Corporate Governance And Reporting An Empirical Study Of The Listed Companies In Bangladesh

Journal of Business Studies, Vol. XXVIII, No.1, June 2007

Corporate Governance and Reporting: An Empirical Study of the Listed Companies in Bangladesh

Md. Hamid Ullah Bhuiyan* Pallab Kumar Biswas**

Abstract: Corporate governance is a burning issue now-a-days. In Bangladesh, a number of attempts have been made on part of different governmental and non-governmental institutions for ensuring better corporate governance. Considering the importance of this issue, this paper has tried to examine the actual corporate governance practices in the listed public limited companies by considering 45 disclosure items. A random sample of 155 listed Public Limited Companies (PLCs) has been taken for this purpose. To facilitate the analysis, a Corporate Governance Disclosure Index (CGDI) has been computed and a number of hypotheses have been tested. The mean and standard deviation of CGDI have been found to be 56.04 and 17.20 respectively. In this study, significant difference has been found to exist among the CGDI of various sectors. Financial sector has been found to make more intensive corporate governance disclosure than the non-financial sector. In general, companies have been found to be more active in making financial disclosures rather than non-financial disclosures. Multiple regression result shows that corporate governance disclosure index is significantly influenced (at 5% level of significance) by local ownership, the SEC notification, and the size of the company. Belonging to financial or non-financial institution, age, multinational company, and size of the board of directors are not found to have any significant impact on corporate governance disclosure. Keywords: Corporate Governance, SEC notification, financial disclosure, multinational company.

Introduction Corporate governance has evolved and grown significantly in the last decade. Following the Enron Collapse there has been an increased emphasis on various aspects of corporate governance, including its disclosure aspect. Numerous countries have already issued corporate governance codes and the recommendations of these codes that typify “good” corporate governance undoubtedly contribute towards increased transparency and *

Md. Hamid Ullah Bhuiyan, Assistant Professor, Department of Accounting & Information Systems, University of Dhaka, Dhaka-1000, Bangladesh. ** Pallab Kumar Biswas, Lecturer, Faculty of Business Administration, Eastern University.

Electronic copy available at: http://ssrn.com/abstract=987717

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disclosure (Mallin, 2002: 253). In case of Bangladesh, the Securities and Exchange Commission (SEC), Bangladesh Bank (BB), the Institute of Chartered Accountants of Bangladesh (ICAB), Bangladesh Enterprise Institute (BEI), the Institute of Cost and Management Accountants of Bangladesh (ICMAB) are some of the pioneer bodies working for ensuring better corporate governance in the country. Their efforts include publication of code of corporate governance for Bangladesh, different reports, organization of seminars, issuance of notification etc. Hence, the main motivation of the current study is to explore whether listed public limited companies in Bangladesh are paying attention to all these arrangements and to what extent such attention is being resulted in annual report disclosure. With this end in view, this article at first briefly discusses various aspects of corporate governance framework. Considering all these aspects, different disclosure issues have been selected to examine the actual corporate governance practices in Bangladesh. “The foundation of any structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system, and funds will flow to the centers of economic activity that inspire trust.” This is a famous quote made by Sir Adrian Cadbury (2000: vi) explaining the importance of corporate governance disclosure. Without adequate reporting mechanisms, shareholders and others cannot be confident that the affairs of the company are being run in a prudent manner for their benefit. Also, there is inadequate assurance that the checks and balances in place are effective. So the main objective of this study is to identify the extent of corporate governance disclosure by Bangladeshi Companies in the annual reports. This study is restricted to the public limited companies listed with the Dhaka Stock Exchange (DSE). This paper is organized into seven sections. The following section offers a discussion on the conceptual framework of corporate governance. Section three focuses on the environment of corporate governance in Bangladesh. The fourth section deals with the historical aspect of corporate governance and the literature review. Section five presents the data collection and research methodology. The sixth section discusses data analysis and research findings. The final section concludes the paper with the scope of future research. Corporate Governance: The Conceptual Framework The essence of corporate governance is about how owners (principals) of firms can ensure that the firm’s assets (and the returns generated by those assets) are used efficiently and in their best interests by managers (agents) delegated with powers to operate those assets. This problem is intrinsic to any arrangement where owners themselves do not undertake the management functions directly. The corporate governance problem arises due to the existence of separation of ownership and control

Electronic copy available at: http://ssrn.com/abstract=987717

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rights, informational asymmetry, and incomplete or state-contingent contracts (Lin, 2001:5). In such a regime, the prerequisite for effective corporate governance involves: Alignment of risk-bearing and control (e.g. rights of shareholders in appointing management, approval of strategy and cash-flow); Monitoring and oversight of management and firm’s performance based on transparency, regular and reliable disclosures, and internal checks and balances; and Incentives (managerial incentives to enhance effort and align interests of management with those of owners). It is generally accepted that the governance problem entails a tension between accountability and managerial initiative i.e. between the need for directors or management to be accountable to shareholders on one hand and the need for management to have the discretion to maximize profits. An apt analogy (with apologies to the Cadbury Report) is in terms of unleashing the tiger (management) into the jungle of the market to seek and exploit opportunities while ensuring that the tiger brings home the meat without consuming it all himself, or that it does not eat up the owner in the process (Lin, 2001:6). To address the corporate governance problem in practice, owners (and stakeholders) need to devise a governance system comprising effective mechanisms of control, oversight and monitoring over management and of incentives for management to behave in the owners’ interest. Such corporate governance system can be perceived as institutional attempts to create a structured dialogue between companies and their shareholders and stakeholders with the purpose of paving the way for understanding the company’s strategic and operational goals, including critical success factors for achieving those goals (Parum, 2005:702). Lin (2001) identifies a number of variables which constitute the design parameters. The most critical of these include the scope of accountability and the desirable purpose and benefits which determine the specific objectives or measures and criteria of whether governance is good or bad. In a good corporate governance system, management should be accountable to not only shareholders but also other stakeholders such as employees, creditors, major suppliers and customers. The scope of accountability can be broadened even further to include those with an indirect stake, i.e. “society” as a whole. Closely related to the question of “to whom should the board be accountable” is the issue of the advantages of corporate governance. A narrow conception of corporate governance deals with safeguarding the interests of shareholders (and other security claimants). This seems pretty much to be the dominant view among firms and institutional investors in AngloSaxon countries. Good corporate governance in this context involves mainly enhanced capacity for shareholders to perform oversight and monitoring functions through, for example, approving (or setting) strategic and financial objectives, management selection, decisions on directors remuneration, profit distribution, board representation, etc.

