See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/356102108

Board Characteristics and Firm Performance Evidence from Listed Companies

in Bangladesh

Article · March 2016

CITATIONS READS

2 240

3 authors:

Shimul Chakraborty Swadip Bhattacharjee

Monash University (Australia) University of Chittagong
5 PUBLICATIONS 22 CITATIONS 20 PUBLICATIONS 127 CITATIONS

SEE PROFILE SEE PROFILE

Sumon Bhattacharjee
Deakin University
6 PUBLICATIONS 126 CITATIONS

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

Corporate greenization View project

Integrated Thinking and Connectivity: An Exploration of Integrated Reporting Practices View project

All content following this page was uploaded by Swadip Bhattacharjee on 10 November 2021.

The user has requested enhancement of the downloaded file.

 llnttk I,uriltruntu
l/olunra XLI, Nos. l-1, ll.lurch_December 2016
(p1t. g9 _H2)

Iloarcl characteristics and Firrn perrbr-mance:

Ilvidencc fr'm Listccr Ilanr<ing companies
of
Ilangladesh

- ShinrLrl Chakratltorlv*
- Srvaclip llhattacharjee-
- Sumon Ilhattacharjee-
.,\ llsl rae I

'l his papcr

trics lo cxp)orc a cotlrPrclrcrsi'c set ol' boartl
clraractcrisrics lnd invcstigates their
itltpacl ou llnarrcial pcrlorttrancc o1-lrslcd
bunks in liangladcsh. Ilased o' obscr'irtrons
lror'all '10 listctl ha'lis lbr rhc 1'car 201 I-l3, tlrc rcsearc:h ol.g0 lirnr-ycars
rlntls that boarcl sizc has srgrrificantly
inrDact on IIOA ancl IIO[: and board positivc
srrir_con.rrnittees have a srgnilicantly,
Ilotvevcr' therc is^ no significant rclationship lrcgativc cl.lect ou IIOI]
bclr'r'ccn board cornposirion rr tlre
li,rrn ol.rcpresclrtatiorl or.
oulsidc indcpcndent dircclors antl Ilrnr pcr[irrr.r.nce.
Sinrilarly, gcntlcr cliversiry irr the board
lnsigrlil)cilnl efl'ect on thc lirnr perlorntance.
Llo,trary to hypotrrcses, horrd actjvrties 'as
ilttcnding boitrd r,cctings) as rvcll as boarrl (hording antr
shurelrortrirg havc i'sig'rficant inlrLre'cc
pcrlitr rnlncc in Iianglaclcsh. o' bark
I(c1'rvortls: (iorporatc (ioVcrtrttnce, Ilourrl 01'l)irec:tors,
Firrlr pcrlirrnraDcc, llanks. ISanglatlcsh
.llll, (llussif'icllion:(i34. Gi2. 02 l. r-2.5

l. Introrluction
'l'he Iloard
o1' Directors (the lloa'cl) is the
cenrral entity in a hr'ctioning
corporatc governancc systctn :trrcl is accountablc
1cl the shareholclers and/or
stakcholclers of'the organizalion. 'r'he
boarcr leacls anci conlrors a company
and
Itence an e{lective boarcl ol- ciirectors
is lunciamental to thc success ol- the
conpany (Mallin 2007, p r24). Iror ilie past
two decacrcs starting 1}om lrre
ctrrrcllcv crisis in 1997. flnancial scanclals
ol'u,cll-establishccl organizalions sLrc:h
as Ilnron (2001), worrdconr (2002), Xerox (2002)anci
qLrestionabre ethics and rnisco'rrucl
many,.,.,or. *rr. cruc tri
0f'their boarcr or. crirectors (rFAC, 2003).
*'i'hc
llrtlhors arc I-cctttrcr. I)epanlllent ol'Accourrtr'rrg;
n ssistanl I)rolLssor, l)cparlrnent
ol N4anagcr1.lcnt
i:f,l':llj:;1.'::",'ffi:i',ll:1,.;:jli..lilJli*;;:i1'''r;''e' ij"iu..;'i;;';', ;;';il,;,'*i"lllll*,.u",n, rcsi,cc,rverv
 Board Characteristics and Firm Performance: Evidence from

Listed Banking Companies of Bangladesh

Shimul Chakraborty*, Swadip Bhattacharjee** and Sumon Bhattacharjee***

* Lecturer, Department of Accounting, University of Chittagong, Bangladesh

**Assistant Professor, Department of Management, University of Chittagong, Bangladesh
*** Assistant Professor, Department of Accounting, University of Chittagong, Bangladesh

1
 Board Characteristics and Firm Performance: Evidence from

Listed Banking Companies of Bangladesh

Abstract:

This paper tries to explore a comprehensive set of board characteristics and investigates their

impact on financial performance of listed banks in Bangladesh. Based on observations of 90

firm-years from all 30 listed banks for the year 2011-13, the research finds that, board size

has significantly positive impact on ROA and ROE and board sub-committees have a

significantly negative effect on ROE. However, there is no significant relationship between

board composition in the form of representation of outside independent directors and firm

performance. Similarly, gender diversity in the board has insignificant effect on the firm

performance. Contrary to hypotheses, board activities (holding and attending board meetings)

as well as board shareholding have insignificant influence on bank performance in

Bangladesh.

Keywords: Corporate governance, Board of Directors, Firm Performance, Banks,

Bangladesh.

