Analysis of Agency Problems in Dhaka Stock Exchange-listed

Companies

Introduction
In corporate and business environments, a principal-agent relationship is a typical setup where a
principal assigns responsibilities and authority to an agent to act on the principal's behalf. The
principle-agent dynamic is common in various business contexts, including owner-employee
relationships, shareholder-manager relationships, and client-professional relationships.

However, inherent conflicts of interest often arise in principle-agent relationships due to the
differing objectives and incentives of the principal and the agent. The principal seeks to
maximize their interests, which could include profit, shareholder value, or achieving specific
goals. On the other hand, the agent may have their own set of motivations, such as job security,
career advancement, or personal financial gain.

Several factors contribute to conflicts of interest in principle-agent relationships:

⮚ The principal and agent may have different priorities and objectives. For example,

shareholders may prioritize maximizing profits, while managers may focus on job
security and career advancement.

⮚ The principal may not have complete information about the agent's actions, and the agent

may possess more knowledge about the day-to-day operations. This information
asymmetry can lead to opportunistic behavior by the agent to pursue their own interests.

⮚ Agents may act in a risk-averse manner to protect their own interests, even if it does not

align with the risk preferences of the principal. This can result in suboptimal decision-
making from the perspective of the principal.
To minimize conflicts and align the interests of both parties, principal-agent relationships require
the design of incentive structures, monitoring systems, and communication techniques.
Implementing transparency, accountability, and performance-based incentives can help address
the challenges associated with conflicts of interest in corporate and business environments.

Identifying and explaining common types of agency problems in corporations:

Agency problems in corporations arise when there is a conflict of interest between different
stakeholders, such as shareholders and managers, leading to a divergence in goals and
motivations. Here are explanations for three common types of agency problems in corporations:

● Managerial Opportunism:

When managers behave more in their self-interest than in the best interests of the firm or the
shareholders, this is known as managerial opportunism. This can involve activities such as
excessive compensation, pursuing personal benefits at the expense of the firm, or making
decisions that prioritize short-term gains to boost personal performance metrics.
For example, a manager may use aggressive accounting techniques or financial manipulation to
artificially increase short-term profits, which could raise the stock price and result in stock
options for the manager's possible personal gain.

● Information Asymmetry:

When one party has more or better information than the other, there is a potential for the
information gap to be exploited. This is known as information asymmetry. In corporations, this
often occurs when managers possess more information about the company's operations, financial
health, or prospects than shareholders.

For example, managers may use knowledge of upcoming financial difficulties or possibilities
that have not been shared with shareholders to their advantage by purchasing or disposing of
business stock before the information is made public, resulting in unjust profits.
 ● Short-Termism:

Short-termism occurs when managers prioritize short-term results at the expense of the
company's long-term sustainability. This can be driven by the desire to meet quarterly financial
targets, which may be linked to executive compensation or stock performance metrics.
For example, a manager may reduce research and development expenditures, postpone critical
maintenance, or implement extreme cost-cutting initiatives to increase short-term earnings.
While this may temporarily enhance financial measures, it might hurt the long-term value.
These agency problems can lead to inefficient allocation of resources, reduced shareholder value,
and a deterioration of the overall corporate governance structure. Companies frequently put in
place measures to lessen these agency issues and match management goals with shareholder
interests, such as performance-based incentives, independent boards, and open reporting.

Objective of the study

• To enhance the understanding of agency problems and agency costs.

• To analyze the impact of agency problems on financial performance.

• To understand the role of corporate governance in solving agency problems.

 1. Data Analysis & Discussion:
1.1. Calculation of Executive Compensation % Net Income:

Total Executive Compensation

∗ 100
Net Profit

APEX TANNERY LIMITED

Particular 2020 2021 2022

Executive Compensation 6000000 6000000 6000000

Net Income (18,172,056) 5,221,750 12,507,065
Executive compensation % net Income (33.02%) 114.90% 47.97%
(Annual Report: Footnotes 39 & 38 contains Executive Compensation of Apex Tannery Ltd.)

Despite fluctuations in net income from year to year, the executive compensation remains
constant at 6,000,000 takas throughout the three years. This suggests that the company maintains
a stable approach to compensating its executives, regardless of changes in financial performance.

In 2020, Apex Tannery Limited incurred a net loss of 18,172,056 taka. Interestingly, the
executive compensation represented 33.02% of this loss. This indicates that executive
compensation was a significant portion of the company's financial outflow during a challenging
year of losses. The company experienced a turnaround in 2021, with a net income of 5,221,750
taka, marking a significant improvement from the previous year's loss. However, the executive
compensation exceeded the net income of 114.90% of the profits. This suggests that executive
compensation consumed a substantial portion of the company's profits during the recovery phase.
In 2022, Apex Tannery Limited continued its profitability route, achieving a net income of
12,507,065 taka. The executive compensation, representing 47.97% of net income, indicates a
more balanced allocation of profits towards executive remuneration compared to the previous
years.

