignment prediction of agency theory has not, so far, been empirically

proven in studies of CEO (who are agents) compensation. Another study, by O’Reilly and Main (2010), also questions the lack of empirical support for linking executive pay with firm performance. They believe executive pay may be more likely a function of management power and influence; that is, more of a behavioural than an instrumental phenomenon.

3.1.2 Stewardship theory

Stewardship theory is contrary to agency theory and it argues against the opportunistic self-interest assumption of agency theory (Hendry & Kiel, 2004). In short, the stewardship theory discards the basic notion of conflicting interests that the agency theory has been associated with (Abels & Martelli, 2013). The stewardship theory posits that management should be empowered to run firms since they are trustworthy individuals and are good stewards of the resources entrusted to them (Donaldson & Davis, 1994; Nicholson & Kiel, 2007) and can make decisions that benefit the whole organisation rather than personal gratification (Abels & Martelli, 2013) and they are motivated to act in the principals’ best interest (Davies, Schoorman & Donaldson, 1997). Since the stewardship theory recognises the presence of a relationship build on trust between principals and agents, it reduces the cost of monitoring and controlling the behaviour of the management (Abels & Martelli, 2013). In this theory, the main model is based on steward whose behaviour is ordered such that pro-organisational, collectivistic behaviours have higher utility than individualistic, self-serving behaviours. The behaviour of a steward will not move away from the interests of the organisation that he/she is working for, and self- serving behaviours will not be traded or substituted for cooperative behaviours by the stewards (Davies, Schoorman & Donaldson, 1997). The steward puts higher value in cooperation than defection even if there is no alignment of interest of the principals and the stewards (Davies, Schoorman & Donaldson, 1997). The stewardship theory also posits that since the steward seeks to achieve the organisational objective including profitability and sales growth, there is a collective behaviour of the steward. Ultimately, this behaviour is beneficial to the principals through positive effects of profit on dividends and share prices (Davies, Schoorman & Donaldson, 1997). The wealth of the shareholder is maximised by the steward through firm performance, because, by doing so, the utility functions of the steward are maximised. The stewards also believe that there has been an alignment of their interest with the corporation and its owners (Davies, Schoorman & Donaldson, 1997). Contrary to the agency theory, stewardship theory proposes that when power

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is concentrated in a single individual and CEO is also the chairman of the board, there would be an attainment of superior performance of the firm (Donaldson & Davis, 1991). As a result, the supporters of stewardship theory argue that there would be a superior return to shareholders than the situation where the CEO and chairman roles are separated (Donaldson & Davis, 1991).

3.1.3 Resource dependence theory

The third and final theory that this study is based on is the resource dependence theory (Pfeffer & Salancik, 1978). This theory posits that organisations are self- insufficient since they rely on the resources at their external environment which are in possession of other organisations in order to achieve their organisational goals (Pfeffer & Salancit 1978, Voss & Brettel, 2014). Therefore, for an organisation to survive depends on the transaction with the external environment to reobtain the required resources (Pfeffer & Slancit, 1978; Bergmann et al, 2016). The resource dependence theory suggests that, organisation that do not have the critical resources in order to achieve the desired goal will have to seek to form a relationship with other organisations in order to secure the required resources (Pfeffer & Salancit, 1978; Singh, Power, & Chuong, 2011). The theory further suggests that, there are some social –legal apparatus that define and control the nature and give a limit of the relationship between an organisation and players in its environment (Pfeffer & Salancit, 1978; Singh, Power, & Chuong, 2011). Power and dependence play a key role in understanding the relationships between inter-organisations. The balance of power is in favour of the organisation that has (resources) what other organisations need (Malatesta & Smith, 2014). If a particular resource is more critical, the stakeholders can have more powers to execute over the organisation by sheer refusal to make the resource obtainable to that organisation. In view of this, if a particular organisation fails to constantly assess their resources usefulness and quality, they are unable to effectively perform their mission, create public value or react to changes coming from the environment (Frączkiewicz-Wronka, & Szymaniec, 2012).

For a competitive advantage to be achieved, an organisation has to secure resources which are available in the environment but are in possession by the stakeholders, which becomes likely if the organisation can present its own resources adequately (Frączkiewicz-Wronka,& Szymaniec, 2012).

Due to division of labour, managers also depend on the resources which are provided by their subordinate employees like organisational connections, work effort and expertise (Voss & Brettel, 2014). Managers use control to make sure that the resources which their firm is dependent on are available. This control increases the availability of critical resources needed by the organisation, which has positive effect on performance of a firm (Voss & Brettel, 2014).

With regards to board of directors, the theory portrays that the board is a vital link between the firm and the important resources that the firm needs to maximise performance (Nicholson & Kiel, 2007). Some of the resources are (1) the board can provide a firm a link to capital and business elite (2) the board can provide a link to important information to the firm (3) the board can provide a link to customers, suppliers, competitors and other significant stakeholders (Nicholson & Kiel, 2007) (4) Non-executive directors on the board provide the firm a link to expert and contacts and also give them prestige (Haniffa & Cooke, 2002). As a result, it has been argued that a firm with high level of links to the external environment is able to give a company with a high level of access to different resources including information, capital, customers and suppliers (Nicholson & Kiel, 2007). According to Nicholson and Kiel (2007), if resource dependency theory holds then two patterns are expected to happen. (1) A firm with high level of links to its external environment has more access to resources and as a result, experience high corporate performance and (2) A frim with low level of links to its external environment has little access to resources and as a result, experience low` corporate performance. Briefly, the agency theory proposes that because there is separation of ownership and control in the modern organisations, it is more likely that the management or the agents will consider their interest and personal gain first instead of working with the interest of the owners in mind. This situation is the result of agency problem. The stewardship theory opposes the criticisms made by the agency theory that the agents will work for their personal gains without the interest of the shareholders. Instead, the stewardship theory recommends that the agents are good stewards, therefore, they should be empowered and entrusted to manage the resources and run the firms for the owners without any monitoring cost. Resource dependency theory on the other hand places emphasis on the corporate governance structures within institutions. For instance, resource dependency theory suggests that directors on the board will ensure that managers are monitored effectively and at the same

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time they serve as a link between the firm and the critical resources required for the maximisation of the firm financial performance.