JEL Classification: G34, G32, G21, N25

1. Introduction

The Board of Directors (the Board) is the central entity in a functioning corporate governance

system and is accountable to the shareholders and/or stakeholders of the organization. The

board leads and controls a company and hence an effective board of directors is fundamental

to the success of the company (Mallin 2007, p 124). For the past two decades starting from

the currency crisis in 1997, financial scandals of well-established organizations such as Enron

(2001), WorldCom (2002), Xerox (2002) and many more were due to questionable ethics and

misconduct of their board of directors (IFAC, 2003). That’s why, characteristics of corporate

board have been considered highly important by an abundance of national and international

2
guidelines for good corporate governance. A survey of the codes of conduct reveals that

without exemption, a substantial amount of space is devoted to the specific organization of

the corporate board (Bennedsen, Kongsted and Nielsen 2008, p. 1098). The ultimate

objective of the corporate governance codes all over the world is to ensure that firms are well

governed by knowledgeable and professional directors who can elevate the firms’

performance to the next level.

1.1 Background of the Study

In the wake of the recent financial crisis, much more attention has been drawn to banks’

corporate governance. Basel Committee on Banking Supervision (2015, p 3) points out that,

“effective corporate governance is critical to the proper functioning of the banking sector and

the economy as a whole.” Moreover, recognizing contribution of the Board, the Basel

Committee specified that, “the board has ultimate responsibility for the bank’s business

strategy and financial soundness, key personnel decisions, internal organization and

governance structure and practices, and risk management and compliance obligations”

(principle 1, section 23). Moreover, the Committee rightly focused on composition of board

to carry out its responsibilities and suggests inclusion of sufficient number of independent

directors as well as individuals with a balance of skills, diversity and expertise, who

collectively possess the necessary qualifications commensurate with the size, complexity and

risk profile of the bank (principle 2, code 47, 48).

The Board is the link between managers and investors and is essential to good corporate

governance and investor relations. UK and US firms as well as firms from other Anglo-

American countries, such as Bangladesh and India, have unitary boards, i.e., single-tier

boards, where two types of director e.g. executive directors (ED) and non-executive directors

(NED) sit together. Conversely, a few countries- such as Germany, China, and Norway- have

two separate boards, known as two-tier board. The two boards are the supervisory board

3
consists of non-executive directors and the management board consists of top management of

the company chaired by the CEO. In Anglo-American Model, the stakeholders are not

allowed to represent on corporate boards. However, follower of Roman-Germanic model, the

German and French corporate governance systems, provide for employee representation at

board level, whilst banks may also be represented on the supervisory board. Since there is no

supervisory board in the Anglo-American settings, the role of the unitary board bears utmost

significance regarding ensuring governance and performance of the company.

A strong board can play a very crucial economic role in firm performance. They can provide

link between the firm and its environment, secure critical resources (Williamson 1996;

Hillman et al. 2000) and play an active role in a firm’s strategic decision making (Fama &

Jensen 1983, Davies 1999; Kemp 2006). That’s why; an effective board is likely to help the

firm achieve superior performance (Gompers, Ishii, & Metrick 2003). The critical role a

board plays in the success of a firm merits an in-depth research on different factors that link a

board to a firm performance.

1.3 The Problem Statement

Financial sector of Bangladesh comprises with commercial banks, non-bank financial

institutions, insurance companies etc. where, the banks play the key role. Banking sector

experienced remarkable progress in respect of automation in functioning in last several years.

Some of the notable regulatory developments over last few years are: introduction of Basel-

III in a phased manner starting from the January 2015; guidelines on environmental and

climate change risk management, green banking, stress testing, building up separate risk

management unit, meeting international standard on Anti Money Laundering

(AML)/Combating Financing of Terrorism (CFT) issues etc. Such initiative created

opportunities for private investments in the banking sector and a good number of private

banks inserted in the financial sector in the subsequent years.

4
However, a number of scams in the banking sector have exposed the vulnerability of the

seemingly resilient financial systems in Bangladesh. The Oriental Bank (was rechristened as

ICB Islamic Bank Limited in 2009, a listed commercial bank in the stock market) was

accused of embezzlement of fund amounting Tk. 340 million by the officials as well as Tk.

5.96 billion (596 crore) by the owners of the Bank through withdrawal without cheques in

2006. Hallmark scam in 2012 on the other hand, took things to a whole new level, clearing

the coffers of Sonali Bank Limited (SBL), a state-owned commercial bank, to the tune of a

whopping Tk. 3600 crore - all channeled through one single branch. It is also alarming to

observe that the directors of SBL allowed disbursement of an amount equivalent to almost

237 per cent of the paid-up capital of SBL only to Hall Mark Group. This is an utter violation

of the ‘Single party exposure limit’. These are the instances of opportunistic tendencies of the

board of directors in the banking sector of Bangladesh. Similarly, the chairman of the board

of BASIC Bank Ltd. was forced to resign, amid growing allegations that he misappropriated

funds by approving shady loans of several thousands crore taka and

the Bangladesh Bank had also fired managing director of the same for his involvement in

loan scam. Very recently, Bangladesh Bank has taken initiatives to remove the MD of state

owned Agrani Bank Ltd. on the allegations of abuse of power and loan scam of 792 crores. A

recent study in Bangladesh shows that, the rapid increase in overdue loans in different years,

irregular payment, irregularities in management, inefficiencies of the official, staffs, pressure

of trade union, deterioration of the level of customer services, or salary, job security, week

communication systems etc. has made profit performance poor. Undoubtedly, all these

irregularities indicate poor functioning of board in the banking industry of Bangladesh which

invalidates the sayings: a board works to enhance the firm performance and enact legally

vested responsibilities and fiduciary duties (Zahra and Pearce, 1989).

5
In the light of above discussion, examining the board-performance link is highly significant in the

traditional society of a developing country like Bangladesh. More interestingly, but not

surprisingly, the boards of directors in most of the listed companies in Bangladesh comprise very

close family members. The boards play a significant part in serving the interests of families

rather than those of general shareholders (Uddin and Chowdhury 2008, p 1026). Muzumdar

(2006) comments that most of the listed companies, except multinationals, are dominated by

family members, as the head of the family becomes the chairman and other family members

occupy the important posts such as CEO or managing director. In Bangladesh, apart from

highly concentrated ownership and consequential board influence, an absence of a liquid

capital market and other dominant control mechanisms including compensation in the form of

share options, are also major features.