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A broader conception includes the narrow conception described above but in addition considers the efficiency aspects from the perspective of national economic vitality. So Lin (2001) suggested that the merits and demerits of any corporate governance system should be evaluated not only in terms of adequacy of shareholders’ interests but should include its capacity to raise financing (which may or may not be in the interests of existing shareholders), productivity and competitiveness which contribute to the dynamism of the economy overall. The broad conception of corporate governance would imply going beyond using shareholder value as the sole objective or criteria of satisfactory governance. 1The choice of a judicious blend of indicators of firm performance and prospects, in this case, depends on either the myopia or “vision” of stakeholders, especially institutional investors, in making investment decisions. Even so, a long-term view requires considerable effort and skills in monitoring and analysis. Under this long range view, a system of corporate governance involves a firm’s three constituent decision-making bodies: the shareholders’ annual general meeting (AGM), the board of directors, and management. It is often assumed that this architecture represents the corporate governance of a firm. But Lin (2001) argues that it only provides a skeletal structure upon which corporate governance could be exercised, and the effectiveness - indeed the very existence of - corporate governance depends entirely on how the skeletal structure is fleshed out. How it is fleshed out depends on (a) Statutory provisions, particularly those relating to the definition and exercise of shareholders’ rights, oversight mechanisms and disclosure, contained in the legal and other (especially financial and securities) regulatory framework of the country or jurisdiction and replicated - and further developed - in the charter of the company; (b) Monitoring, compliance and enforceability of these legal and other statutory requirements. However, how governance works in practice and more crucially how effective it is, depends on a host of internal characteristics (ownership and capital structure) and external factors which act as enforcement mechanisms, of which the most important are (c) Ownership concentration or dispersal, which determines whether a firm is tightly controlled by a group of insiders (e.g. majority shareholders) or by a large number of widely dispersed small shareholders governing largely through markets (e.g. share price movements), and the balance of powers and interests between majority/insiders and minority/outsiders shareholders; (d) Board attributes, such as the composition, representativeness, independence and qualification of board members, as well as the existence of sub-committees (headed by non-executive or independent 1

Consider, for example, a profitable firm, delivering high shareholder value to its investors, but engaged in activities considered by some as socially and ethically irresponsible: such as, say, environmentally damaging or arms sales to repressive regimes. In the shareholder model, the firm may be said to have good corporate governance (in delivering high shareholder value), but in the stakeholder model, it can be said to be badly governed (Lin, 2001: 8).

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directors) on audit, nomination and remuneration, to ensure that it can be an effective oversight body on behalf of stakeholders; (e) Supporting checks and balances, such as independent share registrars, company secretaries, internal financial controls and accurate and timely information accessible to board members; (f) Accounting standards (including auditing) and conventions which determine the type, detail and quality of information disclosed to ensure transparency; (g) Product market competitiveness to instill commercial discipline on management; (h) Efficiency and competitiveness of financial markets, providing financial discipline and incentives, especially equity markets where shareholders can exercise their “vote” in governance through entry and exit, and which provides a market for corporate control as well as monitoring functions performed by institutional investors; (i) Competitiveness of managerial job markets which make managerial jobs “contestable” and thereby elicit managerial effort; and (j) Cultural and historical factors, which, amongst other things, strongly influence business organization, practices as well as the passivity or activism of shareholders in governance. Thus, both internal and external enforcement mechanisms impact on corporate governance (Lin, 2001:5-9). Depending on the above mentioned enforcement mechanisms, different disclosure issues have been identified as a proxy for good corporate governance in Bangladesh and attempts have been made to find out the nature and extent of disclosure by the listed public limited companies in Bangladesh. Corporate Governance in Bangladesh The history of corporate governance in Bangladesh is not very old. About 60 years back from now, the land, which is now Bangladesh, had a few bodies incorporated under the Companies Act. At the time of independence of Bangladesh, many industries and business houses owned by non-locals were abandoned and the government of Bangladesh took possession of these industries by establishing corporate bodies like BCIC (Bangladesh Chemical Industries Corporation) and BSEC (Bangladesh Steel and Engineering Corporation). During 80s, Bangladesh Govt. took privatization policy and since then, private sectors have a substantial impact on the pace and pattern of economic growth (ICAB, 2003:6-7). In Bangladesh, though no remarkable corporate scandals emerged to feel the necessity of corporate governance, yet the stock market crush of 1996 is worth remembering.2 Corporate governance is a function of regulation of corporate bodies through legislation or self regulatory mechanisms such as those of stock exchanges. The current legal 2

The DSE all shares price index rose to 3648.75 on 5th November, 1996 starting from 865 on 1st June, 1996322% increase within a spate of only 158 days. The Market Capital that was T, 56.52 billion by end 1995 reached Tk. 168.11 (137% increase) by end 1996 (Mazumdar, 2006:64).

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framework surrounding corporate entities in Bangladesh include: The Companies Act 1994, Bangladesh Bank Order 1972, The Bank Companies Act 1991, Financial Institutions Act 1993, The Securities and Exchange Ordinance 1969, The Securities and Exchange Commission Act 1993, and The Bankruptcy Act 1997 (BEI, 2003: 28-29). The Companies Act 1994 is the law which governs incorporated entities in Bangladesh. The Companies Act 1994 plays a major role in corporate governance. It defines the rights of not only majority shareholders but minority shareholders as well. The act provides for certain supervisory functions to be undertaken by the shareholders in the form of these rights to attend meetings, appoint and remove directors, and to obtain financial information as well as approve the balance sheet annually. It also provides for various mechanisms for shareholders to enforce these rights, the principal among them being a suit for minority protection under section 233 of the act (vide Afroze, and Jahan, 2005:189). Besides, Director’s report in the annual report is prepared under section 184 of the Companies Act 1994, various issues relating to directors’ ( such as appointment, removal, vacation etc) are addressed through section 90 to 110, issues relating to management and administration are addressed through section 77-89. All these reflect various issues of corporate governance. The Securities and Exchange Commission (SEC) has promulgated different orders and notifications from time to time to ensure good corporate governance practice in the listed public limited companies. On 9th January and 20th February 2006, the SEC has issued order (No. SEC/CMRRCD/2006-158/Admin/2-06) and notification (No.SEC/CMRRCD/2006-158/Admin /2-08) for complying with a number of governance codes. By doing all these, SEC strives to stimulate the listed companies to comply the corporate governance guidelines issued by them so that suppliers of funds to assure themselves of getting a return on their investment (Imam, 2006:34). All these guidelines are issued on the basis of “Comply or Explain”. In other words, a company which has not accepted with any of the SEC-issued corporate guidelines should include an explanation for noncompliance in the company’s annual report to the shareholders (Ahmed, 2006:26). Islam (2006) provided a highlight of few regulatory requirements which are of critical significance for proper issuance and orderly trading in securities and also have direct relevance to corporate governance that is presented in a table given in Exhibit-A1. The Institute of Chartered Accountants of Bangladesh (ICAB) has accepted a number of International Accounting Standards (IAS) and International Standards on Auditing (ISA) in Bangladesh as Bangladesh Accounting Standards (BAS) and Bangladesh Standards on Auditing (BSA) respectively. Moreover, it has published a report named “Corporate Governance in Bangladesh” in 2003 after undertaking a study on the present scenario of corporate governance in Bangladesh. In the report, various recommendations have been