BANK ASIA LIMITED

Particular 2020 2021 2022

Executive Compensation 19262968 20401265 18854125

Net Income 2,024,487,409 2,706,735,981 3,045,871,705
Executive compensation % net Income 0.95% 0.75% 0.62%
(Annual Report: Remuneration Committee 6.5.2; contains Executive compensation of Bank Asia Ltd.)

The data shows that executive compensation as a percentage of net income has decreased
steadily over the years, indicating a more favorable trend for shareholders. In 2020, executive
compensation accounted for 0.95% of net income, which decreased to 0.75% in 2021 and further
decreased to 0.62% in 2022. This suggests that executive compensation consumed a relatively
smaller portion of the company's profits over time.

Bank Asia Limited experienced steady growth in net income from 2020 to 2022, with substantial
increases in profits each year. This positive trend in profitability may reflect effective
management strategies and operational performance, contributing to the company's overall
financial health and shareholder value.
 1.2. Comparing executive compensation packages across the companies:

Executive Compensation % of Net 2020 2021 2022

Income

Apex Tannery Ltd. (33.02%) 114.90% 47.97%

Bank Asia Ltd. 0.95% 0.75% 0.62%

Bank Asia Limited's executive compensation packages are significantly higher than those of
Apex Tannery Limited. Bank Asia Limited's executives received compensation ranging from
approximately 19.26 million takas to 20.40 million takas, whereas Apex Tannery Limited's
executives received a fixed compensation of 6 million takas annually.

In terms of the impact on net income, Apex Tannery Limited's executive compensation as a
percentage of net income exhibited significant fluctuations, with an exceptionally high
percentage of 114.90% in 2021. In contrast, Bank Asia Limited's executive compensation as a
percentage of net income remained relatively low and stable, ranging from 0.62% to 0.95% over
the same period.
Bank Asia Limited's executive compensation as a percentage of net income consistently
remained below 1%, indicating a more favorable alignment with shareholder interests compared
to Apex Tannery Limited, where the percentage varied widely, including a negative percentage
in 2020.

Overall, while Bank Asia Limited's executive compensation packages are higher in magnitude,
they appear to have a less pronounced impact on net income compared to Apex Tannery
Limited's compensation packages, which exhibited more significant fluctuations. However, both
companies may benefit from further evaluation and adjustment of their executive compensation
policies to ensure alignment with shareholder interests and sustainable growth.

1.3. Analyzing the relationship between executive compensation and

shareholder returns (ROE & EPS)

APEX TANNERY LIMITED

Particular 2020 2021 2022
Executive Compensation 6000000 6000000 6000000
ROE -1.76% 0.54% 1.29%
EPS -1.19 0.34 0.82

The executive compensation for Apex Tannery Limited remained constant at 6,000,000 taka
throughout the three years.
ROE measures the company's profitability relative to shareholder equity. In 2020, Apex Tannery
Limited had a negative ROE of -1.76%, indicating a loss. However, in 2021 and 2022, the ROE
improved to 0.54% and 1.29% respectively, reflecting a return to profitability and increasing
shareholder value.

EPS represents the portion of a company's profit allocated to each outstanding share of common
stock. Similarly, EPS for Apex Tannery Limited was negative in 2020 (-1.19 taka), indicating a
loss per share. However, EPS improved in 2021 (0.34 taka) and 2022 (0.82 taka), signifying
positive earnings per share.

Despite fluctuations in ROE and EPS, the executive compensation remained constant. This
suggests that executive compensation did not fluctuate in response to changes in shareholder
returns during the period analyzed. The lack of adjustment in executive compensation in
response to these Fluctuations raises questions about the alignment between executive
compensation and shareholder returns.
 BANK ASIA LIMITED

Particular 2020 2021 2022

Executive Compensation 19262968 20401265 18854125

ROE 7.39% 9.94% 10.70%
EPS 1.74 2.34 2.62

Bank Asia Limited's executive compensation increased from 19,262,968 taka in 2020 to
20,401,265 taka in 2021, before slightly decreasing to 18,854,125 taka in 2022.

ROE measures the company's profitability relative to shareholder equity. Bank Asia Limited
exhibited consistent improvement in ROE over the three years, with ROE increasing from 7.39%
in 2020 to 10.70% in 2022. This signifies a positive trend in the company's ability to generate
profits relative to shareholder equity. Bank Asia's EPS also demonstrated growth over the period,
with EPS increasing from 1.74 taka in 2020 to 2.62 taka in 2022.

Bank Asia's executive compensation increased or remained relatively stable over the years, while
the company's ROE and EPS improved.
 1.4. The role of corporate governance in mitigating agency problems

Internal Mechanisms:

1. Board of Directors:
The board of directors is a key internal mechanism for corporate governance. It acts as a
representative of shareholders and is responsible for overseeing the management of the company.
In case of Apex Tannery Limited, the BOD consists of three members of have ensured the well-
being of shareholders seen as profits are rising and has been paying dividends.

On other side, Bank Asia Limited consists of three Board of Directors and all who assume
executives’ positions. So, considering that they will ensure the well-being of shareholder's
interest while raising no agency problem.

