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CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF BUSINESS SCIENCES AND MANAGEMENT

POST GRADUATE PROGRAMME

Corporate governance and performance in the Zimbabwe banking sector: A case study

of BancABC, Metropolitan Bank and ReNaissance Merchant Bank

By

Cautious Kamunda

C13122432P

A Dissertation Submitted to the School of Business Sciences and Management in Partial

Fulfilment of the Requirements of the Award of the Master of Science in Strategic Management

Degree.

Supervisor: Prof M Gunduza

Date: June 2015

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DECLARATION

I, Cautious Kamunda, do hereby declare that this dissertation is a result of my own investigation

and research, except to the extent indicated in the acknowledgements, references and by

comments indicated in the body of the report, and that it has not been submitted in part or in

full for any other degree to any other university.

Name: Cautious Kamunda Date: 16 June 2015

………………………………….

Student’s Signature

Supervisor: Prof. M Gunduza Date: 16 June 2015

………………………………….

Supervisor’s Signature

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DEDICATION

This dissertation is dedicated to my entire family, especially my sons Jayden Ishe Kamunda

and Chikondi Cautious Kamunda, as well as my beautiful wife Sheillah. I also dedicate the

dissertation to daddy and to the loving memory of my late mom.

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ACKNOWLEDGEMENTS

I wish to express my sincere gratitude to all who assisted me in the production of this document.

Special thanks go to my project supervisor Prof. M Gunduza .Finally l want to thank all

employees of the studied institutions whom I bothered during the production of this document.

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ABSTRACT

Corporate governance has received much attention in the past two decades and has been a

growing topic for debate in both developed and developing countries. This is mainly because

of the Asian crises, the global financial crisis and the many financial scandals and failures that

have occurred in a number of countries. Good corporate governance is now considered crucial

for regulating companies and enhancing their performance.

The purpose of this study was to examine the relationship between corporate governance

practices and in the Zimbabwean banking sector, as a result of the persistent indigenous bank

failures caused by corporate governance deficiencies and the need for Zimbabwe to adopt the

specific corporate governance code. Theoretically, this study looked at the stakeholder theory,

the agency theory and the shareholder theory. Literature indicated that there are various

measures of performance in the banking sector and these are classified as either financial or

non-financial measures. To accomplish the research objectives the research used an interpretive

epistemology and a subjectivist ontological position. An integrated approach regarding

qualitative and quantitative methods was used with qualitative methods being predominantly

utilized. The research used a sample frame of commercial banks to distribute questionnaires

and conduct interviews. Secondary data analysis was used on closed banks.

The study results indicate that there is a positive relationship between corporate governance

and performance in the banking sector in Zimbabwe. Banks with sound corporate governance

practices exhibit favourable performance results both financial and non-financial. Therefore,

this study provides evidence in support of a positive relationship for active shareholders,

effective board of directors, effective management and employee participation and firm

performance based on both performance measures. Based on the conclusion and implications

discussed, this study presents several recommendations for future research.

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Contents

DECLARATION ..................................................................................................................................... i

DEDICATION ........................................................................................................................................ ii

ACKNOWLEDGEMENTS ................................................................................................................... iii

ABSTRACT ............................................................................................................................................. i

CHAPTER 1: INTRODUCTION TO THE STUDY .............................................................................. 1

1.0 Introduction ................................................................................................................................... 1

1.1 Background of the problem........................................................................................................... 1

1.2 Statement of the problem .............................................................................................................. 6

1.3Research objectives ........................................................................................................................ 7

1.4 Research questions ........................................................................................................................ 7

1.5 Significance of research ................................................................................................................ 8

1.6 Limitations .................................................................................................................................... 9

1.7 Delimitations ................................................................................................................................. 9

1.8 Scope of research ........................................................................................................................ 10

CHAPTER 2: REVIEW OF LITERATURE ........................................................................................ 11

2.0 Introduction ................................................................................................................................. 11

2.1 The Concept of Corporate Governance ...................................................................................... 11

2.2 A historical perspective of Corporate Governance ..................................................................... 13

2.3 Objectives of Corporate Governance .......................................................................................... 14

2.4 Banking Sector Corporate Governance ....................................................................................... 15

2.5 Corporate Governance Principles ............................................................................................... 19

2.6 Theoretical Underpinnings on Corporate Governance ............................................................... 21

2.7 Banking Sector Performance ...................................................................................................... 24

2.8 Corporate Governance and Performance .................................................................................... 26

CHAPTER 3: RESEARCH METHODOLOGY .................................................................................. 28

3.1 Introduction ................................................................................................................................. 28

3.2 Research Description .................................................................................................................. 28

3.3 Research Approach and Design .................................................................................................. 29

3.3 The Population and Study Sample .............................................................................................. 31

3.4 Data Collection and Analysis ...................................................................................................... 33

3.4.1 Primary Data Collection instruments ................................................................................... 33

3.5 Reliability and Validity ............................................................................................................... 35

3.5.1 Reliability ............................................................................................................................. 35

3.5.2 Validity ................................................................................................................................ 35

3.6 Data Analysis .............................................................................................................................. 35

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3.7 Conclusion .................................................................................................................................. 36

CHAPTER 4: DATA ANALYSIS AND PRESENTATION ............................................................... 37

4.1 Introduction ................................................................................................................................. 37

4.1.1 Description of sample data and response rate ...................................................................... 37

4.1.1 Shareholder Analysis ........................................................................................................... 40

4.1.2 Board of Directors Analysis ................................................................................................. 42

4.1.3 Audit Committee Analysis ................................................................................................... 44

4.1.4 Management and Staff Analysis .......................................................................................... 47

4.3 Bank Performance ....................................................................................................................... 48

CHAPTER 5: SUMMARY; RECOMMENDATIONS AND CONCLUSIONS ................................. 51

5.1 Introduction ................................................................................................................................. 51

5.2 Research Review ......................................................................................................................... 52

5.3 Conclusions ................................................................................................................................. 53

5.3.1 Bank Performance ................................................................................................................ 53

5.3.2 Relationship between corporate governance and bank performance ................................... 54

5.3.3 Relationship between audit committee and bank performance ............................................ 55

5.3.4 Relationship between corporate governance and management ............................................ 56

5.3.5 Disclosure and Transparency ............................................................................................... 57

5.3.6 RBZ Supervisory Measures ................................................................................................. 58

5.4 Recommendations ....................................................................................................................... 58

5.5 Research Implications ................................................................................................................. 61

5.6 Future Research .......................................................................................................................... 61

REFERENCES ..................................................................................................................................... 63

APPENDICES ...................................................................................................................................... 67

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LIST OF FIGURES

Figure 1: Shareholder Analysis ................................................................................................ 41

Figure 2: Board of Directors Analysis-BancABC ................................................................... 42

Figure 3: Board of Directors Analysis-Metropolitan Bank ..................................................... 43

Figure 4: Audit Committe Analysis-BancABC ....................................................................... 44

Figure 5: Audit Committee Analysis-Metropolitan Bank ....................................................... 45

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CHAPTER 1: INTRODUCTION TO THE STUDY

1.0 Introduction

The Zimbabwean economy has witnessed an unprecedented phenomenon of bank failures and

corporate governance deficiencies are at the center of the failure causes. Corporate governance

is considered integral to the very existence of a firm. The aim of this research is to study the

relationship between corporate governance and bank performance in Zimbabwe. To measure

bank performance this study will use both financial and non-financial indicators. A case study

approach is adopted in this research focusing on BancABC, Metropolitan Bank and

ReNaissance Merchant Bank.

This chapter is an introduction to the problem and its setting. The chapter provides the rationale

of this study and introduces the objectives, key questions and concepts that guide this research.

An analysis of the problem covering its magnitude, distribution, severity and consequences is

given. The chapter also explains the research context, limitations, delimitations and

clarification of the key concepts.

1.1 Background of the problem

The global financial crisis of 2008 and its dampening effects on global economic activity was

largely attributed to failures and weaknesses in corporate governance arrangements. The twin

banking and financial crisis in Zimbabwe during the period 2008 and 2009 was also attributed

to poor corporate governance practices by individual banks. “The banking sector in Zimbabwe

continues to witness flawed corporate governance practices and arrangements designed to

undermine efforts by the regulatory authorities to ensure sustained financial sector stability”

(RBZ Monetary Policy Statement, 2013). The corporate governance problem in Zimbabwe has

been compounded by the existence of complex corporate structures within banking groups and

financial conglomerates which are used as conduits for regulatory arbitrage and siphoning of

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depositors’ funds. Following the Economic Structural Adjustment Programme (ESAP) 1992,

the Zimbabwean banking and financial services sector was liberalized. ESAP transformed the

economy from a command to a free market economy. Financial liberalization brought about

increased competition in the private sector. In line with the liberalized financial services sector

and technological changes countries especially in developing economies need to ensure they

pursue financial sector solvency and stability through corporate governance enhancements.

Researchers found out that corporate governance enhancements will strengthen and upgrade

the corporations’ level of sustainability in an increasingly open environment (Qi, Wu and

Zhang, 2000). It is stated that corporate governance examines how to achieve an increase in

the performance of firms.

The Reserve Bank of Zimbabwe produced the Banking Sector Vision 2020 to achieve financial

sector solvency and stability. The concept of corporate governance is one of the key features

or characteristic of the envisioned Zimbabwean banking sector by December 2020, as specified

in the RBZ blueprint of its Banking Sector Vision 2020. The proposed new law seeks to amend

the Banking Act [Chapter 24:20] to enable it to deal more effectively with developments in the

banking sector and, in particular, to improve the corporate governance of banking institutions.

It is stated that the increase in corporate scandals, the Asian financial crisis of 1997 and the

relative poor performance of business enterprises in African economies have led to the increase

in attention to corporate governance issues in the development debate (Berglof and Von -

Thadden, 1999).

Governance means the process of decision making and the process by which decisions are

implemented. According to the Gandhian definition, corporate governance refers to trusteeship

obligations inherent in company operations, where assets and resources are pooled and

entrusted to the managers for optimal utilization in the stakeholders interests. Good governance

has eight major characteristics. It is participatory, consensus oriented, accountable, transparent,

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responsive, effective and efficient, equitable and inclusive and follows the rule of law.

Corporate governance focuses on effective, transparent and accountable administration of

affairs of an institution by its management. It calls for the upholding of fairness, integrity,

trustworthy and ethical business contact. The history of corporate governance dates back to the

19thcentury. In Zimbabwe it became popular mainly from the year 2000 that is the

hyperinflationary and financial crisis period all over the world as a result of lack of adherence

to corporate governance.Today’s world has seen that organization transparency, financial

disclosure, independency, board size, board composition, board committees, board diversity

are the cornerstone of good governance practices. Corporate governance is essentially about

leadership:

-leadership for efficiency,

-leadership for probity,

-leadership with responsibility,

-leadership which is transparent, and

-leadership which is accountable.

A health banking sector is the heart of any economy, hence corporate governance of banks is

important for several reasons. Banks play an important role in the national and, increasingly,

international payment system. As the main intermediates in the financial systems, they are

important engines of economic growth (King and Levine, 1993). This is particularly true

of African economies where “banking systems are small, costly, and focused on the short-term

end of the yield curve” (Beck and Cull, 2013). Considering their important role as the dominant

source of financing for the real economy, banks greatly affect the governance of real sector

firms. In addition, banks distress, has far more negative consequences in economic

development. Therefore banking sector solvency and stability through effective sector

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management and regulation and good corporate governance become crucial. Governance

problems continue to plague many private and government institutions throughout Africa and

as such undermine the market-based provision of financial services and reform attempts and

government interventions aimed at fixing market failures.