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made for the improvement of corporate governance practice in Bangladesh (ICAB, 2003). Besides the above two, some private firms have been working in this field for quite some time in order to ensure better corporate governance. In August 2003, first such initiative was taken by Bangladesh Enterprise Institute (BEI) by conducting a diagnostic study in this field. Based on the study, BEI in March 2004 has published “The Code of Corporate Governance for Bangladesh”. Subsequently, the ICAB has come up with principles and rules to be followed (Mazumder, 2006: 67). Very recently, the Institute of Cost and Management Accountants of Bangladesh (ICMAB) organized a two-day long Conference on “Corporate Governance-Bangladesh Perspective” on March 14-15, 2006. In spite of the existence of the above mentioned regulatory framework, in many cases, the current system in Bangladesh does not provide sufficient legal, institutional, or economic motivations for stakeholders to encourage and enforce good corporate governance practices. As a result, there are few rewards for companies that institute good corporate governance practices and no penalties for failing to do so (BEI, 2003: 1).While there is increasing recognition of the need for corporate governance reform in Bangladesh, the process has been slowed by the policy dimension of reform efforts, which often runs counter to entrenched interests (www.asiafoundation.org). As a result, the poor functioning of financial markets, opaque, unethical, illegal, or simply unprofessional business practices raise the costs of doing business within the economy, distort domestic investment decisions, and impede foreign investment in Bangladesh. Besides, failings in institutions, government agencies, legal enforcement, and market behaviour, Mazumdar (2006) found family owned business, lack of loyalty, misconception about delegation of authority, and missing internal audit function to be the reasons behind poor corporate governance in Bangladesh. Corporate Governance: Historical Overview and Literature Review Governance is a word with a pedigree that dates back to Chaucer and in his day the word carried with it the connotation wise and responsible, which is appropriate. It means either the action or the method of governing and it is in that the latter sense that it is used with reference to companies. Its Latin root, “gubernare” means to steer and a quotation which is worth keeping in mind in this context is: ‘He that governs sits quietly at the stern and scarce is seen to stir.’ (Cadbury, 2002: 1). Though corporate governance is viewed as a recent issue, there is, in fact, nothing new about the concept. Because it has been in existence as long as the corporation itself (Imam, 2006: 32). Over centuries corporate governance systems have evolved, often in response to corporate failures or systemic crises. The first well-documented failure of governance was the South Sea Bubble in the

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1700s, which revolutionized business laws and practices in England. Similarly, much of the securities law in the United States was put in place following the stock market crash of 1929. There has been no shortage of other crises, such as the secondary banking crisis of the 1970s in the United Kingdom, the U.S. savings and loan debacle of the 1980s, East-Asian economic and financial crisis in the second half of 1990s. In addition to crises, the history of corporate governance has also been punctuated by a series of wellknown company failures: the Maxwell Group raid on the pension fund of the Mirror Group of newspapers, the collapse of the Bank of Credit and Commerce International, Baring Bank and in recent times global corporations like Enron, WorldCom, Pramalat, Global Crossing and the international accountants, Andersen. These were blamed on a lack of business ethics, shady accountancy practices and weak regulators. They were a wake-up call for developed countries on corporate governance. The result is found in different regulatory actions and other reforms.3 Each crisis or major corporate failure – often a result of incompetence, fraud, and abuse- was met by new elements of an improved system of corporate governance (Iskander and Chamlou, 2000:1). Governance has proved an issue since people began to organize them for a common purpose. How to ensure the power of organization is harnessed for the agreed purpose, rather than diverted to some other purpose, is a constant theme. The institutions of governance provide a framework within which the social and economic life of countries is conducted. Corporate governance concerns the exercise of power in corporate entities (www.ccg.uts.edu.au). There are probably as many definitions of corporate governance as there are corporations. The earliest definition of Corporate Governance is provided by the Economist and Noble laureate Milton Friedman (1970) (vide Indian infoline, 2001:1). According to him, Corporate Governance is to conduct the business in accordance with owner or shareholders’ desires, which generally will be to make as much money as possible, while conforming to the basic rules of the society embodied in law and local customs (vide Indian infoline, 2001:1). This definition is based on the economic concept of market value maximization that underpins shareholder capitalism. Apparently, in the present day context, Friedman’s definition is narrower in scope. Over a period of time the definition of Corporate Governance has been widened. It now encompasses the interests of not only the shareholders but also many stakeholders. In fact, a much-quoted definition 3

In the UK the collapse of the Maxwell publishing group at the end of the 1980s stimulated the Cadbury code of 1992, and cases through the 1990s such as Poly Peck, BCCI and recently Marconi stimulated a series of further enquiries and recommendations. The cases of Enron, World Com and Tyco have initiated major debate and legislation in the US.. In Germany the cases of Holtzman, Berliner Bank, and more recently Babcok have served the same catalytic role as did the collapse of HIH (a large insurer), Ansett Airlines and One Tel in Australia.1 Credit Lyonnaise and Vivendi have raised many governance issues in France; and in Switzerland the events at Swissair have had a similar effect. Large failures of both financial and non financial institutions in Japan have also led to regulatory responses and to legal changes (OECD, 2003b:9).

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of corporate governance comes from Sir Adrian Cadbury, father of the core of the UK Combined Code on corporate governance which regulates corporate governance in UK companies. His definition of corporate governance is “the system by which business corporations are directed and controlled (Cadbury, 2002: 1).” But the most authoritative functional definition of corporate governance is provided by the OECD which is consistent with the definition provided by Sir Adrian Cadbury: "Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance” (OECD, 1999: 9). Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society. The incentive to corporations and to those who own and manage them to adopt internationally accepted governance standards is that these standards will help them to achieve their corporate aims and to attract investment. The incentive for their adoption by states is that these standards will strengthen the economy and discourage fraud and mismanagement (Cadbury, 1999: VI).The principal characteristics of effective corporate governance are: transparency (disclosure of relevant financial and operational information and internal processes of management oversight and control); protection and enforceability of the rights and prerogatives of all shareholders; and, directors capable of independently approving the corporation’s strategy and major business plans and decisions, and of independently hiring management, monitoring management’s performance and integrity, and replacing management when necessary (vide Gregory, 2000: i). All these characteristics are there to achieve the broad objective of good corporate governance: maximizing long term shareholder value (Ahmed, 2006: 24). A good number of theoretical and empirical researches on corporate governance disclosure have been undertaken throughout the globe due to the continuing emphasis on this. In conducting the research on corporate governance, annual reports have been used as a main source of information. Karim et al. (1996) argued that annual reports of the companies should be considered as the most important source of information about a company and they used that for a variety of reasons. Bushman and Smith (2001) argued