2. Objectives, Literature Review and Hypotheses

2.1 Objectives of the Study

1. To provide useful information about banks’ board structure in the context of a developing

country.

2. To have an in-depth inquiry of impact of board of directors’ characteristics on financial

performance of listed banks in Bangladesh for the year 2011 to 2013.

2.2 Literature Review

Although there exist several studies on corporate governance in less developed and emerging

economies (Shleifer and Vishny 1997; Sarkar, Sarker and Bhoumik 1998; Asian Development

Bank 2000; Rwegasira 2000; Gibson 2003; Denis and McConnell 2003; Machold and Vasudevan

2004), in the context of Bangladesh there are very few studies on corporate board practices and

firm performance. It can be said that, there is a dearth of research on therelationship between

board characteristics and firm performance in Bangladesh. Rashid, Zoysa, Lodh and Rudkin

6
(2010) finds that, the outside (independent) directors cannot add potential value to the firm’s

economic performance in Bangladesh. Farooque et al. (2007) examines the ownership

performance relationship in an emerging market economy considering ownership as exogenous

and as endogenous. Other researches (Muttakin, Khan, and Subramaniam 2015; Rouf 2011)

investigates impact of board characteristics on disclosures. This study extends the literature on

corporate board practices and firm performance by providing evidence from this emerging

economy. In particular, this study attempts to investigate whether board composition in the form

of board size, board independence, gender diversity, board shareholdings, number of board

meetings, and board sub-committees can influence firm performance in Bangladesh.

2.3 Hypothesis Development

Based on several studies on board-performance link, the study opted for developing the

following hypotheses:

2.3.1 Board size and Firm performance

Determining optimum size of a board is a debatable matter. From an agency perspective, it

can be argued that larger boards are more likely to be vigilant for agency problems, since a

large number of people are reviewing management actions (Kiel & Nicholson 2003). Van den

Berghe and Levrau (2004) argue that expanding the number of directors provides an

increased pool of expertise and thus larger boards are likely to have more knowledge and

skills at their disposal than smaller boards. Previous studies also supported that a large

number of directors on the board is viewed as potentially having a positive impact on

performance (Fama & Jensen 1983; Jensen & Meckling 1976). Conversely some studies

provide a negative relationship between board size and firm performance (Zahra & Pearce

1989; Mak & Li 2001; Adams & Mehran 2005). From the above literature the following

hypothesis can be revealed:

H1: Board size and firm performance are significantly correlated.

7
2.3.2 Board Independence and Firm Performance

The empirical evidence of outside independent directors and firm performance is mixed.

Baysinger and Butler (1985) point out that the non-executive directors provide better

performance to the firm. Several studies have found positive association between

appointment of independent directors and firm performance (Rosenstein & Wyatt, 1990;

Millstein & MacAvoy 1996; Kyereboah-Coleman & Biekpe 2006). In contrast, some studies

find negative relationship between activity of independent directors and firm performance

(Agrawal & Knoebar 1996; Haniffa & Hudiab, 2006). The BSEC Notification 2012 requires

the appointment of IDs at least one fifth of the total directors and the Banking Companies Act

1991 requires at least two directors to the board. So, the research adopts the following

hypothesis -

H2: Number of IDs in the board has a positive impact on firm performance.

2.3.3 Gender diversity and Firm Performance

The proportion of female directors on the board or the gender diversity of the board has

recently become a theme in governance reform worldwide. Adams and Ferreira (2009) who

made the first attempt to examine the role of female directors, found that female directors

have better attendance records than male directors and are more likely to join monitoring

committees. Campbell and Minguez-Vera (2007) found that the percentage of women in the

Board of Directors has a significantly positive impact on Tobin’s Q value. So, the following

hypothesis can be developed on the basis of these literatures –

H3: Firm performance is affected by gender diversity.

2.3.4 Size of Audit Committee and Firm Performance

The main role of audit committee is to improve the quality of firm’s financial reporting

(Pincus et al. 1989) and to monitor financial performance (Wild 1996; Weir, Laing, &

Mckinght 2002). Some authors argued that large audit committee size provides more skilled

8
members serving on the committee which leads to improve the firm reporting (Sunday 2008).

However, some previous studies indicate that small audit committee size improves the firm’s

performance because large audit committee size may reduce the cooperation in the committee

(Lin, Xiao, & Tang 2008). From the above references, we can assume the following

hypothesis –

H4: There is significant relationship between size of audit committee and firm

performance.

2.3.5 Frequency of board meetings and Firm Performance

Effectiveness of a board depends on how often the board members meet to discuss the

various issues facing a firm (Vafeas 1999). Increase in number of board meetings is

considered to represent the intensity of board activity (Vefeas 1999). Scholars suggest that

meet frequently are more likely to perform their duties diligently to protect shareholders

interest (Lipton & Lorsch 1992; Byrne 1996). Lawler, Finegold, Benson, & Conger (2002)

also found that frequently meeting of board practices are positively related to firm

performance. However, on the basis of above literature, the following hypothesis can be

developed –

H5: Board meetings are positively associated with firm performance.

2.3.6 Attendance of board meetings and Firm Performance

High attendance in board meetings ensures good governance practice. Recognizing

importance of attendance in board meetings, the Bangladesh Securities and Exchange

Commission (BSEC) in its Notification no. SEC/CMRRCD/2006-158/134/Admin/44 dated

August 7, 2012 requires the listed companies to disclose ‘the number of Board meetings held

during the year and attendance by each director in the directors’ report to the shareholders.