The complexity of the corporate governance system is also exacerbated by the special nature

of banking functions hence leading to more intricate agency problems. In Africa, political

intervention and instability also further complicate the corporate governance of banks through

government ownership and restrictions on foreign- bank entry (Arun and Turner, 2004).

Furthermore, most developing economies have subjected their financial service sector to

liberalization and privatization, adding even more to the complexity of governance issues in

the sector. In Zimbabwe, following the dictated Economic Structural Adjustment Programme

(ESAP) during the years 1992-1998, the economy was liberalized through the opening of

markets, liberalization of financial markets, privatization, relinquishing government control

and allowed market forces to play their part. The interaction of market forces has greater

implications on the performance of firms as profits will no longer be guaranteed.

Financial performance is a subjective measure of how well an organization can use assets from

its primary mode of business and generate revenues (Greenwood and Jovanovic, 1990).

Financial performance is also used as a general measure of a firm's overall financial health over

a given period of time, and can also be used across firms in the same industry or for cross sector

comparisons. There are many different ways to measure financial performance, but all

measures should be taken in aggregation. Line items such as revenue from operations,

operating income or cash flow from operations can be used, as well as total unit sales

(Jayawardhera and Foley, 2000). Profit is the ultimate goal of firm. To measure the

profitability, there are a variety of ratios used of which Return on Asset (ROA) and Return on

Equity (ROE) are the major ones (Murthy and Sree, 2003). ROA is a major ratio that indicates

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the profitability of a bank. It is a ratio of Income to its total assets (Khrawish, 2011). It measures

the ability of an organization’s management to generate income by utilizing company

assets at their disposal. ROE is a financial ratio that refers to how much profit a company

earned compared to the total amount of shareholder equity invested or found on the balance

sheet. ROE is what the shareholders look in return for their investment. Other financial

measures include Economic Value Added (EVA) and Net Income. Bank performance can also

be measured using non-financial methods such as community investment, cultural entropy,

customer numbers and environmental value.

Regulators use CAMELS ratings to evaluate the safety and soundness of banks. CAMELS

ratings rely heavily on financial statement data and its components are Capital adequacy; Asset

quality; Management quality; Earnings quality; Liquidity; Sensitivity to market risk.

CAMELS ratings range from 1 to 5 as follows

– Composite “1”—banks are basically sound in every respect

– Composite “2”—banks are fundamentally sound, but may have modest

weaknesses correctable in the normal course of business

– Composite “3”—banks exhibit financial, operational, or compliance

weaknesses ranging from moderately severe to unsatisfactory

– Composite “4”—banks have an immoderate volume of serious financial

weaknesses or a combination of other conditions that are unsatisfactory

– Composite “5”—banks have an extremely high immediate or near term

probability of failure

“The banking sector in Zimbabwe continues to witness flawed corporate governance practices

and arrangements designed to undermine efforts by the regulatory authorities to ensure

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sustained financial sector stability. Some, particularly local banking institutions continue to

show total disregard for sound corporate governance practices resulting in some founding

directors ‘dipping their fingers into depositors’ funds” (RBZ Monetary Policy, 2015). It is

against the background of these negative developments and importance and complexity of

governance systems of banks, that this research will have implications on the broader subject,

“What is the relationship between corporate governance and banking sector performance in

Zimbabwe”.

An in depth analysis of BancABC, Metropolitan Bank and ReNaissance Merchant Bank will

help to establish the relationship between corporate governance and performance in the

Zimbabwean banking sector.

Architecture of the Zimbabwean Banking Sector

Following the closure of Capital Bank Limited, AfrAsia Bank and Allied Bank Limited, the

country’s banking sector has gone down to 18 operating institutions, comprising 13

commercial banks, one (1) merchant bank, three (3) building societies and one (1) savings

bank. In addition, there are 147 registered moneylending and credit-only microfinance

institutions” (RBZ Monetary Policy Statement January 2015). On 15 January 2015, the

Reserve Bank of Zimbabwe issued the first deposit taking microfinance institution license

to African Century Limited.

1.2 Statement of the problem

Zimbabwe has witnessed an unprecedented phenomenon of bank failures in the last fifteen

years. At the centre of these financial tsunamis are alleged poor adherence to sound corporate

governance principles and practices at institutional level.This has resulted in a number of

commercial banks being placed under judicial management as well as closures. This calls for

remedies to restore confidence in the banking sector. A number of problems have been

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wreaking havoc in banks’ corporate governance structures. These issues include but not limited

to nepotism, insider loans, make up reporting, and issues of ceremonial boards of directors,

improperly constituted boards of directors, poor board oversight, inexperienced management,

and undue influence or dominance by a few shareholders. Therefore this research seeks to

establish the relationship between corporate governance and bank performance in the

Zimbabwe banking sector.

1.3Research objectives

The main objective of this research is to explore the relationship between corporate

governance and performance in the Zimbabwe banking sector. In detail it seeks to achieve the

following specific objectives:

1) To establish the relationship between corporate governance and performance in the banking

sector.

2) To establish the relationship between directors shareholding and banks performance in

Zimbabwe.

3) To determine the strength of supervisory measurers put in place to enhance good corporate

governance by the Reserve bank of Zimbabwe.

4) To analyze the level of adherence to corporate governance principles by banks in Zimbabwe.

5) To give recommendations to stakeholders about sound strategies to improve corporate

governance in order to stimulate banks performance.

1.4 Research questions

This research aims to address matters concerning the major questions emerging within this

field of study:

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1. Is there a relationship between corporate governance and performance in the banking

sector?

2. Is there a significant relationship between directors’ shareholding and the financial

performance of banks in Zimbabwe?

3. How effective are the supervisory measures put in place to enhance good corporate

governance by the Reserve bank of Zimbabwe?

4. To what extent are banks in Zimbabwe adhering to corporate governance?

5. What plausible recommendations can one give to strengthen the banking sector in

Zimbabwe?

1.5 Significance of research

This research is of both academic as well as practical business significance. From an academic

perspective, the findings of this study will make significant contributions to the field of

Strategic Management and Corporate Governance. The first contribution is to analyze the

contribution of good corporate governance to the performance of banking institutions in

Zimbabwe. The intention is to reverse the persistent bank failures in Zimbabwe and ensure

financial sector stability.

In view of the RBZ Banking Sector Vision 2020, this study is of importance to bank regulators

such as the government and the central bank, local and foreign investors, financial and

economic analysts, banking community, academics as well as other stakeholders. This study

evaluates the current position of banks in relation to the corporate governance principles and

practices spelt out by the Reserve Bank of Zimbabwe. To the management in banking, this

study will inform them on the financial and non-financial effect of good corporate governance

on the performance of their institutions. Through the findings of this study, the management

will be able to strategize on how to realize maximum benefits through adopting good corporate

governance practices.This research anticipates that boards of directors will find the information

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valuable in benchmarking their individual banks’ performance within the industry. The result

of this study will also serve as a data base for further researchers in this field of research. More

so it will highlight the rewards and importance of adhering to principles of corporate

governance.

For the policy makers and Reserve Bank of Zimbabwe (RBZ), the findings of this study will

be important in informing the policy formulation especially with regard to regulating the

financial services sector in Zimbabwe and introduce greater transparency in the shareholding

and operations of banking institutions. The research findings also add a dimension that may

help make banking institutions more responsive to their customers’ needs and to encourage

resolution of disputes between banks and their customers.

To the researcher the study is of value in adding to banking sector knowledge and completion

of the post-graduate studies with Chinhoyi University of Technology. The study will be used

as a source of reference material besides suggesting areas where future research may be

conducted.

1.6 Limitations

Considering the broad nature of the subject matter, time has been a factor to consider as the

researcher is also a full time employee and family man hence balance had to be maintained.

The Zimbabwean banking sector is one of the most secretive and largely opaque business

landscape where every piece of information is insulated under the “confidentiality” ambit.

Therefore, the researcher had to deploy astute data mining techniques to acquire relevant data.

1.7 Delimitations

The study will focus on the relationship between corporate governance and bank performance

in Zimbabwe. This study concentrated on Harare as a representative sample and three banks

BancABC, Metropolitan Bank and ReNaissance Merchant Bank were be used as points of

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references. Harare was chosen since it is the metropolitan province, that is, the political and

economic capital in Zimbabwe. As a cosmopolitan city with diverse businesses, the results

obtainable are considered by the researcher to be representative of all other provinces. The

availability of information of BancABC, Metropolitan Bank and ReNaissance Merchant Bank

necessitated the selection of these three banks. The researcher is an employee of BancABC.

1.8 Scope of research

This study seeks to establish the relationship between corporate governance and performance

of banks in Zimbabwe. The focus on this sector is based on the fact that the banking sector is

the corner stone of economic stability. All financial transactions are facilitated through banks.

Banks play a crucial role of providing loans to companies, individuals as well as the

government. This study focuses on BancABC, Metropolitan Bank and ReNaissance Merchant

Bank.

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CHAPTER 2: REVIEW OF LITERATURE

2.0 Introduction

A literature review discusses prior research, related research and theoretical frameworks in a

particular field of study within a certain period. To review in this context means to look again

in order to come up with informed conclusions.

This chapter focuses on literature related to the relationship between corporate governance and

bank performance; this is done in an endeavor to answer the research questions and achieve

the stated objectives. Literature from both practitioner and academic domains was reviewed.

2.1 The Concept of Corporate Governance

Corporate governance is a system by which businesses either public or private are directed and

managed by different actors in a firm, such as the shareholders, board of directors,

management, employees and other key stakeholders. With reference to the private sector,

Edwards and Clough (2005), stated that corporate governance refers to the relationship between

a firm and all its stakeholders. Corporate governance is amongst the main factors that determine

the stability of any organization and its ability to attain to corporate sustainability despite the

highly competitive global market. Economic literature indicates that the stability and solvency

of any organization depends on the soundness of its individual components and the

relationships between them.

According to Morck, Shleifer and Vishny (1989), corporate governance together with such

other factors as strong prudential regulation, effective marketing and accurate reporting is

among the key factors that determine the soundness of any country’s financial system.

The agency theory dominates the debate on corporate governance. The issue of separation of

ownership and control is a defining feature in any company. According to the Agency Theory

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terms, the owners are principals and the managers are agents with the principals contracting

the agents to perform management duties on their behalf. It is recorded that the contract is not

always cordial and problems occur as the managers in most cases abandon their key duties to

act in the best interests of the owners. Managers in most cases resort to pursuing and

maximizing their own wealth, power and prestige while the principals seek to maximize the

return on their investments. In most large companies such agency tensions or tensions of

interest between owners and managers are more pronounced due to the employee share

schemes in which managers have a small share in the company’s shares. In this regard personal

agents goals maybe given priority over the ultimate objective of maximizing shareholder

wealth.

According to Arun and Turner (2002) there seem to be exists a narrow focus to the subject of

corporate governance, which considers the issue as just as approach through which owners are

guaranteed that managers will fulfill their contractual obligations. Strine (2010) pointed out

that corporate governance is about putting in place the structure, processes and mechanisms

that insure that the firm is directed and managed in a way that enhances long-term shareholder

value through accountability of manager, which will then enhance firm performance. OECD

(1999) defined corporate governance as the system by which business organizations are

directed and controlled in favor of all the stakeholders. Corporate governance can also be

viewed as the manner in which a corporation is run:

-to achieve its objectives

-transparency of its operations

-accountability and reporting

-good corporate citizenship.

