Mitigating mechanism on operational risk and financial performance: evidence from the Ghanaian banking sector

Abstract

This study examined the effects of corporate governance on operational risk and financial performance of listed and non-listed universal deposit banks in Ghana for the period of 2010 to 2022. The study used a descriptive research design. Data were collected from the published annual financial reports of studies listed and non-listed universal banks in Ghana. The population of the study comprised the twenty- three (23) listed and non-listed universal banks. The sample population of fourteen (14) listed and non-listed universal banks in Ghana was arrived at using the inclusive and exclusive criteria. Agency and information asymmetry theories were used to underpin the study. The data were analyzed with the aid of the random and fixed effect panel regression model, the result of the random and fixed effect regression showed that board meetings and independent directors on the board have a negative significant effect on the operational risk. Board size and financial experts on the board have no significant effect on operational risk. On the financial performance of the banks, the results indicate board meetings have a statistically significant positive effect on both ROA and ROE. Board size rather significantly affects ROE and not ROA. However, independent directors and financial experts on the board have no significant effect on ROA and ROE. When firm size was used as the moderating factor between the link of corporate governance and operational risk, the results indicated firm size combined with independent directors increased operational risk while firm size combined with board size and financial experts had no significant effect on operational risk. Firm size in the link between corporate governance and financial performance of the universal banks shows firm size combined with independent directors is positively significant to financial performance (ROA and ROE), and not firm size combined with board size and financial experts on the board. Based on the findings, the study recommended that since independent directors have a negative influence on operational risk, banks should prioritize the selection of independent directors to their boards. In addition, the study suggests that recognizing that board meetings have a statistically significant beneficial influence on both ROA and ROE, banks should create a culture of active and regular board meetings. While board size and financial knowledge did not affect operational risk, banks should prioritize board member quality and competency above board enlargement or the recruitment of financial specialists. Finally, the study recommends that banks should customize their governance practices to their unique size and complexity, taking into account the conditional influence of firm size on the link between independent directors and financial performance.