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MAJ
28,6 Board composition and bank
performance in Kuwait:
an empirical study
472
Mejbel Al-Saidi and Bader Al-Shammari
Accounting Department, College of Business Studies,
Public Authority for Applied Education and Training, Hawally, Kuwait

Abstract
Purpose – This study aims to examine the relationship between board composition (i.e. non-executive
directors, family directors, role duality and board size) and bank performance, using a sample of nine
listed Kuwait banks over the 2006 to 2010 period.
Design/methodology/approach – The study uses ordinary least squares (OLS) and two-stage-least
squares (2SLS) to test such a relationship and to address endogeneity in explanatory variables.
Findings – The results provide some evidence that board composition of banks relates to their
performance. According to the OLS regression results, only board size and proportion of non-executive
directors negatively affect bank performance. Meanwhile, the 2SLS results indicate that role duality
positively affects a bank’s performance while board size affects a bank’s performance negatively.
Research limitations/implications – Although the model has explained a significant part of the
variation in performance, still unexplained is a material part that represents the “noise” of the model. Data
availability limited the ability to study other aspects of corporate governance mechanisms such as number
of audit committee members on board. The sample size is small; thus, in future research, the sample size
could be increased by including a longer period of time or different countries such as members of the Gulf
Cooperation Council (GCC) (Kuwait, Bahrain, Qatar, Oman, United Arab Emirates, and Saudi Arabia).
Practical implications – Given the importance of effective boards in monitoring bank values, more
actions and rules need to take place in Kuwait to improve the efficacy of boards in protecting
shareholders and their interests in Kuwaiti banks. Regulators may mandate a corporate governance
code or adopt the OECD corporate governance principles as a starting point in Kuwait. Kuwaiti
companies may use the findings to make appropriate choices about board appointments and best
governance to improve performance. Investors also may use the findings to understand Kuwaiti
companies. Such findings may assist them to diversify their investment portfolios.
Originality/value – This study asserts to provide insights on the relationship between bank
performance and board composition in Kuwait. The study extends prior research and investigates the
roles of board of directors in banks in the context of an emerging market characterized by weak
shareholder protection and highly concentrated ownership.
Keywords Corporate governance, Board composition, Banking sector, Performance, Kuwait
Paper type Research paper

1. Introduction
Corporate governance has recently attracted more interest from academic and
regulators around the world. Globalization, deregulation, the integration of capital
markets and recent corporate scandals have intensified the existing debate on how to
Managerial Auditing Journal control the conflict inside and outside the companies, as well as how to design effective
Vol. 28 No. 6, 2013
pp. 472-494
q Emerald Group Publishing Limited
0268-6902
The authors thank the Editor and two anonymous referees for their valuable comments and
DOI 10.1108/02686901311329883 suggestions that have improved the quality of this paper.
corporate governance principles. Investors in developed countries and, to a lesser extent, Board
the Middle East, have started to question company managers and audit firms who were composition
supposed to protect them. In this context, several governance mechanisms –
particularly board composition characteristics – have been introduced to help align the in Kuwait
interests of managers with shareholders.
Several studies in corporate governance literature have investigated the
relationship between firm performance and board composition in Kuwait, including 473
those of Al-Shammari and Al-Sultan (2009) and Al-Saidi (2010). However, all of these
studies excluded banks from their samples due to differences in the regulations and
capital structures. As a result, a little is known about the effectiveness of bank
performance and corporate governance. Indeed, corporate governance in the banking
industry has been almost ignored in the literature in developing countries in general
and Middle East in particular.
The banking system is an important sector built on confidence and trust, which
underscores the importance of corporate governance principles in the industry. In
addition, the banking sector is important for a country’s economic growth as it
allocates funds to various sectors of the economy and implements monetary policy.
Kuwait banking sector offers a particularly appropriate context for the study for two
reasons. First, banks listed on Kuwait Stock Exchange (KSE) represent a market
capitalization of KWD 21 billion (more than US$65 billion) as of 31 December 2010,
which corresponds to approximately 20 percent of the gross domestic product (GDP) of
the country (AMF, 2011). Second, the October 2008 crisis involving Kuwait’s second
largest bank, Gulf Bank, raised a call for new corporate governance principles by a
number of members of parliament (MPs), the chamber of commerce, and the Union of
Investment Companies (UIC). This crisis resulted when the bank’s board of directors
was responsible for using the capital and clients’ deposits in risky derivatives.
Therefore, it is important to examine corporate governance in the banking sector
within Kuwait’s corporate governance by focusing on the board composition
characteristics – namely, non-executive directors (NED), family directors (FD), role
duality, and board size (BS).
This study provides insights about the relationship between bank performance and
board composition. It may enhance understanding of corporate governance mechanisms
appropriate for adoption in Kuwait and explore whether board composition influence
performance of Kuwaiti listed banks. It may enable banks to make appropriate choices
about board appointments and best governance to create and improve performance. In
Kuwait, regulators play an important role in protecting investors and keeping
confidence in the economy. They may mandate corporate governance code or adopt the
Organization of Economic Cooperation and Development (OECD) governance principles
as a starting point in Kuwait. This study is also important because there is a growing
international recognition of the importance of corporate governance structure for a
company’s success, given that several organizations and countries have issued
guidelines and recommendation for best governance practices and board composition.
For example, the OECD’s best governance practices issued in 1999 have become an
international benchmark for regulators, investors, and companies worldwide.
This study aimed to extend prior research and investigate the roles of board of
directors in banks in the context of an emerging market characterized by weak
shareholder protection and highly concentrated ownership. Specifically, this study
MAJ contributes to existing corporate governance literature by investigating the relationship
28,6 between bank performance and board composition characteristics in the Kuwaiti
banking sector. To this end, it uses an empirical study of a sample of nine Kuwaiti
commercial banks, which differ in terms of their monitoring and corporate governance
characteristics during the years 2006-2010.
The results of OLS regressions revealed that two variables – namely, the proportion
474 of NED and BS – negatively affect bank performance based on accounting measure
(return of assets (ROA)). However, this relationship becomes insignificant based on
market measure (Tobin’s Q). Meanwhile, FD on boards and role duality do not affect
bank performance. After controlling for endogeneity issues by using 2SLS, the
proportion of NED and BS become insignificantly negative in both measures. However,
only BS is significant based on accounting measure. Meanwhile, role duality positively
affects bank performance based on market measure, whereas it is insignificant based on
accounting measure. Regarding the presence of FD, the study found no relationship
with bank performance. A Hausman test demonstrated that board composition
characteristics are endogenous.
The paper proceeds as follows: Section 2 describes the banking system in Kuwait;
Section 3 describes corporate governance in Kuwait; Section 4 discusses the theoretical
framework; Section 5 presents the literature review and hypotheses development;
Section 6 describes the data and methodology used; and Section 7 presents the results.
The study ends with summary and conclusions, including limitations and avenues for
future research in Section 8.