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2.2 A historical perspective of Corporate Governance

The background of corporate governance dates back to the 19th Century when state corporation

laws enhanced the rights of corporate boards without unanimous consent of shareholders. They

did it in exchange for statutory benefits such as appraisal rights in order to make corporate

governance more efficient. The early debates came up after the increase of agency problem,

which emanated from separation of ownership and control. Corporate governance systems

undergone dramatic changes over the years, often in response globalization, corporate scandals

or systemic crises. The concept of corporate governance is gaining momentum because of

various factors as well as the changing business environment. Today’s world has seen that

organization transparency, financial disclosure, independence, board size, board composition,

board committees, board diversity among other is the cornerstone of good governance

practices.

“Currently many country leaders all over the world has increased concern over corporate

governance due to the increase of reported cases of frauds, inside trading, agency conflicts

among other corporations saga” (Enobakhane, 2010).Corporate failures have been recently

witnessed in both developed and developing countries with the reported cases of the East Asia

crises of 1997 and 1998 and the just ended global financial crisis of 2007 and 2008. The crises

emanated from the poor governance practices from the financial sector. Since mortgage market

was the mother of the crisis, this has triggered the world leaders to enact some laws, which

increase banks governance. This is supported by Ahmad (2006) who argued that a sound

banking system requires appropriate infrastructure to support efficient conduct of banking

business operating environment, governance and regulatory framework at domestic as well as

international levels in order to reduce bank crisis.

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2.3 Objectives of Corporate Governance

Kolk and Pinkse (2010) assert that good corporate governance has many benefits to the

organization. Good governance is integral to the very existence of a company. It inspires and

strengthens investor’s confidence by ensuring company’s commitment to higher growth and

profits.In 2002, L Klapper and I Love from the World Bank found evidence that improving a

company’s corporate governance has proportionately greater impact in countries with weak

legal environments. They suggested that companies can partially compensate for ineffective

laws and enforcement by establishing good corporate governance at the company level and

providing credible investor protection. Corporate governance has been reported as

guaranteeing better access to external finance, lower costs of capital – interest rates on loans,

improved company performance and sustainability, higher firm valuation and share

performance and reduced risk of corporate crisis and scandals.

According to the ICSI, factors which add greater value through good governance may be

summarized as follow:

adoption of good governance practices results in stability and growth to the enterprise.

good governance system, is key to building public and stakeholder confidence.

Investors seek to enter into contracts with organizations with exemplary corporate

governance credentials benchmarked to international best practices.

effective governance reduces perceived risks, consequently reduces cost of capital; it

also enables board of directors to take quick and better decisions which ultimately

improves bottom line of the corporates.

in today’s knowledge driven economy, demonstrating excellence in skills has become

the ultimate tool in the hands of board of directors to leverage competitive advantage.

adoption of good corporate governance guarantees corporate sustainability in the long-

run and strengthens relationships with existing and potential.

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a good corporate citizen is a center of attraction and enjoys a position of respect.

potential stakeholders seek to enter into relationships with enterprises who adhere to

standard governance principles and practices.

Good corporate governance can reduce the risk of financial crisis, which can have devastating

social and economic costs (Levine, 2006). Good corporate governance can lead to better

relationship with all stakeholders and thus improve labor relations as well as the climate for

improving social aspects such as environmental protection (Enobakhane, 2010). Brown and

Caylor (2004) found out that adhering to high standards of good governance results in better

performance. This clearly shows that good corporate governance is a determinant of

performance in the banking sector.

RBZ Journal - Bank Licensing Supervision and Surveillance (2004) indicates that banking

markets thrives on public confidence, otherwise without this confidence it will struggle to

maintain its status as a driver of economic transformation. Corporate governance is pivotal to

achieving the growth prospects of an economy, because sound corporate governance practices

reduces investment risk, attract foreign direct investments and improve performance of

organizations (Spanos, 2005).

2.4 Banking Sector Corporate Governance

Considering their important role in an economy, corporate governance of banks is of great

importance. Banks are highly unique with regards their capital structures and associated

information asymmetry. This is because banks to have more debt than equity in their capital

structure, as a result of deposits from clients both demand and savings deposits. This creates

tensions between managers and owners: conflicts in interests and risk perception among

more than two parties at the same time. Most depositors have little knowledge and incentive

to monitor the managers and shareholders in the bank. The secrecy within the banking market

allows bank managers and shareholders an incentive to invest in riskier assets.

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On a theoretical perspective, corporate governance has been seen as an economic

discipline, which examines how to achieve an increase in the effectiveness of certain

corporations with the help of organizational arrangements, contracts, regulations and

business legislation (Basel Committee on Bank Supervision, 2003). It has been emphasized

that banks play a crucial role in any economy; hence the need to enhance their corporate

governance if solvency and stability are to be attained (Basel Committee on Banking

Supervision, 2003). Levine (1997) stated three important roles of banks in an economy:

banks have a dominant position in the financial system of a developing country and

are extremely important engines of economic growth.

since financial markets are small and underdeveloped, banks in developing economies

are the most important source of finance for real sector firms.

banks in developing countries are usually the main depository for the economy’s

savings.

The management of banks requires a consideration of corporate based on two dimensions. First,

there is need for transparency in the corporate function, thus protecting the investors’ interest.

Second, there is need for a risk sound management system in a bank. The Basel Committee

on Banking Supervision (1999) indicates that, corporate governance involves the manner

in which the business and affairs of individual institutions are governed by those at the

highest levels of the organization’s hierarchy. This has implications on how individual banks:

i) set organization’s goals and objectives (mainly generating a return on investments);

ii) conduct day-to-day business (operations management);

iii) incorporate all stakeholder segments;

iv) align corporate activities with the environment.

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Banks are both opaque and complex. “Banks can alter the risk composition of their assets more

quickly than most nonfinancial industries, and banks can readily hide problems by extending

loans to clients that cannot service previous debt obligations” (Levine, 2006). Moreover, the

business of securitization has in essence speeded up the process of lending at the origination

stage and in interbank markets and increased opacity by merging large amounts of information

and relying on credit ratings. Opacity and complexity play a role in governance in both the

interaction between the board and management and the relationship between the bank and its

regulators.

External corporate governance is the key type of governance in banks considering their

complexity, but also on the internal governance mechanisms to show the commitment of bank

managers and equity owners to depositors. The Basel Committee on Banking Supervision

(BCBS) states that board of directors and internal auditors play a crucial role in the governance

of banks. Literature suggests that board size, composition and activity affect the board’s

effectiveness, which in turn affects bank value (Nam and Lum, 2006). In order to allow

banks to play the key dual roles of advisor and monitor within the banking market, banks tend

to have much bigger and more independent boards. This is also necessitated by their particular

idiosyncrasies and agency tensions within the banking system.

Board of directors

Organizations, in line with the evolution of corporations are managed and directed under the

direction of board of directors. The board works closely with the CEO and through him or her

delegate to management, the authority and responsibility for managing the everyday affairs of

the corporation. The shareholders relies on directors for the monitoring of management. It is

important that directors display a range of expertise, experience and strategic thinking.

Effective directors maintain an attitude of constructive skepticism; they ask incisive, probing

18

questions and require accurate, honest answers; they act with integrity; and they demonstrate a

commitment to the corporation, its business plans and long-term stockholder value.

The board of directors of the corporation is ultimately responsible for the stewardship of the

organization. The board of directors has a dual mandate:

Advisory: consult with management regarding strategic and operational direction of the

company.

Oversight: monitor company performance and reduce agency costs.

The theory of corporate governance in banking requires consideration of the following issues:

supervision and regulation as part of external governance

regulation of the market itself as a distinct and separate dimension of decision making

within banks

regulation as constituting the presence of an additional interest external to and separate

from the firm’s interest

regulation as constituting an external party that is in a risk sharing relationship

with the individual bank firm.

Therefore, in order to misunderstand the agency tensions in banking the issue of supervision

and regulation need to be considered in totality. This may lead to prescriptions that amplify

rather than reduce risk. In Zimbabwe, the regulatory functions, which is directed at the

objective of promoting and maintaining financial sector stability in the economy is

controlled by the Reserve Bank of Zimbabwe while the supervisory bodies are Deposit

Protection Corporation and the Reserve Bank of Zimbabwe. Therefore, accepting that

regulation impacts the banking market as a whole calls for the acceptance of the fact that

regulation impacts on the dynamics and structure of the owners and management relationships

in banks.

19

The BCBS (1999) states that there is a positive relationship between transparency of

information related to decisions and actions; and accountability in that it gives market

participants sufficient information with which to judge the management of a bank. The

Committee further indicated that corporate governance structures varies across countries

hence, there is no one size fits all answer to structural issues and that laws do not need to be

the same across countries. Sound governance therefore, can be practiced regardless of the form

used by a banking organization. The committee therefore suggested four important forms of

oversight that should be included in the organizational structure of any bank in order to ensure

the appropriate checks and balances. These forms of oversight include:

1) board oversight on management and the company;

2) stakeholder oversight not involved in the day-to-day running of the various business

areas;

3) direct line supervision of different business areas, and;

4) independent audit functions and risk management

Total quality management is one key essence of good governance in banking industry, which

includes six performance areas (Klapper and Love, 2002). These critical success areas include

capital adequacy, assets quality, management, earnings, liquidity, and sensitivity risk. It is

stated that the extent of adherence to these six parameters determines the quality rating of an

organization.

2.5 Corporate Governance Principles

Good governance has 8 major characteristics. It is participatory, consensus oriented,

accountable, transparent, responsive, effective and efficient, equitable and inclusive and

follows the rule of law. It assures that corruption is minimized, the views of minority are taken

20

into account and that the voices of the most vulnerable in society are heard in decision making.

It is also responsive to the present and future needs of society.

Transparency

Transparency necessitates that information is freely available and directly accessible to those

who will be affected by such decisions and their enforcement. It is an open life, open book

system in a competitive world. The accounting and auditing functions play an essential role in

good corporate governance, emphasizing the importance of corporate transparency with

shareholders and other stakeholders.

Participation

It refers to the involvement of all stakeholders in decision making. Participation could be either

direct or through legitimate intermediate institutions or representatives. Participation by a few

key individuals can have an influential role on company business, performance, reputation, and

share valuation.

Rule of Law

Good corporate governance requires fair legal frameworks that are enforced impartially. It also

requires full protection of human rights. This is a corollary to the transparent principle. It means

an enterprise should obey all the rules and regulations already in force in the community.

Consensus Oriented

It is a principle of increasing involvement and hence ownership. Listen long so as to make

wise, well informed decisions. It involves getting different perspectives on one issue.

Equity and inclusiveness

21

A society’s well-being depends on ensuring that all its members feel that they have a stake in

it and do not feel excluded from the mainstream society.

Efficiency and Effectiveness

Good governance means that processes and institutions produce results that meet the needs of

society while making the best use of the resources at their disposal. The concept of efficiency

covers the sustainable of available resources.

Accountability

Accountability is considers the relationship between an organization and its external

environment, and therefore the need for the organization to assume responsibility for the effects

of its practices. This concept therefore places an organization as part of the wider societal

network and has responsibility to the total network rather than just to its shareholders.

“Accountability is a means of concretizing relations between institutions, delineating

responsibilities, controlling power, enhancing legitimacy, and ultimately promoting

democracy” (Fisher, 2004:510). This implies a relationship in which an individual or agency

is held to answer for performance that involves some delegation of authority to act.

Responsiveness

Good governance requires that institutions and processes try to serve all stakeholders within a

reasonable timeframe. It is a corollary of participation and transparency principle.

