Board independence and financial performance of listed Moroccan banks

Abstract

The existing literature on corporate governance provides mixed and inconclusive results on the relationship between independent directors and firm performance. To highlight this issue in the banking sector of a developing country such as Morocco, this paper uses a recent panel of data from the six (6) Moroccan banks listed on the Casablanca Stock Exchange for the period from 2009 to 2021. Using panel data regression methods (OLS and Fixed Effects Model) to test the effect of board independence on financial performance, the study finds a negative and significant association between the proportion of independent directors and return on assets (ROA) and a positive and insignificant relationship with return on equity (ROE). This implies that the appointment of independent directors, as an isolated act, does not significantly enhance performance. Our results offer no clear evidence to support the predictions of agency and resource dependence theories. Instead, they support the basic assumptions of stewardship theory that board independence inversely affects performance.

Our study shows that it is not sufficient to rely exclusively on the number of independent members to ensure effective monitoring of management, limit conflicts and agency costs, and improve performance. Mechanisms other than those envisaged in agency theory need to be considered in designing 'good' governance structures. To the best of our knowledge, our research is unique in that we examine the effect of board independence by employing several theories, which is not common in the literature, at least in the Moroccan context.

Keywords: independent directors; financial performance; governance theories; Moroccan banks.

JEL Classification : C12, C23, G21, G34, O16

Paper type : Empirical research