2. Banking in Kuwait
Kuwait’s banking system was established in 1941 when the British Bank of the Middle
East became the first bank to operate in Kuwait. In 1952, the National Bank of Kuwait
(NBK) became the country’s first Kuwaiti public shareholding bank. In 1977, the
Kuwait Finance House (KFH) was opened as the second oldest Islamic bank. More
recently, in October 2005, HSBC became the first foreign bank to operate in the Kuwait
market, signalling an initial step in opening Kuwait’s economy to international banks.
The Central Bank of Kuwait (CBK), established in 1968, acts as the government’s bank
and monitors the country’s banking system.
The majority of Kuwait’s domestic banking sector is owned by institutional,
government, and individual (families) shareholders. This situation creates entry barriers
for foreign banks; indeed, Kuwait limits foreign ownership to 49 percent. Entry barriers
also limit the number of banks in Kuwait, which currently has six commercial, three
Islamic, one specialized, and seven foreign bank branches. By comparison, Bahrain, for
example, has 30 banks. Kuwait’s banking sector still relies on deposits and loans as the
main sources and uses of funds, and banks’ assets are mainly composed of loans and, to a
lesser degree, securities investments.
Like most developing countries, some traditional mechanisms may not work as well
as in developed countries. For example, the market for corporate control (takeover) is
very rare in Kuwait, as ownership is concentrated in the hands of families, institutions
and the government; these shareholders influence management decisions through their
representatives in management and on boards. Banks’ roles are also limited because,
according to law, they are prohibited from having any shares in a firm; thus, they have
no representatives on boards. Figure 1 provides Kuwait’s banking structure.
 Kuwait banking structure
Board
composition
Kuwait Central Bank in Kuwait

Commercial banks Islamic banks Specialized banks (not listed) 475

• Local (six banks) • KFH Industrial Bank

• Foreign (7 banks • Bubyan of Kuwait
not listed) • International
Figure 1.
Kuwait banking structure
Source: Industry Report (2009, p. 5)

3. Corporate governance in Kuwait

Three governmental bodies are concerned with the principles of corporate governance
in banking sector in Kuwait – the Ministry of Commerce and Industry, the KSE, and
the CBK. The Ministry promulgated a number of corporate governance principles in the
company Law No. 15 of 1960, whereas the KSE law issued an Amiri Decree of 14 August
1983 that includes only two corporate governance principles. The CBK Law No. 32/1968
also has two corporate governance rules, all designed to protect investors and users of
financial reporting, set up mechanisms for monitoring companies, and establish
directors’ rights and responsibilities and users of financial reporting. According to these
laws, all listed companies including banks must comply with accounting regulations
imposed by the Ministry of Commerce, the KSE requirements and the CBK rules.
There are 12 provisions concerning corporate governance practices in the company
law. Specifically, these provisions address the board members’ general responsibilities,
voting, rights, and composition as well as the BS. The company law stipulates a minimum
of three directors for each company with no ceiling on the maximum number, and the term
of office is not more than three years, renewable. In terms of board composition, the
company law provides for the appointment of one or more executive directors by allowing
directors to hold concurrently with the office of director any other office or place in the
company, but there is no provision for the balance of executives and NED.
In terms of board structure based on duality or otherwise of the chief executive
officer’s role on the board and in the company itself, the company law does not prevent
the appointment of the same individual as chairman of the board of directors and CEO.
The company law also does not prohibit the appointing of family members in a board.
The law is silent on creating an audit committee or any other committee. However, no
protection is offered for minority shareholders as large shareholders have the ability to
control the composition and structure of boards by using the one share, one vote
system.
The KSE law is silent on all of the above provisions. The law only requires that all
members of a company’s board of directors inform the stock exchange administration
of the number of shares owned by the director within one month from the date of their
appointment to the board of directors. However, such information is not published only
the stock market is informed of it. The law also stipulates that no members of the board
MAJ of directors of a company may have any direct or indirect interest in contracts and
28,6 transactions that are concluded with or for the company, unless they have been
granted an authorization from the general meeting.
The CBK law prohibits a single person or legal entity from owning more than
5 percent of any bank’s capital. However, shareholders can own more than 5 percent
with the CBK’s approval. The CBK also must approve board of directors’ membership
476 and all new members.
These provisions have not been amended since issuance of the company law in
1960, the CBK law in 1968, and stock exchange law in 1983. This study has been
undertaken to assess the impact, if any, of these provisions on corporate performance.

4. Theoretical framework
Many corporate governance theories (e.g. agency theory, stewardship theory, resource
theory) have posited that a link exists between board composition and firm performance
( Jensen and Meckling, 1976; Donaldson and Davis, 1991; Davis et al., 1997; Conner and
Prahalad, 1996). This study uses agency theory as the main theoretical framework for
our discussion. Agency theory focuses on the conflict of interests between managers and
owners (Berle and Means, 1932; Fama, 1980; Fama and Jensen, 1983; Jensen and
Meckling, 1976). The implication for corporate governance from an agency theory
perspective is that adequate monitoring or mechanisms need to be used to protect and
reduce the conflicts of interest between shareholders and management, among
shareholders, and between debt-holders and firms as such conflicts lead to agency costs
(Fama and Jensen, 1983).
Agency theory leads to normative recommendations that boards should have a
majority of outside and – ideally – independent directors, that the position of chairman
and CEO should be held by different persons, and that BS is an important aspect of
effective corporate governance (Cadbury Committee, 1992; Jensen, 1993; OECD, 2004).
The literature on board composition characteristics as a governance mechanism focuses
primarily on issues such as inside versus outside directors (also known as executive
versus NED or independent directors), FD, role duality, and BS with an aim to improve
the effectiveness of oversight. Table I summarises the relationship between these four
mechanisms and firm performance from the agency theory perspective.

5. Literature review and hypotheses development

Existing literature on boards’ corporate governance has focused on three main themes:
the effects of board composition and performance; effects of board characteristics
(diversity, external ties, etc.) on the firm’s competitiveness and performance; and links
between board processes and outcomes (Filatotchev et al., 2007). However, little
attention has been given to the relationship between board composition characteristics
and performance in the banking sector. In this study, and consistent with the Kuwaiti
context, four mechanisms were examined. In this section, we develop hypotheses on
the relationship between bank performance and board composition characteristics –
particularly, NED, FD, role duality, and BS.

