Political connections inevitably exist in modern corporate governance. They are beyond the orthodox corporate governance norms, but have an impact on the performance of corporate governance. This paper discusses and analyzes the impact of political connections on the performance of Chinese listed commercial banks in the governance process of the board of directors, the board of supervisors and the senior management. This paper combines theoretical analysis with empirical research to study the relationship between corporate governance, political connections and bank performance based a sample of unbalanced panel data of 16 Chinese listed banks from 2008 to 2016, using multivariate regression models. I also adopt alternative definitions of dependent variables and use additional control variables to conduct robustness tests.
The main conclusions of this study are drawn as follows: First, political connections of the board of directors have a positive impact on bank performance, while those of the board of supervisors and the CEO have no obvious impact on such performance. Second, the appointment of the chairman of the board of directors has hindered the improvement of earning, liquidity, safety and potential of listed banks, but administrative appointment of the chairman of the board of supervisors has improved the safety of commercial banks. Third, the concurrent roles of chairman and CEO, the professional background of the chairman of the board of supervisors and compensations paid to the CEO have negative impacts on bank performance.
The implications of this paper is to analyze the external governance mechanism of listed banks in China, in particular the characteristics of corporate governance of listed banks with government participation and the impact of such participation on corporate governance. I also make an empirical study on the relationship between corporate governance mechanism in China's banking industry and bank performance, in order to verify the actual effect of corporate governance mechanism. The research verifies the actual effects exerted by the corporate governance mechanism and offers rationale policy guidance for banking reform in China.
The originality of this paper lies in the selection of representative indicators such as earning, liquidity, safety and potential for growth to measure the bank's comprehensive performance. The study also takes into account external governance i.e. political connections, a factor rarely employed in related studies, and advocates for further optimization on banks’ internal governance by activate internal governance under external governance.
Key words: Corporate Governance, Commercial Banks, Political Connections, Bank Performance