A well-structured board with a mix of executive and non-executive directors, including

independent directors, helps ensure a balance of power and prevents excessive influence by
management. Both companies have Board of Directors of 3 people but in Apex Tannery Limited
3 of them are majority shareholders who do not hold any executive role while Bank Asia Limited
have 3 members on Board of Directors who all play the roles of executives.

2. Executive Compensation:
This type of compensation aims to match the interests of shareholders and executives. Bonuses,
stock options, and other incentives based on the business's performance are frequently included
in compensation packages. Over the three years, Apex Tannery Limited's net profit increased
steadily, but the amount paid to executives stayed mostly unchanged. This implies that the
business has demonstrated good cost controls by lowering the percentage of net income allotted
to executive compensation.
Executives are encouraged by performance-based compensation to make choices that advance
the company's long-term success rather than just concentrating on immediate profits. Bank Asia
saw a loss in 2020, bounced back with a sizable profit in 2021, and then experienced another
profit in 2022. Executive compensation was maintained in the face of losses, demonstrating a
consistent policy both employee and executive compensation.

Shareholders can assess if executive compensation is reasonable and commensurate with the
company's performance when it is disclosed transparently. This is upheld in the situations of both
businesses.

3. Shareholder Activism:
Activism on the part of shareholders entails them actively interacting with the firm to shape its
policies and choices. Since the majority of stockholders occupy executive roles with decision-
making authority within Bank Asia Ltd., this is done there. By using proxy voting, shareholders
can voice their thoughts on crucial issues such as executive salaries and director elections.

External Mechanisms:

1. Regulatory Frameworks:
To ensure just and open business practices, governments, and regulatory agencies create
laws and regulations. The Dhaka Stock Exchange Commission (DSEC) upholds stringent
laws about fair trading procedures, fraud prevention, and financial disclosure.
Consequently, Apex Tannery Limited and Bank Asia Ltd. both release their annual
financial statements, which are examined by an impartial third-party company. In
addition to guaranteeing that businesses abide by the law and ethical standards, regulatory
compliance helps to lessen information asymmetry.
Role of Corporate Governance in solving agency problem in Apex Tannery Limited

A thorough analysis of Apex Tannery Limited's corporate governance structure demonstrates a

thorough framework intended to successfully handle the agency problem. First off, a key factor in
reducing agency issues is the composition of the board of directors. The regulatory criteria are
followed in the composition of the Board, guaranteeing a balance between independent and
executive directors. The appointment process, tenure restrictions, and independence requirements
are closely adhered to, even though the firm does not meet the one-fifth threshold for independent
directors. The CEO and chairperson jobs' duality is effectively managed, promoting clear duties
and a division of authority. Another essential component in resolving agency issues is the
management certification procedure. The CEO and CFO's certification process guarantees
accountability and openness regarding the compliance and accuracy of financial statements.
Stringent requirements for the selection and dismissal of important management staff promote
stability and guard against haphazard changes. Effective decision-making is facilitated by the
clear definition of roles and duties for the MD/CEO, CS, CFO, and HIAC. The creation of board
committees aids in the resolution of agency issues as well. Transparency and accountability are
demonstrated by the creation of Audit Nomination and Remuneration Committees. Checks and
balances are maintained by the Audit Committee's supervision of internal audit, financial
reporting, and contacts with external auditors. The policies of the appointment, assessment, and
compensation of executives and directors are actively influenced by the Nomination and
Remuneration Committee. To avoid conflicts of interest and preserve their independence, there
should be explicit limitations on the services that external auditors can offer. Independence is
further strengthened by laws prohibiting auditors and members of their families from owning
stock in the company under audit. The participation of shareholders is another important concern.
By actively choosing the experts who issue compliance certificates, shareholders strengthen their
position in governance. Shareholders are kept informed via reporting duties, which include
disclosures in the annual report and statements in directors' reports. A dedication to
accountability is shown via consistent certification from impartial experts, reporting on
governance initiatives, and compliance disclosures. The transparency of the company for
stakeholders is improved by its compliance with website disclosure regulations. The Nomination
and Remuneration Committee actively participates in the development of policies that match
executive and director compensation to industry norms and performance requirements. Effective
governance is facilitated by policies of diversity and director credentials.