Chou, Chung, & Yin (2013) suggest that high meeting attendance by directors themselves

9
can enhance a firm’s performance but high attendance by their representatives has an adverse

effect. Based on the above reference, the following hypothesis can be reveled –

H6: There is a significant association between attendance of board meetings and firm

performance.

2.3.7 Board shareholding and Firm Performance

Hayes, Mehran, & Schaefer (2005) explore the interactions between percentage of shares

held by the directors and firm performance. Board shareholding is an encouragement for

board members to monitor management and to enhance firm performance. Consistent with

this view, Chung and Pruitt (1996) considered that, board’s ownership will improve firm’s

performance. Based on the above references, the following hypothesis can be developed –

H7: Board shareholding is positively related with firm performance.

2.3.8 Board sub-committee and Firm Performance

Board sub-committees are formed and used as another agency conflict–controlling

mechanism by firms to organize their boards in such a way that they can make most

effective use of their directors, with much of the key decision-making and

implementation occurring at committee level (Kesner1988; Bilimoria & Piderit1994).

Some early supportive empirical evidences are provided by Wild (1996) and Laing

and Weir (1999), who reportedthat a positive effect on firm performance resulted after

the establishment of audit committees. According to Laing and Weir (1999) and Weir

and Laing (2000), the presence of remuneration committees is similarly positively

associated with the improved performance of companies. Finally, Klein (1998) found a

positive (though weak) relationship between the presence of a remuneration committee

and company performance. So, the following hypothesis can be developed on the basis of

above literatures –

H8: Board sub-committee is positively associated with firm performance.

10
3. Methodological Issues

The research emphasizes on studying a situation or a problem in order to explain the

relationship between variables (i.e. board characteristics and firm performance). For the

purpose of empirical analysis, this study uses descriptive analysis, correlation and multiple

regression analysis. A descriptive analysis of data is conducted to obtain sample

characteristics. Regression analysis are used to examine the relationship between board size

independent directors, female directors, audit committee size, frequency of board meeting,

attendance of directors in the board meetings, board shareholdings, and board compositions

as independent variables and firm performance (ROA, ROE) as dependent variables.

3.1 The Sample Size

The sample frame consists of all banks (30 banks) listed in Dhaka Stock Exchange (DSE) and

Chittagong Stock Exchange (CSE) in Bangladesh from 2011 to 2013 that resulted in a total of

90 firm‐year observations. We collect the financial and board data from the financial

statements, corporate governance disclosures, directors’ report, Chairman’s statement and

notes to the financial statement contained in annual reports.

3.2 Model specifications and Multiple Regressions

We use regression analysis to test the relation between the board characteristics and financial

performance of the firms. The assumptions underlying the regression model were tested for

multicollinearity based on the correlation matrix as well as the variance inflation factor (VIF)

ROA = α + β1 BS + β2 ID + β3 FD + β4 MAC + β5 NBM + β6 ABM + β7 BSH + β8 BSC + €

ROE = α + β1 BS + β2 ID + β3 FD + β4 MAC + β5 NBM + β6 ABM + β7 BSH + β8 BSC + €

Where,

11
 Independent Variables: Board of Directors’ Characteristics
BS= Board Size Total number of directors on the board
ID= Independent Directors (Board Number of Independent Directors in the Board. This
Independence) satisfies the definition of an independent director as
provided in the BSEC Notification 2012.
FD= Female Directors (Gender Number of Female Directors in the Board
diversity)
MAC= Members of Audit Committee Total number of audit committee members.
NBM= Number of Board Meeting The number of regular meetings held by the board of
during the year directors during each year. The meetings refer to
those held in person, excluding the telephonic
meetings.
ABM= Attendance in Board Meetings Average percentage of attendance of Directors in the
Board Meetings held in a year.
BSH= Board Shareholdings Percentage of share capital held by the directors
BSC= Board Sub-committees Number of Board Sub-committees
Dependent Variables: Financial Performance Ratios
Return on Assets (ROA) ‘Earnings Before Interest and Taxes’ (EBIT) scaled
by the book value of total assets
Return on Equity (ROE) Net Income scaled by Equity Capital

3.3 Test for Multi Co linearity and Autocorrelation

The multicolinearity is a phenomenon where two or more variables are highly correlated.

High degree of multicolinearity indicated bias relation between two variables and it may

affect accuracy of multi regression test results. The problem exists if independent variables

are highly correlated at each other with correlation exceeding 0.90 according to Tabachnick

and Fidel (2007). Multicolinearity can also be examined by tolerance and VIF test. Myers

(1990) suggested that a VIF value of 10 and tolerance level greater than (>) 1 are causes for

concern. The multicolinearity statistics of the independent variables of this study is presented

in Table-5.

It is seen that, none of the independent variables has a tolerance value in excess of 0.9 and a

VIF value in excess of 10. So, in this study, multicollinearity is not a problem in interpreting

the regression results. Moreover, Durbin-Watson test value in these models are 1.062 and

1.374 respectively (see Table 5), which confirms the absence of autocorrelation.

12
4. Findings and discussion

4.1 Corporate Governance Initiatives regarding Corporate Board in Bangladesh

Before presenting the relationship between board characteristics and financial performance, a

comparison of corporate governance initiatives regarding corporate boards in Bangladesh is

presented in Table- 2.