2.6 Theoretical Underpinnings on Corporate Governance

According to the agency theory good corporate governance should lead to an improvement in

the stock prices or long-term performance, because when agents are better supervised,

agency costs are decreased (Albanese, Dacin and Harris, 1997). Firms need internal

mechanisms of corporate governance to mitigate the probability of having agency problems.

22

The agency problem was first highlighted by Adam Smith in the eighteenth century. The

agency theory is assumed to afford a foundation of corporate governance through the use of

internal corporate governance mechanisms. According to the Agency Theory, the shareholders

are principals and the managers are agents with shareholders contracting the agents to perform

service on their behalf. Tensions occur as the organization is viewed as an organization with

contracts between the shareholders and the managers. Managers may pursue personal motives

other than maximizing shareholder wealth, which give rise to tensions and as such increase

agency costs.

It is highly possible that managers pursue their own self-interest rather than in the best

interests of the company because of asymmetric information as managers generally are

on the ground than shareholders whether they are meeting their objectives, and uncertainty.

The business environment is full of uncertainty with a number of factors that can influence the

performance of the company. The Agency Theory argues that under conditions of incomplete

information and uncertainty, which characterize most business settings, two agency problems

arise: adverse selection and moral hazard. Adverse selection refers to the condition under

which the shareholders are unable to ascertain whether management accurately represents their

ability to do the work as per the contract. Moral hazard refers to the condition under which the

shareholders cannot be sure if the managers has put forth maximum effort.

Agency theorists considers directors as self-serving and stewardship theorists suggests

that directors frequently have interests that are consistent with those of owners. Where

managers have served a corporation for a number of years, there is a “merging of

individual ego and the corporation” (Donaldson and Davis, 1991). Equally, managers may

carry out their roles in line with the contracts of service and from a sense of duty. The

stewardship perspective suggests that the attaining organizational results also satisfies the

individual needs of the steward. The steward identifies greater satisfaction accruing from

23

satisfying organizational goals than through self-serving behavior. Stewardship theory

recognizes the importance of structures that empower the steward, offering maximum

autonomy built upon trust.

The stakeholder theory is also discussed in corporate governance, with regard to the

organization’s responsibility to the wider community. A stakeholder is any group of individuals

who can affect or is affected by the activities of the firm, in achieving the objectives of the firm

(Freeman 1984). Sundaram and Inkpen (2004) that “stakeholder theory attempts to address the

question of which groups of stakeholder deserve and require management’s attention”.

Stakeholder theory supports the agency perspective, where responsibility of directors is

increased from shareholders to other stakeholders’ interests.

The stakeholder theory is particularly important for managers in a corporation, who have

critical networks of relationships other than those with the owners, managers and employees

who are part of the agency theory (Freeman, 1999). Kaplan and Norton (1996) argue that a

company should develop relationships with customers by improving customer services,

thereby enhancing its financial performance. Atkinson, Waterhouse and Wells (1997)

emphasize that employees and communities also need to be included in relationships in order

to enhance financial performance. The influences and functional mechanisms relating to

stakeholders can affect a firm’s ability and performance (Clarkson, 1995).

According to Clarke (2004), if management focuses on maximizing the total wealth of the

organization, they need to consider the effects of their decisions on the wider community.

Pesqueuy and Damak-Ayadi (2005) indicate that the practice of stakeholder management will

result in higher profitability, stability and growth, and will thus affect firm performance. Good

corporate governance must focus on creating a feeling of security that a company will consider

24

the interests of stakeholders, as the board of directors is responsible for the company as well as

its stakeholders.

2.7 Banking Sector Performance

Research on the determinants of bank profitability focused mainly on the returns on equity and

bank assets, and net interest rate margins. It has traditionally explored the impact on bank

performance of bank-specific factors, such as risk, market power, and regulatory costs.

Bank-specific determinants

Credit risk is the main source of bank-specific risk in is credit risk leading to high non-

performing loans. Banks are mainly exposed to credit risk by weak legal environments, , poor

enforcement of creditor rights, and a lack of sufficient information on borrowers. At the

macroeconomic level, weak economic growth adds to risk as it promotes the deterioration of

credit quality, and increases the probability of loan defaults. The ratio of loans to deposits and

short term funding is mainly used to measure credit risk in banking. This provides a forward-

looking measure of bank exposure to default and asset quality deterioration.

The other important proxy for the overall level of risk undertaken by banks is the bank activity

mix. This considers the extent that different sources of income are characterized by different

credit risk and volatility. The activity mix is measured with the ratio of net interest revenues

over other operating income. Interest earning activities are generally regarded as riskier than

fee based activities, which would need to be rewarded by higher returns. It is stated that banks

that rely on deposits for their funding are less profitable, due to the required extensive branch

network, and other expenses that are incurred in administering deposit accounts.

In line with the CAMELS framework capital adequacy is an important variable in determining

bank performance. In imperfect capital markets, well capitalized banks need to borrow less in

order to support a given level of assets, and tend to face lower cost of funding due to lower

25

prospective bankruptcy costs. Also, in the presence of asymmetric information, a well-

capitalized banks could provide a signal to the market that a better-than-average performance

should be expected (Athanasoglou et al., 2005). Well capitalized banks are, in this regard, less

risky and profits should be lower because they are perceived to be safer. In this case, we would

expect to observe a negative association between capital and profits. It is stated that there is a

positive relationship between capital and bank profitability, reflecting the soundness of the

financial system (Athanasoglou, et al.2005). Likewise, Berger (2005) finds positive causation

in both direction between capital and profitability.

Measures of Bank Profitability

Measures of after-tax rates of return, such as the return on average total assets (ROA) and the

return on total equity (ROE), are widely used to assess the performance of firms, including

commercial banks. Bank regulators and analysts mainly use ROA and ROE to assess industry

performance and forecast trends in market structure as inputs in statistical models to predict

bank failures and mergers and for a variety of other purposes where a measure of profitability

is desired.

The most important profitability ratio from an investor’s viewpoint is the return on equity

(ROE) ratio. It is often called ROI, return on investment ratio, because it indicates the annual

rate of return to the firm’s investors or owners. Return on equity represents the residual return

that is available to owners after deducting all other financing costs.

The return on assets (ROA) ratio indicates the rate of return on the firm’s assets. It can be used

to compare rates of return with alternative investments that could be undertaken.

Return on Total Assets

26

The ratio of net income to total assets measures the return on total assets (ROA) after interest

and taxes. It is a ratio of income to its total assets and measures the ability of an organization’s

management to generate income by utilizing company assets at their disposal.

ROA=Net income available to common stockholders/Total asset

Return on Common Equity

Ultimately, the most important, or “bottom line,” accounting ratio is the ratio of net

income to common equity, which measures the return on common equity (ROE). It is a

financial ratio that refers to how much profit a company earned compared to the total amount

of shareholder equity invested or found on the balance sheet. ROE is what shareholders look

in return for their investment.

ROE=net income available to common stockholders/common equity

2.8 Corporate Governance and Performance

It is important to note that good corporate governance is most likely to lead to improved

corporate performance by reducing risk of investors and ensuring better decision-making. In

this regard, the firm’s value may respond instantaneously to news indicating better corporate

governance. However, quantitative evidence supporting the existence of a link between the

quality of corporate governance and firm performance is relatively scanty (Imam, 2006). Good

governance means shareholders and managers are putting the corporate resources to good use

hence leading to improved performance. As potential stakeholders aspire to invest in firms

with good governance, they are likely to enjoy lower costs of capital, which is a source of better

firm performance. Other key stakeholders, such as employees and suppliers, also aspire to be

associated with and enter into business relationships with organizations that exhibit good

governance, as the relationships are likely to be more prosperous, long lasting than those with

firms with less effective corporate governance. It is therefore essential to appreciate that

27

upholding the principles of good corporate governance is essential for good corporate

performance.

28

CHAPTER 3: RESEARCH METHODOLOGY

3.1 Introduction

This chapter describes the research methodology of this study. This chapter is based on the

definition of research which implies that the research process;

a. is undertaken within a framework of a set of philosophies (approaches);

b. uses procedures, methods, and techniques that have been tested for validity and

reliability; and

c. is designed to be unbiased and objective.

Adherence to the three criteria mentioned above enables the process in this context to be called

a “research”. As such the research methodology used in exploring the relationship between

corporate governance and performance in the Zimbabwe banking sector is described. This

section also defines the geographical area of the study, the study design, population and sample.

The data collection instruments including the methods adopted to maintain validity and

reliability of the instruments are also described.

3.2 Research Description

The research used an interpretive epistemology to examine the relationship between corporate

governance and bank performance in Zimbabwe. Interpretivism comes from phenomenology

and symbolic interactionism. The interpretivist philosophy was chosen because there are

multiple variables to be understood and all impact corporate governance and bank performance.

There was also need for the researcher to be deeply involved in the research, and data is mostly

qualitative, that is, spoken word and documents. The researcher adopted a subjectivist

ontological position because reality is socially constructed from the perceptions and consequent

actions of respondents. There are also multiple variables that affect the relationship between

29

corporate governance and bank performance. The uniqueness of banks and the large number

of bank stakeholders also necessitated the adoption of the subjectivist position.

According to Kumar 1999, there are three perspectives that can be used to classify the kind of

research that is performed: the application of the research study, the objectives in undertaking

the study and the type of information being sought. Pure research or fundamental research is

undertaken for academic interest or to increase understanding of fundamental principles only

and has no practical implications, while applied research tries to apply the existing theoretical

knowledge to a particular issue or problem. According to this researcher, this research is both

exploratory and explanatory. It applies the theory of the relationship between corporate

governance and performance in the Zimbabwean banking sector and therefore has also an

inclination towards being applied research. This study is exploratory since the research is

performed to investigate the undertaking of a larger study in future. In the case of exploratory

research, a small-scale research is undertaken to decide if it is feasible to do a detailed

investigation.

3.3 Research Approach and Design

Both exploratory and explanatory methods of research were adopted for this study. The

emphasis is on describing the nature or condition and the degree of relationship between

corporate governance and performance in Zimbabwe rather than on judging or interpreting the

financial statements of the banks under study. The researcher used this kind of research to

obtain first hand data (exploratory) from the respondents so as to formulate (explanatory)

rational and sound conclusions and recommendations for the study. A qualitative approach was

predominantly adopted, followed over by the quantitative approach. This was because social

constructivist is considered to be an integrated perspective. The research used qualitative

methods in the form of case studies to create an in-depth and rich account with regards the

relationship between corporate governance and bank performance. The quantitative method

30

was used to determine the generalization of the results to other banks in Zimbabwe and banking

markets similar to the Zimbabwean market.

Quantitative Approach

Contrary to the qualitative method, the quantitative approach is centred on the quantification

of relationships between variables. The quantitative approach helps prevent bias in gathering

and presenting research data.

Qualitative Approach

Qualitative research refers to “a form of social enquiry that focuses on the way people interpret

and make sense of their experience and the world in which they live”. “Qualitative approach

generates verbal information rather than numerical values” (Polgar and Thomas, 1995). Due to

the exploratory and explanatory nature of the research, surveys were used. “A survey obtains

information from a sample of people by means of self-report, that is, the people respond to a

series of questions posed by the investigator” (Polit and Hungler 1993). In this study the

information was collected through self-administered questionnaires and interviews distributed

personally to the sample bank representatives of the three banks under study in Zimbabwe.

The survey approach was selected because it offers an accurate description of the

characteristics, such as opinions, beliefs, behaviour, experiences, and knowledge of the

situation being researched. This design was applied to meet the objectives of the study as spelt

out in Chapter 1. “Research design refers to a tool for undertaking a study with extreme control

over factors that may interfere with the validity of the findings” (Burns and Grove 2003). Polit

et al (2001) defines research design as ‘the researcher’s overall technique for answering the

research questions or testing the research hypotheses.

