Corporate Governance Reforms and Firm Performance in Bangladesh

Abstract

The Asian financial crisis of 1997 and global financial crisis of 2007-08 provokes worries about the weakness or failure of the corporate governance rules and practices throughout the world. In Bangladesh, at first the corporate governance guideline (CGG) was issued by the Bangladesh Securities and Exchange Commission (BSEC) in 2006 though it was lagging behind the world’ standard. The collapse of stock market in Bangladesh during 2010-2011 instigates the policy makers and scholars to explore the indispensable areas for the further revisions and amendments in the corporate governance mechanisms and re-examine or review their effects on firm performance. Like many Asian countries (such as India, Malaysia, Singapore, China, Vietnam, Indonesia), most of the Bangladeshi firms are family controlled. There remains a high reluctance in family centric firms to objectively adopt the corporate governance systems for the best interests of shareholders (Hasan et al., 2014). Overall, these facets promote the necessity of learning the new way and remind us to find the new steps of corporate governance mechanisms that will let the firm to yield corporate effectiveness and efficiency in attaining the shareholders’ wealth maximization. In family controlled firms, the monitoring role from the body of independent directors is mostly expedient to protect the interests of the non-family (minority) shareholders. According to the Organisation for Economic Co-operation and Development (OECD), the proportion of independent directors to the corporate board shall be increased in family controlled firms for effective monitoring and better performance of firms. In Bangladesh, CGG issued in 2006 have been revised in 2012 and 2018. The major areas of the corporate governance reforms in Bangladesh that concern this study are: (a) board independence –the ratio of independent directors to non-independent directors in a board shall be 1:5 as of CGG of 2012, up from the previous recommendation of 1:10 as of CGG of 2006; (b) qualifications of independent directors are precisely mentioned in the corporate governance code issued in 2018; (c) independence of audit committee – appointing an independent director as the chairman of audit committee becomes compulsory to all listed firms as per corporate governance guidelines issued in 2012; (d) audit committee meeting- executing at least four meetings by audit committees becomes compulsory as per corporate governance code issued in 2018; and (e) CEO duality (when the board chair and the chief executive officer are same person) become strictly iv proscribed as compulsory basis as per corporate governance guidelines issued in 2012. Ultimately, this prohibition leads many listed firms to maintain a family-CEO duality which is referred to a situation when the chairman of a board and the chief executive officer are not the same person but they belong to the same family. It is argued that family directors keep family control over the board through family-CEO duality even in the absence of CEO-duality. Thus, this study considers the family-CEO duality as a neo CEO duality. Moreover, family directors usually hold substantial stake of the family centric firm and occupy majority seats of the board. This dominance might instigate them to easily grab the opportunity of expropriating the firms' wealth at the cost of non family shareholders’ interests. Considering whole these things, this study empirically examines the influence of board independence, audit committee independence, audit committee meeting, family-CEO duality, and family ownership on firm performance. Further to this, this study investigates the moderating role of family-CEO duality and family ownership on the relationship between board independence and firm performance. This study collected data from a sample of 210 non-financial companies those were listed with the Dhaka Stock Exchange between the years of 2000 and 2020. A total of 2655 firm-year observations (unbalanced panel) have been selected for 21 years longitudinal data panel. This study applies two-step system generalized method of moments (GMM) approach for econometric analysis of data. This approach is more sophisticated to control for endogeneity problems inherent in the data variables. This study finds that any increase in the proportion of independent directors to the board does not lead to improve the performance of firms. Similarly, independent chairman of the audit committee does not lead to enhance the performance of firms. But, the board independence as well as audit committee independence positively influences firm performance when firms appoint qualified independent directors through complying with corporate governance code of 2018. The findings of the study also reveal that frequency of audit committee meeting is not beneficial to firms even though audit committee meets at least four times in a year. Further to this, this study documents that family-CEO duality and family ownership are negatively associated with firm performance. These results suggest that family-CEO duality does not make a board free from excessive influence of family dominance. As a result, this family control provides them with excessive power to expropriate firms’ assets for family benefits at the cost of non-family shareholders’ benefits. By the same token, family ownership incentivizes the family v directors to achieve their personal benefits rather than organizational benefits, consistent with the entrenchment effect. The results also show that the interaction of board independence and family-CEO duality is significantly and positively associated with performance of firms. Similarly, the interaction of board independence and family ownership is positively and significantly related to performance of firms. These findings indicate that both family-CEO duality and family ownership moderate the relationship between board independence and performance of firms. Based on the findings of this study, it is concluded that effective reforms in corporate governance mechanisms are crucial for enhancing the performance of firms. The findings of this study have significant policy implications for the companies, investors, regulators and policy makers in Bangladesh. First, firms may get important insights for designing the structure and composition of the board, which will help them attain higher productivity and more efficiency. Second, investors may consider the issue of family-CEO duality and family ownership while choosing their optimal investment portfolio. Third, the regulators and the policymakers may design and impose more standard rules and regulations taking account of family dominance in Bangladeshi listed firms that could encourage the firms to practice better monitoring, more transparency, and enjoy better performance. This will contribute to the development of capital market and economic growth of Bangladesh.