**2. Literature review**

### **2.1 Theoretical background and hypotheses: board determinants**

In previous studies, the trend in research was to study separately, either the impact of BOD on CBs' FP or the impact of BOD on PBs' FP. However, this study aims to compare these two impacts and specify which board type has a greater effect on FP although their conclusions are not unified. For this reason, our work aims to address an explanation of the evolution of Islamic and conventional banks' performance proportionate to the change in the BOD structure in the specific financial context of covid-19 in emerging and developing countries. The banking governance literature has identified several determinants of BOD. Yet, to avoid econometric problems arising from the unavailability of observations from one of the samples, I have included only four determinants of board composition effectiveness: size, rooting of the board chairman, independence of the board members, and the number of meetings held.

### *2.1.1 Board size*

In the banking governance literature, the impact of board size on banks' FP was largely addressed by several studies [9–17]. Nevertheless, previous research has not yet yielded a unified result, which is why this question remains unanswered [9]. At this stage, the most pressing question concerns the optimal number of directors to better control the managers' activities and subsequently improve the banks' performance. However, previous studies failed to determine the ideal number of directors. Practically, we noticed that the evidence of the board size impact on CBs is inconclusive [18], while work on the board size of PBs is almost nonexistent.

In some studies, the correlation between board size and FP revealed the existence of an intermediate approach named the "neutralist approach" [9, 18, 19].

A lot of research has established a positivist vision about the fundamental role of the board size as a stimulator of FP [13, 20–32]. The board's size enhanced its ability to monitor and improve banks' FP. As a result, as the number of directors increases, so does the ability to harmonize instruments and mobilize resources to guard against risks. The small board easily suffers from the leaders' influence more than the large

### *Impacts of Board Quality on Financial Performance in Conventional… DOI: http://dx.doi.org/10.5772/intechopen.112089*

one does because it has a variety of experiences belonging to the different administrators [33]. The addition of more members creates more interaction between them and provides a favorable ground for encouraging directors to pursue their interests and make mistakes. The impact of such a work environment can lead to an inappropriate climate full of agency relationships, conflicts of interest [34], and financial statement fraud [35].

Although some researchers found that the more board members there are, the higher the bank's FP, other studies found that a small board is more effective at improving a bank's FP. These researchers argue that the number of directors is negatively related to abnormally high profitability because the board's size minimizes managerial incentives to destroy the bank's value and its FP [2, 10, 36–50]. Moreover, large boards are less effective according to the criteria of coordination, control, and decision-making flexibility [2, 37]. Also, boards with fewer directors have more effective control than large boards with supervisory challenges because of communication difficulties [43]. Similarly, a small board provides a better control function, while boards with large sizes tend to control the general manager [2]. Besides, within this same stream, Rashidah and Fairuzana [51] confirmed that there is a positive relationship between the board size and the propensity to manage the outcome.

Our proposal focuses on conventional and participatory banks, in which the board size has a greater effect on the bank's value regardless of its type [52]. Given the dependent and independent contradictory results, the meaning of our basic assumptions essentially depends on the consideration of board size in an agency context as a principal proxy, which allows us to signal the effect of conflicting relationships on FP.

After a rich exposure to the literature concerned with the relationship between the FP and the board size, we propose the following suggestion:

Hypothesis 1: The board size.

Hypothesis 1.1: The board size has a negative effect on the FP of conventional and participatory banks during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 1.2: The board size has a positive effect on the FP of conventional and participatory banks during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 1.3: The board size has a negative effect on the CBs' FP, but it has a positive effect on the PBs' FP during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 1.4: The board size has a positive effect on the CBs' FP, but it has a negative effect on the PBs' FP during and after the covid-19 crisis in emerging and developing countries.

### *2.1.2 Board chairman's rooting: automatic mandate renewal*

Previous research has attempted to demonstrate the board's effectiveness and its impact on the CBs' FP [28, 32, 53, 54], while others have shown the opposite [17, 45, 55–59]. However, in PBs the subject of rooting is not yet widely treated. This may be due to the weakness of the board effect or because of its limited power as a governance mechanism. Theoretically, rooting means the occupation of the same post by a manager after the end of their first fixed-term contract. It is manifested in two methodical forms leading to the same results: either through the CEO duality or by the same person as the board chairman; or the same person who is designed as the board

chairman will exceed his first contract or will automatically renew his mandate without verifying the conditions of his independence.

The opinions of previous studies already carried out on CBs'samples are divergent. Moreover, the empirical results did not confirm whether the duality/rooting generates a clear impact or, if this impact is real, whether it has a positive or negative impact on the banks' FP. Based on the trend of the previous results highlighted in this area, we predict the following hypothesis:

Hypothesis 2: The rooting of the board chairman.

Hypothesis 2.1: There is a positive relationship between the rooting of the board chairman and the FP of conventional and participatory banks during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 2.2: There is a negative relationship between the rooting of the board chairman and the FP of conventional and participatory banks during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 2.3: There is a positive relationship between the rooting of the board chairman and the CBs' FP, but this relationship is negative in the PBs' case during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 2.4: There is a negative relationship between the rooting of the board chairman and the CBs' FP, but this relationship is positive in the PBs' case during and after the covid-19 crisis in emerging and developing countries.

### *2.1.3 Board independence*

The literature on the relationship between board independence and FP is also inconclusive. Independent directors' impact on banks' FP presented several nonuniformities [12, 16, 18, 19, 60–64].

