There is a lack of consensus regarding the impact of corporate governance practices in correspondence to the number of board members and board independence in banking sector. This paper aims to investigate the relationship of board independence and board size with productivity and efficiency of 23 banks listed on the Karachi Stock Exchange, Pakistan, by analyzing the data obtained from the annual reports of the selected banks for the period 2006-2010. Ordinary Least Square (OLS) regression analysis and Generalized Method of Moment (GMM) are used to examine the relationship between board independence and profitability, taking care of endogeneity and data scattering factor. Two control variables—the size of a firm and funds available for lending—are also considered. The results show that there is a positive relationship between board independence and bank profitability and efficiency. Independent directors play a crucial role in providing genuine advice during executive decision-making process which is an important source for improving overall corporate governance. Moreover, results regarding the role of control variables suggest a positive relationship between total assets and deposits of the firm and firm’s performance, supporting the stewardship theory.

Corporate governance is a route through which companies are provided with directions and boundaries are set in terms of control. The idea of corporate governance came into popular usage from the 1980s (Pieper et al., 2008), but it originated in the 19th century (Yammeesri and Herath, 2010) and its definition varies from country to country. Hence, there is no single universally accepted definition of corporate governance (Paul et al., 2011). Its dimensions are distributed in several clusters ranging from broad to narrow and internal to firm along with external to firm. Mathiesen (2002) argued that corporate governance secures and ensures a motivational environment within the organization. Maw et al. (1994) mentioned in their research that corporate governance is a fancy term which refers to the effective roles required to be played by directors and auditors. In a broader context, corporate governance refers to the corresponding group of economic, legal and social bodies that safeguard the interests of corporation owners (Javed and Iqbal, 2007). Moreover, corporate governance refers to the legal system and key players who control the operations at the company, and among these key players, board size has a vital role (Pathan and Skully, 2010). So far there is no theory regarding board size and board independence contributing to the value of a firm.

Corporate Governance Journal, Board Size, Board Independence, Banking Industry, Ordinary Least Square (OLS), Karachi Stock Exchange, Pakistan, Nigerian Stock Exchange.