Table 1: Comparison of CG initiatives regarding corporate boards in Bangladesh

Key areas of BEI Code BSEC Notification- The Bank Companies Act,
Board 2012 1991 (Amended in 2013)
1. Board size Should be 7-15 Should be 5-20 Maximum 20 (including 3 IDs)
2. Number of IDs Not specified At least one-fifth (1/5) Minimum two (2) if the board
of the board size. size is less than twenty (20).
3. Conditions for Not specified Specified in Condition Specified in Section 15(9)
IDs 1.2 (ii)
4. Qualification Not specified Specified in Condition Not specified
of IDs 1.3
5. CEO Duality The position of the The position of the The position of the Chairman
Chairman of the Board Chairman of the Board of the Board and the CEO
and the CEO should be and the CEO should be should be filled by different
filled by differentfilled by different person.
person. person.
6. Board Specific board Not specified Role of the board is outlined in
Responsibilities responsibilities outlined Sec. 15B.
7. Board Specified Not specified Specified in Sec. 15 (6)
Membership
Criteria
8. Restriction on Not specified Not specified Forbids holding of more than
holding shares 10% shares in any bank by any
person, company or members
of a family either personally or
jointly or both.
9. Term of the Retirement by rotation Not specified Maximum term of a director is
Office of Director of 20% of the board. The three (3) years not exceeding
term limit for directors two (2) consecutive terms.
of banks and other
financial institutions
should be a maximum of
12 years.
Source: BEI Code 2004; BSEC Notification No. SEC/CMRRCD/2006-158/134/Admin/44,
on 07 August 2012; Bank Companies Act 1991.

4.2 Descriptive Statistics

The descriptive statistics of all variables used in the model are shown in Table 3. As shown,

the average board size is approximately 14 directors, ranging from a minimum of 5 directors

13
to a maximum of 24 directors. At present, all the banks comply with the legal and regulatory

requirements. Table 3 also reveals that the average number of independent directors to the

board is 1.73 with maximum 4 members and minimum 0.Further scrutiny reveals that, 4

sample banks failed to comply the requirements legal and regulatory requirement regarding

IDs. The statistics also shows that all boards of the selected companies are male dominated.

The average number of female directors is 1.37. There are many boards with no female

directors. The maximum number of woman in the board is 5. On an average, there are 4.26

members in the Audit Committee to the board with maximum 6 members and minimum 3

members. But the focal point is that some companies do not comply minimum ID

requirement. The average frequency of board meeting is 17.76 times per fiscal year with

minimum 7 times and maximum 31 times and the average attendance of board of directors

are 72.92% in the board meetings. It appears that banking and financial sector entails much

more regular board meetings due to nature of business. The percentage of inside ownership

has a mean value of 36.94% with SD 19.33%. There is high difference between the

minimum, which is 4.63% and the maximum of 90.19%. This implies that board directors in

some companies may own more than 50% of shares in the firm attributing them the majority

of the ownership. The descriptive statistics table also shows that in each board there are 3.04

sub committees on an average.

Table 2: Descriptive Statistics

N Range Minimum Maximum Mean Std. Deviation
BS 90 19 5 24 13.99 4.20
ID 90 4 0 4 1.73 0.88
FD 90 5 0 5 1.37 1.40
MAC 90 3 3 6 4.26 0.92
NBM 90 24 7 31 17.76 6.42
ABM 90 41 56 97 72.92 8.42
BSH 90 85.56 4.63 90.19 36.94 19.33
BSC 90 3 2 5 3.04 0.60
ROA 90 13.98 -9.97 4.01 0.98 1.69
ROE 90 28.96 1 29.96 12.87 5.95

14
In Table 3, ROA shows a mean performance of almost 0.98%, the maximum performance

reported is around 4.01% and the minimum is -0.9.97% with deviation of 1.69 between firms.

On the other hand, ROE reports the average score of 12.87% with maximum 29.96% and

minimum 1.00%.

4.3 Correlation Analysis

Table 4 summarizes the correlation between dependent variables (ROA, ROE) and

independent variables (Board size, Independent directors, Female directors, Members of

Audit Committee, Frequency of board meetings, Attendance of board meetings, Board

shareholdings, Board sub-committees). The table displays that dependent variable ROA is

significantly correlated with independent variables – board size and frequency of board

meetings. Other dependent variable ROE is positively related with board size but shows a

negative relationship with board sub-committees.

Table 3: Correlation Analysis

BS ID FD MAC NBM ABM BSH BSC ROA ROE
Pearson
BS Correlation 1 0.123 0.127 .275** 0.107 -0.12 0.156 .211* 0.415** 0.220*
Pearson
ID Correlation 1 0.152 0.043 0.119 -0.186 0.118 .320** 0.028 -0.152
Pearson -
FD Correlation 1 -0.047 0.182 -0.177 -0.015 0.195 0.098 -0.098
Pearson -
MAC Correlation 1 0.194 -0.024 .418** .388** 0.054 -0.05
Pearson
NBM Correlation 1 0.067 -0.026 0.035 .212* -0.015
Pearson
ABM Correlation 1 0.187 -0.046 0.074 0.081
Pearson
BSH Correlation 1 -0.018 0.195 0.022
Pearson
BSC Correlation 1 -0.054 -.350**
*significant at 5% level of significance, **significant at 1% level of significance

Furthermore, table also represents the correlation between the independent variables each

other. It shows that board size is positively correlated with audit committee size and board

15
sub-committees, which means that the size of the board of directors play a significant role in

determining the members of audit committee and number of sub-committees. Besides, board

sub-committees also maintain a positive relation with independent directors and audit

committee size. It is interesting that no relationship has been found between independent

directors and other independent variables except board sub-committees, which means that

independent directors’ roles are very negligent in board performance. The correlation table

also displays a negative relation between members of audit committee and board

shareholdings. The rest of the independent variables namely female directors, number of

board meetings and attendance of board meetings are not correlated with each other and other

independent variables. The most important finding from this relationship is that female

directors do not play significant role in board performance.

