“Corporate governance and firm performance in the Saudi banking industry”

The current research aims to explore the impact of corporate governance on the Saudi banking performance for the period of 2014–2017. Though many researchers tested the relationship of corporate governance and firm performance, globally as well as in Saudi Arabia, however, during the literature review, it was found that many excluded the banking industry. This study tries to fill the gap by looking exclusively at the Saudi banking industry. Firm performance is measured through return on assets, return on equity, and Tobin’s Q as the dependent variables. The corporate governance practices are measured through the board characteristics (size, meeting, number of committees, independence, foreign board membership), and an audit committee (size, meeting, independence) as the independent variables. Firm size and firm age are the controls. Panel data analysis was implemented, using both descriptive and multivariate analysis through multiple regression to investigate the governance practices and firm performance. The empirical findings demonstrate that board size, audit committee meeting and bank size have a positive impact on ROE, whereas board independence has a negative impact on ROE. Similarly, board size and bank size have a positive relationship with ROA and board meeting has a negative relationship with ROA. Further, board (size and independence) and bank size have a positive relationship with Tobin’s Q, whereas number of board committees and bank age have a negative relationship with Tobin’s Q. Finally, audit committee (size and independence) and foreign board membership have no impact on the bank performance. of of


INTRODUCTION
The concept of corporate governance arose from the belief that the separation of ownership and management within a corporation might create substantial misuse of managerial discretion (including the possibility of abuse or conflict of interest) (Tirole, 2006). The term "corporate governance" was first coined in 1960 (Mason, 1960), derived from an analogy between the governance of cities, nations, or states and the governance of corporations (Becht et al., 2002). Corporate governance is "the system by which companies are directed and controlled" (Cadbury, 1992). Many existing studies mention that good corporate governance practice: strengthens the board, helps in effective board monitoring, improves firm profitability and performance, and achieves better economic efficiency and growth (Al-Baidhani, 2015; OECD, 2004; Sarkar & Sarkar, 2018).
Dutch Shell, Satyam, and Siemens (to name a few). These all became critical concerns in the legal system and for regulators. In addition, they became issues in the media and for academic and corporate researchers investigating the failure of governance mechanisms and looking to define corporate governance systems, frameworks and mechanisms (Larcker & Tayan, 2016). Since then, many codes, standards, and regulations have been formulated to define corporate governance mechanisms. If a corporation is well managed and governed transparently, obviously, all its stakeholders and investors will benefit, which is the objective of good corporate governance practice. At the same time, if companies are well managed and properly governed in line with international and domestic corporate governance standards, companies, industries, and the economy as a whole, will prosper. Ultimately, good governance practice is a key driver and the life-blood of economic growth (Quibria, 2006).
Corporate governance in Saudi Arabia can be linked to the issue of a company law back in 1965. However, the recent Saudi Corporate Governance Code was issued by the Capital Market Authority (CMA), the Saudi regulator of capital markets, in December 2006 through Resolution No. 1/212/20061/212/ (CMA, 2006. Although the practice was voluntary until 2010, at that point, it became mandated that all listed Saudi companies followed the corporate governance guidelines (Buallay et al., 2017). However, this is still an introductory stage for these companies and there is a long way to go in the Saudi Arabia corporate governance and disclosure practices. Good corporate governance in banking requires safe and sound operations and compliance with applicable laws, regulations and guidelines (SAMA and CMA in the Saudi banking system) while protecting the interests of depositors (Fidanoski et al., 2013;Wilson, 2006 The aim of this study is to measure the impact of corporate governance practice on the banking industry performance in Saudi Arabia examining the most recent data and adding variables to the existing ones in the literature using panel data analysis (Al-Sahafi et al., 2015; Baullay et al., 2017). Although many researchers have conducted studies internationally, even in the Gulf and in Saudi Arabia, to test the impact of corporate governance on the stock market, on industry and on the economy, the current study found that most excluded the banking industry (Ghabayen, 2012;. This study fills this research gap by looking exclusively at the Saudi banking industry. The study also scales down the measurement of the impact of corporate governance on Saudi banking during 2014-2017. Therefore, this research aims to investigate the impact of corporate governance practice on the return on assets (ROA), return on equity (ROE) and Tobin's Q of Saudi banking industry. Their study showed a mixed result of size (board and bank) and independence of the board and its positive significant impact on the financial performance. At the same time, the concentration of ownership and leverage ratio had a negative significant impact on the financial performance, and the CEO status, an audit committee (size and independence) had no impact on the bank performance.

LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
Ghabayen (2012) tested the relationship between board characteristics and the non-financial company performance of 102 Saudi firms in 2011. The independent variables were the size and composition of an audit committee (AC) and the board of directors; ROA was the dependent variable. The analysis found the board size, AC size and AC composition had no impact on the firm performance; whereas, board composition had a negative significant impact on the firm performance. Dependent variable was corporate governance disclosure score (zero for non-compliance and nine for full compliance); firm profitability (ROA), firm liquidity (current ratio), firm debt ratio, firm size (total assets), board independence, and audit committee size were independent variables. The findings showed an association between firm size and corporate governance disclosure (statistically non-significant). The study found that board independence was negatively significant; audit committee size and firm profitability (ROA) and firm liquidity were positively significant, whereas firm size was not positively significant for corporate governance.
Al-Ghamdi and Rhodes (2015) studied family ownership, governance practice and firm performance in Saudi Arabia for the period of 2006-2013 for 11 industrial groups, excluding banks and financial services. Their independent variables were ownership concentration, managerial ownership, asset turnover, expense ratio, CEO family (dummy), size of the board, CEO duality (dummy), debt to assets, debt to equity, size and family-firm (dummy); dependent variables taken were ROA and Tobin's Q. The study concluded that ownership concentration for family owned firms had no impact on ROA; whereas, there was an impact on Tobin's Q. Performance and managerial relationship for family owned firms had an impact on ROA and Tobin's Q. This was reversed for non-family companies.
Al-Janadi et al. (2013) found that corporate governance mechanisms had a significant impact on voluntary disclosure practices of 87 companies listed on the Saudi Stock Exchange in 2006-2007. They used seven variables as independent ones and five control variables (i.e., firm size, profitability, financial sector, industrial sector, and service sector) for the study; the dependent variable was the voluntary disclosure practice (zero for non-disclosure, one for partial disclosure, and two for full disclosure).
El Mehdi (2007) examined the board, ownership structure, and performance in the financial market using panel data analysis (2000-2005) of 24 firms listed on the Tunisia Stock Exchange. He took 10 independent variables, an industry dummy, and a year dummy; a dependent variable taken was Tobin's Q. He found a weak governance system in Tunisia and a relationship between governance and firm performance.
The existing studies reviewed here are similar in nature, in the GCC and Saudi perspective. In contrast, we examine Saudi Arabia banking industry specifically and for the recent 4-year period. Foreign board membership is introduced along with seven other independent variables (see Table 2). In addition, firm age and firm size are included as the control variables. It is believed that this study serves as a road map for regulators and practitioners.

Hypotheses
The following hypotheses are proposed referring to the above literatures (some abbreviations are expanded in Table 2

METHODOLOGY
The aim of the current research is to investigate specific variables from 2014 to 2017 in the Saudi banking industry. Both descriptive and multivariate analyses were applied through multiple regressions normally used by researchers to test the relationship between corporate governance and firm performance ( . ROA, ROE and Tobin's Q are used to measure the firm performance. The independent variables are board characteristics (size, independence, meetings, number of board committees and foreign board membership) and audit committee characteristics (size, meetings and independence). The firm size and firm age are taken as controls (see Table 2).

Descriptive statistics
The descriptive statistics, as reported in Table 3, depict the average board size among the Saudi banks as 9.81 members, with a minimum size of 9 and a maximum of 11 directors. This is in line with Salomn's (2000) view, who recommended that the size between 8 and 15 directors would be optimal for a large-scale company.

Pearson correlation analysis
A Pearson correlation analysis (Table 4) was conducted to identify potential correlation among the variables. This analysis is crucial to insure the regression results are unbiased and to confirm that variables are not correlated (Field, 2013). Table 4 demonstrates that no variable was highly correlated.  Note: * -correlation is significant at the 0.05 level (two-tailed), ** -correlation is significant at the 0.01 level (two-tailed).