Non-executive directors
In previous studies, a firm’s degree of independence is measured by the presence of
NED, who are perceived to be independent of executive directors and thus have more
 Board
Board composition
characteristics Arguments composition
Non executive NED help alleviate agency problem by monitoring and controlling
in Kuwait
directors management behaviours (Berle and Means, 1932)
Outsiders have incentive to develop reputations as governance experts;
insiders do not monitor effectively (Weisbach, 1988) 477
Rosenstein and Wyatt (1990) the appointment of outside directors increase
share value
Family directors Both inside and outside directors are important for effective boards (Fama and
Jensen, 1983)
Jensen and Meckling (1976) argued family managers are insiders and they
reduce and even eliminate the agency problem and thus agency theory would
predict a positive impact on the performance of family management
Role duality Jensen and Meckling (1976) argued against role duality Table I.
The concentration of decision management and control in one person reduces Theoretical arguments
boards’ effectiveness in monitoring (Fama and Jensen, 1983) relative to board
Board size Boards are less effective as they grow in size as decision making slows composition
and CEOs can dominate with greater ease ( Jensen, 1993) characteristics

incentive to do their role more effectively (Cadbury Committee, 1992). Executive

directors are full-time employees of the company and should have clearly defined roles
and responsibilities as they manage the day-to-day operations, while NED are not
employees of the company or affiliated with it in any other way (Weir and Laing, 2001).
Fama and Jensen (1983) argued that NED are unlikely to work with executive directors
against the interests of the shareholders. In addition, they argued that more NED on
bank boards improve the supervision and reduce the conflict of interest among
stakeholders. Jensen and Meckling (1976) suggested that boards dominated by NED
may help to alleviate the agency problem by monitoring and controlling the
opportunistic behavior of management to ensure that they pursue shareholders’
interests. The presence of NED can make executive directors feel evaluated and under
pressure (Haniffa and Hudaib, 2006). Pearce and Zahra (1992) argued that boards
dominated by NED may influence the quality of directors’ deliberations and decisions
and provide strategic direction and improvement in performance.
Empirically, the relationship between firm performance and NED is mixed. For
example, Weisbach (1988), Rosenstein and Wyatt (1990) and Brickley et al. (1994) found
that having more NED positively influenced firm performance. Similarly, Black et al.
(2006) found that firms with boards made up of 50 percent NED have higher
performance. Brown and Caylor (2004) also found a positive and strong relationship
between firm performance and NED. However, Agrawal and Knoeber (1996) found a
negative relationship between firm performance and the proportion of NED, whereas
other studies failed to find any relationship between the two (Bhagat and Black, 2002;
Haniffa and Hudaib, 2006; Hermalin and Weisbach, 1991).
In the banking industry, AlManaseer et al. (2012) and Pathan et al. (2007) found a positive
relationship between bank performance and NED. However, a negative relationship has
been found in Jordan (Bino and Tomar, 2012) and Ghana (Kyereboah-Coleman and Biekpe,
2006). Praptiningsih (2010) found no significant relationship between bank performance
and NED in four Asian countries. Adams and Mehran (2003) also found no significant
relationship between the proportion of NED and bank performance.
MAJ In Kuwait, company law, CBK law and KSE law failed to determine the proportion
28,6 of NED to the board of directors, as there is no provision for the balance of executives
and non-executives directors. However, the CBK enacted more regulations in the
banking sector, Article No. 68 in 1968 stated that:
To be a member of directors in any Kuwait bank, or a Chief of the Executive, or his Deputy or
Assistant thereof, or to continue occupying any of these posts, requires the fulfilment of the
478 following conditions (1) not to have been adjudged guilty in breach of trust and declared
bankrupt; (2) to be of good reputation; (2) to have adequate experience in banking; and (4) not to
be a member of a Board of Directors or staff in any of the other banks operating in the State of
Kuwait.
According to the CBK, the aim of these conditions is to improve the bank value and
performance. Consequently, because NED are unlikely to work with executive directors
against the interests of the shareholders, it can be argued that a board with more NED is
more likely seen to monitor management, to limit the opportunistic behavior of the CEO
and to provide strategic directions leading to improvement in performance. Based on the
theoretical expectation and Kuwaiti context, it is hypothesized that:
H1. Bank performance is positively related to a higher proportion of NED on the
board.

Family directors
The proportion of family member representatives may also affect firm performance.
Berle and Means (1932) and Jensen and Meckling (1976) argued that firm value is
increased when ownership and control are combined. According to Fama and Jensen
(1993) long-term family relationships provide firms with strong management
monitoring and discipline. McConaughy et al. (2001), Mishra et al. (2001) and Tsai et al.
(2006) have found a positive relationship between family members on boards and firm
performance. They argued that FD offer many advantages that could improve firm
performance (e.g. strong relations, quick decisions, guaranteed business stability, and
long-term planning). James (1999) suggested that family members’ traits, such as trust
and altruism, can promote an atmosphere of commitment for good business and enhance
performance.
However, family members on boards may produce several problems; for example,
controlled firms may face threatening factors such as family instability, a lack of
planning, problems with succession planning, nepotism, and favouritism that may very
negatively influence firm performance (Smith and Amoako-Adu, 1999). Maury (2006)
argued that family firms reduce agency problems between shareholders and managers
and increase the conflict between large shareholders and minority shareholders. He also
found that family firms have higher firm performance; however, such advantages
disappear when shareholder protection is weak.
A number of listed firms in Kuwait have substantial family ownership and elect
family members to sit on boards as both non-executive and executive directors.
Companies with a higher proportion of family members on the board are more likely to
perform better because higher presence of family members is more likely seen to
stabilize the business and to provide long-term planning. Consistent with theoretical
perspectives and the Kuwaiti context, the following hypothesis is drawn:
H2. Bank performance is positively related to the presence of FD on the board.
Role duality Board
Duality refers to the situation when one person holds the two most powerful positions composition
on the board of directors – namely, CEO and chairman. The CEO is a full-time person
responsible for the company’s day-to-day operations and, as such, is responsible for the in Kuwait
company’s performance. In contrast, the chairman is normally a part-time employee
primarily responsible for ensuring that the board operates effectively. The Cadbury
Committee (1992) recommended separating the two roles to ensure a clear division of 479
responsibilities and thus combining the two roles is a key indicator of bad corporate
governance. Lipton and Lorsch (1992), Worrell et al. (1997) and Carlsson (2001)
supported the agency theory with respect to the separation of the two positions, as
such separation improves the board’s effectiveness in management monitoring that
also could lead to improved performance. They contend that CEO duality makes the
board inadequate and powerless in the face of a strong CEO.
Empirically, the studies on this issue have yielded mixed results. Rechner and Dalton
(1991) and Lipton and Lorsch (1992) found that CEO duality makes a board insufficient
and ineffective in making decisions to improve performance. However, Tian and Lau
(2001) found a positive relationship between duality and performance for Chinese listed
companies. Similarly, there is some evidence that companies that have duality perform
better than those with separate leadership (Donaldson and Davis, 1991; Kiel and
Nicholson, 2003). Daily and Dalton (1992), Dahya and McConnell (2005), Faccio and
Lasfer (1999), Haniffa and Hudaib (2006) and Weir et al. (2002) found no significant
relationship between firm performance and role duality. In banking literature,
AlManaseer et al. (2012) found a positive relationship between bank performance and
role duality in Jordan. They also found that combining the roles sometimes avoided
ambiguity in responsibilities.
In Kuwait, Al-Shammari and Al-Sultan (2009) investigated the relationship between
corporate governance mechanisms and firm performance for non-financial companies
on the KSE from 2004 to 2007 and found a positive relationship between role duality
and firm performance measures. In the Kuwaiti setting, listed firms are not required by
law to separate the role of firm chairman and CEO (or managing director). Thus,
consistent with the theoretical perspective – and given the numerous companies
worldwide that combined these two roles and subsequently went bankrupt or faced
financial crisis – it is hypothesized that:
H3. Bank performance is negatively related to role duality.