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that a fundamental objective of corporate governance research in accounting is to provide evidence on the extent to which information provided in financial accounting systems mitigate agency problems. Research in the field of corporate governance disclosure during the recent years has mainly focused on the disclosure practices found in the annual reports by determining the extent of corporate governance disclosures in the annual reports of the companies of a country. In the Twenty First Session of International Standards of Accounting and Reporting (Geneva 27-29 October, 2004) UNCTAD Secretariat presented a report (which was prepared after conducting a survey on 30 companies representing different geographical regions and industry) that found increasing convergence among national and international corporate governance codes and guidelines but it also reported significant deviation in terms of disclosure practices and content of disclosure. Gompers et al (2003) used the incidence of 24 governance rules to construct a “Governance Index” to proxy for the level of shareholder rights at about 1500 large firms in the USA during the 1990s. They found that firms with stronger shareholder rights had higher firm value, higher sales growth, higher profits, lower capital expenditures, and made fewer corporate acquisitions. But except for size and, to a lesser extent, ownership structure, Réal Labelle (2002) did not find consistent and significant relations between disclosure quality of governance practices and firm performance or other corporate governance variables such as the proportion of unrelated director, the CEO’s plurality of offices and the level of financing activity in Canada. Similarly, a number of attempts have been made by various researchers throughout the world regarding the determinants of corporate governance. Durnev and Kim (2005) provide empirical and theoretical evidence that companies with greater growth opportunities, greater needs for external financing, and more concentrated cash flow rights practice higher quality governance and disclose more and the strength of their influence depends in part on the country’s legal environment. On the other hand, Barucci and Falini (2005) find that in Italian financial market, governance features are affected by shareholders’ composition, balance sheet data and company features. Anand et al. (2006) provide empirical evidence that the absence of a large empirical block holding and a high need for external financing are the firm characteristics associated with the adoption of the Canadian guidelines and when it comes to voluntarily adopting the U.S. Sarbanes-Oxley Act (SOX) provisions, firm size becomes an important determinant. From the context of Bangladesh, Hossain et al (2005) made a study on voluntary disclosures on corporate social responsibility in Bangladesh by taking 75 sample companies. They found that only 9 companies (12%) disclosed several issues on corporate governance in their annual reports covering issues like Internal Financial Control (including management structure, financial reporting, asset management, functional reporting), Statement of director’s responsibilities for preparation and

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presentation of financial statements, Board Committees and Rights and relations with shareholders. Besides, they also found 5 companies to highlight legal issues, 9 to disclose about business ethics, 7 companies to report on the shareholder’s dialogue, 5 to report on community relations, 14 to report on environmental sustainability and no companies to report on human rights and labour standards. Al-Amin and Tareq (2006) found significant statistical relationship between company size measured by annual turnover and corporate governance disclosure after a survey of 30 companies. After conducting a questionnaire survey of 151 companies in 2002, Centre for Policy Dialogue (CPD) reported the adoption of corporate governance policy in 66.7 percent of the companies and compliance with national and international benchmarks in 43.3 percent of the companies. Hossain and Khan (2006) conducted an extensive survey of 100 sample companies of DSE and/or CSE (Chittagong Stock Exchange) and found significant relationship between corporate governance disclosures and some corporate attributes such as multinational affiliation, linkage of auditor with big four audit firms, concentrated ownership by sponsors and banking companies influence. In their survey, they considered 25 issues in developing corporate governance disclosure index. The present study has been conducted considering 45 different issues that not only cover these 25 issues but also other important issues considered by UNCTAD (2004). Methodology of the Study The main objective of this study is to examine the level of corporate governance disclosures of the sample companies. So a disclosure index has been developed (mainly on the basis of the papers prepared by the UN secretariat for the nineteenth session of ISAR (International Standards of Accounting and Reporting), entitled “Transparency and disclosure requirements for corporate governance” and the twenty second session of ISAR, entitled “Guidance on Good Practices in Corporate Governance Disclosure”) for the companies under study. Issues in corporate governance disclosure are classified into 5 broad categories. Financial disclosures, non-financial disclosures, annual general meetings, timing and means of disclosure, and best practices for compliance with corporate disclosure. Under non-financial disclosures, different headings such as company objectives, governance structure and policies, members of the board and key executives, material issues regarding employees, environmental and social stewardship, material foreseeable risk factors, and independence of auditors are used. Under all these broad and subcategories, a total of 45 issues have been considered (See Exhibit A-2 in Annexure). For this research, randomly selected 155 listed public limited companies have been considered. The companies were classified into 11 categories under 2 broad headings:

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Financial sector and non-financial sector. Financial sector includes banks and insurance companies. Non-financial sector includes engineering, food & allied, fuel & power, jute, textile, pharmaceuticals & chemical, paper and packaging, service and miscellaneous. The disclosure practices of selected companies are analyzed as of July1, 2006. The primary sources used for the survey include company annual reports and internet. With the help of the list of disclosure issues, the annual reports of the companies were examined. A dichotomous procedure was followed to score each of the disclosure issue. Each company was awarded a score of ‘1’ if the company appears to have disclosed the concerned issue and ‘0’ otherwise. The score of each company was totaled to find out the net score of the company. A corporate governance disclosure index (CGDI) was then computed by using the following formula: Total Score of the Individual Company Maximum Possible Score Obtainable by Company

CGDI= × 100

By using the total CGDI the following hypotheses have been tested: Hypothesis 1

There is no significant difference among the CGDI of 11 sectors.

Hypothesis 2

CGDI of financial and non-financial sectors are equal.

Hypothesis 3

Companies do not differ significantly in avg. financial and nonfinancial disclosure index.

Hypothesis 4

There is no significant association between a number of corporate attributes (viz, size of the company, local ownership (which includes public ownership, institutional ownership, and government ownership), multinational company, belonging to financial or nonfinancial institution, age, the SEC notification, size of the board of directors) and the extent of corporate governance disclosure.

To provide primary evidence of the impact of corporate attributes on corporate governance disclosures of different companies in Bangladesh, this paper uses the following multiple regression technique. CG = C + β1LNSA+ β2LOCALt + β3MNCt + β4FINt + β5AGEt + β6NOTIt + β7BODt + et

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Table 1 Operationalisation of the Research Variables Variable

Acronym

Operationalisation

Expected Sign

CG

Total score obtained by the company divided by the maximum score obtainable by one company multiplied by 100

Sales (Proxy for size)

LNSA

Natural log of the sales of the company

+

Local Ownership

LOCAL

The proportion of general ownership (summation of public, institutional and government ownership) in the company

+

Dependent Variable: Corporate Governance Disclosure Index

Independent Variables:

Multinational Company

MNC

Financial Institution

FIN

Age

AGE

The Securities and Exchange Commission Notification

NOTI

Board Size

BOD

Dichotomous with 1 if the company is a multinational one and 0 otherwise Dummy Variable, 1 if the company is a financial institution and 0 otherwise Years of operation in the market as a listed public limited company Dichotomous with 1 if the AGM of the company is held after the SEC notification (After March 2006) and 0 otherwise Number of directors in the board