Role of Corporate Governance in Solving Agency Problems in Bank Asia Limited

When the interests of management (agents) and shareholders (principals) vary, agency problems
can occur in the banking sector as well. Short-term profits, aggressive risk-taking, or financial
gain may take precedence over long-term value creation for shareholders and the financial health
of the bank by management. Putting together a capable, independent, and diverse board of
directors can help guarantee that management is effectively overseen, that strategy is in line with
shareholder interests, and that management is held responsible for its actions. Putting in place
open disclosure procedures Building trust and enabling shareholders to make well-informed
decisions is made possible by accurate and on time disclosure of financial information, risk
management techniques, and any possible conflicts of interest. Building a strong internal control
system Ensuring regulatory compliance, preventing fraudulent actions, and protecting the bank's
assets can all be achieved with well-defined rules, processes, and internal controls. Connecting
executive pay to output Executive remuneration is incentivized to act for the benefit of the bank
and its stakeholders when it is tied to long-term performance indicators like as sustainable
profitability and risk management, rather than short-term gains. Encouragement of moral
behavior A robust business culture that prioritizes moral conduct, honesty, and social
responsibility reduces the likelihood that management will make immoral decisions. Diminish
the asymmetry of information Making more informed decisions is made possible when
management and shareholders have a smaller knowledge gap. Sync up rewards supporting
executives to make decisions that are in the best interests of the bank and its investors by
implementing efficient performance measures and incentive plans. Encourage responsibility
establishing clear lines of power and open communication to hold management accountable for
their decisions and deeds. Boost one's reputation fostering confidence between stakeholders is
essential to drawing in and keeping consumers and investors. It is imperative to acknowledge
that corporate governance is a continuous procedure rather than a one-time fix. It is imperative
that Bank Asia Limited consistently assesses and enhances its corporate governance system to
adjust to evolving conditions, guarantee its efficacy in addressing agency issues, and promote
enduring, long-term development.

1.5. Examine the corporate governance structures of the selected companies.

Corporate Governance Structure of Apex Tannery Ltd

By the guidelines established by the Bangladesh Securities and Exchange Commission's (BSEC)
Notification on Corporate Governance, Apex Tannery Limited has submitted a thorough report.
After examining the corporate governance structure of the Apex

Here are some observations we have made on Apex Tannery Ltd:

Board of Directors:
Nearly all of the BSEC's requirements regarding the Board of Directors are met by Apex
Spinning & Knitting Mills Limited. The board's size range, the independent directors'
qualifications and shareholding position, the appointment and tenure of the board of directors,
the dual role of CEO and managing director, the directors' report to shareholders, the
management's analysis and discussion, the CEO and CFO's declaration or certification, the code
of conduct, board meetings, and record keeping are just a few examples.

The board shall have five to twenty members, with one-fifth of them being independent
directors, according to BSEC regulations. There are five board members and one independent
director for the company. by the first requirement regarding the diversity of the board of
directors. The second criterion is to have at least one-fifth (1/5) of the total number of directors
be an independent director; this condition is also met and further explained in the compliance
report. Does not own any shares or fewer than 1% of the company's total paid-up shares; is not
affiliated with, connected to, or a sponsor of the business; is not a director, nominee, shareholder,
associate, sister concern, subsidiary, parent, or holding entity that owns one percent (1%) or
more of the business's total paid-up shares based on a family relationship; and his or her family
members are not permitted to hold the aforementioned shares in the business. These two
requirements have been met. from independent directors' perspective conditions like not holding
a position as an executive with the corporation during the two (two) fiscal years prior; having no
further financial or non-financial ties to the company, its subsidiaries, or its linked businesses;
they also meet the requirement. An independent director, a TREC holder, a director, or an officer
of any stock exchange; not received a sentence for a crime involving immorality;

Selected by the Board of Directors and given the go-ahead by the shareholders at the Annual
General Meeting; this is also how the company operates. The Independent Director position
cannot be unfilled for longer than 90 (ninety) days; the corporate governance culture of the
company has also been noted to reflect this culture. The term of office of an Independent
Director is three (3) years, renewable for a maximum of one (1) term; Apex Tannery satisfies all
requirements. Former Government Official: A person holding a position in the government,
statutory, autonomous, or regulatory body that is not below the fifth grade of the national pay
scale and who has at least a bachelor's degree in economics, commerce, business, or law;
additionally, according to the company's compliance report, the current independent director is a
bureaucrat with more than 12 (twelve) years of experience.

Governance of the Board of Directors of a Subsidiary Company

No subsidiary company exists for Apex Tannery Limited.

Managing Director (MD) or Chief Executive Officer (CEO), Chief Financial Officer
(CFO), Head of Internal Audit and Compliance (HIAC) and Company Secretary
(CS).
All positions listed in the title should be filled by the board, according to the company's
successful application. This company similarly follows the policy of having various people
perform the roles of MD or CEO, CS, CFO, and HIAC.The Board must clearly define the roles,
responsibilities, and duties of the CFO, HIAC, and CS. These two requirements were also met, as
evidenced by the report. The MD or CEO, CS, CFO, and HIAC of a listed company shall not
hold any executive position in any other company at the same time.The Board's consent and
prompt notification to the Commission and stock exchange(s) are required before the MD or
CEO, CS, CFO, and HIAC may be dismissed from their positions; this kind of situation is not
observed yet. The Annual Report must include the MD's or CEO's and CFO's certification;
which is also practiced in Apex Tannery Ltd.

Board of Directors Committee

Apex Tertiary Limited has set up both an Audit and a Nomination/Remuneration Committee by
BSEC governance guidelines. On November 13, 2018, at the 287th Board Meeting, NRC
became official.

