Study of Corporate Governance in Bangladesh through

the Impact of Ownership Structure on Firm’s Performance

SUBMITTED BY
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NAME ID No.
Mohammad Abidur Rahman 3-09-15-004

Shirin Sultana 3-09-15-022

Mohammad Kamruzzaman 3-09-15-045

Debashish Roy 3-09-15-047

Mohammed Mojibul Haider 3-09-15-057

Definition of CG
• According to the Oxford English Dictionary, CG states governance to be ‘‘the act or
manner of governing, the office or function of governing, sway, control’’. In this
definition it is not to government and such but rather to management as ‘‘handle,
administer, run, supervise, look after, watch over, direct, head, oversee,
superintend, preside over, be in charge of . . .’’.
• According to Tricker [1994], corporate governance is an umbrella term that includes
specific issues from interactions among senior management, shareholders, board
of directors, and other corporate stakeholders.
• According to Cadbury and Greenburg, corporate governance as “system” by which
companies are directed and controlled (Report, CFACG 1992).
• By Public accounts and Estimated Committee 2002, Corporate governance as
“structures and processes for decision making, accountability, control and behavior
at governing body”.
• The World Bank argues that the frame work of corporate governance should be
based on four pillars- of Responsibility, Accountability, Fairness and Transparency
(RAFT).

Ownership structure
Ownership structure of a corporation is basically divided into three categories. These are
institutional ownership, managerial ownership and individual ownership.
• Institutional owners include pension funds, mutual funds, life insurance companies,
trust departments of commercial banks, property and casualty insurance
companies, closed-end funds, savings institutions, and commercial bankers.
Normally they include the company’s share as their portfolio investment.
• Managerial ownership consists of directors, managers, and other management
teams members, who hold the company’s shares directly. Concentrated ownership
falls in this category, where family members control the majority portion of shares.
• The third group of investors is the individual owners. This group constitutes a major
pie of total shareholding as compare to developed countries. Nonetheless, they do
not control much of dollar vote. Hence no effective control mechanism could be
placed on managerial decision making.

Definition of disclosure
The definition of disclosure captures the release of relevant information, either in the form
of press releases, public announcements, or financial reports.

Findings and Findings Analysis

Ownership Structure on Firm’s Performance

Mahmood Osman Imam and Mahfuja Malik (2007) provide empirical evidence on the
nature of corporate governance through ownership structure (in the pattern of ownership
mix and ownership concentration) in the context of Bangladesh affects on farm
performance, and finally the impact of ownership structure upon firm’s dividend payout
policy. They also observe that these top shareholders belong mostly to controlling family.
They imply ownership concentration to affect profitability significantly negatively. The
negative effect of ownership concentration can be traced back to family- or foreign-owned
non-quoted firms as well as quoted firms with different large shareholders. A positive
impact of ownership concentration on profitability, supportive of managerial discretion and
agency theories (Principal-agent relationships should reflect efficient organization of
information and risk-bearing costs), shows up for quoted firms, which have financial
institutions as large shareholders. Only the middle range of board ownership (23 per cent–
60 per cent) reveals an alignment of both groups’ interest. It was expected to have a
negative impact on performance considering the controlling dominance of family or founder
over the firm’s overall activity. Dividend per share shows a significantly positive relationship

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with performance as it serves as a signal of a high quality firm. This is because in
Bangladesh dividend performance is considered to be a strong indicator of financial
performance and sound operational management of the firm and depend on the level of
board ownership and the institutional set-up in a particular country.

Managerial Decisions: Yenn-Ru Chen, Yu-Lin Huang, and Chun-Nan Chen (2009) find
that ownership control affects both a firm’s financial condition and its investment
decisions. The ownership control can show two competing effects on a firm’s financial
decision, which in turn affect its investment decisions. This creates agency costs as agency
decision may diverge from the objective of maximization of the welfare of the principal. The
implications of this misalignment of interest between principals and agents can affect a
firm’s performance. In Bangladesh there has been a growing concern that family-
dominated corporations are not responsive to minority shareholders and are unwilling to
reveal their business plans and finances to outsiders.

Public Announcements’ Disclosures: The actual disclosure of information heavily

depends on the company’s disclosure policy, which is strongly affected by several
corporate governance mechanisms, including the managers elected, management
structure, remuneration principles, and ownership structure. It is supported by Laivi Laidroo
(2009). The results show that ownership structure has strong associations with the public
announcement disclosures of companies or corporations. Disclosure quality was proxied
with the disclosure score based on six disclosure quality attributes selected upon the basis
of information theory – informativness, relevance, precision, rarity, frequency, and
unexpectedness – and with two quantitative disclosure measures – number of sentences
and number of announcements disclosed. Public announcement disclosure quality showed
statistically significant negative association with ownership concentration and foreign
ownership, and positive association with institutional ownership as expected. Block holder,
foreign, and institutional ownership were also economically significant determinants of
disclosure on these three markets.

Debt Policy: There is a significant impact of institutional ownership which serves as a

monitoring device to mitigate agency problem between owner and principal. The
institutional ownership variable has the positive predicted sign in the debt equation.
However the variable has the negative predicted sign in the managerial ownership
structure.

Recommendations
We have following recommendations on ownership structure:
1. Ownership should be 23 per cent–60 per cent to reveals an alignment of both
groups’ interest that will improve the farm’s performance in all arena.
2. The institutional ownership should come in large blocks to be more capable of
monitoring and controlling the management thereby perhaps contributing to
corporate performance.
3. Company’s disclosure policy should be user friendly of public announcement
disclosure that will remove the barrier to pass information timely, accurately &
reliably.

Question
1. What is Corporate Governance? Give recommendation on the perspective of OS in
Bangladesh.
2. Explain the type of Ownership Structure? Which one is best in your opinion and
Why?
3. How OS affects the firms performance? Explain.
4. Ownership should be 23 per cent–60 per cent to reveals an alignment of both
groups’ interest that will improve the farm’s performance in all arena.- Justify it.