Abstract
This study strives to investigate the effects of board independence on financial performance of publicly held manufacturing companies in Bangladesh using both accounting (ROA) and market-based (Tobin’s Q) performance measures. Initially, we select 150 manufacturing companies but only 85 companies remain in the study sample after fulfilling the data availability criteria over a period from 2006-2017. The OLS regression model reveals that board independence has positive effects on both ROA and Tobin’s Q, which supports some prior studies (Pearce& Zahra, 1991; Zahra & Pearce, 1989; EzzamelW Hossain, Prevost R Choi, Park Y Joh& Jung, 2012), but the relationship between board independence and Tobin’s Q are not statistically significant. Bangladesh Securities and Exchange Commission (BSEC) has made it a mandatory requirement in the corporate governance guidelines to include1/5th of the total directors as independent directors into corporate boards for bringing transparency and accountability of its affairs without considering the underlying institutional differences. Though board independence is considered as an important mechanism of corporate board practices in most of the developed economies, it is still less appealing in emerging economies, especially in Bangladesh. Keywords: Independent directors; firm performance; effective function . DOI : 10.7176/EJBM/11-33-11 Publication date: November 30 th 2019
Highlights
The average board independence of the sample companies is 1.3943 that reveals on average more than one independent director sits on the corporate board
We investigate whether board independence has any effect on corporate financial performance in the context of Bangladesh
The OLS regression results show that board independence and corporate financial performance are positively associated with each other, which support the findings of some prior studies (Pearce& Zahra, 1991; Zahra&Pearce, 1989; Ezzamel&Watson, 1993; Hossain, Prevost &Roa, 2001; Choi, Park &Yoo, 2007; Joh& Jung, 2012), and the propositions of agency theory
Summary
Following the collapse of some giant corporate entities around the world, most of the companies realize the pivotal roles played by the independent directors as their presence add extra monitoring ability on the corporate board which creates a barrier against the self-interest behavior of the agents (Shleifer&Vishny, 1997).But, an independent director “... should be independent of management and free from anybusiness or other relationship which could materially interfere with the exercise of their independent judgment, apart from their fees and shareholding (The Cadbury Report (992, Code 2.2).” The Cadbury Report in 1992 and the Tyson Report in 2003 discuss in detail the role and duties of an independent director and both the reports mentioned that the presence of independent directors into the corporate board ensures diversity in knowledge and culture which excels the effectiveness of the corporate board. The Cadbury Report in 1992 and the Tyson Report in 2003 discuss in detail the role and duties of an independent director and both the reports mentioned that the presence of independent directors into the corporate board ensures diversity in knowledge and culture which excels the effectiveness of the corporate board. Independent directors can put forward their impartial outlook and actively take part in board discussion and decision-making process. They are supposed to speak for the interest of shareholders especially minority atomistic shareholders and protect their interest. The independent directors should ensure their presence and performance in the board without prejudice and free from any influence of insiders, such as corporate management, executive directors, and the dominant shareholder (if any)
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