Audit Committee:

The company has met the criteria and created an Audit Committee to support the Board in
ensuring the accuracy of financial statements and upholding efficient internal control. The duties
assigned to the committee by written documents are also completed.

The company makes sure that its Audit Committee has three or more members in accordance
with the requirement. These members are non-executive directors, including at least one
independent director, who have been selected by the board. Every member of the committee is
financially literate, and one has at least ten years of experience in accounting or a similar field of
financial management. Whenever there is a casual vacancy on the committee, the Board
promptly replaces it. The committee's secretary is the company secretary. Dr. ATM Shamsul
Huda is the current chairperson of the Board, which is chosen by an independent director from
the committee. A temporary chairman may be chosen in the chairperson's absence; however, no
such elections took place during the reporting period. The committee has a quorum of two
members or two-thirds of the committee, whichever is higher, and at least one independent
director must be present for quorum formation. The chairperson attends the Annual General
Meeting, and the committee meets at least four times a year.

The Audit Committee is in charge of the financial reporting procedure, keeps an eye on
accounting regulations, and makes sure internal audit and compliance procedures are adequate. It
also oversees the selection and performance of outside auditors, meets with auditors to discuss
financial statements, and evaluates the management's financial statement review process. It also
examines linked party transactions, audit fees, management correspondence, and internal audit
functions. The committee provides the Board with an update on its work and promptly notifies
the Board of any suspected fraud, irregularities, or material deficiencies. The audit committee's
report, including any reports given to the board of directors by condition 5(6)(a)(ii), is duly
signed by the audit committee chairperson and included in the issuer company's annual report, by
the requirement.

Nomination and Remuneration Committee (NRC)

As required, the corporation formed a Nomination and Remuneration Committee (NRC) as a

subcommittee of the Board. The NRC was established on November 13, 2018, during the 287th
Board Meeting. It supports the Board in developing policies and criteria for nominating directors
and top-level executives, as well as in setting compensation guidelines. The NRC committee is
composed of three people at minimum, one of whom is an independent director, and its Terms of
Reference (TOR) are spelled out in written form. In Apex Ternary All of the committee's
members are non-executive directors who have been nominated and appointed by the Board,
which also has the power to fill temporary openings at the NRC and remove or appoint any
member.

While there were no instances of external experts being appointed or staff members being co-
opted as advisers during the reporting period, the chairperson of the Nomination and
Remuneration Committee (NRC) has the ability to do so. In this company’s scenarioThe
committee's secretary is the company secretary, and a minimum of one Independent Director
must be present for the NRC meeting to have a quorum. Other than director's fees or honoraria
from the corporation, NRC members are not compensated for advising or consultancy work.
With provisions for appointing a temporary chairperson in the event of the Chairperson's
absence, the Board appoints an Independent Director to serve as the NRC Chair. In order to
respond to questions from shareholders, the chairperson must be present at the annual general
meeting (AGM). The NRC holds a minimum of one meeting per year, and the minutes from that
meeting are verified at the next one. Independent and answerable to the Board as well as the
shareholders is the Nomination and Remuneration Committee (NRC). It is responsible for a
number of things, such as making sure that the relationship between compensation and
performance is clear, striking a balance between fixed and incentive pay for directors and top
executives, ensuring that the Board is diverse, finding qualified candidates for the Board and for
director positions, identifying employee needs and selection criteria, and managing the
company's training and human resources. In the annual report, the NRC details its policies for
nomination and compensation, evaluation standards, and activities.

External or Statutory Auditors:

The organization (Apex Tannery) complies with the mandate that it refrain from providing
fairness views, assessment or valuation services, financial information system design, and
implementation. To maintain independence and prevent conflicts of interest, the company strictly
adheres to non-engagement in diverse services. This includes abstaining from any activities that
the Audit Committee deems to present conflicts of interest, such as bookkeeping, broker-dealer
services, actuarial services, internal audit or special audit services, and any other services.
Furthermore, the business does not provide audit or certification services about adherence to
corporate governance guidelines. Moreover, throughout the audit period, partners and staff of
external audit firms are not allowed to have shares in the company, and their families are not
allowed to retain shares either. Attending shareholder meetings is mandatory for representatives
of external or statutory auditors to respond to questions from the public and guarantee
accountability and openness in the business's operations.

Maintaining a website by the Company

The company complies with the obligation to have an official website that is connected to the
stock exchange's website, guaranteeing transparency and accessibility for stakeholders.
According to legal requirements, the website has been operational since the listed date.
Additionally, the company's website provides investors and other interested parties with
convenient access to key information through full disclosures required by the listing regulations
of the relevant stock exchanges.

