LITERATURE REVIEW

This is s second chapter of study which explain about the empirical studies performed by
different researcher, corporate governance play an important role to boost up the performance of
firm and the ultimate purpose of the company is to increase the shareholder’s wealth and
corporate governance help company to protect the right of shareholder by protecting there right it
will increase the demand of the share of that company which boost its value and dividend with
time. This study is typically focus on banking sector of Pakistan and its performance and
relationship with corporate governance practices.

Relationship between corporate Governance and Firm performance

Every organization have its own goals and those goals are totally depending upon the
performance of firm, performance of firm also create positive impact on shareholders and
ultimately it increases the capital of company (kajola, 2012). There is a positive relationship
between corporate governance and invest, investors are more attracted toward those companies
who follow good practices of corporate governance (Notbrook, 2006). If company follow good
practices it will minimize the risk of the company and its also minimize unsystematic risk of the
company (IFC, 2004). A researcher (Enobakhane, 2006) says that corporate governance
strengthens the relationship with stakeholders, improve the sustainable environment and
contribute in corporate social responsibility. The performance of company who follow good
practices of corporate governance performed for longer period and whenever they need capital it
is available for them (Colabrese et al, 2013)

Board Size

According to the authors (Hermalin & Weisbach, 2003) in their study says that, small board size
is more appropriate and successful than large board size because large board size have large
amount of people, there is more chances of difference of opinion due to this conflicts may occur,
but another researcher (Dalton, 2005) criticized on small boards in his study, he find that due to
small number of people there will be lack of diversity of knowledge, large board have large
number of people so that they have more knowledge share in between them, they have more
skills and expertise’s as compared to small boards. Another author (Mak & Yuanto, 2003) in his
study specify that the performance of Malaysian and Singapore companies is higher because of
its small board size which composed of five board members only (Adam & Mehran, 2005) in
their study indicate positive relationship between firm performance and large board size is
depend on type of industry, some sectors have positive relationship between firm performance
and large board size. On the other hand, (Bhagat & Black, 2001) state that there is no
relationship between performance of company and its board size. Some of researcher find out
that there is negative relationship between firm performance and large board size and overall
performance of company will be decline due to large board size they are (Chan & Li, 2008),
(Mustafa, 2006), (De Andres et al, 2005).

Board Composition

Number of studies specify that composition of board directly affect the overall performance of
the firm. Usually board composition is consisting of executive and non-executive directors,
directors who are depended on others are known as executive directors and in depended directors
are known as non-executive directors (Shah et al, 2011). A researcher (Stai Kouras el al, 2007)
says in his study there is no relationship between firm performance and board composition,
another researcher who conduct research on bank in Ghana also indicate that there is no
relationship between firm performance and board composition (Adusei, 2010). Many authors
like (Omer, 2003), (Lefort & Urzua, 2008), (Krivogorsky, 2006) indicates positive relationship
between financial performance and board composition of the company, other like (Erickson et al,
2005), (Coles et al,2001) indicates negative relationship between firm performance and board
composition. (Bhagat & Black, 2002) & (De Anders et al, 2005) said in their studies that there is
no relationship and association between firm performance due to and board composition.
Audit committee

As Per the code of corporate governance every commercial bank working under central bank of
county must develop at least three committees which are, Risk and audit committee, main board
management committee and remuneration committee. The fundamental reasons for these
committees are to supervise, monitor and control the activities of members of board, person who
supervise this committee is outside director who is also a permanent member of these committee
(RBZ, 2004). Another researcher (Romano, 2012) concluded in his study that audit committee is
like a blood for a firm, these committees are very vital for an organization controlling and
monitoring activities are performed by management and one of the basic function of these
committees are to protect the rights of shareholders. Another author has same viewpoint that
these committees are tool for monitoring activities of management and these committees have
positive relationship with financial performance of a firm, they also improve the efficiency of
banks (Bussoli, 2013). These committees are one who monitor the financial accounts of a firm
and guide the management about the performance of the company and their opinion and feed
back in every meeting, they also provide all information to the board directors with their
recommendations (kig, 2006). According to (vance, 2010) in his study he find that audit
committee have positive relationship with financial performance of banks the financial accounts
are improved due to the supervision of audit committee. Number of meetings are conducted on
periodic bases which improve the performance of firm due to the recommendation being given
by audit committee. Furthermore, a study by (Rubarsky & Pincus, 2000) suggest that there
should be more meeting to improve the financial performance of the company, same results were
given by (Mc Mullen Pincus, 2002) in his study, According to his study financial performance is
improved when number of meetings are conducted by the committees, some researcher like
(Klein, 2002) find in his study that number of meeting create negative impact on performance of
company. Many researcher find positive relation in their studies and many of them find negative
relation with number of meeting and audit committee meeting