Board Governance and Bank Performance: Evidence From Southeast Asian Banks Using Dynamic Panel Analysis

The present study explores the relationship between board governance features and bank performance for banks operating in Southeast Asia. The study employs panel data on commercial banks from six countries in Southeast Asia. The study adopts fixed effects and dynamic System GMM methods of estimation in order to account for bank heterogeneity, potential endogeneity, and bank performance persistence. The results show very little evidence to suggest that there is a systematic link between most of the formal governance features – board size, board diversity, board independence, and compensation – and bank performance when bank features and macroeconomic environment are controlled for. In terms of the effects of board governance attributes, only board skills show a significant negative relationship with return on assets in the dynamic model, implying that banks with more competent directors may focus more on risk management than bank profitability. On the other hand, macroeconomic factors seem to be much more significant in explaining differences in bank performance. The robustness tests indicate that key findings hold even when using different sets of instruments and treating board skills as endogenous variable. In sum, the results suggest that the association between formal board governance structures and bank profitability may be more limited and context-dependent in highly regulated banking environments such as those found in Southeast Asia.