An examination of the relationship of governance structure and performance: Evidence from banking companies in Bangladesh

Abstract

Corporate governance has become increasingly important in developed and developing countries just after a series of corporate scandals and failures in a number of countries. Corporate governance structure is often viewed as a means of corporate success despite prior studies reveal mixed, somewhere conflicting and ambiguous, and somewhere no relationship between governance structure and performance. This study empirically investigates the relationship between corporate governance mechanisms and financial performance of listed banking companies in Bangladesh by using two multiple regression models. The study reveals that a good number of companies do not comply with the regulatory requirements indicating remarkable shortfall in corporate governance practice. The companies are run by the professional managers having no duality and no ownership interest for which they are compensated by high remuneration to curb agency conflict. Apart from some inconsistent relationship between some corporate variables, the corporate governance mechanisms do not appear to have significant relationship with financial performances. The findings reveal an insignificant negative impact or somewhere no impact of independent directors and nonindependent non-executive directors on the level of performance that strongly support the concept that the managers are essentially worthy of trust and earn returns for the owners as claimed by stewardship theory. The study provides support for the view that while much emphasis on corporate governance mechanisms is necessary to safeguard the interest of stakeholders; corporate governance on its own, as a set of codes or standards for corporate conformance, cannot make a company successful. Companies need to balance corporate governance mechanisms with performance by adopting strategic decision and risk management with the efficient utilization of the organization's resources.

Corporate Governance and Firm’s Profitability: An Emerging Economy-based Investigation

“…It can be understood from the aforementioned explanation that large percentage of shares held by the directors minimises the agency problems up to a certain point, but later it maximises that problems. It is also found in the study of Ahmed and Gabor (2012) that there is no significant association of directors' ownership with firm performance. Fama and Jensen (1983) stated that positive association of ownership concentration with firm's profitability seems to disappear and firm's profitability decreases when ownership concentration goes beyond a certain level, thus leading us to develop the following hypothesis: H3: Firm's profitability is negatively associated with the percentage of shares held by the directors in Bangladesh.…”

“…Family duality instead of CEO duality is included in this study as another board characteristic since CEO duality is not in existence right now in Bangladeshi manufacturing firms (Rahman & Saima, 2018). Director ownership is used as an independent variable in the earlier study of Ahmed and Gabor (2012).…”

“…But, later, pooled OLS with some modifications is applied to address several issues that may influence the results. Endogeneity is one of the potential problems in CG which OLS method fails to address, and this leads the results to be biased and consequently hampers them from drawing a generalised conclusion (Ahmed & Gabor, 2012). There are several techniques used by the researchers to solve this problem such as fixed effects, lagged variables, control variables and generalised method of moments (Li, 2016).…”

Effect of Corporate Governance on Financial Performance of Deposit Money Banks in Nigeria

“…Despite the fact that Board of directors existed in the failed corporate businesses worldwide yet there exist some of corporate governance problems which led to their failure such as the role of corporation's board, corporation's corporate culture, and whistle blowing system and corporation internal and external auditors [5][6][7][8].…”

Banking Sector’s Corporate Governance Practices: Study on Rangpur Region in Bangladesh

“…From this point of view, only few rules and regulations can't bring success of the corporate governance. It is essential to combine the psycho-physiological aspects with the prevailing socio-political-cultural environment of a group of people working in the entities to build-up an effective corporate governance structure Ahmed & Gábor [1].…”