Reporting and Compliance of Corporate Governance

The organization has fulfilled the obligation to secure an annual certification from a licensed
professional accountant or secretary, like a cost and management accountant or chartered
accountant, attesting to its adherence to the terms of the Commission's Corporate Governance
Code. Transparency and accountability are ensured by the certificate, which is revealed in the
Annual Report and was supplied by ARTISAN, Chartered Accountants. Furthermore, the
shareholders select the professional who will provide the certificate at the annual general
meeting (the 47th AGM will have a distinct agenda item dedicated to this purpose). The
company's directors are in charge of including the compliance status, which indicates whether
the business has complied with these requirements, in the directors' report.
Corporate Governance Structure of Bank Asia:

Bank Asia Limited has filed a comprehensive report in compliance with the standards outlined in
the Bangladesh Securities and Exchange Commission's (BSEC) Notification on Corporate
Governance. After looking into the Bank Asia’s corporate governance structure

The following are our observations regarding Bank Asia’sLtd:

Board of Directors:

Within the allowable range of 5 to 20 members, the Board of Bank Asia Limited consists of 17
directors, including the Managing Director. Five of these directors have been appointed as
independent directors, satisfying the minimum requirement of one-fifth of the board's members
being independent. These independent directors fulfill a number of requirements that guarantee
their independence, including not owning any stock in the company, not being related to
sponsors or other directors, not having held executive positions in the business during the
previous two fiscal years, and not having any financial or other connections to the business or
any of its subsidiaries. Additionally, they have never been found guilty of any crimes and do not
work for the company's audit firms, capital market intermediaries, or stock exchanges.
Transparency and accountability are ensured by the Annual General Meeting of shareholders
authorizing the selection of Independent Directors. Moreover, in order to ensure efficient
supervision and governance, the position of Independent Director cannot be unfilled for longer
than ninety days.An independent director's term of office is three (three) years, with the option to
be extended for a single subsequent term.

In order to ensure compliance with corporate rules, financial laws, and regulatory requirements,
independent directors must be knowledgeable, honest, and able to make a significant
contribution to the business. They may have come from academics, the legal and financial
professions, corporate or government leadership, business leadership, or regulatory authorities.
Furthermore, independent directors need to have worked in any of the above disciplines for at
least ten years. Although the requirements and experiences are usually quite strict, there have
never been any exceptions to this rule in this company’s history; nonetheless, unusual
circumstances may allow for exceptions with the Commission's prior consent. In terms of job
duality, a company's chief executive officer or managing director and chairperson of the board
must be held by separate people. It is also prohibited for the CEO or Managing Director of one
listed firm to hold the same position in another listed company at the same time. The non-
executive directors shall elect the Chairperson of the Board, and the Board shall specify the
duties and responsibilities of the Chairperson and the Managing Director or CEO, respectively.
For that particular meeting, a non-executive director may be chosen to serve as the temporary
chairperson in the event that the chairperson is not present. Any absences from the meeting must
be appropriately noted in the minutes.these practices also observed in their activity

Governance of Board of Directors of Subsidiary Company

Every requirement regarding the composition of the Board of Directors of the holding company
has been fulfilled by Bank Asia, ensuring that these provisions are also applicable to the
composition of the Board of the subsidiary company. Additionally, at least one independent
director from the holding company serves on the Board of the subsidiary company, and the
minutes of the subsidiary company's Board meetings are reviewed at subsequent meetings of the
holding company's Board. Furthermore, the minutes of the holding company's Board meetings
explicitly state that they have reviewed the affairs of the subsidiary company. Moreover, the
Audit Committee of the holding company meticulously reviews the financial statements,
particularly focusing on the investments made by the subsidiary company, ensuring
comprehensive oversight and governance across the entire corporate structure.In addition, the
holding company's Audit Committee carefully examines the financial accounts, paying special
attention to the investments made by the subsidiary firm, to guarantee thorough monitoring and
control throughout the whole corporate hierarchy.
Managing Director (MD) or Chief Executive Officer (CEO), Chief Financial Officer (CFO)
Head of Internal Audit and Compliance (HIAC) and Company Secretary(CS):-

The CEO, Managing Director, Company Secretary, Chief Financial Officer, and Head of Internal
Audit and Compliance have all been appointed by the Board in accordance with its mandate. As
needed, different people occupy these positions, guaranteeing a division of duties. Moreover,
executives in a listed firm are not permitted to hold these positions concurrently with executive
positions in other businesses. The Board has clearly defined the roles, responsibilities, and
obligations of the CFO, HIAC, and CS. Furthermore, the Board must approve the removal of the
MD or CEO, CS, CFO, or HIAC from their posts. The Commission and stock exchange(s) are
promptly informed of these changes, guaranteeing openness and legal compliance.

Meeting the required number of attendees, the company's Managing Director (MD) or Chief
Executive Officer (CEO), Company Secretary (CS), Chief Financial Officer (CFO), and Head of
Internal Audit and Compliance (HIAC) attend the Board meetings. In addition, the CEO, CFO,
and MD certify to the Board that they have examined the year's financial statements and have
determined that they give a true and fair picture of the company's operations, adhere to
applicable legal requirements and accounting standards, and contain no materially false
statements. Moreover, they attest that the organization did not engage in any unlawful,
fraudulent, or code of conduct-violating transactions throughout the year. The Annual Report
discloses these certifications, guaranteeing accountability and openness in financial reporting and
governance practices.

Audit Committee.