4.4 Multiple Linear Regression Analysis

The models are regressed using linear regression analysis by the SPSS and the results are

presented in Table 5. It is observed that, only board size (BS) has significantly positive

impacts on either measure. Board sub-committees have a significantly negative effect on

ROE. It is found that, outside independent directors (ID) cannot add economic value to firms

in Bangladesh. This findings support the comment of ADB (2003) that, non-executive

directors fail to give independent judgment in enhancing corporate wealth for all

shareholders, as the nominees tend to have business or social connections with the controlling

shareholder group. The study documents that, having female directors (FD) on board does not

influence the financial performance of the firm. There could be several possible reasons for

such findings. Due to appointment based on family ties as well as lack of educational

qualifications and expertise, female directors in developing countries might not be able to

exert their expertise on the financial performance of the firm. Statistically, there is no

16
relationship between board activities (such as, number of meeting (NBM) and attendance in

board meeting (ABM)) and firm performance (ROA and ROE). Such findings resembles the

view of Jensen (1993) that, routine tasks absorb much of a board’s meeting time and thus

limit the opportunities for outside directors to exercise meaningful control over management.

Jensen (1993) suggests that board activity is likely to symbolize a response to poor

performance. Furthermore, the study finds that board shareholdings (BSH) tend to have no

impact on firm performance. In Bangladesh, total shareholdings by the board are not a

significant factor to obtain control of the company. During the stock market fall in 2010-11, it

was observed that, directors of many companies sold significant portion of their shares. On

November 22 in 2011, the regulator through a directive made it mandatory for the sponsors

and directors of listed companies to hold a minimum stake of 2% individually and 30%

collectively. However, the directors challenged the directive by filing petitions to the High

Court (HC) and the HC on June 21 upheld the SEC's special power to impose any condition

on the market. It can be said that, dominant shareholding families can control the formation

of the board without having significant voting rights. Reaz and Arun (2006) revealed that in

banking companies in Bangladesh, the election and re-election of directors is an event at

AGMs that is carefully arranged by the sponsor directors, so that their chosen individuals can

be elected and re-elected time and time again. This observation is also consistent with the

survey conducted by the BEI (2004). The study also does not find any direct relationship

between ownership and performance.

17
 Table 4: Impact of Board Characteristics on ROA and ROE
Impact of Board Characteristics Impact of Board Characteristics on
on ROA ROE
Collinearity Collinearity
Independent Statistics Sig. Statistics
t Sig. t
Variables
Tolerance VIF Tolerance VIF
(Constant) -1.649 0.103 2.253 0.027
BS 3.651* 0.000 0.785 1.274 3.104* 0.003 0.785 1.274
ID -0.076 0.940 0.819 1.221 -0.253 0.801 0.819 1.221
FD 1.379 0.172 0.867 1.154 -0.496 0.621 0.867 1.154
MAC 0.364 0.717 0.564 1.774 -0.022 0.983 0.564 1.774
NBM 1.906 0.060 0.900 1.111 -0.504 0.616 0.900 1.111
ABM 0.964 0.338 0.867 1.154 0.99 0.325 0.867 1.154
BSH 1.189 0.238 0.666 1.501 -0.487 0.627 0.666 1.501
BSC -1.584 0.117 0.710 1.409 -3.431* 0.001 0.71 1.409
Adjusted R2 0.191 0.155
F stat 3.631 3.048
Significance of F 0.001* 0.005
Durbin-Watson 1.062 1.374
*significant at 5% level of significance

5. Concluding Remarks

Objective of this study is to analyzethe influence of board characteristics on financial

performance for listed banks in Bangladesh. We document that, board size has significantly

positive impact on ROA and ROE and board sub-committees have a significantly negative

effect on ROE. This result may reflect the nature of the environment in which corporations

operate in Bangladesh whereby greater board size supports the resource dependency theory.

However, it is revealed that there is no significant relationship between board compositions in

the form of representation of outside independent directorsand firm performance, implying

that the outside IDs cannot add potential economic value to the firm in Bangladesh. It is

possible that, there is an attitude in some Bangladeshi boards that the IDs are appointed onto

the board to comply with regulatory requirements and only allowed to play an advisory role.

It is also possible that, busy outside IDs may not have necessary reputation and networking

18
contacts that are necessary to generate benefits to the entity.Similarly, presence of female

directors in the board has insignificant effect on the performance.

One aspect of resource dependency theory linked with corporate governance and

performance is the intensity of board activity, as measured by the frequency of board

meetings and attendance by the directors in the board meetings. That’s why, the research

hypothesizes that, there would be a positive relationship between board activity and firm

performance. Contrary to predictions, the study revealed that board activities as well as board

shareholding have insignificant influence on firm performance.

5.1 Limitations of the Study

The results presented in this paper are subject to some limitations that should be taken into

account when interpreting the results. Firstly, the study only covers a single sector among the

listed companies in Bangladesh. Further research can be carried out based on comparative

analysis on other sectors as well as on different developed and developing countries.

Secondly, a restricted number of variables related to corporate governance were addressed in

this study, which limits the generalizability of the findings. Important issues that were not

explored include size of firms (assets), sales, multiple directorship, director remuneration and

training opportunities for board members. We suggest for further studies to be carried out by

increasing the sample size and the consideration of institutional, cultural and industry specific

factors in order to identify other influences.

5.2 Policy Implications

Given the limitations of the findings outlined above, the findings from this study add to the

body of literature on corporate governance in emerging economies such as Bangladesh. In

our view, although independent outside directors, in general, do play an advisory role rather

19
than adding economic value, there is a need for further exploration as to whether IDs can

provide effective judgmental contributions to firms. The findings have important implications

for directors and public policy makers engaged in corporate governance in emerging

economies, such as Bangladesh. The unique characteristics of the Bangladesh market, such as

the high proportion of family businesses, suggests that corporate governance measures may

be less significant in businesses where there is an implied family influence on the business

activities.