+ +

+

+

+

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Size: The size of the reporting company has been a major variable in most studies examining disclosure variability and several measures of size may be annual sales, total assets, fixed assets, paid up capital, shareholders equity, capital employed, and the market value of the firm (Karim, 2006: 97). In this study, natural log of sales has been used as the proxy for the size of the company. Ownership pattern: In Bangladeshi PLCs, ownership pattern include sponsor ownership, institutional ownership, government ownership, foreign ownership and public ownership. In this study local ownership (which includes public ownership, institutional ownership, and government ownership) has been used with the expectation to find any relationship with corporate governance disclosure. Company: In Bangladesh at present, a number of multinational companies are operating. Because of their operation in different parts of the world, it is expected that multinational companies will make more corporate governance disclosure than local companies. So a dummy variable has been taken where 1 for the multinational listed companies in Bangladesh, and 0 for other companies. Age: In this paper, attempts have been made to find out if there exists any relationship between the number of years of operation as a listed public limited company in the market and the extent of corporate governance disclosure. Age has been calculated by finding the difference between the annual report year and the year of listing. The Securities and Exchange Commission Notification: The Securities and Exchange Commission (SEC) imposed several conditions on 20th February, 2006 with which each and every public limited company is subject to abide by on ‘comply or explain’ basis. So it is expected that the company whose AGM took place after March, 2006 would make more corporate governance disclosure than other companies whose AGM took place before March, 2006. Financial Institution: In Bangladesh, Bangladesh Bank pays special attention to financial institutions (banks and leasing companies) by different circular, audit, notification etc. So in this study, attempts have been made to add one dummy variable (1 if the company is a financial institution) in the multiple regression model to find significant relationship with corporate governance disclosure, if any. Board Size: Large boards are usually more powerful than small boards and, hence, considered necessary for organizational effectiveness (Florackis and Ozkan, 2004). For instance, as Pearce and Zahra (1991) point out, large powerful boards help in strengthening the link between corporations and their environments, provide counsel and advice regarding strategic options for the firm and play crucial role in creating corporate identity. So the board size has been considered in the multiple regression model.

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Other than all these variables, natural log of assets (LNASST) has also been used to develop a correlation matrix. Since multiple regression is used to test the hypotheses, assumptions of multicollinearity, normality, homoscedasticity and linearity are also tested. The Pearson correlation matrix is used to test the multicollinearity assumption, while an analysis of residuals, plots of the standardized residuals against predicted values are conducted to test for homoscedasticity, linearity and normality assumptions. Before going for testing the above mentioned hypotheses, a Run Test has been performed for testing the randomness of observed data. Besides Run Test, several statistics techniques such as Kolmogorov-Smirnov goodness of fit test, Wilkoxon Rank Sum W test, Analysis of Variance (ANOVA) have been applied in this study. For checking normality of population Kolmogorov-Smirnov goodness of fit test has been conducted and Wilkoxon Rank Sum W test has been conducted to test the equality of means where normality of population can’t be ensured. Findings of the Study While there is increasing tendency to disclose different aspects of corporate governance, the disclosure practices and the content of disclosures among the selected companies varied greatly. Table 2 Frequency Distribution of Total Score by Individual Company Total Score

N

Cum. N

%

Cum. %

12-16

8

8

5.16

5.16

16-20

37

45

23.87

29.03

20-24

39

84

25.16

54.19

24-28

16

100

10.32

65.52

28-32

14

114

9.03

73.55

32-36

17

131

10.96

84.51

36-40

20

151

12.90

97.42

40-44

4

155

2.58

100.00

Source: Compiled and Computed from the Annual Report of the Concerned Company

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Journal of Business Studies, Vol. XXVIII, No.1, June 2007

Table 3 Frequency Distribution of CGDI CGDI

N

Cum. N

%

Cum. %

30-40

29

29

18.710

18.710

40-50

49

78

31.61

50.32

50-60

17

95

10.97

61.29

60-70

19

114

12.26

73.55

70-80

17

131

10.97

84.52

80-90

24

155

15.48

100.000

Source: Compiled and Computed from the Annual Report of the Concerned Company

As seen in above tables (Tables 1, 2), there is a significant range in the disclosure item scores among the selected companies. With a maximum of 45 disclosure items and the average score of 25, or 56%, four companies received the highest score of 40 or 89% (from four different sectors with their AGMs after March 2006). At the low end, eight received a score of 15, or 33% (from three different sectors with their AGMs before March 2006). Test result of Run Test (Exhibit-A4) asserts that null hypothesis of randomness of data can’t be rejected as P-value is more than α value which is 5%. The majority of the selected companies have disclosed information that is consistent with the disclosure items checklist. In general, the highest scores are associated with those disclosure items that address financial results, accounting policies and the existence of various governance structures and mechanisms. At the high end of the range, all selected companies have disclosed financial and operating results, size, composition and change in board structure, compliance with different rules and accounting policies, information regarding ownership structure, auditor appointment & rotation, auditor fees and 99% have disclosed the information regarding shareholder right (Exhibit-A2). Lower scores concerned with various aspects of the board and key executives relating to organizational hierarchy (16%), directors’ biography (6%), remuneration committee (14%), as well as existence of a code of conduct (6%). In order to find out if the companies emphasize more on financial disclosures rather than on non-financial disclosures, the following hypothesis has been tested:

Corporate Governance and Reporting: An Empirical Study

17

Ho: Companies do not differ significantly in avg. financial and non-financial disclosure index. H1: Companies differ significantly in avg. financial and non-financial disclosure index. The result is given in Exhibit-A5 and A7. From the exhibits, it is found that null hypothesis of equal variance can’t be rejected (P value, 0.188, is more than α value of 5%). Under the assumption of equal variance, the null hypothesis of equality of means can’t be accepted. It means that companies do differ significantly in average financial and non-financial disclosure index. In this paper, the selected companies have been classified into 11 sectors. The reason behind classification is to find out extent of disclosure by different sectors. The sector wise disclosure is shown in the following table:

Table 4 Sector-wise CGDI Distribution No. of Sector

Avg.

Kolmogorov-

Companies

Minimum

Maximum

CGDI

S.D.

Smirnov z

P value

Miscellaneous

22

33.33

88.89

55.35

16.41

0.93

0.36

Service

3

44.44

77.78

56.30

18.64

0.63

0.82

Jute

3

37.78

42.22

39.26

2.56

0.67

0.77

Fuel & power

5

42.22

82.22

60.00

19.53

0.71

0.70

Pharmaceuticals

15

37.78

88.89

62.22

17.07

0.63

0.82

Textile

20

33.33

88.89

55.67

23.75

1.18

0.12

Engineering

15

37.78

82.22

54.67

14.30

0.77

0.60

Food

24

33.33

82.22

46.28

14.75

0.91

0.37

Paper

4

33.33

35.56

34.44

1.28

0.61

0.85

Insurance

18

40.00

71.11

53.46

10.11

0.96

0.32

26

44.44

88.89

68.35

11.39

0.80

0.55

56.04

17.20

Financial Institution

N=155

Source: Computed and Compiled from Annual Reports

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Journal of Business Studies, Vol. XXVIII, No.1, June 2007