As stated in the Corporate Governance Code, the company has complied with its obligation to
the Board of Directors in relation to the Audit Committee. The Audit Committee is a
subcommittee of the Board that consists of a minimum of three members, one of whom is an
independent director. Every member is financially literate, and at least one of them has a lot of
accounting or money management expertise. The Board fills any vacancies that may occur
quickly to guarantee the Audit Committee's work continues. The Committee's secretary is the
company secretary, and a minimum of one independent director is required for a meeting of the
Committee to be quorum. The Board appoints the Audit Committee Chairperson, who is an
independent director. The minutes must appropriately note the cause for the Chairperson's
absence before the remaining members can choose a temporary Chairperson in their place. These
procedures guarantee efficient supervision and governance in compliance with legal obligations.

The Corporate Governance Code's requirements for the Audit Committee's performance have
been successfully met. The Committee holds at least four meetings a fiscal year, with the
possibility of holding extra emergency meetings if needed. The Chairperson of the Committee
guarantees their attendance at the Annual General Meeting (AGM). A minimum of two
members, or two-thirds of the Committee, must be present for a quorum to be formed for
Committee meetings, and the attendance of an independent director is required. The Committee
is in charge of a number of things, such as the appointment and performance of external auditors,
internal audit, accounting policies, financial reporting, and compliance procedures. In order to
verify compliance and efficacy, they examine financial accounts, linked party transactions,
management letters, and audit fees.

Though no such instances occurred during the reporting period, the Committee swiftly notifies
the Board of any discoveries pertaining to conflicts of interest, suspected fraud or irregularities,
or potential violations of laws or regulations. The Committee reports its actions to the Board.
These actions show a dedication to good corporate governance principles, accountability, and
openness.Throughout the reporting period, the Audit Committee has not come across any
occurrences that needed to be reported to the authorities or disclosed to the Board right away.
Furthermore, there haven't been any cases where the Board or management has arbitrarily
disregarded the Committee's recommendations for correction. Consequently, the Commission
has not received any reports in this respect. As required by the Corporate Governance Code, the
operations carried out by the Audit Committee, including any reports made to the Board, have
been suitably documented and disclosed in the company's annual report.
Nomination and Remuneration Committee (NRC)

According to Bangladesh Bank Circular No. BRPD (R-1) 717 / 2021-5064, dated June 16, 2021,
a bank entity is exempt from filing this form.

External or Statutory Auditors

When it comes to ensuring that its external or statutory auditors don't perform services that are
prohibited, like bookkeeping, actuarial services, broker-dealer services, appraisal or valuation,
internal audit services, or any other service decided upon by the Audit Committee, Bank Asia
complies with all applicable regulations regarding their engagement. Furthermore, the bank
makes certain that no partner or employee of external audit companies owns any shares of the
examined company while they work for the firm, and that statutory or external auditors are
present at shareholder meetings to answer any questions. In addition, the bank stays away from
any other service that can lead to a conflict of interest and abides by the rule that forbids audit or
certification services linked to corporate governance compliance.

Maintaining a website by the Company

Regulations about Bank Asia’s official website have been complied with in full. Since the day of
listing, the bank has kept up a working website that is connected to the stock market's website,
guaranteeing that the comprehensive disclosures mandated by the stock exchange rules are
accessible on its website

Reporting and Compliance of Corporate Governance

For the most part, Bank Asia has met the requirements to earn a corporate governance
compliance certificate. As required, the bank has acquired the required certification for the year
ending December 31, 2022, from M/s. Suraiya Parveen & Associates, Chartered Secretaries.
Nevertheless, the shareholders at the annual general meeting failed to appoint the expert who
issued the certificate. However, the directors of the company have lawfully fulfilled that duty by
stating in the directors' report—in compliance with Annexure-C—whether or not the firm has
complied with the conditions.

1.6. Role of corporate governance in solving agency problems in selected

companies?

Corporate governance plays a crucial role in addressing agency problems within companies like
Apex Tannery Ltd and Bank Asia Ltd. An agency problem arises when there is a conflict of
interest between the management (agents) and the shareholders (principals), where the agents
may prioritize their interests over those of the shareholders. Effective corporate governance
mechanisms are designed to mitigate these conflicts and ensure that the interests of shareholders
are protected. Here's how corporate governance helps in solving agency problems in the selected
companies:

● Board of Directors Composition: Both companies have boards of directors with a mix of

executive and independent directors. Independent directors bring an objective perspective

and oversight to the decision-making process, reducing the likelihood of management
acting solely in their interests.

● Independent Directors: Both companies have appointed independent directors who are

not involved in the day-to-day operations of the company. These directors are required to
meet certain qualifications and standards of independence, ensuring that they can
effectively represent the interests of shareholders.

● Board Committees: Both companies have established board committees such as the Audit

Committee and Nomination/Remuneration Committee. These committees provide

specialized oversight in areas like financial reporting, audit, and executive compensation,
ensuring transparency and accountability in decision-making.