31

3.3 The Population and Study Sample

According to Burns and Grove, a population is defined as all elements that meet the sample

criteria for inclusion in the reserach. Targeted population consists of all Zimbabwean banks as

per the banking sector architecture by the Reserve Bank of Zimbabwe. A sample frame of

commercial and merchant banks was then selected from the total population. A sample frame

refers to a list of all people or units in the population from which a sample can be chosen.

A sample is “a proportion of a population” (Polit et al (2001). To achieve pertinent

information, certain inclusion criterion was imposed. The participants who qualified for sample

selection were bankers. This qualification ensured that the participants understand corporate

governance in Zimbabwe. The respondents were selected from the (3) commercial banks under

study. A carefully selected sample can provide data representative of the population from

which it is drawn. The three commercial banks under study are categorised as follows: Foreign-

owned bank (BancABC), Indigenous bank (Metropolitan Bank) and closed bank (ReNaissance

Merchant Bank).

The sampling process in this study involved:

Multi-stage cluster sampling for banks. First, the banks were divided into foreign-

owned and indigenous banks. Secondly, the banks were divided into operating and

closed banks.

Purposive sampling was then applied on each cluster in view of the availability of

information.

Respondents were then selected using stratified sampling in which the following stratums were

developed: Shareholders, Board of Directors, CEO, Audit Committee, Management and Staff.

Purposive sampling was adopted on management and the following key bank departments were

studied: Treasury, Finance, Corporate Banking, Strategy and Business Development, Retail

32

Banking, Risk and Compliance, Human Resources, Legal and Corporate Services, and

Operations.

Simple random sampling was used on staff with the assistance of the Human Resources

Management of each bank.

The research used three questionnaires and interviews to gather data from bank representatives.

The questionnaires were distributed as follows:

Research instrument Respondents (number)

Questionnaire 1: Shareholders, Board of

Directors and CEO

10

Questionnaire 2: Management 48

Questionnaire 3: Staff Satisfaction 50

Interview 5

A valid research study is one that finds the truth. Internal and external validity components

were used to ensure the study sample and population give valid data. External validity is based

on the adequacy of the sample. If the sample is representative of the desired population then

results will generalize. This researcher ensured generalization by first defining the study

population and then employed judgmental sampling method. Judgmental sampling is a non-

probability sampling technique where the researcher selects units to be sampled based on their

knowledge and professional judgment. This type of sampling technique is also known as

purposive sampling and authoritative sampling. As a result three commercial banks namely

BancABC, Metropolitan Bank and ReNaissance Merchant Bank were chosen. Internal validity

on the other hand refers to the adequacy of the research design and the degree of control

exercised in data gathering.

33

3.4 Data Collection and Analysis

3.4.1 Primary Data Collection instruments

A research instrument is “a tool used to collect data, or designed to measure knowledge,

attitudes and skills” (Parahoo 1997).

Questionnaires and Interviews

Questionnaires and interviews were used as data collection instruments. A questionnaire is a

printed or e-mailed self-report form designed to elicit information that can be obtained through

the written responses of the subjects. The information obtained through a questionnaire is

similar to that obtained by an interview, but the questions tend to have less depth.

Questionnaires were preferred basing on the following characteristics as specified by Brink

and Wood 1998:

Each participant enters his\her responses on the questionnaire, saving the researcher’s

time.

It is less expensive than conducting personal interviews.

Respondents feel that they remain anonymous and can express themselves in their own

words without fear of identification.

Data on a broad range of topics may be collected within a limited period.

The format is standard for all subjects and is independent of the interviewer’s mood.

Three questionnaires were designed and presented to the bank representatives in Harare. The

three questionnaires were as follows:

Questionnaire 1: Shareholders, Board of Directors and CEO Evaluations

34

Questionnaire 2: Management Questionnaire

Questionnaire 3: Staff Satisfaction Survey

The management questionnaire was distributed to three representatives from the following

bank divisions: Corporate Banking, Retail Banking, Operations, Finance, Treasury, Risk

Management, Legal and Human Resources. Sample questionnaire is as attached on the

appendices section. Both open ended and close-ended questions were asked. Open-ended

questions were included because they allow respondents to respond to questions in their own

words and provide more detail. Since they are easier to analyse and administer closed-ended

questions were included in this study. Also, closed-ended questions are more efficient in the

sense that a respondent is able to complete more closed-ended items than open-ended items in

a given period of time (Polit and Hunger 1993:203).

Interviews are one-on-one, probing discussions between a trained research and a respondent.

This study used unstructured interviews in order to discover much more about the interviewee

by what they say and think. This allowed the researcher to gain considerable insight from each

respondent and was useful for understanding unusual behaviours. However, results were highly

dependent on researcher’s interpretation.

The researcher also utilized unstructured dialogue to gain unique insights from enthusiasts and

cover sensitive topics.

3.5.2 Secondary Data Collection

Desk research was adopted to gather quantitative data, utilizing archives, records, and

publications from the selected banks. The researcher approached each of the selected banks in

person to gather the required data. Secondary data was also utilized on ReNaissance Merchant

Bank as a closed bank.

35

3.5 Reliability and Validity

3.5.1 Reliability

This measures the degree of consistency to which any given instrument measures the attribute

it is designed to measure. Data collection bias was highly minimized to ensure reliability. To

try and minimize the bias, the researcher administered the questionnaires personally and

standardizing conditions such as exhibiting similar personal attributes to all respondents, such

as friendliness and patience. Environmental comfort was ensured through upholding privacy,

confidentiality and avoiding general physical discomfort.

3.5.2 Validity

This measures the extent to which a research instrument measures what it is intended to

measure, that is, does the research instrument allow you to hit “the bull’s eye” of the research

object? Questions were based on information gathered during the literature review to ensure

that they were representative of what the study intends to achieve.

3.6 Data Analysis

After data collection, the data was organized and analysed. For analysis of quantitative data, a

computer programme SPSSwill be used. The following will be used to arrange and analyse

data in the next chapter:

Tables

Pie Charts

Figures

Graphs

36

3.7 Conclusion

This chapter described the research methodology, including the population, sample data

collection instruments as well as strategies to ensure the ethical standards, reliability and

validity of the study. The research findings are then discussed in the next chapter.

37

CHAPTER 4: DATA ANALYSIS AND PRESENTATION

4.1 Introduction

This chapter presents an analysis of the results obtained from the study of corporate governance

and performance in the Zimbabwean banking sector. A case study approach of three banks

namely BancABC, Metropolitan Bank and ReNaissance Merchant was adopted. These results

were obtained from 68 questionnaires that were distributed and interviews that were carried

out during the research study period. The research used an interpretivist-subjectivist paradigm

in data gathering.

4.1.1 Description of sample data and response rate

Data for this study were collected from two sources. The first sample provided the primary data

that were collected by survey questionnaire and interviews. The second database was the

secondary data which were collected from the bank’s annual reports, banking sector surveys,

liquidator reports, newspapers and internet sources.

Response Rate

Below is a table showing the response rate on the distributed questionnaires. The response rate

was greatly enhanced by the introductory note on each questionnaire which clearly stated the

purpose of the study. Respondents were also given ample time to respond to the questionnaires.

Table 1: Response Rate

Group Population-(n) Responses % response rate

68 64 94%

Shareholders 10 8 80%

38

Chief Executive Officers

2 2 100%

Board of Directors 6 5 83.33%

Audit Committee 6 6 100%

Management 14 13 83.33%

Staff 30 30 100

4.2 Demographic Analysis

This study protected the privacy data of the respondents who played important roles in

Zimbabwean financial institutions and markets; they are CEOs, board directors, independent

directors, auditors, and shareholders of the banks studied. The presentation of profiles of the

respondents including name, address, gender, age, education and income were aggregated in

order to protect their confidentiality because the disclosure of the profiles matter with the

privacy law. Demographic analysis is presented in three characteristics as follows.

4.2.1 Respondent Positions in banks

The table below shows the distribution of the positions of respondents. The largest group,

44.1% of overall respondents, was employees.The second largest population was management

comprising 20.6%. Next, bank shareholders were 14.8%. Independent directors and audit

representatives were each 8.8%. CEOs of the banks were 2.9%.

39

Table 2: The distribution of the frequency and percentage of respondents

Positions Frequency Percentage

Shareholder 10 14.8%

CEO 2 2.9%

Director 6 8.8%

Management 14 20.6%

Auditor 6 8.8%

Employees 30 44.1%

Total 68 100%

4.2.2 Respondent levels of education

The table below shows the distribution of the respondents’ level of education. There is a

favorable level of education position amongst BancABC than Metropolitan Bank. It was noted

that some of the qualifications especially amongst management and employees within

Metropolitan Bank were not banking related. Some of the board members within Metropolitan

Bank are related parties and therefore are not independent non-executive directors.

Table 3: The levels of education percentage distribution

Position Diploma Bachelor Masters Doctoral

BancA

BC

METB

ANK

BancA

BC

METB

ANK

BancA

BC

METB

ANK

BancA

BC

METB

ANK

Sharehol

der

- - 5% 20% 90% 80% 5%

CEO - - - - 100% 100% - -

Director - - 20% 60% 80% 40% - -

40

Manage

ment

- 20% 15% 60% 85% 20% - -

Auditor - - - 10% 100% 90% - -

Employ

ees

- 30% 25% 60% 75% 10% - -

Secondary data analysis of ReNaissance Merchant Bank indicated that the qualifications of

most of the board members were not consummate with the operations of a bank. For instance

it is recommended by the principles for Corporate Governance in Zimbabwe that the chairman

must be a lawyer, while the board was served by a holder of a Master in Business

Administration. The same is the case at Metropolitan Bank.

4.1.1 Shareholder Analysis

The shareholder analysis dealt with the identification and discovery of whether shareholders in

each of the banks under study get their rights and responsibilities or not according to the best

practice. This was necessitated by the agency theory tensions, hence the need to align the

interest of shareholders to maximize wealth.

41

The results indicate a favorable position in terms of shareholder issues within BancABC. The

majority of respondents within BancABC indicated that shareholders within the bank were

practicing their rights and actively participated in shareholders meetings. Shareholders within

BancABC according to the questionnaire results strongly prohibited inside trading as compared

to those within Metropolitan Bank.

Content analysis of ReNaissance Merchant Bank indicated that the shareholding structure at

the bank was chameleon-styled in nature as it camouflaged the true identity of the beneficiary

shareholders.

Respondents from Metropolitan Bank indicated the need to protect minority shareholder rights

and enhancing shareholder activism should be prioritized. It was stated that inside trading has

led to the current crisis at the bank and as such must be strongly prohibited.

The study results therefore indicate that there is a positive relationship between bank

performance and its shareholders’ exercise of rights. The respondents from BancABC indicated

that the success of the bank is necessitated partly by the fact that its shareholders receive timely

0%

20%

40%

60%

80%

100%

120%

BancABC

Metropolitan Bank

Figure 1: Shareholder Analysis

Figure 1: Shareholder Analysis

42

and accurate information on the banks performance and as such make informed decisions give

the fast paced business environment as a result of globalization.

4.1.2 Board of Directors Analysis

This section was aimed at examining the level of effectiveness of shareholders meetings and

the level of independence of the board of directors and their impact on bank performance.

Boards of directors are responsible for monitoring managers, exercising control on behalf of

shareholders and improving the protection of shareholders especially minority shareholders.