References:
1. Adams, R. and D. Ferreira (2009), “Women in the boardroom and their impact on
governance and performance”, Journal of Financial Economics, Vol. 94(2), pp. 291–
309.
2. Adams, R. B. and H. Mehran (2005), “Corporate performance, board structure and its
determinants in the banking industry”, in EFA 2005 Moscow Meetings.
3. Agrawal, A and C. R. Knoeber (1996), “Firm performance and mechanisms to control
agency problems between managers and shareholders”, Journal of Financial and
Quantitative Analysis, Vol. 31, pp. 377–397.
4. Asian Development Bank (2000), Corporate Governance and Finance in East Asia, A
Study of Indonesia, Republic of Korea, Malaysia, Philippines and Thailand, A
Consolidated Report, Volume 1, Manila: The Asian Development Bank.
5. Asian Development Bank (2003), ADB report on Bangladesh ‘capacity building of the
Securities and Exchange Commission and selected capital market institutions, Dhaka,
Bangladesh.
6. Basel Committee on Banking Supervision (2015), Corporate governance principles for
banks. Downloadable from: http://www.bis.org/bcbs/publ/d328.pdf.
7. Baysinger, B. D. and H. N. Butler (1985), “Corporate governance and board of directors:
performance effects of changes in board composition”, Journal of Law, Economics
and Organization, Vol. 2, pp. 101-124.
8. Bennedsen, M., H. C. Kongsted and K. M. Nielsen (2008), “The causal effect of board
size in the performance of small and medium-sized firms”, Journal of Banking &
Finance, Vol. 32, pp. 1098–1109.
9. Bilimoria, D. and S. Piderit (1994), “Board committee membership: effects of sex-based
bias”, Academy of Management Journal, Vol. 37, pp. 1453- 1477.
10. Brickley, J. A., J. L. Coles and T. L. Rory (1994), “Outside directors and the adoption of
poison pills”, Journal of Financial Economics, Vol. 35, pp. 371-390.
11. Byrne, J. A. (1996, November 25), The National Association of Corporate Directors’
New Guidelines Won’t Tolerate Inattentive, Passive, Uninformed Board Members.
Business Week. New York.
12. Campbell, K. and A. Minguez-Vera (2007), “Gender diversity in the boardroom and firm
financial performance”, Journal of Business Ethics, Vol. 83(3), pp. 435–451.

20
13. Chou, H.I., H. Chung and X. Yin (2013), “Attendance of board meetings and company
performance: Evidence from Taiwan”, Journal of Banking and Finance, Vol. 37, No.
11, pp. 4157-4171.
14. Chung, K. H. and S. W. Pruitt (1996), “Executive Ownership, Corporate Value and
Executive Compensation: A Unifying Framework”, Journal of Banking and Finance,
Vol. 20, No. 7, pp. 1135–1159.
15. Davies, A. (1999), “A Strategic Approach to Corporate Governance. London: Gower
Press.
16. Denis, D. K. and J. K. McConnell (2003), “International Corporate Governance”, Journal
of Financial and Quantitative Analysis, Vol. 38, No. 1, pp. 1-36.
16. Fama, E. F. and M. C. Jensen (1983), “Separation of ownership and control”, Journal of
Law and Economics, Vol. 26, pp. 301–325.
17. Farooque, O. A., T. V. Zijl, K. Dunstan and A. K. M. W. Karim (2007), “Corporate
governance in Bangladesh: link between ownership concentration and financial
performance”, Corporate Governance: An International Review, Vol. 15, No. 6, pp.
1453‐1468.
18. Gibson, M. S. (2003), “Is Corporate Governance Ineffective in Emerging Markets?”,
Journal of Financial and Quantitative Analysis, Vol. 38, No. 1, pp. 231-250.
19. Gompers, P., J. Ishii and A. Metrick (2003), “Corporate Governance and Equity Prices”,
The Quarterly Journal of Economics, Vol. 118, No. 1, pp. 107–155.
20. Haniffa, R. and M. Hudaib (2006),”Corporate governance structure and performance of
Malaysian listed companies”, Journal of Business Finance & Accounting, Vol. 33, pp.
1034-1062.
21. Hayes, R., H. Mehran and S. Schaefer (2005), “Board Committee Structures, Ownership
and Firm Performance”, Working Paper, Federal Reserve Bank of New York and
University of Chicago.
22. Hillman, A. J., A. A. Canella and R. L. Paetzold (2000), “The Resource Dependency Role
of Corporate Directors: Strategic Adaptation of Board Composition in Response to
Environmental Change”, Journal of Management Studies, Vol. 37, No. 2, pp. 235–
255.
23. International Federation of Accountants (IFAC) (2003), Rebuilding Public Confidence in
Financial Reporting,International Federation of Accountants (IFAC).
24. Jensen, M. (1993), “The modern industrial revolution, exit and the failure of internal
control systems”, Journal of Finance, Vol. 48, pp. 831– 880.
25. Jensen, M. C. and W. H. Meckling (1976), “Theory of the firm: managerial behavior,
agency costs and ownership structure”, Financial Economics, Vol. 3, pp. 305-360.
26. Kemp, S. (2006), “In the Driver’s Seat or Rubber Stamp? The Role of the Board in
Providing Strategic Guidance in Australian Boardrooms”, Management Decision,
Vol. 44, No. 1, pp. 56–73.
27. Kesner. I.F. (1988), “Directors’ characteristics and committee membership: An
investigation of type, occupation, tenure, and gender”, The Academy of Management
Journal, Vol. 31, No. 1, pp. 66-84.
28. Kiel, G.C. and G. J. Nicholson (2003), Board composition and corporate performance:
How the Australian experience informs contrasting theories of corporate governance”,
Corporate Governance, Vol. 11, pp. 189-205.
29. Klein, A. (1998), “Firm Performance and Board Committee Structure”, Journal of Law
and Economics, Vol. 41, No. 1, pp. 275–303.
30. Kyereboah-Coleman, A. and N. Biekpe (2006), “The link between corporate governance
and performance of the non-traditional export sector: Evidence from Ghana”,
Corporate Governance, Vol. 6, pp. 609-623.

