The Impact of Corporate Governance on Disclosure Practice: An Analysis of Islamic and Conventional Banks in the GCC Countries

Abstract

Effective corporate governance plays a crucial role in firms and affects important firm policies, including disclosure and transparency policies. Corporate governance has gained significant importance in the past two decades, especially after the high-profile corporate scandals such as Enron and the 2008 financial crisis. These events have brought the importance of corporate governance to the forefront and resulted in calls to strengthen corporate governance mechanisms, especially in the financial sector. The main objective of this research is to examine the impact of corporate governance mechanisms on the extent of disclosure for Islamic and conventional banks. To do this, the current study develops two indexes, namely board effectiveness and internal control strength. The study also develops an index for Shariah governance strength (specific to Islamic banks), which is comprised of the Shariah supervisory board and other Shariah governance-related characteristics. These indexes along with the underlying individual characteristics are used as determinants in examining the relationship between corporate governance and the extent of disclosure. To measure the extent of disclosure, the study develops a disclosure index and using a sample of 52 Islamic and conventional banks performs a content analysis of the bank’s annual reports for the period from 2015 to 2019. Regression analysis is undertaken to examine the impact of the main corporate governance indexes and the individual variables on the extent of disclosure.
The result of the disclosure analysis shows statistically significant weakness in the disclosure practices of the Islamic banks when compared to their conventional counterparts, thus suggesting that Islamic banks need to enhance their disclosure policies. On the other hand, the results of the regression analysis shows that both corporate governance indexes (board effectiveness and internal control strength) have a significant positive impact on the extent of disclosure. The Shariah governance strength index is also significantly and positively associated with the extent of disclosure. Moreover, the findings show that several individual corporate governance characteristics are associated with the extent of disclosure. Board independence, audit committee size, financial expertise and internal audit independence are all positively and significantly associated with the extent of disclosure.
Overall, the findings of this study reveal that effective corporate governance has a significant impact on the extent of disclosure and banks with more effective boards and a stronger internal control environment tend to be more transparent. Moreover, Islamic banks which have stronger Shariah governance are more likely to provide higher levels of disclosure. These findings can provide informative and valuable insight to regulators, policymakers and bank stakeholders, who can use them to make enhancements to the corporate governance mechanisms of both Islamic and conventional banks.