Regression analysis
A multiple regression technique which is used by many researchers was applied to examine the relationship between the corporate governance and firm performance ( . As stated by Hutcheson and Sofroniou (1999), when the regression model comprises both continuous and dummy variables, OLS is a suitable statistical technique. Therefore, the ordinary least squares (OLS) regression was used to test the relationship between the corporate governance practice and bank performance. . This indicates that an increase in size of the board could bring more diversified expertise and know-how which in turn generates the increase in ROA as a result of better decision making process (Arslan et al., 2010). In contrast, the table also shows that board meetings had a negative association with ROA at the 10% level. This implies that an increase in board meetings reduced bank performance. Our result is in line with previous research that found that board meetings had a negative influence on firm performance (see, e.g., Danoshana & Ravivathani, 2013;Kutum, 2015;Vafeas, 1999). In addition, bank size had a positive relationship with ROA at the 1% significance level.
The result of the model with ROE (Table 6) shows that the size of the board had a positive significant relationship with ROE at 5%. Further, the analysis shows that the frequency of the audit committee meetings had a positive significant relationship with ROE at 5%. Moreover, bank size had a positive relationship with ROE at the 1% level of significance. In contrast, the strategic committee showed a negative association with bank performance at 10% of significance. Further, the proportion of independent directors on the board showed a negative and statistically significant relationship at 10%. This suggests that banks with more independent non-ex- ecutive directors were more likely to have lower performance. One reason may be that those independent directors were appointed based on their relationships with the majority shareholders and, therefore, there was a question as to the degree and extent of their true independence at these Saudi companies (Almoneef, 2014). Table 7 shows the result of the model with Tobin's Q and that the board size had a positive relationship with Tobin's Q at the 5% level, which is in line with the ROA and ROE models. Moreover, the outcomes show that the proportion of board independence and bank size were significantly positively associated with Tobin's Q at the 5% and 1% levels, respectively. However, the number of board committees, the strategic committee, and firm age were significantly negatively related with Tobin's Q at the 10% and 5% levels, respectively.
From the regression analysis, it was found that board size (H1) was statistically significant with ROA at the 1% level. It was also statistically significant with ROE and Tobin's Q (both at the 5% level). Board independence (H2) was negatively statistically significant with ROE (at the 10% level), whereas it was positively statistically significant with Tobin's Q at the 5% level; with ROA, it showed no significance. Board meetings (H3) were negatively statistically significant with ROA (at the 10% level) and statistically insignificant with ROE and Tobin's Q. The number of board committees (H4) was negatively statistically significant with Tobin's Q (at the 10% level), whereas non-significant with ROA and ROE. Audit committee meetings (H6) were statistically significant with ROE at the 5% confidence level, and did not have any significant relationship with ROA and Tobin's Q. Bank size (control) was statistically significant with ROA, ROE, and Tobin's Q at the 1% level. Similarly, bank age (control) was negatively significant with Tobin's Q at the 5% level. At the same time, it was observed that audit committee size (H5), audit committee independence (H7), and foreign board membership (H8) were statistically insignificant with ROA, ROE, and Tobin's Q. Therefore, these three hypotheses were rejected.

CONCLUSION
This study examined the relationship of mechanisms of corporate governance vis-a-vis the board of directors (size, meetings, number of committees, independence and number of foreign members), the audit committee (size, meeting and independence), and the firm performance (ROA, ROE and Tobin's Q) of the banking industry represented by firms listed on the Saudi Stock Exchange (TADAWUL). The motivation for the study is based on the lack of detailed research on the Saudi banking industry's corporate governance practices and its relationship with the firm performance. This study contributes to the literature by furthering the authors understanding of the detailed relationship of the board of directors and the audit committees with firm performance, specifically in the banking industry in Saudi Arabia. As the Saudi stock market is now open for global investment, it is proposed (hypothesis) that there is a relationship between corporate governance practice and firm performance using the banking industry as the sample. The results do not support all the proposed hypotheses; however, most were proven to be significant. This study may help the government, the Saudi Arabian Monetary Agency (SAMA) and the Capital Market Authority (CMA) to authorize more amendments to the corporate governance code as well. Although the Saudi banking industry follows corporate governance codes, a more rigorous approach could help improve their performance. This scope of research can be further extended to the other financial services industries of Saudi Arabia like insurance companies, even to the whole GCC countries banking industry and the financial services sector as well.

ACKNOWLEDGEMENT
The researchers would like to thank the Deanship of Scientific Research at King Saud University represented by the research center at the College of Business Administration for supporting this research financially.