Banc ABC

According to the respondents the roles and responsibility within BancABC are clearly stated

and its board members are well qualified and diverse. Though a significant number of

respondents indicated that the bank’s strategy is successfully communicated to stakeholders

management felt the board was not doing enough reading from the current restructuring

exercise which highly ivory tower. The respondents further indicated that the board members

are not in any way affiliated with a significant customer or supplier. As a result of the diversity

0%

20%

40%

60%

80%

100%

120%

Extremely

Significantly

Moderately

Slightly

Not at all

Figure 2: Board of Directors Analysis-BancABC

Figure 2: Board of Directors Analysis-BancABC

43

and qualifications of the board members it was indicated that the board members stay abreast

of issues and trends which could affect strategic or business plans of the bank as indicated by

the innovative products the bank is offering.

Metropolitan Bank

Respondents at Metropolitan Bank indicated that the current demise at the bank was as a result

of the ineffectiveness of the board of directors. Though roles were clearly stated as per the

requirement of the Reserve Bank of Zimbabwe bank strategy was not being communicated

properly and the board members are affiliated to the customers and suppliers. It was further

indicated that the board members were not adequately qualified to make informed decisions

regarding the bank’s strategic direction.

At ReNaissance Merchant Bank it was noted that the directors awarded themselves unbridled

powers to influence decision making and the day to day operations of the bank. Inside trading

was so rampant as the directors disbursed colossal loans to friends and relatives. The situation

was rescued by the Reserve Bank firing the bank’s directors in order to protect the depositors

0%

20%

40%

60%

80%

100%

120%

Extremely

Significantly

Moderately

Slightly

Not at all

Figure 3: Board of Directors Analysis-Metropolitan Bank

Figure 3: Board of Directors Analysis-Metropolitan Bank

44

and financial system. The same issues that affected ReNaissance Merchant Bank were reported

at Metropolitan Bank during this research. It was therefore indicated that there is need to

strengthen the role and effectiveness of shareholders meetings.

4.1.3 Audit Committee Analysis

Audit committee independence was used as a corporate governance mechanism in this study.

It is mostly measured as the number of independent members to the total number of audit

committee members in the bank’s board. The Audit Committee is one of the important

committee of the board of directors. Both banks under study had the Audit Committee as it is

a requirement for every banking institution. Respondents from both BancABC and

Metropolitan Bank indicated the following functions as key to the audit function:

to monitor the integrity of the financial statements of the bank;

to review the bank's internal financialcontrolsystem;

tomonitorandreviewtheeffectivenessofthe bank'sinternal audit function; and

to monitor and review the external auditor's independence, objectivity and

effectiveness.

BancABC

0%10%20%30%40%50%60%70%80%90%

100%

Not at all

Slightly

Moderately

Significantly

Extremely

Figure 4: Audit Committee Analysis-BancABC

Figure 4: Audit Committe Analysis-BancABC

45

Results from BancABC indicated that the audit committee discharges its roles effectively and

is highly independent. Some respondents highlighted that the committee was not receiving

relevant information as was seen in 2003 when the bank lost a number of its assets as a result

of audit inefficiencies. It was highlighted that the audit committee meets regularly with internal

and external auditors to ascertain whether the auditors have had disagreements with

management and how these disagreements have been resolved.

The audit committee at BancABC also reviews with the auditors whether all the systems and

procedures are adequate and whether there are any material systems and controls that need

strengthening. The bank highlighted the following attributes as key to the success of the bank’s

audit function: independence, expertise and audit committee policy.

Metropolitan Bank

Results from Metropolitan Bank indicated that the audit function had some inefficiencies which

are negatively affecting the performance of the bank. It was indicated that the scope of internal

0%10%20%30%40%50%60%70%80%

Not at all

Slightly

Moderately

Significantly

Extremely

Figure 5: Audit Committee Analysis-Metropolitan Bank

Figure 5: Audit Committee Analysis-Metropolitan Bank

46

audit within Metropolitan Bank was too narrow to improve efficiency within the bank.

Respondents indicated there was more of compliance rather that commitment to the internal

audit function. The internal audit department was not effective as it was independent in its

operations. Respondents indicated that internal auditors at the bank lacked the ability to report

all deficiencies without fear of reprisal by management. At ReNaissance Merchant Bank the

Reserve Bank had to fire the Head of Internal Audit when the bank crisis occurred. Respondents

at Metropolitan Bank indicated the need to redefine the contents of the audit report and

developing training programs for audit committee members.

There is therefore a positive relationship between corporate governance audit function and

bank performance as measured by ROA and ROE. The results are in line with the agency theory

perspective, which assumes a significant relationship between audit committee independence

and bank performance. The possible explanation for this result is that the audit committee has

oversight responsibility for preparing the financial statements, reducing the chances of earnings

restatements and improving the credibility and integrity of financial information produced by

the bank by identifying potential fraud in the financial statements. Therefore, the audit

committee increases depositor and investors’ confidence in a bankand ensures the proper

utilization and maximization of the shareholders’ funds. The audit committee monitors

mechanisms that enhance the quality of information between principals and agents, which in

turn helps to minimize agency problems (Rouf, 2011).

According to the agency theory, the independent members of an audit committee can reduce

the benefits from withholding information and assist shareholders in monitoring managers’

activities (Mohamad & Sulong, 2010). The present results support the agency theory, which

suggests that audit committees might mitigate agency problems, leading to reduced agency

costs by aligning the interests of controlling owners with those of the company.

47

4.1.4 Management and Staff Analysis

This research indicated that linking performance to reward is central to managing the agency

conflicts in banks. This is because reward is a motivator that will encourage specific behaviors

or result in higher performance levels. In order to motivate managers, the use of an integrated

performance and reward strategy should be considered, if the organization invest time in

knowing what their real needs are. Financial and non-financial rewards is part of the real needs.

There seems to be so much focus on financial rewards by economists despite the importance

on non-financial rewards. Money represents a generalized claim on resources and is generally

preferred over an equal dollar-value payment in kind. In this research the results from

Metropolitan Bank indicated a focus on monetary rewards as compared to a more balanced

approach at BancABC.

In Maslow’s ‘hierarchy of needs’ theory, economic reward only influences the lower of the

needs and the higher level needs are satisfied by non-economic rewards. Herzberg later

reported on the hygiene factors that impact employee satisfaction and motivation as an

expansion of the Maslow’s theory.

The performance at BancABC was seen to be closely related to its reward structures. It was

also noted that at Metropolitan Bank, bank performance was only measured in accounting

terms and as such ignoring the key non-financial metrics.

Motivation levels were low within Metropolitan bank as employees indicated issues of job

security, recognition, salaries, education and expertise, and conditions of work as the major

factors leading to low motivation. However, at BancABC was considered high because of

favorable pay conditions, job security and education and expertise programs.

48

4.3 Bank Performance

This study revealed that there is a positive relationship between corporate governance practices

in Zimbabwe and bank performance measures of ROE and ROA, and non-economic measures.

The bank performance measures report the efficiency of management in increasing profitability

and the market value of firms in an unstable economic environment such as Zimbabwe. This

confirms the agency theory perspective of the relationship between better governance practices

and firm performance.

Return on Equity

In this study, the variables that were significantly related to ROE during the period under

review in Zimbabwe were corporate reporting practices. Empirically correlation and analysis

of variance reported a significant relationship between corporate reporting and ROE. The other

corporate governance variables such as shareholders, CEO, management, employees and board

of directors committees also have an impact on ROE. The results are in line with Brown and

Caylor (2004) who also observed that better governance is associated with a higher ROE.

Similarly, various other researchers reported enhancements in corporate performance is

measured by Return on Equity indicating compliance with sound corporate governance

practices.

Return on Assets

The present research indicates that shareholders, board of directors and CEO are the variables

that are significantly related to ROA. It was found out that where the asset base is large relative

returns will be poor, confirming that the larger the denominator, the greater the numerator

required to obtain higher profit (Kiel & Nicholson 2003). Kiel and Nicholson also state that if

the size of the assets is controlled, revenue is strongly and positively correlated with ROA.

Relationship between corporate governance and bank performance

49

This study tested the relationship between the implementation of corporate governance

principles and the bank performance in the Zimbabwe. Corporate governance principles were

measured using: rights of shareholders, board of directors, CEO, audit committee, management

and employees responsibilities. According to the stakeholder theory perspective, there is a

significant relationship between the implementation of good corporate governance and firm

performance. Results show a positive relationship between the implementation of corporate

governance and the ROA and the ROE. These results show that the implementation of

corporate governance principles in banks could influence the accounting-based and market-

based measures of bank performance.

Analysis and implication

The present result confirms the findings of Dao (2008), Cheung et al. (2011) and Kalezić

(2012). The previous empirical results show that corporate governance positively affects the

performance and value of listed companies. The results showed that good corporate governance

practices can predict future performance in listed companies. The positive relationship between

bank performance and the implementation of corporate governance principles is in accordance

with the stakeholder theory perspective. The correlation results also confirm that the

implementation of sound corporate governance principles has a positive effect on bank

performance in Zimbabwe because the implementation of corporate governance principles

enables effective monitoring, helps firms to attract investment, raises funds with a low capital

cost, generates long-term economic value and enhances firm performance (Sengur, 2011). The

present results suggest that a key best practice of corporate governance is establishing a clear

relationship between stakeholders and management, as well as considering the interests and

demands of all stakeholders, thereby leading to longer term business. The implementation of

corporate governance principles is vital to good corporate governance in Zimbabwe. Based on

the stakeholder theory, this research revealed a positive association between bank performance

50

and corporate governance principles, which results in the management of relationships with all

stakeholders. The results show that management thatconsider all stakeholders’ interests

reported improvements in their bank’s financial performance as measured by ROE and ROA.

51

CHAPTER 5: SUMMARY; RECOMMENDATIONS AND CONCLUSIONS

5.1 Introduction

This chapter commences with a discussion on the political and economic environment in which

banks operate in Zimbabwe. It also discusses the various strategies banks have used to

counteract the adverse effects of the volatile political and economic environment, which have

resulted in the resilience on the financial services sector and the economy. Findings of the study

are based on various theoretical perspectives and empirical literature on corporate governance

practices. Furthermore, this chapter provides a summary of the conclusions drawn from the

variables of corporate governance and the determinants of bank performance. It also discusses

the relationship of corporate governance practices on bank performance. Finally,

recommendations for the specific code of best practice in banking and the recommendations

for future research are summarized.

The purpose of this study has been to explore the relationship between corporate governance

and performance in the Zimbabwe banking sector. Good corporate governance in Zimbabwean

banks is essential in attracting investments and building depositor confidence. Successfully

attracting investment both local and foreign provides a stimulus to the economy, which results

in increased productivity and growth. Therefore this study used a comparative analysis between

BancABC, Metropolitan Bank and ReNaissance Merchant Bank to investigate the extent to

which corporate governance practices were adopted in Zimbabwe. Significant relationships

between corporate governance practices of shareholder rights, CEO, board of directors,

management, audit and employees, and firm performance were reported in this study. To

achieve the main objective, the study had several specific objectives:

establish the relationship between corporate governance and performance in the

banking sector.

52

establish the relationship between directors shareholding and banks performance in

Zimbabwe.

determine the strength of supervisory measurers put in place to enhance good corporate

governance by the Reserve bank of Zimbabwe.

analyzethe level of adherence to corporate governance principles by banks in

Zimbabwe.

give recommendations to stakeholders about sound strategies to improve corporate

governance in order to stimulate banks performance.

In view of the volatile political and economic environment during the period under study, banks

in Zimbabwe were undertaking strategies to mitigate risks by diversification into new products

and new markets and undertaking emergency reassessments of the short-term goals in the

backdrop of a worsening country scenario. One of the factors for the high performance of banks

that operate in this highly volatile environment is their diversification.