The first stream found a positive effect of board independence on the FP [27, 36, 65–72], as this would lead to better monitoring, broad expertise, and better protection of the rights of minority shareholders [73]. According to agency theory, outside directors reduce agency problems between shareholders and executives by protecting shareholder interests and reducing opportunistic managerial behavior [42]. This prevents the executive director from making mistakes and prevents him from making false choices in the adverse selection of dependent administrators [74]. Board members are directly elected by shareholders to represent their interests [75]. Besides, independent directors are appointed to the board to control executive directors, protect minority shareholders, and maximize FP [76]. In other words, outside directors ensure that executives pursue policies that are consistent with shareholders' interests as intended, because if the number of independent directors increases, the propensity to manage the result decreases [77]. Independent members on the boards of conventional and Islamic banks are often perceived as a sign of transparency and voluntary governance quality improvement. According to this approach, the presence of independent directors on banks' boards is an additional mechanism of governance aimed at mitigating behavioral and moral hazards among stakeholders, protecting shareholders' interests, creating value, fostering control independence, resolving business problems, limiting their exposure to risk, and improving their institutions' FP [36, 78]. Moreover, external directors are more qualified with a high level of expertise, and experience and ensure the best execution of their tasks compared to boards dominated by simple employees [79].

However, another discordant explanatory approach stipulated that external directors were not able to understand the complexity of the banks' activities. They

### *Impacts of Board Quality on Financial Performance in Conventional… DOI: http://dx.doi.org/10.5772/intechopen.112089*

considered outside directors unable to carry out their stakeholder control, detect the opportunistic managers' behavior, and monitor the overruns against the sense of increased performance. Moreover, within this argument, some researchers found that the presence of foreign directors on the board has a negative and significant effect on banks' FP [17, 31, 32, 45, 80–83]. Independent directors with conflicting interests lead to poor governance practices, as the situation favors the appearance of conflict between the board and managers [73] leading to a decline in performance [84]. Also, Minton et al. [85]; Beltratti and Stulz [36], and Adams [86] found that the financial expertise of the independent directors of commercial banks is negatively related to the variations of their values. They went through financial troubles, which led to a decrease in the banks' FP.

In financial institutions, we recorded that many studies were done on one of two banking models, but not many supported the comparative approach. Several studies highlighted the effect of board composition and its impact on the CBs' FP [17, 18, 87]. However, the literature review showed that few studies have focused on the independence degree of PBs' boards since it is not a primary governance quality mechanism.

Theoretically, according to agency theory, board independence is both an index of transparency and a success factor in mitigating excessive risks. The independent directors, who are known to be vigilant, curb conflicts of interest, and at the same time stimulate bank growth. Empirically, the results report mixed conclusions, depending on contextual factors and sampling specifications. Previous research has yielded different results, according to which the correlation between board independence and FP depends on the absence and/or presence of other contingent factors.

As shown in the literature review, it is generally accepted that the independence of the BOD is a very important factor in determining the type of correlation between the quality of the board-generating effect, the optimal number of independent directors, and the objective of maximizing the banks' FP. They are expected to be more effective in monitoring operational, strategic, and decision-making activities in conventional or Islamic banks. Therefore, they have benefited from more freedom from any managerial influence, especially the CEO, to avoid conflict situations. Based on the previous selective studies, we formulated our third research hypothesis in the following form:

Hypothesis 3: The proportion of the board's independent directors.

Hypothesis 3.1: There is a positive relationship between the proportion of the board's independent directors and the FP of conventional and participatory banks during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 3.2: There is a negative relationship between the proportion of the board's independent directors and the FP of conventional and participatory banks during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 3.3: There is a positive relationship between the proportion of the board's independent directors and the CBs' FP, but the same relationship is negative in the PBs' case during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 3.4: There is a negative relationship between the proportion of the board's independent directors and the CBs' FP, but the same relationship is positive in the PBs' case during and after the covid-19 crisis in emerging and developing countries.

### *2.1.4 Meetings held by the board of directors*

Based on the literature review, several studies have identified the importance of the frequency of board meetings as a determinant able to influence governance quality in one way or another in different contexts [88–92] or as a performance control parameter [9, 11, 17, 93].

The effect added by this governance mechanism led us to distinguish two groups of previous studies. The majority of the proposals put forward by the researchers opt for a large number of meetings so that the BOD can effectively carry out its monitoring role [32, 43, 89, 93, 94]. However, there are other researchers who have founded a current based on their opposite results [31, 88, 90, 95]. In contrast, an intermediate stream has established coordination among governance mechanisms to determine whether the quality of one mechanism affects or enhances the quality of the other [9, 89, 92]. These researchers found no correlation.

Contrary to studies that considered board meetings' number in CBs, the studies discussing the effect of board meetings' number on FP in PBs are almost nonexistent. The results of the impact of the board meeting on the FP are mixed.

From the foregoing, it appears that the frequency of board meetings plays a very important role in the FP of both participatory and conventional banks. We draw the following hypothesis from the foregoing:

Hypothesis 4: The frequency of board meetings.

Hypothesis 4.1: There is a negative relationship between the frequency of board meetings and the FP of conventional and participatory banks during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 4.2: There is a positive relationship between the frequency of board meetings and the FP of conventional and participatory banks during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 4.3: There is a negative relationship between the frequency of board meetings and the CBs' FP, but this relationship is positive in the PBs' case during and after the covid-19 crisis in emerging and developing countries.

Hypothesis 4.4: There is a positive relationship between the frequency of board meetings and the CB' FP, but this relationship is negative in the PBs' case during and after the covid-19 crisis in emerging and developing countries.