Board size
Previous studies have argued that BS is an important mechanism of effective corporate
governance and is related to firm performance ( Jensen, 1986; Zahra and Pearce, 1989).
Agency theory suggested that the number of directors on the board has an effect on the
extent of a company’s monitoring, controlling, and decision making. Prior studies
(Jensen, 1993; Lipton and Lorsch, 1992; Yermack, 1996) have argued that a small BS is
more effective with a greater diversity of knowledge and experience and preferable on
the grounds of easy co-ordination, cohesiveness, and communication. AlManaseer et al.
(2012) and Pathan et al. (2007) argued that big BS may produce problems of coordination,
communication, and decision-making as well as more risks. However, Haniffa and
Hudaib (2006) and Pearce and Zahra (1992) argued that a large BS is more likely to
provide companies with more expertise to not only monitor managers, but also secure
MAJ critical resources. Adams and Mehran (2003) and Coles et al. (2008) argued that larger
28,6 boards are better for corporate performance because they allow for more effective
monitoring by reducing the domination of the CEO within the board, with the result of
reducing agency costs, allowing for representation of different shareholders on the
board, protecting shareholders’ interests, and having a greater range of expertise and
resources to help make better decisions.
480 Empirical studies reported mixed results. Yermack (1996) found a negative
relationship between firm performance (Tobin’s Q) and BS. Haniffa and Hudaib (2006)
found similar results; however, this relationship became positive when performance was
measured by ROA. Al-Saidi (2010) found no relationship between BS and firm
performance. Meanwhile, Al-Shammari and Al-Sultan (2009) found a positive relationship
between BS and firm performance.
In banking studies, Kyereboah-Coleman and Biekpe (2006) investigated 18 banks in
Ghana and found a positive relationship between BS and firm performance. Adams
and Mehran (2003) found a positive relationship between BS and bank performance
(Tobin’s Q) for American bank-holding companies, arguing that larger bank boards
increase manager supervision and provide banks with more human capital and advice
for managers. However, AlManaseer et al. (2012) and Pathan et al. (2007) found a
negative relationship between BS and firm performance.
Kuwaiti law does not specify the maximum number of directors for banks, although
all listed companies must have at least three directors. In the case of Kuwait, it can be
predicted that BS is likely to negatively relate to bank performance because coordination
and communication among members on board are more likely to be problematic leading
to weak monitoring that may affect performance. Therefore, it is hypothesized that:
H4. Bank performance is negatively related to BS.

Control variables
To test the hypotheses, four additional variables were included to control for other
potential influences of bank performance. The first is bank size (Al-Shammari and
Al-Sultan, 2009; Bhagat and Bolton, 2008; Demsetz and Lehn, 1985; Hermalin and
Weisbach, 1991; Haniffa and Hudaib, 2006). Short and Keasey (1999) suggested that
large firms can easily generate funds and make investments and may be able to create
entry barriers that lead to improved performance. The second control variable is
leverage (debt ratio), which has often been used in corporate governance studies
(Agrawal and Knoeber, 1996; Aljifri and Moustafa, 2007; Haniffa and Hudaib, 2006).
Debt-holders have incentives to exert more influence over management actions.
Consistent with agency theory, debt financing may raise the pressure on managers to
perform well because it reduces the moral hazard behavior by reducing free cash flow at
the disposal of managers (Jensen, 1986). Accordingly, companies with higher leverage
are more likely to improve their performance.
The third control variable is capital adequacy (CA) ratio, which is often used as a
control variable in studies (Bino and Tomar, 2012; Kim and Rasiah, 2010; Love and
Rachinsky, 2007; Praptiningsih, 2010) investigating the relationship between bank
performance and corporate governance mechanisms. The majority of previous argued
that a bank CA have potential effects on how corporate governance impacts performance.
Finally, ownership concentration (OC) was included as control variable. Previous studies
have demonstrated that OC by large shareholders (institutions, government,
and individuals) improves firm performance because they have more incentive to reduce Board
the conflict between management and shareholders as well as reduce free-ride problems composition
(Grossman and Hart, 1980; Xu and Wang, 1997). However, OC may lead to expropriate
and tunnelling problems (La Porta et al., 2002). Other researchers have argued that no in Kuwait
relationship exists between OC and firm performance because of the endogeneity issue
(Demsetz and Lehn, 1985; Mehran, 1995; Omran et al., 2008). Therefore, the current model
includes proxies for bank size, debt ratio, CA, and OC as control variables[1]. 481
6. Method and data
Sample selection and variable measurement
The sample for the study was drawn from banks listed on KSE. There are only nine banks
listed on the KSE and these banks were selected to examine the relationship between
corporate governance mechanisms and performance during years 2006-2010. These years
were selected because they are the most recent when starting this study. This leads to
45 ban-year observations for the whole sample. Data related to performance measures,
board composition characteristics, control variables, and instrument variables from 2006
to 2010 were collected from various sources, such as Annual Companies Guide published
by KSE (2010) and banks’ annual reports. The dependent variables are two performance
measures – namely, Tobin’s Q (market measure) and ROA (accounting measure). The
independent variables are board composition, control variables and instrument variables.
Table II summarizes the dependent and independent variables and their proxies.