The researcher noted that there has been a massive restructuring by most banks during the

period under review with banks embarking on massive retrenchments and downsizing.

5.2 Research Review

The nature of the research was introduced in Chapter 1, which covered the background of the

study, literature review, methodological issues, findings and implications of this study, with

the principles and issues for investigation, research objectives and methodology employed.

Chapter 2 presented the development of corporate governance practice. In particular, this

chapter started with the various definitions of corporate governance and discussed the two main

corporate governance systems as practiced around the world. Further, thechapter reviewed the

historical development of corporate governance. As the literature review section, the chapter

extensively reviewed the previous theoretical and empirical literature relating to this area of

53

study. It outlined the benefits of the implementation of good corporate governance practices,

and the measures of bank performance.

Chapter 3 introduced the methodology employed in this study, which was a predominantly

qualitative research methodology. The data were selected using a questionnaire and interview

instruments that were discussed in detail. Chapter 4 described the results of the data collected

from the questionnaire and interview survey and secondary sources,which were reported in

Chapter 3.

5.3 Conclusions

5.3.1 Bank Performance

The results of this study and the literature report there is a positive relationship between good

corporate governance and performance. It was noted that many bank failures in Zimbabwe are

due to the board’s lack of oversight over company performance in an effective and consistent

manner. This is because the structure of the board, particularly in relation to the structure of

the decision making process which needs to be reformed to enable companies to focus on

sustaining high performance in the face of a rapidly changing environment (Cutting &Kouzmin

2000). Therefore, corporate governance structures must be designed to improve the quality of

monitoring of board decisions (Laing & Weir 1999). It can also be argued that banks with

effective governance practices consisting of the shareholders, board, management and

employees structures are likely to have strategies that will result in long-term sustainability of

the bank.

Furthermore, studies have reported that for governance practices to have a positive effect on

banks’ market value they must result in an increase in shareholders return and satisfy all the

stakeholders. The research indicated that highly performing banks adopt both accounting

measures of ROE and ROE; and non-accounting measures of environmental sustainability,

54

cultural entropy and community development. The funding of social activities by Banc ABC

was mentioned as a contributing factor to its favorable performance.

There is a prevalence of ivory tower planning in mostly indigenous banks in Zimbabwe yet

employees play a crucial role in the governance of banks and the enhancement of bank

performance. The bank failures in Zimbabwe are a result of the prime focus on the long term

issues of the bank yet shunning the day-to-day governance of the institutions to which

employees are critical. In this regard the corporate governance issue must take a holistic

approach in order to ensure improved bank performance.

Bank stakeholders need to be educated on the total measures of bank performance as there is

so much reliance on published accounts as the primary measure. Other key non-economic

measures are not emphasized. The researcher noted that economic performance is a subjective

measure of how ell an organization can use assets from its primary mode of business and

generate revenues.

5.3.2 Relationship between corporate governance and bank performance

The descriptive results of this study indicated a positive relationship between corporate

governance and bank performance in Zimbabwe. With regards to shareholder rights the

research findings indicated that the favorable balance sheet position, ROA and ROE on

BancABC are as a result of the following corporate governance issues:

the shareholders are able to practice their rights and ask pertinent questions when they

attend shareholder meetings,

the bank strives to ensure shareholders receive timely and regular information on the

bank,

the bank strongly prohibits inside trading and abusive self dealing.

55

However at Metropolitan Bank, which bank is currently struggling the issue of inside trading

was largely blamed for the poor asset quality and accounting results. Within Metropolitan Bank

it was highlighted that the concentrated shareholders negatively impacted the performance of

the bank as compared to the dispersed structure within BancABC.

The closure of ReNaissance Merchant Bank was as a result of corporate governance

shortcomings at the board level. Bank performance was greatly affected in terms of liquidity.

This had negative impacts on bank’s financial position and eventually affecting the employees

and the overall performance.

5.3.3 Relationship between audit committee and bank performance

Research results indicated that there is a positive relationship between an independent audit

committee and internal audit function with bank performance. As it is a requirement by the

Reserve Bank of Zimbabwe for banks to have the audit committee and internal audit division,

all banks in Zimbabwe are compliant. However, the study results indicated deficiencies with

regard to the monitoring and review of the bank’s audit function both internal and external.

Where the committee monitors and reviews the effectiveness of the internal controls, the

descriptive results shows an improvement in performance. The issue of audit committee

independence was emphasized as crucial to bank performance, as having a higher number of

independent members on the audit committee reduces information asymmetry problems and

helps to monitor management, hence enhancing firm performance (Fama& Jensen, 1983).

The investigation of Metropolitan Bank and ReNaissance Merchant Bank suggested that the

failure of the bank was created by high bad debts resulting from the self-dealing behavior of

management that used the money of the bank to fund their cross-holding businesses and close

connections. The results also showed that Metropolitan Bank seemingly has poor accounting

standards such as inadequate auditing. As a result, audit committee independence significantly

contributes to bank performance, with increased profitability and market value.

56

5.3.4 Relationship between corporate governance and management

The agency problem is at the center of corporate governance structures in organizations. The

findings of the study confirm the stakeholder theory argument, which suggests that maintaining

a good relationship between the management and stakeholders can positively influence

performance. According to Freeman (1984), companies should notonly consider their

shareholders, but also the interests of their stakeholders. The interview results reinforced that

good corporate governance significantly contribute to enhancing bank performance because it

produces better management and increased allocation of the resources. Though the results were

favorable for BancABC, it was noted that at Metropolitan Bank there is a lack of proper

monitoring mechanisms of the management and the accountability to shareholders, which are

in line with the agency theory perspective. Respondents advocated for a banking sector specific

corporate governance code, which will help in monitoring management and discovering

whether there is manipulation in financial reports and then increasing the quality of these

reports.

The researcher noted that all respondents alluded to a positive relationship between corporate

governance and bank performance, but the focus on bank performance measures was wholly

from an accounting perspective. A few researchers from BancABC pointed out to non-

accounting measures as crucial to the assessment of bank performance. Respondents from

Metropolitan Bank attributed the current challenges at the bank to self-maximizing behavior of

management.

Research results from BancABC pointed out that good performance reflected a high quality of

management that improves the wealth of shareholders, such as higher dividend payouts and

higher share values. In view of the important role played by audit, it was highlighted that the

board should establish an internal control system department based on consultation with

57

management, and that the implementation of the internal control system is supervised under

this department.

The benefits of well-organized corporate governance are as follows: “a good corporate

governance structure helps ensure that the management properly utilizes the enterprises

resources in the best interest of absentee owners, and fairly reports the financial condition and

operating performance of the enterprise” (Lin and Hwang, 2010). Respondents further

indicated that the aim of corporate governance is to facilitate the efficient use of resources by

reducing fraud and mismanagement with the view not only to maximize, but also to align the

often conflicting interests of all stakeholders.

The research results therefore indicated a positive relationship between corporate governance

and bank performance in Zimbabwe.

Research results also pointed the important role played by employees in guaranteeing bank

performance. It was noted that banks must secure the interests of employees at all times and

ensure that they are guaranteed a positive working atmosphere, further training courses, health

coverage and fair retirement packages. To improve performance the bank’ board of directors

and the managers must hold duties not only to the company itself, but also to employees, the

trade union, the works council and the public. This principle is embodied in the stakeholder

theory of the firm. This principle should cover the role of stakeholders to reflect the interaction

with, and treatment of, stakeholders such as employees.

5.3.5 Disclosure and Transparency

It was noted that good corporate governance promotes timely and accurate disclosure on all

important matters regarding the bank, covering both financial , non-financial, performance,

ownership and governance of the bank. Respondents highlighted that a bank information

disclosure that consists of corporate performance disclosure and financial accounting

58

disclosure is the principal means through which banks become transparent to all stakeholders.

As a result of the prevalence of cosmetic management in most failed banks it was highlighted

that the disclosure and transparency should show that the existence of policies and instructions

are in line with the banking laws and regulations.

Therefore, transparency and disclosure are significant and fundamental features of corporate

governance, which means that good disclosure practice is a form of good corporate governance.

This is because the market might expect more serious information asymmetry problems if a

bank have poor information disclosure and transparency practices.

Patel, Balic and Bwakira (2002) report that higher transparency and better disclosure reduces

the information asymmetry between a firm’s management and stakeholders. In line with the

present research findings, their results suggest that companies with lower transparency and

disclosure are less performing than companies with higher transparency and disclosure.

5.3.6 RBZ Supervisory Measures

Bank corporate governance cannot be enhanced unless there is a competent regulator. Research

results indicated the adequacy of the supervisory measures bt the RBZ as they are in line with

the Basel Committee on Bank Supervision. Respondents made reference to the following

supervisory attempts:

On-site examinations

Risk based examinations

Consolidated supervision

5.4 Recommendations

In line with the launch of the National Code of Corporate Governance (Zimcode) in Zimbabwe

this research advocates for the fast-tracking of the specific code of banking sector corporate

governance in order to avert the persistent bank failures. The specific code should be simple,

59

practical, All stakeholder segments should participate in setting the code. Globalization has

posed both challenges and opportunities to corporate governance reforms in both developed

and developing countries. On one hand,

globalizationcanacceleratetheconvergenceofcorporategovernancetointernational standards

(Khanna, 2001).On the other hand, however, globalization has increased the competition for

some in efficient domestic firms and thus created high pressure for them to survive. In view of

globalization effects, the specific banking sector code should encompass these developments.

In view of the Banking Sector Vision 2020, corporate integrity, strengthened market discipline,

increased transparency through improved disclosure, effective regulation and corporate

accountability are common principles that are the foundations for sound corporate governance.

Zimbabwe should aggressively pursue the adoption and implementation of global standards,

principles and practices aimed at strengthening the financial system. In the same view the

banking sector Act must encompass corporate governance issues.

There is need to relook at the bankruptcy laws and regulations affecting banking in Zimbabwe.

This is in view of the fact that the performance of most banks has been negatively affected by

the growing non-performing loans yet the banks are unable to dispose of the pledged or ceded

securities.

In line with the launch of the National Code of Corporate Governance in Zimbabwe, the

following recommendations are proffered from the point of view of this study:

Shareholders should be encouraged to participate at shareholders meetings and ask

pertinent questions for the growth of individual banks,

Inside trading must be prohibited;

Shareholders must carry their responsibility of electing board members;

The effectiveness of shareholders meeting should be measured regularly;

60

Banks should provide training programs for audit committee members and internal

audit;

The regulatory authority must clearly define what kind of information must be

contained in the report on audit committee's activities;

Indigenous banks should be encouraged to avoid ivory tower planning and ensure the

participation of managers and lower level employees;

There is need for banks to take both the shareholder and stakeholder perspectives in

their operations for performance to be improved;

Training and development should be highly prioritized by all banking institutions especially on

corporate governance issues. There is a misconception that corporate governance is for those

at the highest levels of the organizational hierarchy.

Banks should also incorporate corporate governance as a measure of bank performance rather

than focusing on the economic measures only. This is in line with the important role played by

firms in attained corporate sustainability.

In this highly competitive banking sector, employee motivation is crucial to the performance

of the bank. Banks should strive to maintain favorable employment conditions rather that focus

on the monetary rewards. This has significant implications on customer services function of

the bank.

It is also important for the RBZ to consider the systemic risk resulting from indigenous bank

failures and as such treat each bank failure from an economic empowerment viewpoint. This

is in view of increasing concentration ratio on foreign owned banks due to indigenous bank

failures.