The above table shows that among 11 sectors considered, banking sector has ranked the highest (69%) and paper and packing has ranked the lowest with only 34% disclosure. Considering these 11 sectors hypothesis has been tested to find out whether there is any difference in the average CGDI among these sectors. Ho: There is no significant difference in the avg. CGDI among various sectors. H1: Significant difference exists in the avg. CGDI among various sectors. The test result is shown in Exhibit-A8. Test result shows that null hypothesis of no significant difference in the avg. CGDI among various sectors can’t be accepted. In other words, various sectors differ significantly among themselves in respect of average CGDI. In Bangladesh, financial sectors (Banks and Insurance companies in this study) are subject to close monitoring and supervision by Bangladesh Bank and the SEC. As a result, more restrictions are imposed on this sector while the non-financial sectors are a little bit relaxed to some extent. So, attempts have also been made to distinguish financial and non-financial sectors’ CGDI. Ho: There is no significant difference between financial and non-financial sector avg. CGDI. H1: Significant difference exists between the financial and non-financial sector avg. CGDI. The result is given in Exhibit-A5 and A7. At 5% level of significance, null hypothesis of equal variance can’t be assumed because significance value (.036) is less than the α value of 5%. By assuming un-equal variance, null hypothesis of equality of means can’t be accepted at 5% level of significance. So null hypothesis of difference in average CGDI between financial and non-financial sector can’t be accepted. Finally, attempts have been made to find out the impact of various corporate characteristics on the corporate governance disclosure. For this, a multiple regression model is run. The descriptive statistics for the independent and dependent variables are given in Exhibit-A9. A correlation matrix of various independent variables along with dependent variables is constructed which is shown in Exhibit –A10. The correlation matrix shows that other than size of the board and age, all the independent variables are significantly correlated with corporate governance disclosure index at 1% or 5% (MNC) level of significance. High correlation has been found between natural log of asset and natural log of sales (.704), belonging to financial and non-financial institution (FIN) and natural log of asset (0.675). Due to the existence of high correlation between natural log

Corporate Governance and Reporting: An Empirical Study

19

of asset and some other independent variables, natural log of sales has been selected to act as proxy for size of the firm. The results of multiple regression (Exhibit-A11) show that the corporate governance disclosure is significantly influenced (at 5% level) by size of the company (represented by the natural log of sales), local ownership, and the SEC notification. The multiple correlation coefficient (R) is 0.649 (R2 = .421) and the adjusted R2 is 0.393, meaning that more than one-third of the variation in corporate governance disclosure index can be predicted from the selected independent variables. It has also been found that the variable SEC Notification (NOTI) has both the highest correlation with CGDI (0.50) when other predictor variables are ignored (i.e. the highest zero-order correlation) and the highest unique correlation with CGDI (0.420) when its shared variation with the other predictor variables is taken into account (i.e. the highest beta value). The beta weights suggest that other than local ownership (-.185) and age (-.026), all the independent variables are positively contributing towards predicting audit committee disclosure. As the SEC notification has been found to exert significant influence on corporate governance disclosure practice, so it is important to make the compliance of the conditions mandatory in the place of voluntary compliance (comply or explain basis) on part of the listed companies. Again, the positive beta value of natural log of sales implies that larger the size of the firm, the greater will be the extent of disclosure. So law is necessary to reduce the gap between large and small firm level disclosure practice. On the other hand, though local ownership has been found to be a significant independent variable in explaining the extent of corporate governance disclosure practice, its beta value is negative meaning that corporate governance disclosure decreases as local ownership portion increases in a company. So policies should be devised so that corporate governance disclosure increases with the increase in local ownership portion in the company. Moreover, from the multiple regression model output, it has also been observed that belonging to financial or non-financial institution, age, multinational company, and, size of the board of directors do not contribute significantly towards predicting the corporate governance disclosure. It means that for Bangladesh, these variables are not significant contributors towards ensuring better corporate governance at the current moment. The survey result reveals that there are important corporate governance issues on which disclosure is not yet a widespread practice. It is particularly a matter of concern that the biography of the board members, remuneration committee information, code of ethics, directorship information, organizational hierarchy are not being widely disclosed. Given the growing complexity of business operations and of issues that boards have to deal with, the investing public would be interested to know whether members of the board of the enterprises in which they have invested or plan to invest in have sufficient educational and professional qualification to carry out the business, how the remuneration of the employees is being fixed, under which rules and guidelines the board members are

20

Journal of Business Studies, Vol. XXVIII, No.1, June 2007

running the business, to what extent the board members are busy with other companies’ directorship. With respect to certain disclosure items, a number of more detailed findings are drawn from the survey, as discussed below. Financial Disclosures: As has been said earlier, the selected companies are more eager to disclose financial information rather than non-financial information. All the companies have disclosed information regarding financial and operating results and accounting policies. Again, 140 (90%) companies have disclosed information regarding dividend. In case of corporate governance framework, only 28% companies have disclosed their position. Corporate governance framework includes declaration by the board regarding fair presentation of financial statements, consistent application of accounting policies and standards, sound internal control system, ability to continue as a going concern etc. Non-financial Disclosures: Out of 95 companies who’s AGMs were held after March, 2006, 52 companies (55%) have made disclosure of the SEC Compliance Report in the respective annual reports. It means that about 45% companies didn’t make any disclosure regarding Corporate Governance Disclosure requirement of the SEC. The reluctance on part of the companies to comply with the disclosure requirement is an alarming sign, indeed. Again, out of these 52 companies, 15 companies have disclosed only the SEC required checklist. Other 37 companies have disclosed both the SEC required checklist as well as separate statement of corporate governance or separate section for corporate governance to make their position clear regarding various aspects of corporate governance. Out of the 43 noncomplied companies, 13 companies have provided some sort of information in the annual reports regarding corporate governance in a separate statement or separate section. Out of 60 companies who’s AGMs were held before March, 2006, only 6 companies (10%) have provided information regarding corporate governance practice in their organizations in separate corporate governance statement or section. Again, 66 companies (43%) have been found to disclose information regarding company objectives. All the selected companies have disclosed information regarding ownership structure and all but one disclosed information regarding shareholder rights. In the survey, disclosure of voting right and attachment of proxy form is considered as synonymous to shareholder right. The results of the survey show a disparity among selected companies between the disclosure of the existence of governance mechanisms and the disclosure of information on the transparency and effectiveness of these mechanisms. On average 23% of the

Corporate Governance and Reporting: An Empirical Study

21

selected companies have disclosed the existence of some sort of governance structures (existence of audit committee, remuneration committee, and other committees), 33% on composition of the committees and 28% on role and functions of the committees. Again, all the companies have disclosed the composition of the board (including executives and non-executives) but only 23% have disclosed the role and functions of the board. Results also reveal different levels of transparency among selected companies with respect to the board. Only six percent of selected companies have disclosed the qualifications and biographical information of each board member, while 23% of selected companies have disclosed the duties of the directors and 19% disclosed the number of directorships and other positions held by directors. Companies did better in disclosing the remuneration of directors. 96% companies have disclosed this information in the notes to the financial statement. A total of 137 companies (88%) have disclosed information regarding responsibility of the companies towards employees. The disclosure contents vary significantly and include relation with employees, industrial relation, provision of gratuity, provident fund, workers’ profit participation fund etc. Forty one per cent of selected companies have disclosed the company policy and performance in connection with environmental and social responsibility, although in most cases relationships between a company's policy and performance and their impact could not be discerned. The content of disclosure varies among selected companies. A few companies have disclosed specific natural environmental targets, while others disclosed more employee training and health programmes and/or contributions made to the natural environment and community. Results reveal different levels of transparency among selected companies with respect to risk assessment and management and confirm a strong tendency on the part of financial companies to score higher than non-financial companies. Total 36 companies (23%) have disclosed information regarding this. Out of the 36 companies, 24 (94%) are financial companies. Sound internal control system is a pre-requisite for good corporate governance. Out of 155 companies surveyed, only 53 (34%) companies have disclosed information regarding internal control system inside the organization. Most of the companies provided the information in the SEC Checklist. Though it is a general practice to disclose the notice of AGM and the agenda of the AGM in the annual report, 3 companies have been found without such disclosure. As a result, from the annual report it is not possible to find out the matters to be discussed or decisions to be taken in the AGM. 63 companies (41%) have disclosed information regarding number of board meetings held during the last financial year. Out of these companies, 38 companies have been found to disclose each and every director’s attendance in the board meetings as well. Though internet is not so widespread in our country at the current moment, still 68 companies (44%) have disclosed information

