Corporate governance and CEO remuneration in Bangladesh

[Truncated] Modern, large corporations are typically characterised by the separation of ownership from control. From an agency perspective, the shareholders (the principal) appoint managers (the agent) to act on their behalf, but the agent may not always act in the best interests of the principal. The principal-agent conflict of interest leads to the incurrence of agency costs – costs that are borne by both parties in order to mitigate this conflict.

My aim was to investigate the effectiveness of corporate governance (CG) practices in managing the agency costs of appointing a CEO to run a business. I address four related questions: (i) Do firms with better CG restrict ‘excessive’ CEO remuneration? (ii) Is the CEO’s remuneration more sensitive to the firm’s financial performance in better governed firms? (iii) Are better governed firms more likely to disclose any information about their executive directors’ remuneration (including that of the CEO)? (iv) Do better governed firms disclose more information about their executive directors’ remuneration?

These four research questions were explored using a sample of listed Bangladeshi companies. I offer four reasons why Bangladesh is an interesting setting. Firstly, the institutional environment, cultural factors and relatively weak enforcement of the law in Bangladesh lead to wide variation in governance practices across firms and over time. Secondly, the spread of firm ownership typically is limited in Bangladesh. It tends to be concentrated among a few individuals, often members of the same family, which can have a significant influence on firms’ CG practices. Thirdly, Bangladesh is a developing economy and it is generally acknowledged that developing countries have been under external pressure to ‘lift their game’ by introducing higher standards of governance. The International Financial Agencies (IFAs), for example, have strongly encouraged the development of CG structures as part of their development funding process. Fourthly, 2006 saw the introduction of a set of Corporate Governance Guidelines in Bangladesh as a unitary code of best practice for listed companies. This was a significant development and provides an interesting opportunity to study the impact of new regulatory guidelines on firms’ practices.