Corporate governance
has become an issue of developed and developing countries. According to Imam
& Malik (2007), Corporate governance has received new urgency because of
global financial crisis and major corporate failures that shock major financial
centers of the world. Hence, corporate governance has become an important
factor in managing organizations in the current global and complex environment.
Corporate governance can be defined as a frame work that keep stakeholders
rights by demonstrating an effective board of directors, efficient internal
control and audit in addition to reliable financial reporting and disclosure
(Hassn, n.d.). Melvin and Hirt (2005) described corporate governance as referring
to corporate decision-making and control, particularly the structure of the
board and its working procedures.
Cadbury
(2003) come backed add the fact of corporate governance as it is all about
maintaining a balance between social and economic goals and is concerned with
holding the balance between economic and social goals and between personal and
shared goals.

 

One unique characteristics
of  share companies (corporations) as
opposed to other forms of business organizations such as sole-proprietorship
and partnership is that the owners of the firm and its management are
separated. Such separation of ownership and control occurs because the
owners  are many and every owner for
practical and economic reasons cannot be mangers of  the firm. In modern corporations the
separation of ownership and control leads to an agency problem where the agent
operates the firm in line with their own interests, instead of shareholders
(Jensen & Meckling, 1976). In such scenario, the need for corporate
governance arises from these potential conflicts of interest among stakeholders
such as shareholders, board of directors and managers in the corporate.

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According to Imam &
Malik (2007) these conflicts of interest often arise from two main reasons.
First, different participants have different objectives and preferences.
Second, the participants have imperfect information as to each other’s actions,
Knowledge and preference.

 

To minimize conflict of
interest and reduce  agency cost, many
mechanisms were proposed by various groups. These includes managerial
compensation, corporate governance, takeover, proxy light etc (Sanda et al.,
2005).  Among the many proposed
mechanisms corporate governance has received wide attention among
researchers  (Jensen & Meckling
1976). Many researchers like Kelifa (2012), Kibrysfaw (2013), and Hlanganipai
Ngirande (2014), have studied based on a number of corporate governance
mechanisms including board size, board remuneration, size of audit committee
and board ownership which are frequently used. They have studied the impact of
corporate governance mechanisms on firms financial performance from different
perspectives in different environments using the above mentioned and other
related variables. The researchers found mixed results on the
relationship between corporate governance mechanisms and firms financial
performance.

 

According to Mulugeta
(2010), Ethiopia has established strategic framework for the financial sector,
and emphasize the importance of further strengthening corporate governance and
accountability of financial institutions, and improving the capacity of
financial sector professionals. Ensuring better corporate governance of
corporations, financial institutions and markets is increasingly recognized as
a pre-condition for the countries development and it is directed and supervised
by the NBE.

 

In
Ethiopia some corporate governance problem have been shown related to lack of
knowledge in governance system by some target groups. Also there are some
unreformed corporate laws that binder transparency in corporate governance
(USAID,2007). Despite  decades of
intensive researcher, existing  empirical
studies do not provide clear and consistent results on the impact of corporate
governance on financial performance.

 

This
study analyzed the impact of corporate governance (such as board size, gender
diversity in boardroom, board
competency, board members experience in the finance sector,  frequency of board meeting and size of audit
committee) on the financial performance of micro finance institutions evidenced
from Amhara credit and saving institutions for nine years (2007/08 to 2015/16).

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