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Journal of Business Studies, Vol. XXVIII, No.1, June 2007

regarding financial position and/or annual report in their website. Most of these companies are banks and financial institutions and foreign companies. Not a single company has disclosed in a statement that the board of directors had confidence that the auditors were independent and their integrity had not been compromised in any way. All selected companies disclosed the complete letter of the "Independent Audit Report" in their annual. Again, all the companies disclosed information regarding appointment and rotation of auditors as well as their remuneration. Concluding Remarks and Scope of Future Research This study undertakes content analysis studies. It has been found that a good number of DSE listed companies in Bangladesh have chosen to disclose information regarding various issues of corporate governance with a view to ensure compliance with regulatory requirement and to increase the confidence of various constituents of business as well as society. But only disclosure in the annual reports shall not be enough. Practice of good corporate governance and its appropriate disclosure can facilitate and stimulate the performance of companies, limit the insiders’ abuse of power over corporate resources and provide a means to monitor managers’ opportunistic behaviour. The survey findings show that corporate governance disclosure in Bangladesh is significantly influenced by local ownership, the SEC notification, and size of the company but belonging to financial or non-financial institution company, multinational company, age and size of the board of directors do not have significant impact on corporate governance disclosure. So steps should be taken for mandatory compliance of the SEC notification and for reducing the gap between large and small firms’ disclosure practices. Within the current type of analysis, scope may be widened by covering the corporate governance disclosure practice by Bangladeshi public limited companies over a number of years to find out the extent of importance the organizations are emphasizing on this issue. Moreover, in this article, all the disclosure items are given same weight. Although this helps to reduce subjectivity, the market may place higher emphasis on certain elements of governance. Also, some aspect of governance may be considered to be a basic component or prerequisite to implementing others and thus should be given more weight. Further analysis may also include managerial perceptions studies and stakeholders’ perceptions studies.

Corporate Governance and Reporting: An Empirical Study

23

References Afroze, Sadia, and Mossammet Asma Jahan. 2005. Corporate Governance Practices in Bangladesh. Journal of Business Studies XXVI (2):181-196. Ahmed, Fakhruddin. 2006. Corporate Governance – Bangladesh Perspective. Key note speech provided in ICMAB Conference 2006 on “Corporate Governance-Bangladesh Perspective”: 24-27. Ahmed, J. and W. Karim. 2005. Corpliance to International Accounting Standards in Bangladesh: A Survey of Annual Reports. The Bangladesh Accountant 48(21): 23-41. Al-Amin, and Mohammad Tareq. 2006. Reporting on Corporate Governance as a Voluntary disclosure: A study on the Annual Reports of Bangladeshi Companies. The Bangladesh Accountant 50(23):100-105. Anand, A.I., F. Milne, and L.D. Purda. 2006. Voluntary Adoption of Corporate Governance. bepress legal series Working Paper 1277, http://law.bepress.com/expresso/eps/1277. The Asia Foundation. 2004. Bangladesh. Available at www.asiafoundation.org. ASX (Australian Stock Exchange) Corporate Governance Council. 2003. Principles of Good Corporate Governance and Best Practice Recommendations. Sydney. Barger, Teresa. 2004. Corporate Governance – A Working Definition. International Corporate Governance Meeting – Hanoi. Vietnam – December 6 2004: 1-4. Barucii, E., and J. Falini. 2005. Determinants of Corporate Governance in the Italian Financial Markets. Economic Notes byBanca Monte dei Paschidi Siena SpA, 34(3): 371-405. BEI (Bangladesh Enterprise Institute). 2003. A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh, edited by Farooq Sobhan and Wendy Werner. Dhaka: 1, 28-29. Bushman, Robert M., and Abbie J. Smith. 2001. Financial Accounting Information and Corporate Governance. Journal of Accounting & Economics 32(1-3): 237-333. Cadbury, Adrian. 2002. Corporate Governance and Chairmanship: A Personal View. Oxford University Press Inc. New York: 1 _______. 2000. Overview of Corporate Governance: A Framework for Implementation. The World Bank Group. Washington. D.C.: V-VI. Chwodhury, Dhiman. 1999. Performance Related Pay: An Assessment of Profit Sharing and Employee Share Ownership Schemes. Bureau of Business Research. Dhaka University: 23. CPD (Centre for Policy Dialogue). 2002. Corporate Responsibility Practices in Bangladesh: Results from a Benchmark Study. CPD Occasional Paper Series. Dhaka: 4-7.

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Dhaka Stock Exchange. 2006. Monthly Review. Special Issue(June 2006) 21(6): 36-46. Durnev, A., and E. H. Kim. 2005. To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation. Journal of Finance 60: 1461-1493. Florackis, C. and A. Ozkan. 2004. Agency Costs and Corporate Governance Mechanisms: Evidence for UK Firms. Working paper, University of York. Gompers, Paul A., Joy L. Ishii, and Andrew Metrick. 2003. Corporate Governance and Equity Prices. Quarterly Journal of Economics 118(1): 107-155. Gregory, Holy J. 2000. International Comparison of Corporate Governance Guidelines and Code of Best Practices. New York. Weil. Gotshal & Manges LLP: i. Guillén, Mauro F. 1999. Corporate Governance and Globalization: Arguments and Evidence Against Convergence. Working Paper. The Wharton School University of Pennsylvania. Hossain, Dewan Mahboob, Amirus Salat, and Al-Amin. 2005. Voluntary Disclosure on Corporate Social Responsibility: A Study on the Annual Reports of Bangladeshi Companies. The Bangladesh Accountant 47(20): 28-34. _______, and Arifur Rahman Khan. 2006. Disclosure on Corporate Governance Issues in Bangladesh: A Survey of the Annual Reports. The Bangladesh Accountant 50(23): 95-99. ICAB (The Institute of Chartered Accountants of Bangladesh). 2003. Corporate Governance in Bangladesh. published under The World Bank Financed Project “Development of Accounting and Auditing Standards in Bangladesh” [IDF Grant No. 237304]. Imam, Mahmood Osman. 2006. Firm Performance and Corporate Governance through Ownership Structure: Evidence from Bangladesh Stock Market. Paper presented in ICMAB Conference 2006: 31-47. Indian Infoline. 2001. “What is Corporate Governance?” Nov. 26. 2001. Available at www.indiainfoline.com. Iskander, Magdi R., and Nadereh Chamlou. 2000. Corporate Governance: A Framework for Implementation. The World Bank Group. Washington. D.C. Islam, Mirza Azizul. 2006. Role of Securities and Exchange Commission (SEC) in Corporate Governance. Paper presented in Seminar on Corporate Governance organized by SEC. Karim, A.K.M.W. 1996. The Association between Corporate Attributes and the extent of Disclosure in Bangladesh. Dhaka University Journal of Business Studies 17(2): 89-124. _______, M.A. Islam, and A. Chowdhury. 1996. User’s Perception of published accounts in Bangladesh: An empirical study. Dhaka University Journal of Business Studies 17(1): 211-233.