Analytical procedures
Since multiple regressions were used to test the hypotheses, five econometric
assumptions were tested: linearity, normality, multicollinearity, heteroskedasticity,

Variable Proxy

Dependent variables
Tobin’s Q (TQ) Book value of debt þ market value of common stock/total assets
Return of assets (ROA) Earnings after Zakat and tax/total assets
Independent variables
Board composition variables
Non-executive director (NED) The proportion of NED to total number of directors on the board
Family directors (FD) Percentage of FD to total directors on the board
Role duality (ROLE) Dummy variable; 1 if the chairman is also the CEO, 0 otherwise
Board size (BS) Total number of directors on the board
Control variables
Bank size (BAS) The natural logarithm of total assets
Debt ratio (DT) Total liabilities/total assets
Capital adequacy (CA) Equity/total assets
Ownership concentration (OC) Ownership of more than 5 percent
Instrument variables
Lags variables Four endogenous variable for the prior year
Table II.
Notes: Sources of information for the dependent, independent, control variables are Annual Summary of the
Companies Guide published by KSE (2010) and annual reports; data are related to financial year-end; dependent and
Zakat is defined as a religious duty (tax) charged in accordance with Al-Quran’n Al-Karim and levied independent variables
on profits of companies (Maali et al., 2006) and their proxies
MAJ and autocorrelation. The aim of testing these assumptions is to indicate whether these
28,6 assumptions could cause estimation problems. Several techniques were used to
address the implications of these problems[2]. In addition, a Hausman test and Sargan
test were used to test the robustness of our results.
The first step was to run a multiple regression by considering the performance
measures as dependent variables and the board composition and control variables as
482 independent variables, but this regression ignored possible endogeneity. The following
model tested the study’s hypotheses:

PERM ¼ a þ B1 NED þ B2 FD þ B3 ROLE þ B4 BS þ B5 BAS þ B6 DT þ B7 CA

þ B8 OC þ 1

where:
a intercept.
PERM Tobin’s Q and ROA.
NED non-executive directors.
FD family directors.
ROLE role duality.
BS board size.
BAS bank size.
DT debt ratio.
CA capital adequacy.
OC ownership concentration.
1 random error term.
The second analysis tested endogeneity. Endogeneity refers to the presence of
unobserved variables that impact the relationship between performance and board
composition characteristics. It indicates that a relationship exists between the error
terms of independent variables (Brooks, 2002). This problem may make the OLS
regression inapplicable for estimating the parameters of each equation. Consequently,
OLS assumptions will be violated when estimating the equations (Gujarati, 2004;
Brooks, 2002). We addressed these problems by using the instrument variables for the
board composition characteristics – namely, the lags variables for NED, FD, role
duality, and BS.

7. Results
Descriptive analysis
Table III presents the Pearson correlation matrix for the dependent, continuous
independent, and control variables. Gujarati (2004) suggested that multicollinearity
may be a problem when the correlation exceeds 0.80. In this study, the highest
correlation between BS and family members on board (FD) was 0.536, indicating no
multicollinearity problem.
 Board
Variables Mean Min. Max. SD Skewness Kurtosis
composition
ROA 0.0179 2 0.07 0.04 0.02002 22.573 9.115 in Kuwait
TQ 1.1768 0.60 1.82 0.20952 0.567 2.012
NED 0.9416 0.86 1.00 0.06219 20.177 21.906
FD 0.0889 0.00 0.29 0.12762 0.761 21.431
ROLE 0.4815 0.00 1.00 0.50435 0.076 22.072 483
BS 8.2963 7.00 10.00 1.05740 20.034 21.372
BAS 4,137.55 329.0 12,907.00 3,538.83 1.372 0.891
DT 0.8209 0.60 0.94 0.06119 20.938 2.006
CA 0.1124 0.00 0.22 0.05004 20.791 1.094
OC 0.4552 0.00 0.78 0.24088 20.540 20.793 Table III.
Descriptive statistics
Note: For definition of the dependent and independent and control variables, see Table II for the study’s variables

The descriptive analysis in Table IV suggests that the dependent variables in our
model were not normally distributed. Brooks (2002) suggests that the data to be normal
if standard skewness is within ^ 1.96 and standard kurtosis ^ 3. Also, the analysis of
residuals, plots of the studentised residuals against predicted values indicated that the
assumptions of heteroskedasticity, autocorrelation, linearity were violated. Thus,
consistent with previous studies (Haniffa and Hudaib, 2006; Haniffa and Cooke, 2002;
Cooke, 1998) we transformed dependent variables and bank size using normal scores,
then performed our regressions. Cooke (1998) argued that normal scores technique is
the most appropriate way in transforming to make R 2 and F-value is more powerful
and increase the level of significant[3].
For the dependent variables, Table IV shows that the mean for the ROA and
Tobin’s Q were 0.017 and 1.176, respectively. Comparing this result with Al-Saidi’s
(2010) study in Kuwait that found mean values for ROA and Tobin’s Q to be 0.09 and
1.7, respectively, indicating that banks have lower performance than non-financial
firms. This could be related to that the world financial crises starting in 2007 affected
banks more than non-financial companies.
For NED, the sample mean value (94 percent) shows that the ratio of NED is slightly
more than 90 percent of the total number of the directors, suggesting that NED represent
the majority of the Kuwaiti banks’ boards. This result is quite higher for the results
found by both Al-Saidi (2010) and Al-Shammari and Al-Sultan (2009) (83 percent).

