“Exploring the role of corporate governance in driving financial performance: An empirical investigation of Nepalese commercial banks”

This study delves into the substantial impact of corporate governance practices on a company’s financial performance, focusing specifically on Nepalese commercial banks in the Kathmandu Valley. With 419 participants from all 27 «A» grade commercial banks, the study concentrates on employees currently working in these banks, particularly top-level staff such as managers, department heads, and officers. The primary objective is to investigate the role of corporate governance in driving financial performance, using Return on Assets (ROA) and Return on Equity (ROE) as financial performance indicators of banks. The study explores various factors influencing corporate governance’s impact, including corporate governance policies, disclosure policies, board size, income diversity, and ethnic diversity. Data collection involves primary data from participants associated with the banks, and the analysis is conducted using the Statistical Package for the Social Sciences (SPSS). Descriptive, correlation, and regression analyses are employed to understand the relationship between corporate governance and financial performance variables. Notably, regular evaluations of the board of directors are found to have a beneficial impact on financial performance. A bank’s transparency in sharing performance information exhibits a stronger positive correlation with ROE (R=0.183) compared to ROA (R=0.060), suggesting that ROE is more sensitive to disparities in information availability. Furthermore, the study identifies a negative impact of board size on financial performance, with low-income diversity positively influencing it and board ethnic diversity exerting a negative and statistically significant influence.


INTRODUCTION
The responsibilities of corporate governance are crucial in influencing the financial performance of businesses, as it establishes the foundation for sustainable growth and the production of long-term value (Bai et al., 2023).The demand for efficient governance procedures becomes more noticeable as organizations handle a progressively dynamic global environment.Corporate governance describes the rules, policies, and processes regulating and controlling organizations (Dewri, 2022).The primary goal of corporate governance is to improve transparency, accountability, and ethical behavior inside a company, providing a working environment favorable for a long time.The relationship between corporate governance and economic growth is complex.Forming a solid board of directors is crucial.Strategic decisions and monitoring fall to the board of directors, the foundation of corporate governance (Mertzanis et al., 2020).A diverse, independent, and ex-perienced board is more likely to provide effective checks and balances, reducing management errors and maintaining financial policies.Effective governance structures promote sensitive financial management, decreasing cash mismanagement (Gerged, 2021).This is essential for capital allocation optimization and financial performance.Transparent financial reporting, an essential part of effective governance, boosts investor morale and helps attract earnings in favorable conditions.
In recent economic instability, corporate governance and financial performance are linked.Organizations with strong frameworks can handle challenges, react to market changes, and seize new possibilities (Cumming et al., 2021).However, poor leadership may worsen economic downturns, causing financial instability and value deconstruction.Business governance now requires social responsibility.Increasing public expectations make companies consider environmental, social, and governance (ESG) issues in their decision-making (Karwowski & Raulinajtys, 2021).Sustainable and responsible company practices prevent environmental and social hazards and attract a growing number of socially conscious investors, improving financial performance.
In a volatile business environment, corporate governance and financial performance are intricately linked and affect firm success.An expertly managed organization exhibits resilience, adaptability, and ethics, which are essential for long-term financial success.Solid corporate governance practices guide enterprises toward long-term financial success in the 21st century.Corporate governance drives the financial performance of Nepalese commercial banks, and this study examines the variables that influence long-term financial success.

