The Role of Monitoring and Bonding Mechanisms of Good Corporate Governance Towards Banks Performance

Abstract

Purpose of the study: This paper aims to examine the effects of the monitoring mechanism and bonding mechanism of corporate governance on the performance of the bank. The monitoring mechanism is divided into an external mechanism, represented by concentrated ownership, and the internal mechanism is represented by the proportion of independent board. Bonding mechanism is measured issuance of bonds as long-term debt financing. Methodology: This study is predictive and exploratory, so the Partial Least Squares Structural Equation Modeling using a WarpPLS60 application. Researchers use data from 24 banks that constantly has the value of bonds circulated, which from 2011 to 2018. There are consists of 4 state-owned commercial banks, 13 private banks, and 7 regional government-owned banks. Main Findings: The researcher found that external monitoring mechanisms as measured by ownership concentration, positively and significantly influence the performance at government-owned banks. Internal monitoring mechanism, as measured by the percentage of the number of independent commissioners, positively and significantly affects the performance at all the banks. The bonding mechanism as measured by issuing bonds negatively and significantly affects the performance of all the banks. Applications of this study: The integrative multi-theory model proposed by the authors in this study is a unique contribution to the intermediary financial literature. Banks seeking to maximize their performance must be balanced with the interests of shareholders and their stakeholders. Novelty/Originality of this study: The study examined the differences in behaviour and the role of monitoring and bonding mechanisms of corporate governance in state-owned banks and private. The results of this study contribute to the theory of entrenchment and financial intermediation.