Variables TQ NED FD BS BAS DT CA OC

ROA 2 0.064 2 0.278 * 0.245 2 0.224 0.062 2 0.511 * * 0.231 2 0.200

TQ 2 0.218 2 0.082 0.041 2 0.043 0.084 2 0.289 * 2 0.144
NED 2 0.213 0.048 0.190 0.294 * 0.046 2 0.072
FD 2 0.536 * * 0.095 0.124 0.163 2 0.115
BS 0.380 * * 2 0.239 0.057 2 0.090
BAS 0.130 0.132 2 0.468 * *
DT 2 0.031 0.031
CA 2 0.494 * * Table IV.
Pearson correlations
Notes: Correlation is significant at: *0.05 and * *0.01 levels (two-tailed); for definition of the dependent matrix for the continuous
and independent and control variables, see Table II independent variables
MAJ The proportion of NED in Australia is 69 percent (Kiel and Nicholson, 2003) and the
28,6 proportion of NED in the USA is 60 percent (Bhagat and Black, 2002). With respect to FD,
the mean of family members on the board is 8 percent, indicating that presence of family
members on the board is not common in Kuwaiti banks’ boards. The minimum value of
0 suggests that there are no family members on the board and the maximum value of
29 percent suggest that about less than half of the board is form one family. Although
484 family members on the board exist in Kuwaiti banks’ boards, they did not represent the
majority in any board. Al-Shammari and Al-Sultan (2010) reported that 19 percent of the
Kuwaiti non-financial companies’ boards were family members. This indicates that
family members on board are more common in non-financial companies than banks.
Role duality’s mean value (0.48) shows that about half of the banks have a separate
leadership structure. Al-Saidi (2010) reported that role duality in non-financial firms in
Kuwait existed and it was approximately 53 percent of the firms while Al-Shammari
and Al-Sultan (2009) found that it was 63 percent of the non-financial companies. The
role duality in Australia is 23 percent (Kiel and Nicholson, 2003) and the role duality in
Malaysia is 25.7 percent (Haniffa and Hudaib, 2006). These findings suggest that role
duality is common in both banks and non-financial companies in Kuwait.
In the case of board composition, the mean value of BS is 8.29 indicating that BS of
Kuwaiti banks is 8, with a minimum of 7 and a maximum of 10. This is consistent with
the recommendation of Lipton and Lorsch (1992) and the Cadbury Committee report for
board effectiveness. It recommends that the size of the board to be between eight and ten
members for board effectiveness. However, this finding is higher than that of Al-Saidi
(2010) and Al-Shammari and Al-Sultan (2009), who found the BS in non-financial
companies in Kuwait to be about six members. Comparing the average size of the
Kuwaiti banks’ boards with other banks in different countries indicates that it is higher
than the board in Australia (six members) (Kiel and Nicholson, 2003), but lower than the
BS in the USA 11.45 (Bhagat and Black, 2002) (11 members). However, the BS in Kuwait
is similar in the UK (eight members) (Conyon and Peck, 1998). Overall, this finding
suggests that Kuwaiti banks prefer higher number of directors on the board.
For control variables, the sample companies have mean values of 4.137.550 million for
total assets and 82 percent for the ratio of total liabilities to total assets. the average CA
rate is 11 percent, which is very close to the minimum requirements of the CBK
(12 percent). Finally, the mean value of OC (45 percent) is quite high, but very close to
Al-Saidi’s (2010) finding of 50 percent. In the case of large shareholders, Al-Shammari et al.
(2008) studied ownership in Kuwait and found the concentration by institution have a
mean value of 36 percent.

OLS regression
This study is concerned with investigating the association between board composition
characteristics and performance of nine listed banks in the KSE between 2006 and
2010. Table V presents the results of the regression equation linking board composition
and bank performance based on accounting and market measures. The F-value for
each measure is significant at the 1 percent level and the adjusted R 2 for each measure
is 47 and 49 percent, respectively.
The proportion of NED on the board is negative and significant based on accounting
measure (ROA). This finding is opposite to H1, which predict a positive association
between bank performance and proportion of NED on the board. However, the result is
 Board
Variable NED BS ROLE FD TQ ROA
composition
NED 2 0.943 26.426 * * 20.453 4.009 2 4.365 in Kuwait
FD 0.037 2 6.906 * * * 1.299 0.824 0.610
ROLE 2 0.080 * * 0.377 0.007 0.922 0.017
BS 0.005 0.067 0.076 * * 0.222 2 0.519 * *
NED-res 3.889 4.821 * * 0.089 28.718 * * 0.637 485
FD-res 2 0.260 * 5.386 * * 20.913 21.183 2 1.620
ROLE-res 0.042 2 0.149 0.103 20.587 2 0.448
BS-res 0.010 0.003 0.028 20.349 2 0.052
Intercept 0.799 * * * 12.307 * * 6.009 * * 1.133 * 23.736 16.949 * *
F-test 0.00 0.00 0.00 0.00 0.00 0.00
Notes: t-test significant at: *p , 0.10, * *p , 0.05 and * * *p , 0.01; for definition of the dependent
and independent and control variables, see Table II; the independent variables in each regression
equation include the endogenous variables: NED, FD, ROLE, and BS, the respective residuals from Table V.
each reduced form regressions: NED-res, FD-res, ROLE-res, and BS-res, and the exogenous variables Durbin-Wu-Hausman
in the system test for endogeneity