LITERATURE REVIEW
In the beginning, the necessity of good corporate governance was highlighted by the need to defend the interest of shareholders.However, as time went on, the focus grew to encompass the protection of other significant interests inside commercial organizations as well (Jizi et al., 2014).The claim that these other interests are just as endangered by badly managed corporate organizations is the basis for the shift toward stakeholder focus.Research has consistently shown that good governance policies positively affect company success.For instance, according to Kolk and Pinske (2010), a solid corporate governance framework increases stakeholder trust and shows that management is serious about running a company responsibly and efficiently.A company's success and its investors' safety are enhanced by well-managed corporations (Spanos, 2005).
According to Uwuigbe (2011), there is a negative relationship between the size of a bank's board and the bank's profitability, but a positive relationship between its financial performance and directors' interest and degree of corporate transparency.Good corporate governance involves maximizing long-term shareholder profit while being ethical and transparent.Corporate governance protects shareholder interests and promotes transparency, making a firm more profitable (Garcia et al., 2016;Govender & Hassen-Bootha, 2022).The size of the board emerges as a crucial characteristic of the board of directors, underscoring its importance within the governance framework.(Tibiletti et al., 2020 The size and independence of the corporate board affected the performance of Bangladeshi banks and found that governance had a weak effect on the returns on equity and assets (Kutubi, 2001).Diverse ownership types and combinations may affect decision-making, tactics, policies, and in-formation sharing, raising organizations' legitimacy (Haniffa & Cooke, 2005;Subramanian et al., 2023).The board of directors, an important part of corporate governance, ensures that management's goals meet stakeholders' goals (Pasko et al., 2022;Zaman et al., 2020).The quantity of directors forming the board is suggested to directly affect its functionality and overall corporate efficiency (Ali & Ayoko, 2020;Alrowwad et al., 2022;Raboshuk et al., 2023).A larger board is assumed to have a more extensive pool of knowledge, improving its capacity to make crucial and prompt decisions independently.( The impact of ethnic diversity on the financial performance of Nigerian companies was examined over a 6-year period from 2012 to 2017.Tobin's Q and Return on Assets (ROA) measure the financial performance.Ethnic diversity, board size, and leverage are addressed in the Nigerian context (Kabara & Modibbo, 2020).Ethnic diversity has a negative insignificant impact on performance.Due to the directors' diverse ethnic, language, and cultural backgrounds, moderate ethnically diverse boards may have better monitoring effectiveness due to their wide range of perspectives (Gul et al., 2016).Ethnic diversity has no impact on firm performance for the firm (Amin & Nor, 2019).Income diversification hurt Vietnamese commercial banks from 2007 to 2017.Revenue diversification boosts bank performance.Bank diversification benefits state-owned and foreign banks but disadvantages domestic banks.Diversification also benefits experienced banks (Luu et al., 2020).Wang and Cao (2022)  The bank provides equal utilization of information about its performance to both shareholders and investment analysts.
H 3 : Firms with larger board sizes have a positive relationship with their financial performance.
H 4 : The level of board ethnic diversity within a group is positively correlated with the financial performance of banks.
H 5 : Diversity income plays a less important role in a bank's performance.

METHODOLOGY
The utilization of research approaches helps in the formulation of the findings and objectives and the presentation of the outcomes from the data gathered during the study period.The major objective of this research technique is to direct the researcher at every stage to achieve the study's principal objectives.In this study, primary data collection is carried out.This study employed first-hand information to look into the issue as well as research topics, encompassing 419 participants from all 27 "A" grade commercial banks and focusing on the current workforce of these institutions.Specifically, it focuses on top-level personnel, including managers, department heads, and officers.The sample included 312 people aged 20-29, 88 people aged 30-39, 16 people aged 40-49, and three people aged 50 and more.This study used questionnaires with a Likert rating scale from 5 (strongly agree) to 4 (agree), 3 (neutral), 2 (disagree), and 1 (strongly disagree).This study uses quantitative and descriptive methods to analyze financial performance and corporate governance.The demographic profile of the respondents of the study is presented in Table 1.This study examined two models.The mathematical models for the study are as follows: Model 1 Model 2 where ROA -Return on Assets, ROE -Return on Equity, X 1 -Board of directors, X 2 -Disclosure Policies, X 3 -Board sizes, X 4 -Board ethnic diversity, X 5 -Income diversity, β 0 -Constant, β 1 , β 2 , β 3 , β 4 , β 5 -Coefficient of Independent Variables, and ε i -Error term.Table 4 demonstrates the significant results from an analysis of variance (ANOVA) performed on the dependent variable, ROA, and the explanatory parameters.With an F-statistic of 4.049 (p = 0.001), the regression model shows a statistically significant impact, highlighting the significance of the factors investigated on the Bank's profitability.

RESULTS
Table 5 represents the findings of an investigation into the correlation between corporate governance elements and ROA in Nepalese commercial banks.A negative effect on return on assets has been observed for regularly scheduled board of director meetings, suggesting impending difficulties.
Annual report clarity has a good effect on ROA, but board size has an insignificant impact.Moreover, board ethnic diversity emerges as a statistically significant factor positively affecting bank performance, indicating its relevance in the context of financial outcomes.In contrast, the income diversity group has an insignificant impact on ROA.Table 8 shows the research findings provide critical insights into the relationship between corporate governance characteristics and ROE.Notably, regular board meetings and income diversity have favorable associations with ROE, indicating their potential impact on increasing a commercial bank's profitability.These empirical coefficients add important modifications to the examination of financial performance factors.However, the board size, board ethnic diversity, and annual reports clearly described the company's activities as having an insignificant effect on the ROE.   the independent variable on the respective dependent variable.The associated p-values (Sig.) are less than 0.001, indicating that these impacts are statistically significant.In essence, the variables negatively influence both ROA and ROE, and these effects are statistically meaningful with a high level of confidence, suggesting a substantial impact on the financial performance indicators.