61

5.5 Research Implications

This study builds on research drawn from the corporate governance literature. The extant

literature in this field tends to focus on situation analysis given the economic environment in

Zimbabwe. Very little work examines the importance of corporate governance to the

performance of banks in Zimbabwe. This research assessed the importance of corporate

governance to the performance of banks. The outcomes of this research will be of interest to

policy makers and practitioners (entrepreneurs, managers and directors). Policy makers will

find this work useful given the need to draft the specific code for banks in Zimbabwe.

Entrepreneurs, investors, directors and managers will find this research useful because it

examines the relationship between corporate governance and bank performance.

There is need to improve depositor confidence especially amongst indigenous banks in

Zimbabwe hence reduce the level of concentration on total assets and deposits. An

improvement in the corporate governance of indigenous banks in Zimbabwe through corporate

governance enhancements highlighted in this study will be useful in moving the Zimbabwean

economy from the current oligopolistic market to a more competitive market.

The findings of this research also have implications for existing corporate governance theory

from an emerging market perspective.

The researcher noted that bank performance can be greatly improved with prudent

management. There is therefore need for banks in Zimbabwe to invest heavily in leadership

development programmes to enhance performance.

5.6 Future Research

This study makes a considerable contribution to the exploration of the relationship between

corporate governance and performance in banking practices in Zimbabwe. However, a

significant amount of empirical research has not been covered by this study, which may be

62

useful for further study of Zimbabwe and other developing countries. Thus, there are numerous

ways in which the research study as a whole can be extended.

In view of the Zimbabwean financial services sector legacy issues, one possible avenue for

future research is to examine external stakeholders’ perceptions concerning corporate

governance practices in Zimbabwean banks. These stakeholders include investors, external

auditors, academics and the public in developing countries especially given the need for

Foreign Direct Investments in Zimbabwe. Another focus for future research could be a

comparison of the corporate governance practices between banks in developing and developed

countries.

It is also recommended that future studies specifically investigate the Zimbabwean banking

sector board meeting, board committee, CEO performance, CEO skills, tenure of the CEO,

executive remuneration and incentives for management, staff tenure, and staff qualifications,

as these can be used as corporate governance mechanisms to test their relationship with

performance.

63

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APPENDICES

QUESTIONNAIRE 1: SHAREHOLDERS, BOARD OF DIRECTORS AND CHIEF

EXECUTIVE OFFICE EVALUATIONS

SECTION 1-GENERAL QUESTIONS

68

1.1 What is you category of respondent? (Tick where applicable)

Shareholder Audit Committee Member

Board Member Chief Executive Officer

1.2 In which of the following age group do you belong? (Tick where applicable)

Under 25 26-35 36-45

46-55 56-65 Over 60

1.3 Please indicate the highest level of education.

High School Diploma Bachelor

Masters Doctoral Other

1.4 Where (country) did you receive the highest level of education?

………………………………………………………………………………..

1.5 What was your major (field of specialization)?

………………………………………………………………………………..

1.6 How many years have you worked in your current position? (Tick where applicable)

5 years or

less

6-10 years 11-15 years

16-20 years 21-25 years 26+ years

1.7 Who is the major shareholder in your organization and what is the percentage shareholding?

………………………………………………………………………………….

SECTION 2: CORPORATE GOVERNANCE QUESTIONS

The statements below deal with your attitude towards some issues which relate to whether

shareholders, board of directors, C.E.O, or audit committee in your company get their rights

and responsibilities or not according to the best practice.

SHAREHOLDERS

Statement Not at

all

Slightl

y

Moder

ately

Significantly Extr

emel

y

Shareholders are able to practice their rights

Shareholders receive timely and regular

information on the bank

Shareholders participate in the general

meetings and ask simple but critical

questions

Shareholders elect members of the board

Inside trading and abusive self-dealing are

prohibited

Comments/Suggestions for improvement

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

……………………………...

69

…………………………………………………………………………………………………

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…………………………………………………………………………………………………

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…………………………………………………………………………………………………

………………………………

…………………………………………………………………………………………………

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…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

………………………………

BOARD OF DIRECTORS

Statement Not at

all

Sligh

tly

Mode

rately

Signifi

cantly

Extr

emel

y

The role, responsibility and objectives of the board

are clearly stated and well understood by board

members

The board of directors monitors and regularly reviews

the performance of management

The corporate plan of the bank is regularly reviewed

The board and management are successfully

communicating the bank’s strategies

The board of directors act on a fully informed basis,

in good faith, with due diligence and care

The board ensures compliance with applicable law

and take into account the interests of all stakeholders

Board members are not affiliated with a significant

customer or supplier

The board is fully independent

Board room conflicts of interest are effectively

avoided

Board members stay abreast of issues and trends

which could affect strategic or business plan of the

bank

The frequency of scheduled board meetings is

appropriate in order to address the business of the

bank

The range of qualifications and experience that

individual board members bring to the board

enhances its ability to govern

Finances and other resources of the organization are

well controlled through the finance and audit

committee

70

Board members have at least basic understanding of

business management particularly banking sector

performance

Comments/Suggestions for improvement

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

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…………………………………………………………………………………………………

…………………………………………………………………………………………………

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…………………………………………………………………………………………………

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…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

………………………………

AUDIT COMMITTEE AND INTERNAL AUDIT

Statement Not at

all

Slightly Moderate

ly

Signific

antly

Extr

emel

y

Audit committee exists and is independent

of management

The audit committee monitors and reviews

the effectiveness of the company’s internal

audit function

Audit committee includes someone with

expertise in accounting and auditing

The committee members understand the

audit committee function

Audit committee has access to relevant

information

Generally, the audit committee is effective

71

The audit committee reviews and monitors

the integrity of the financial transactions and

statements of the bank before they are

approved by the board and published.

Comments/Suggestions for improvement

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

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………………………………

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…………………………………………………………………………………………………

…………………………………………………………………………………………………

………………………………

DISCLOSURE AND TRANSPARENCY

Statement Not at

all

Slightly Moderate

ly

Signific

antly

Extr

emel

y

Disclosure and transparency are of high

priority in the bank

The bank discloses the bank’s objectives

and policies

The bank discloses the financial statements

and information in the newspaper

The bank has a website and internet

The bank discloses members of the board

and key executives

The financial statements and reports are

reflective of the performance of the bank

Generally, the bank’s disclosure and

transparency are fair and effective

72

Comments/Suggestions for improvement

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

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…………………………………………………………………………………………………

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…………………………………………………………………………………………………

………………………………

…………………………………………………………………………………………………

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…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

………………………………

PERFORMANCE MEASUREMENT

Statement Not at

all

Slightly Moderate

ly

Signific

antly

Extr

emel

y

The performance measurement framework

of the bank is adequate

Performance is assessed on both accounting

and market basis

State any three performance measurement indicators emphasized in the bank

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

……………………………………

73

QUESTIONNAIRE 2: MANAGEMENT QUESTIONNAIRE

SECTION 1

1. Rate your knowledge of and familiarization with the organization, regarding services, key

personnel, corporate mission, goals and objectives.

1 2 3 4 5 6 7 8 9 10

2. How well do you understand your responsibilities as a manager?

1 2 3 4 5 6 7 8 9 10

3. Rate your relationship with other employees, directors and shareholders.

1 2 3 4 5 6 7 8 9 10

4. Rate your knowledge of the banking industry compared to the other bank employees.

1 2 3 4 5 6 7 8 9 10

5. Rate your involvement in the strategic planning process of your organization.

Never 1 2 3 4 5 6 7 8 9 10 Always

6. Rate your attendance at executive meetings.

1 2 3 4 5 6 7 8 9 10

7. Rate your participation in board meetings.

1 2 3 4 5 6 7 8 9 10

74

8. Rate your overall performance as a member of the bank.

Unsatisfactory 1 2 3 4 5 6 7 8 9 10

Satisfactory

9. Briefly what contributions have you made to the bank since your engagement?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

……………………………………

10. At management level, what do you think is the relationship between corporate governance

and bank performance?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

……………………………………

11. To what extent are banks in Zimbabwe adhering to corporate governance practices?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

……………………………………

12. How effective are the supervisory measures put in place to enhance good corporate

governance by the Reserve Bank of Zimbabwe?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

……………………………………

13. How is bank performance measured in your context?

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

75

…………………………………………………………………………………………………

…………………………………………………………………………………………………

…………………………………………………………………………………………………

……………………………………

SECTION 2

The statements below deal with your attitude towards some issues which relate to whether

shareholders, board of directors, C.E.O, or audit committee in your company get their rights

and responsibilities or not according to the best practice.

Statement Not at

all

Sligh

tly

Mode

rately

Signifi

cantly

Extr

emel

y

Shareholders receive accurate, timely and regular

information on the bank

Inside trading, nepotism and abusive self-dealing are

prohibited

The shareholders are easily accessible to management

The board of directors monitors and regularly reviews

the performance of management

The board is fully independent

The board and management are successfully

communicating the banks corporate strategies

The corporate plan of the bank is regularly reviewed

and communicated

The range of qualifications and experience that

individual board members bring to the board

enhances its ability to govern

Generally, the board of directors is effective

Finances and other resources of the bank are well

controlled through the finance and audit committee

The audit committee exists and is independent of

management

The audit committee monitors and reviews the

effectiveness of the company’s internal audit function

The audit committee has access to relevant

information

Generally, the audit committee is effective

Disclosure and transparency are of high priority in the

bank

The bank discloses the bank’s objectives and policies

Generally, the bank’s disclosure and transparency are

effective.

Comments/Suggestions for improvement

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

76

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

……………………

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

……………………

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

……………………

QUESTIONNAIRE 3: STAFF SATISFACTION SURVEY

SECTION 1

I am employed at the bank as

a(n)…………………………………………………………………

My employment at the bank is Full-time Part-time Other

77

I have been at the bank for:

Up to

12

months

1-3

years

3-5

years

5-10

years

10

years +

My age is:

Under

20

20-24 25-35 36-44 45

years+

I am:

Male Female

Statement Stron

gly

Agree

Disag

ree

Neutr

al

Agree Stro

ngly

Disa

gree

It is clear what is expected of me in my position at the

bank

I enjoy my job

There is good teamwork in my work area

I get on well with my fellow workers

My supervisor/manager is not easy to communicate

with

My ideas are well received and supported by my

colleagues

I believe the facilities and equipment that we work

with could be improved or updated

I am proud to work at the bank

There are not many career or promotional

opportunities if I stay at the bank

I believe that I am well paid for what I do

I feel that my work is valued by senior management

I have read and understood bank’s mission statement

and values

I believe that the responsibilities for my job are

suitable for my qualifications and experience

I believe that the organization provides adequate time

for training for all staff

I believe management and board considers staff to be

key stakeholders

I believe my opinions would have little impact on

board decisions

In my view staff are encouraged to take part in

decision making processes

Overally I am happy with my job

78

I believe that the bank maintains job security to the

best of its ability

I get real sense of achievement for my job.

Comments/Suggestions for improvement

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

………………………………………………………………………………………………………………………………………………………

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……………………

INTERVIEW GUIDE-EXTERNAL GOVERNANCE EXPERTS

1. What is your definition of corporate governance?

2. What makes corporate governance of banks different from other private sector

players?

3. What is the relationship between corporate governance and bank performance?

4. What is good corporate governance in a bank set-up? What are the elements?

5. How can good corporate governance be achieved and sustained?

79

6. How do banks best manage risks?

7. What do you understand the terms transparency and accountability in banking?

8. Is there a significant relationship between directors’ shareholding and financial

performance of banks?

9. To what extent are banks in Zimbabwe adhering to corporate governance practices?