consistent with findings in Jordan (Bino and Tomar, 2012), in Ghana (Kyereboah-Coleman
and Biekpe, 2006), and in the USA (Agrawal and Knoeber, 1996; Bhagat and Black, 2002;
Yermack, 1996). The results contradict the agency theory argument that the presence of
independent directors improves firm performance. Such a contradiction stems from the
lack of business knowledge and the lack of true independence as large shareholders are
the only ones responsible for appointing NED, even in banks.
However, this relationship is insignificant based on market measure (Tobin’s Q),
which is consistent with several studies (Adams and Mehran, 2003; Al-Saidi, 2010;
Praptiningsih, 2010; Weir et al., 2002). Al-Saidi (2010) studied the situation in Kuwait
and found no relationship between firm performance and the proportion of NED
in non-financial companies. In short, both results suggest that the proportion of NED is
not effective in monitoring managers or reducing the expropriation of shareholders in
Kuwaiti banks.
In terms of FD on board, the finding reported insignificant relationship between bank
performance and proportion of family members on board. Thus, H2 is rejected. This
result suggests that presence of family members does not have an effect on performance.
A possible interpretation for this result could be related to lack of business experience
given that family members were appointed on the board by their share ownership power
in Kuwait. This result is consistent with Tsai et al. (2006) and Maury (2006).
Role duality (ROLE) was found to be insignificant for either measure. Thus, H3,
which predict bank performance is negatively related to role duality is rejected. This
result may imply that duality is not important for bank performance in Kuwait. This
result is consistent with the findings of Vafeas and Theodorou (1998), Laing and Weir
(1999), and Al-Saidi (2010) in the case of role duality. However, Praptiningsih (2010)
examined banking in four Asian countries and found that role duality is negatively
associated with the ROA.
The variable BS is significant based on ROA, thereby supporting H4, which predicts a
negative association between bank performance and BS. This is consistent with the
results of Adams and Mehran (2003), AlManaseer et al. (2012), Pathan et al. (2007)
and Yermack (1996). It is also consistent with the agency perspective (Jensen, 1986).
MAJ However, this result is inconsistent with Haniffa and Hudaib (2006), Pearce and Zahra
28,6 (1992), Adams and Mehran (2003) and Coles et al. (2008). A possible explanation for this
finding is that small BS may be easy for coordination and communication leading to
effective monitoring and less risks which in turn improve bank performance.
However, this relationship becomes insignificant based on the market measure; thus,
the market does not view BS to be related to better performance because of the absence of
486 a corporate governance code in Kuwait. This result is consistent in Praptiningsih (2010)
examined banking in four Asian countries and found that BS is insignificant in terms of
firm performance based on ROA. However, Al-Shammari and Al-Sultan (2009)
investigated the situation in Kuwait and found a positive relationship between firm
performance and BS in non-financial companies. Similarly, Bino and Tomar (2012)
found that BS positively affects firm performance for banks in Jordan.
For control variables, with respect to OC, the results report a negative relationship
between bank performance based on market measure and no relationship between the
two variables based on accounting measure. Both results are inconsistent with agency
theory (Jensen and Meckling, 1976), which argues that OC reduces agency problems
between shareholders and managers. We also found a negative relationship between
bank size and bank performance based on market measure, which supports the finding
of Weir et al. (2002). However, this result is opposite the outcome with the accounting
measure. Although the Kuwaiti market suggests that small banks are performing better,
large banks may have access to critical resources and can use more political power than
smaller banks. Thus, larger banks, as measured by ROA, are generally associated with
better performance than smaller banks, this may indicate that Kuwait banks benefit
from in offering services not just providing loans. Kuwaiti banks may have expanded
their off-balance sheet activities to reduce the negative impact of reduction the interest
rate resulting from increasing competition among banks.
In addition, the relationship between bank performance and debt is insignificant
based on market measure and negative based on accounting measure. The negative
result is consistent with the findings of Haniffa and Hudaib (2006) and McConnell and
Servaes (1995). It can be concluded that the debt variable is not effective in Kuwait.
Finally, CA is negative based on market measure and no relationship based on accounting
measure. Both results confirmed that CA is not effective mechanisms in improving the
bank performance. This result may imply that the different efforts by the monetary
authority (CBK) to review the capital of the banking sector is not to improve the
performance of the Kuwait banks but to maintain stability and the regulations in the
banking industry.

Testing the endogeneity

After estimating the equation, we investigated the possible endogeneity between board
composition characteristics (endogenous variables) and bank performance measures
using the Hausman test. We performed two steps. First, we regressed each of the four
board variables on the exogenous variables (all control variables þ instrument variables)
and obtained the fitted value of each endogenous variables. Second, we included the
residuals as additional variables in the original OLS regressions. For example, if the null
hypothesis is that other board composition characteristics are exogenous to BS (other
board variables are not BS), their residuals from the reduced form regressions will be not
related when BS is the dependent variable.
 Table VI shows that, in the regression of NED, the estimated coefficient of the residuals Board
FD-res is significant. Similarly, in the regression of BS, the residuals FD-res appear to composition
affect BS. In the regression of role duality (ROLE), the residuals of NED-res are significant.
In the bank performance regression (only Tobin’s Q), residuals of NED-res are statistically in Kuwait
significant. Finally, the F-test of the Hausman test on the null hypothesis indicated that
all residuals are jointly equal to zero; thus, the 2SLS regressions should be used.
487
2SLS regression
Table VII presents the results of the 2SLS regression based on both measures –
namely, the market and accounting measures. The main differences between the OLS
and 2SLS regressions are summarised as follows:
.
The NED become insignificantly negative in both measures.
.
FD remain insignificant. However, the relationship becomes positively insignificant.

Variables (expected sign) TQ ROA

R2 0.57 0.58
Adjusted R 2 0.47 0.49
F-value 5.978 6.329
NED (þ ) 3.056 2 3.670 *
FD (þ ) 20.260 2 1.010
ROLE (2 ) 0.454 2 0.070
BS (2) 0.051 2 0.584 * * *
BAS (þ) 20.297 * * 0.435 * *
DT (þ ) 0.501 2 11.187 * * *
CA (2 ) 211.142 * * * 2.440
OC (þ ) 22.551 * * * 0.073
Intercept 4.303 17.307 * * * Table VI.
OLS regression of
Notes: t-test significant at: *p , 0.10, * *p , 0.05 and * * *p , 0.01 (one-tailed); for definition of the Tobin’s Q and ROA
dependent and independent and control variables, see Table II on all variables

Variables (expected sign) TQ ROA

2
R 0.44 0.50
Adjusted R 2 0.31 0.40
F-value 3.555 4.668
NED (þ ) 25.719 2 3.020
FD (þ ) 0.174 0.163
ROLE (2 ) 1.198 * 0.153
BS (2) 20.161 2 0.478 * *
BAS (þ) 20.427 * 2 0.365 *
DT (þ ) 20.065 2 10.496 * * *
CA (2 ) 29.989 * * 2.502
OC (þ ) 23.062 * * 2 0.099
Intercept 24.818 15.047 * * Table VII.
2SLS regression of
Notes: t-test significant at: *p , 0.10, * *p , 0.05 and * * *p , 0.01; for definition of the dependent Tobin’s Q and ROA
and independent and control variables, see Table II on all variables
MAJ .
Role duality (ROLE) significant positively affects bank performance based on
28,6 market measure but insignificant positively based on accounting measure.
.
The BS becomes negative and insignificant based on market measure and
negative but significant based on accounting measure.
.
Bank size (BAS) becomes significantly negative in both measures.
488 .
Debt (DT) is negative in both measures, but significantly based on ROA only.
.
OC becomes negatively significant based on market measure and negatively
insignificant based on accounting measure.

Table VIII presents a comparison between OLS and 2SLS results. This is very
important table to present the different between running the regression with control
the problem of endogeneity and after controls this problem. For example, bank size
provided conflict results with OLS regressions. However, the results become negative
significant with both performance measures.

Robustness
To effectively identify the equations, we needed to select valid instruments that meet
the following conditions:
.
the instruments are correlated with the endogenous variable; and
.
the instruments are exogenous to the main equation.

Several tests have been used in previous studies, such as Sargan test (Shea, 1997) and OLS
regression (Staiger and Stock, 1997). This study used Staiger and Stock’s (1997) test to
determine the instruments’ validity. Staiger and Stock (1997) computed the partial R 2 and
its associated F-statistic and suggested that the F-value should exceed five after including
the instrument. Table IX indicates that the F-test is statistically significant in all four
equations; thus, we can reject the null hypothesis that no correlation exists between our
instrumental variables and endogenous variables, thereby enhancing the overall validity
of the instruments.
The significance of the partial R 2 and the F-tests of all the instruments provide
strong evidence that they are highly correlated with the endogenous variables (board
characteristics), thereby supporting the overall the validity of the study’s instruments.