Hypothesis testing
H 3 : Firms with board sizes have a positive relationship with their financial performance., suggesting that the model explains a significant portion of the variability in these financial performance indicators.The "Sum of Squares" values for regression and residuals, along with their corresponding degrees of freedom, contribute to calculating the F-statistic, which is used to assess the overall significance of the regression model.Table 18 shows the model summary of the board ethnic diversity level within a group with the financial performance of the commercial banks.
There is only an insignificant correlation between higher levels of board ethnic diversity and higher ROA and ROE.The low R-squared values (.004 for ROA and .007for ROE) show that board ethnic diversity has a minimal impact on financial performance since they support the notion that only a small percentage of the variation in bank performance can be attributable to ethnic diversity.Table 19 shows the regression models for both ROA and ROE are statistically significant (p < 0.05), indicating that the examined parameters have a notable impact on these financial performance indicators.The F-statistics (5.168 for ROA and 10.118 for ROE) are used to assess the overall significance of the regression models.
Table 20 displays the regression analysis results, providing insights into the relationship between specific variables and financial performance indicators, specifically Return on Assets (ROA) and Return on Equity (ROE).For both ROA and ROE, the unstandardized coefficient represents the estimated impact of the independent variable on the respective dependent variable.In this case, the unstandardized coefficients are -0.039 for ROA and -0.055 for ROE.The "t" values of -2.273 for ROA and -3.181 for ROE assess the significance of the impact, and the corresponding p-values (Sig.) are both less than 0.05, indicating that these impacts are negatively statistically significant.
H 5 : Income diversity plays a less important role in a bank's performance.Table 21 displays the outcomes of the model summary and shows that the R-squared values for the influence of income diversity on ROA and ROE are only 0.004 and 0.003, respectively.Based on these findings, this diversity element appears to contribute significantly to the examined context in influencing bank performance.
Table 22 shows both regression models for ROA and ROE are statistically significant (p < 0.05), suggesting that the examined parameters significantly influence these financial performance indicators.

DISCUSSION
The descriptive statistics for several areas of the respondents' perceptions are presented in Table 2.The findings revealed varied opinions on board meeting frequency, with a mean score of 3.69 and a standard deviation of 1.004.Respondents widely agreed on the clarity of annual reports, with an average rating of 4.24 and a low standard deviation of 0.748.Views on board size's importance for bank performance were diverse, with a standard deviation of 0.889 and an average rating of 3.48.Income diversity's impact on bank performance was perceived as less significant, with a mean score of 3.13 and a standard deviation of 1.005.Ethnic diversity's significance saw varied opinions, with a mean rating of 2.79 and a standard deviation of 1.036.Additionally, bank profitability indicators, ROA and ROE, averaged 3.90 and 3.89, respectively, with lower standard deviations indicating less diversity in opinions.
The regression analysis result is presented in Table 5 and Table 8 to evaluate the effect of the independent variables on ROA and ROE (proxies as financial performance).The beta coefficient for regular board meetings shows a negative value of -0.054, which suggests a 1 percent addition to regular board meetings will cause a 0.054 percent decrease in ROA.The negative result indicates that an increase in regular board meetings can be less productive in the value of assets.This result is significant (p-value < 0.05).Also, a beta coefficient of -0.053 for regular board meetings indicates that ROE will increase by 0.053% for every 1% increase to these meetings.The encouraging outcome suggests that the ROE's performance may be improved by holding board meet-ings more frequently.The finding is statistically significant (p-value < 0.05).
The result further shows a significant positive effect of annual reports describing the company's activities on ROA at a 10 percent level of significance, with a coefficient of 0.044.This suggests that a unit increase in annual reports describing the company's activities will increase ROA by 0.044 units.Also, at the 5% level of significance, the analysis reveals that the annual reports describing the company's operations had a negligible negative influence on ROE (coefficient = -0.028).For every unit increase in the number of yearly reports detailing the company's activity, the return on equity (ROE) drops by 0.028 units.The results are in agreement with what Chilumuri and MBA (2013) have found about how disclosure regulations and corporate governance interact.
The coefficient for board size shows a negative value of 0.002 indicating that a unit increase in board size leads to an increase in bank performance (proxies as return on assets) by 0.002 units.This result implies that the size of the board supports the performance of the bank by a very low amount.However, since the probability value is greater than 5 percent (p-value > 0.05), this observation is not significant.Similarly, a negative value of -0.001 for the board size coefficient indicates that there is a 0.001 unit drop in bank performance (representing return on equity) for every unit increase in board size.Based on these findings, it appears that larger boards do not contribute to improved bank performance.However, this finding is not statistically significant because the probability value is more than 5% (p-value > 0.05).Here, the study's findings corroborate those of Bektas and Kaymak (2009) and Al-Matari et al. (2014b) regarding the effects of board size.
For income diversity, the beta coefficient of .027indicates a positive effect of income diversity on ROA.Specifically, it shows that as income diversity increases by 1 percent, ROA is expected to increase by 0.027 The result for the board ethnic diversity group also shows a beta coefficient of 0.034, indicating a positive effect of the Board ethnic diversity group on ROA.
From the result, an increase of 1 percent in the Board ethnic diversity group generates about 0.034 percent in ROA.With a p-value of 0.039, this result is significant at 5 percent.The board ethnic diversity group also had a favorable influence on return on equity (ROE), as shown by the beta coefficient of 0.024.The results show that there is a 0.024 percent rise in ROE for every 1% increase in the ethnic diversity group of the Board.This finding is not statistically significant at the 5% level (p = 0.140).These results are consistent with those of Amin and Nor (2019).

