The purpose of this research is to study the corporate governance mechanisms and their impact on performance of commercial banks in Ethiopia. The study examined the relationship between selected internal and external corporate governance mechanisms, and bank performance as measured by ROE and ROA. Accordingly, the study used mixed methods approach, particularly structured review of documents and in depth interviews were used. Both financial and non financial data were collected from all commercial banks that were in operation from the year 2005 to 2011 in Ethiopia. The findings indicated that board size and existence of audit committee in the board had statistically significant negative effect on bank performance in terms of both ROE and ROA; whereas bank size had statistically significant positive effect on bank performance in terms of both ROE and ROA. Similarly, capital adequacy ratio as a measure of external corporate governance mechanism had statistically significant positive effict on bank performance. On the other hand the remaining variables such as loan loss provision, loan to deposit ratio, and ownership type did not have statistically significant effect on bank performance. The study also indicated the various challenges of corporate governance mechanism in Ethiopian commercial banks that have adverse effict on bank performance, which include absence of organized stock exchange, high government intervention and involvement in business activities leading to unfair competition, lack of corporate governance awareness, absence of nationally implemented code of corporate governance, absence of nationally implemented accounting as well as auditing standards, and weak legal framework to protect minority shareholder rights.