OLS 2SLS
Variables TQ ROA TQ ROA

NED Non sig. Negative sig. Non sig. Non sig.

FD Non sig. Non sig. Non sig. Non sig.
ROLE Non sig. Non sig. Positive sig. Non sig.
BS Non sig. Negative sig. Non sig. Negative sig.
BAS Negative sig. Positive sig. Negative sig. Negative sig.
DT Non sig. Negative sig. Non sig. Negative sig.
Table VIII. CA Negative sig. Non sig. Negative sig. Non sig.
Comparison between the OC Negative sig. Non sig. Negative sig. Non sig.
results of OLS and 2SLS
regressions Note: For definition of the independent variables, see Table II
8. Summary and conclusions Board
This study has assessed the relationship between board composition characteristics and composition
bank performance of a sample of nine listed banks in KSE between 2006 and 2010.
It aims to extend prior research and investigate the roles of board of directors in banks in in Kuwait
the context of an emerging market characterized by weak shareholder protection and
highly concentrated ownership. This study has applied the OLS and 2SLS regressions to
test such a relationship. 489
The results demonstrate that the proportion of NED and the presence of FD on
boards have no impact on bank performance. These findings are inconsistent with the
agency theory, in which firms benefit from appointing independent directors because
they may have knowledge and expertise. However, BS negatively affects bank
performance, which is consistent with agency theory results. Meanwhile, role duality
positively affects bank performance, which is opposite of agency theory.
In terms of control variables, OC affects bank performance negatively, which means
that a conflict of interests exists among shareholders. This is consistent with the
La Porta et al. (2002), who argued that a tunnelling problem exist among large
shareholders. OC is a significant determinant in influencing firms, but the results do not
support the argument that OC improves performance by improving monitoring and
reducing the free-rider problems. In addition, bank size and CA negatively affects bank
performance based on market measure. Similarly, debt negatively affects bank
performance based on accounting measure.
This study has a number of limitations that provide opportunities for future
research. First, although the model has explained a significant part of the variation in
performance, still unexplained is a material part that represents the “noise” of the model.
Data availability limited the ability to study other aspects of corporate governance
mechanisms, such as characteristics of the remuneration and nominating committees,
share ownership by managers and wealth and financial positions of managers. These
variables have been found to be important theoretically and empirically in other
corporate governance structure studies. As information of these variables becomes
available about Kuwaiti companies, the effects of such factors on performance should be
examined. In addition, future studies may want to consider the impact of share
ownership held by executive and NED on performance.
Second, the sample size is small; thus, in future research, the sample size could be
increased by including a longer period of time or different countries such as members of
the Gulf Cooperation Council (GCC) (Kuwait, Bahrain, Qatar, Oman, United Arab
Emirates, and Saudi Arabia). This may benefit regulators in these states in their efforts
to harmonize their commercial and corporate governance regulations in the Gulf.
Finally, it has been argued that OLS yields biased and inconsistent estimators and that

Endogenous variables Partial R 2 F-test (first stage) p-value significant

NED 0.40 5.358 0.00

FD 0.59 11.104 0.00
ROLE 0.71 19.151 0.00 Table IX.
BS 0.76 24.252 0.00 Test of instruments’
quality first stage
Note: For definition of the independent variables, see Table II partial R 2 and F-test
MAJ the use of 2SLS yields consistent estimators. However, if 2SLS regressions are better
28,6 than OLS for explaining the relationship between board composition characteristics and
performance, they also have some limitations in terms of identifying the instruments.
Nevertheless, several previous studies have used this methodology for capturing the
endogeneity issue (Agrawal and Knoeber, 1996; Al-Saidi, 2010; Cho, 1998; Hermalin and
Weisbach, 1991). Many tests can be used to ensure that the instruments are valid and
490 estimates are meaningful. In this study, the partial R 2 and F-value are used, with the
result that the null hypothesis that all instruments are exogenous only at the 1 percent
level cannot be rejected.
This study sought to add value to the literature on Kuwaiti banks’ performance,
providing insight into a significant determinant mostly associated with bank
performance – namely, board composition. Given the importance of effective boards
in monitoring bank values, more actions and rules need to take place in Kuwait to
improve the efficacy of boards in protecting shareholders and their interests in Kuwaiti
banks. Specifically, regulators may mandate a corporate governance code or adopt the
OECD corporate governance principles as a starting point in Kuwait. Kuwaiti
companies may use the findings to make appropriate choices about board appointments
and best governance to improve performance. Investors also may use the findings to
understand Kuwaiti companies. Such findings may assist them to diversify their
investment portfolios.

Notes
1. Previous studies also applied credit risk (bank risk). However, this variable is excluded
because data are not available for all banks in the current study.
2. The regression was run using panel data. Panel data were adopted because they combine
time series and cross-sectional data. Several options of panel data were used in previous
studies, including fixed effects, random effects, OLS, and dynamic. The current study used
the OLS panel to be consistent with Agrawal and Knoeber (1996).
3. Prior studies used the natural logarithm transformation for the bank size. This study run
regressions with transforming the logarithm of the bank size but it provides less powerful
results. However, when we apply the normal score techniques for bank size, the powerful of
the regressions improved.

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About the authors

Dr Mejbel Al-Saidi earned his PhD at the University of Portsmouth, UK in 2010. Dr Al-Saidi is
currently Assistant Professor of College of Business Studies, Public Authority for Applied
Education and Training, Kuwait. Dr Al-Saidi’s research interests focus on corporate governance
mechanisms and their role in improving the firm performance and value, corporate
governance disclosure and accountability as well as accounting and financial engineering.
Dr Bader Al-Shammari earned his PhD at the University of Western Australia, Perth in 2005.
Currently he is an Associate Professor of College of Business Studies, the Public Authority for
Applied Education and Training, Kuwait. He is an editorial board member of Afro-Asian Journal
of Finance and Accounting. He has research interest in enforcement and compliance with
international financial reporting standards by the Middle Eastern countries, voluntary disclosure,
corporate governance and cost of quality reporting. He has published in International Journal of
Accounting, Journal of International Business and Economics, Review of Business Research and the
Middle East Business and Economic Review. Bader Al-Shammari is the corresponding author and
can be contacted at: [email protected]

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