CONCLUSION
This paper examines the role of corporate governance in driving the financial performance of commercial banks in Nepal.This study used 419 current working employees of commercial banks of different designations.The study highlighted a gender distribution of 53.5% male and 46.5% female, while a substantial proportion claimed a medium family status.ROA and ROE are two dependent variables used to measure the financial performance of banks.Because the study used self-reported data and a crosssectional approach, there are some possible sources of bias that could make it harder to find strong and generalizable results.
The study further shows that regular director meetings have been found to have a negative effect on return on assets, which might indicate that there are upcoming challenges.There is a positive correlation between annual reports and ROA, but there is little or no correlation between board size and ROA.Also, regarding financial results, board ethnic diversity is relevant as it is a statistically significant component that positively impacts bank performance.The income diversity group, on the other hand, does not significantly affect ROA.Particularly, a commercial bank's profitability may be enhanced by instituting frequent board meetings and promoting revenue diversification, both of which are positively associated with return on equity.When looking at financial performance aspects, these empirical coefficients make significant changes.Return on equity is unaffected by board size, ethnic diversity on the board, or the annual reports detailing a company's operations.
The study concludes that effective governance has a key influence on enhanced bank profitability and suggests that proper governance systems should be maintained to guarantee that banks are managed economically, based on the findings above.Moreover, considering contextual variations and delving into the evolving dynamics of governance processes over time could offer valuable insights, contributing to a more comprehensive understanding of the intricate relationship between corporate governance practices and long-term organizational performance.

H 1 :
Regular evaluations of the Board of Directors' (BoD) financial performance significantly affect organizational effectiveness.
Ali & Ayoko, 2020;Tibiletti et al., 2020).Alabdullah and Naseer (2023) explored how board size, business size, and ageing affect Dubai-listed enterprises' finances.According to the study, board size did not affect the earnings of the company.

Table 1 .
Demographic profile of respondents

Table 3
shows the model summary of the dependent variable of ROA, which shows a relatively low R Square of .015.This indicates that the independent variables account for 1.5% of the variance in ROA.With an adjusted R-squared of just 0.011, taking the complexity of the model into account provides an insignificant increase.The estimated standard error between observed and expected ROA values is .516.

Table 2 .
Descriptive statistics of corporate governance and financial performance

Table 5 .
Coefficients of ROA

Table 7
demonstrates the outcomes of an ANOVA model are statistically significant (p = 0.023), suggesting that the examined parameters collectively have a notable impact.The F-statistic (2.611) assesses the overall significance of the regression model, and the "Sum of Squares" values provide insights into the variability explained by the model and the unexplained variability.

Table 8 .
Coefficients of ROE

Table 23 .
Coefficients (H 5 ) On the other hand, the study confirms what Luu et al. (2020) found: that income diversity positively impacts financial performance.This shows that the current study and Luu's previous work on topic are converging.