21
31. Laing, D. and C. Weir (1999), “Governance structures, size and corporate performance in
UK firms”, Management Decision, Vol. 37(5), pp. 457-467.
32. Lawler III, E. E., D. L. Finegold, G. S. Benson and J. A. Conger (2002), “Corporate
Boards: Keys to Effectiveness”, Organizational Dynamics, Vol. 30, No. 4, pp. 310–
324.
33. Lipton, M. and J. Lorsch (1992), “A Modest Proposal for Improved Corporate
Governance”, Business Lawyer, Vol. 48, pp. 59-77.
34. Lin, Z. J., J. Z. Xiao and Q. Tang (2008), “The Roles, responsibilities and characteristics
of audit committee in China”, Accounting, Auditing& Accountability Journal, Vol.
21, pp. 721-751.
35. Mak, Y. T. and Y. Li (2001), “Determinants of corporate ownership and board structure:
Evidence from Singapore”, Journal of Corporate Finance, Vol. 7, pp. 236-256.
36. Machold, S. and A. K. Vasudevan (2004), “Corporate Governance Models in Emerging
Markets: The Case of India”, International Journal of Business Governance and
Ethics, Vol. 1, No. 1, pp. 56-77.
Mallin, C.A. (2007), “Corporate Governance”, 2nd Edition, Oxford University
Press, Oxford, UK

37. Millstein, I. M. and P. W. MacAvoy (1998), “The active board of directors and
performance of the large publicly traded corporation”, Columbia Law Review, Vol.
98, pp. 1283-1321.
38. Muttakin, M. B., A. Khan and N. Subramaniam (2015), “Firm characteristics, board
diversity and corporate social responsibility: evidence from Bangladesh”, Pacific
Accounting Review, Vol. 27, No. 3, pp. 353‐372.
39. Muzumdar, A.K. (2006), “Management accounting for improved corporate governance of
listed companies”, paper presented at ICMAB Conference on Corporate Governance
Bangladesh Perspective, ICMAB, Dhaka, 54-80.
40. Myers, R. H. (1990), Classical and modern regression with applications, 2nd edition,
Boston: PWS-Kent.
41. Pincus, K., M. Rubarsky and J. Wong (1989), “Voluntary formation of corporate audit
committees among NASDAQ firms”, Journal of Accounting and Public Policy, Vol.
8, pp. 239-265.
42. Rashid, A., A. De Zoysa, S. Lodh and K. Rudkin (2010), “Board Composition and Firm
Performance: Evidence from Bangladesh”, Australasian Accounting, Business and
Finance Journal, Vol. 4, No. 1, pp. 76-95.
43. Reaz, M. and T. Arun (2006), “Corporate governance in developing economies:
perspective from the banking sector in Bangladesh”, Journal of Banking Regulation.
Vol. 7, No. 1/2, pp. 94-105.
44. Rosenstein, S. and J. G. Wyatt (1990), “Outside directors, board independence, and
shareholder wealth”, Journal of Financial Economics, Vol. 26, pp. 175-192.
46. Rouf, A. (2011), “Corporate characteristics, governance attributes and the extent of
voluntary disclosure in Bangladesh”, African Journal of Business Management, Vol.
5, No. 19, pp. 7836-7845.
47. Rwegasira, K. (2000), “Corporate Governance in Emerging Capital Markets: Whither
Africa?”, Corporate Governance: An International Review, Vol. 8, No. 3, pp. 258-
267.
48. Sarkar J. and S. Sarkar (2012), Corporate Governance in India, Sage Publication India
Pvt. Ltd., India.

22
 49. Sarkar, J., S. Sarkar and S. K. Bhaumik (1998), “Does Ownership Always Matter?
Evidence from Indian Banking Industry”, Journal of Comparative Economics, Vol.
26, No. 2, pp. 262-281.
50. Shleifer, A. and R. W. Vishny (1997), “A Survey of Corporate Governance”, The Journal
of Finance, Vol. 52, No. 2, pp. 737-783.
51. Sunday, K. (2008), “Corporate governance and firm performance: the case of Nigerian
listed firms”, European Journal of Economics, Finance and Administrative Sciences,
Vol. (1450-2275), pp.1-13.
52. Tabachnick, B. G and L. S. Fidell (2007), Using Multivariate Statistics, 5th edition, USA:
Pearson Education Inc.
53. Uddin, S. and J. Choudhury (2008), “Rationality, traditionalism and the state of corporate
governance mechanisms: illustration from a less‐developed country”, Accounting,
Auditing & Accountability Journal, Vol. 21, No. 7, pp. 1026‐1051.
54. Van den Berghe, L. A. A. and A. Levrau (2004), “Evaluating boards of directors: What
constitutes a good corporate board?”, Corporate Governance: An International
Review. Vol. 12, pp. 461–478.
55. Vefeas, N. (1999), “Board meeting frequency and firm performance”, Journal of
Financial Economics, Vol. 53, pp. 113-142.
56. Weir, C. and D. Laing (2000), “The Performance-Governance Relationship: the Effects of
Cadbury Compliance on UK quoted Companies”, Journal of Management and
Governance, Vol. 4, pp. 265-281.
57. Weir, C., D. Laing and P. J. McKnight (2002), “Internal and external governance
mechanisms: Their impact on the performance of large UK public companies”,
Journal of Business Finance & Accounting, Vol. 29, pp. 579–611.
58. Wild, J. J. (1996), “The audit committee and earnings quality”, Journal of Accounting,
Auditing and Finance, Vol. 11, pp. 247-276.
59. Williamson, O. E. (1996), The Mechanisms of Governance. New York: Oxford
University Press.
60. Zahra, S.A. and J. A. Pearce (1989), “Boards of directors and corporate financial
performance: A review and integrative model”, Journal of Management, Vol. 15, pp.
291-334.

23

View publication stats