● Transparency and Disclosure: Both companies adhere to regulations regarding

transparency and disclosure, including maintaining operational websites, providing

timely and accurate financial information, and obtaining annual certifications of
 compliance. This ensures that shareholders have access to relevant information to make
informed decisions and hold management accountable.

● Executive Accountability: Both companies have mechanisms in place to hold executives

accountable, such as requiring certification of financial statements by the CEO and CFO,
and board approval for the appointment and removal of key executives. This helps align
the interests of management with those of shareholders.

In summary, corporate governance mechanisms like independent directors, board committees,

transparency, and executive accountability play a crucial role in mitigating agency problems by
ensuring that management acts in the best interests of shareholders and upholds principles of
transparency, accountability, and fairness.

1.7. Key findings regarding agency problems, financial performance, and

corporate governance.

Findings from the analysis and discussion of the executive compensation and financial
performance of Apex Tannery Limited and Bank Asia Limited are as follows:

Financial Performance:
Apex Tannery Limited:

● Despite fluctuations in net income, executive compensation remained constant at

6,000,000 takas annually over three years.

● In 2020, executive compensation represented a significant portion (33.02%) of the

company's net loss, indicating a heavy financial burden during a challenging year.

● Despite fluctuations in return on equity (ROE) and earnings per share (EPS), executive

compensation remained constant, raising questions about alignment with shareholder

returns.
Bank Asia Limited:

● Bank Asia Limited experienced steady growth in net income, ROE, and EPS over the

three years, reflecting effective management strategies and operational performance.

● Executive compensation packages at Bank Asia Limited were significantly higher in

magnitude compared to Apex Tannery Limited, but they had a less pronounced impact on
net income.

● Executive compensation as a percentage of net income consistently remained below 1%,

indicating a more favorable alignment with shareholder interests compared to Apex

Tannery Limited.

● Despite changes in ROE and EPS, executive compensation at Bank Asia Limited

increased or remained relatively stable over the years, suggesting a less responsive
approach to shareholder returns.

Agency Problem & Corporate Governance:

● Board Composition and Independence: Both companies have boards with diverse

expertise and backgrounds. They adhere to the regulatory requirement of having

independent directors, ensuring oversight and accountability.

● Management Structure: The companies maintain a clear separation between the roles of

CEO/Managing Director and Chairperson of the Board, preventing concentration of

power. They also appoint individuals with relevant expertise to key positions such as
CFO, CS, and HIAC.

● Committee Structure: Both companies have established Audit Committees to ensure

financial transparency and compliance. Additionally, Bank Asia has a Nomination and
Remuneration Committee, indicating a commitment to fair compensation practices.
 ● External Auditors: Both companies follow regulations to prevent conflicts of interest and

ensure the independence of external auditors. They do not engage auditors in prohibited
services and maintain transparency in auditor-shareholder interactions.

● Corporate Reporting and Compliance: Both companies demonstrate a commitment to

transparency and accountability through their reporting practices. They obtain annual
certifications of corporate governance compliance and provide shareholders with clear
information on adherence to regulatory requirements.

Recommendation
To address agency problems and reduce associated costs, Apex Tannery Ltd and Bank Asia Ltd
should consider the following recommendations:

● Performance-Based Compensation: Implement a performance-based executive

compensation structure tied to key financial metrics such as net income, ROE, and EPS.
This would align management incentives with shareholder interests and encourage value
creation.

● Regular Compensation Review: Conduct regular reviews of executive compensation to

ensure it remains aligned with company performance and market benchmarks.

Adjustments should be made based on performance outcomes to prevent excessive
financial burdens during challenging periods.

● Shareholder Engagement: Foster greater shareholder engagement and transparency by

providing regular updates on executive compensation decisions and seeking input from
shareholders on compensation policies. This can help enhance accountability and
mitigate potential agency conflicts.

● Board Oversight: Strengthen board oversight mechanisms by enhancing the

independence and expertise of board committees, particularly the Audit Committee. This
 would improve financial transparency, risk management, and compliance, reducing the
likelihood of agency problems.

● Risk Management: Implement robust risk management practices to identify and mitigate

potential conflicts of interest, particularly regarding executive compensation decisions.

This could involve establishing clear guidelines and procedures for compensation review
and approval.

● Corporate Governance Training: Provide ongoing training and development

opportunities for board members and senior executives to enhance their understanding of
corporate governance principles and best practices. This would promote a culture of
compliance and ethical behavior throughout the organization.

By implementing these recommendations, both companies can strengthen their corporate

governance practices, enhance shareholder value, and mitigate the risk of agency problems and
associated costs.

Conclusion
In conclusion, addressing agency problems and reducing associated costs requires a multifaceted
approach that emphasizes performance-based compensation, enhanced shareholder engagement,
strengthened board oversight, robust risk management practices, and ongoing corporate
governance training. By implementing these recommendations, companies like Apex Tannery
Ltd and Bank Asia Ltd can enhance transparency, accountability, and alignment with shareholder
interests. Ultimately, these efforts can lead to improved corporate governance, sustainable
growth, and enhanced shareholder value in the long term.