The impact of corporate culture and corporate governance on bank performance in Egypt

Abstract

Economic changes expose financial institutions to a wide range of risks. The crumbling of business enterprises and corporate scandals lead to loss of credibility. Unlike other non-financial institutions, banks are unique as their management concerns the money of others. With the emergence of numerous cases of corruption of banks in Egypt and the escape of several businessmen especially in the last half of the 1990s, Egypt’s banking governance has become more prone to financial corruption. Therefore, there is a necessity for adopting a strong corporate culture to ensure adequate corporate governance practices. This research investigates the impact of corporate culture and corporate governance on banks' performance in Egypt. Fourteen constructs have been identified from the literature review that might enhance the performance of banks in Egypt. Ten constructs related to corporate culture are communication, leadership and tone at the top, risk, transparency, control, ethics and integrity, coordination and integration, commitment, accountability and adaptation to environment. The remaining four constructs related to corporate governance represented in board characteristics are: board size, frequency of meetings, board independence and CEO duality. The researcher also uses three measures of banks performance: ROA, ROE and NIM. The study was initiated by a Delphi technique to identify the importance of the corporate culture attributes with respect to corporate governance and bank performance. A questionnaire of corporate culture aspects was administered to 522 employees in banks. Two models were developed and 23 banks in Egypt were involved in this research. The research covers a five-year period (2010–2014). Ridge regression was used to test the ten hypotheses of the first model, and OLS regression was used to test the four hypotheses of the second model. The results indicate that corporate culture and board characteristics affect banks' performance. The first model shows that there is a positive and significant relationship between transparency, sound risk culture and performance (ROA and ROE). v Furthermore, a positive relationship exists between leadership and tone at the top and NIM. The second model shows a negative and significant relationship between frequency of meetings and ROA, a negative and significant relationship between board size and ROA, a positive and significant relationship between board independence and ROA and a positive and significant relationship between CEO duality and NIM. This study contributes to literature regarding how corporate culture and corporate governance affect banks' performance in Egypt. The research findings would benefit managers in identifying the most relevant corporate cultural aspects and how they could affect bank performance. It is also beneficial for regulators to recognise the importance of corporate governance and how board characteristics influence performance.