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Labelle, Réal. 2002. The Statement of Corporate Governance Practices (SCGPS): A Voluntary Disclosure and Corporate Governance Perspective. Available at www.ssrn.com. Lin, Cyril. 2001. Private Vices in Public Places: Challenges in Corporate Governance Development in China. OECD Development Centre. Available at www.oecd.org. Mallin, Christine. 2002. The Relationship between Corporate Governance, Transparency and Financial Disclosure.Corporate Governance: An International Review 10(4): 253-255. Mazumdar, M. Abul Kalam. 2006. Management Accounting for Improved Corporate Governance of Listed Companies. Paper presented in ICMAB Conference 2006 on “Corporate Governance-Bangladesh Perspective.” Nestor, Stilpon and John K. Thompson. 2001. Corporate Governance Patterns in OECD Economies. Is Convergence under way? Available at www.oecd.org. OECD (Organisation for Economic Co-operation and Development). 1999. OECD Principles of Corporate Governance. OECD Publications Service. France: 9-19. Ooghe, Hubert, and Veerle De Vuyst. 2001. The Anglo-Saxon Versus The Continental European Corporate Governance Model: Empirical Evidence Of Board Composition In Belgium. Vlerick Leuven Gent Management School. Parum, Eva. 2005. Does Disclosure on Corporate Governance Lead to Openness and Transparency in How Companies are Managed? Corporate Governance: An International Review 13(5): 702-709. Pearce, J. A. and S. A. Zahra. 1991. The relative power of CEOs and boards of directors: Associations with corporate performance. Strategic Management Journal12: 135-53 Roche, Julian. 2005. Corporate Governance In Asia. Routledge. New York. Shleifer, Andrei, and Robert W. Vishny. 1997. A Survey of Corporate Governance. The Journal of Finance 52 (2): 737-783. University of Technology Sydney. Corporate Governance: The Significance of Corporate Governance. Available at www.ccg.uts.edu.au. UNCTAD (United Nations Conference on Trade and Development). 2005. Guidance on Good Practices in Corporate Governance Disclosure. Available at www.unctad.org. ______. 2004. Review of the Implementation Status of Corporate Governance Disclosures and the Role of such Disclosures in Adding Sustainable Value. Available at www.unctad.org. ______. 2002. Transparency and Disclosure Requirements in Corporate Governance. Available at www.unctad.org.

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ANNEXURE Exhibit - A1 SEC’s regulatory requirements and their interface with the corporate governance: SEC’s regulatory requirement

Relevance to SEC’s function

Relevance to pillars of corporate governance

Detailed information requirement in the prospectus for issuing securities for public subscription under Public Issue Rules 1998

i, ii, iii

ii, iii

Neither the Company, nor any of its sponsors, directors or associates be a bank defaulter prescribed by 12th May 2002 notification as amendment to Public Issue Rules 1998

iii

iv

Information requirement (including audited financial statements) under Issue of Capital Rules 2001 for companies seeking consent to raise capital for whom Public Issue Rules 1998 and Right Issue Rules of 1998 do not apply as well as their continuing requirement to hold Annual General Meeting regulatory and submit annual audited financial statements.

ii, iii

iii

Requirements of Rights Issue Rules 1998 including no bank default or tax default certificates for Sponsors/Directors.

i, ii, iii

iii, iv

The requirement under October 2000 notification of issuer companies to hold annual general meetings regularly in each year of Gregorian calendar and to hold discussions in conformity with Company Act which includes audited annual accounts

ii, iii

i, iii

The requirement under January 2000 notification as amendment to the Securities and Exchange Rules, 1987 that the financial statements of an issuer of a listed company be audited, by a firm of Chartered Accountants consisting of not less than two partners in practice for a minimum of seven years, in accordance with International Standards of

ii, iii

ii, iii

Corporate Governance and Reporting: An Empirical Study

27

Auditing and the provision that, if necessary in public interest, such financial statements may also be audited by an auditor appointed by the Commission Prevention of insider trading defined as trading in securities based on access to Undisclosed price sensitive information under Securities and Exchange Commission (prevention of insider trading) Regulations, 1995

ii, iii

ii, iv

Procedures for acquisition or take-over of substantial shares under notification no. SEC/CMRRCD/2001-25/Administration-1/13 published in Bangladesh Gazette on 15 April 2002;

ii, iii

ii, iii

Eligibility criteria and codes of conduct of merchant bankers under 1996 rules; stock dealers, brokers and authorized representatives under 2002 rules; sponsors, trustees, asset managers and custodians of mutual funds under 2001 rules; and of depository and depository participants under Depository Act of 1999, Depository Regulations of 2000 and Depository (User) regulations of 2000

ii, iii

ii, iii, iv

The requirement for issuer companies to notify SEC and the stock exchanges about any decision about price-sensitive information within half an hour of such decisions under SEC’s order of 19 December 2000

ii, iii

iii, iv

SEC’s function i

=

Proper issuance of securities;

ii

=

Protection of investor’s interest;

iii

=

Capital market development

Source: Islam, 2006: 5-8

regulation

Corporate Governance i and

=

Compliance with regulatory requirements;

ii =

Equitable treatment stakeholders;

iii =

Disclosure of information, accounts;

iv =

Business ethics.

of

material including

28

Journal of Business Studies, Vol. XXVIII, No.1, June 2007

Exhibit-A2 Disclosure Items and their rankings Disclosure Item No. of Companies

Percentage

I. Financial Disclosures: 1. Financial and Operating Results

155

100

2. Related Party Transaction

93

60

3. Critical Accounting Policies

155

100

4. Corporate reporting framework

44

28.39

5. Statement of Director’s responsibilities towards preparation and presentation of financial statements

72

46.45

6. Risk and estimates in preparing presenting financial statements

75

48.39

7. Segment reporting

72

46.45

8. Information regarding future plan

58

37.42

9. Dividend

141

90.97

66

42.58

11. Ownership Structure

155

100

12. Shareholder Rights

154

99.35

13. Size of board

155

100

14. Composition of board

155

100

15. Division between chairman and CEO

101

65.16

16. Chairman Statement

55

35.48

17. Information about Independent Director

50

32.26

18. Role and functions of the board

35

22.58

19. Organizational Hierarchy

24

15.48

20. Changes in Board Structure

155

100

21. Compliance with different legal rules

155

100

22. Audit committee

46

29.68

and

II. Nonfinancial Disclosures: A. Company Objectives: 10. Information about company objectives B. Ownership and Shareholders’ Rights:

C. Governance Structure and Policies:

Corporate Governance and Reporting: An Empirical Study

29

23. Remuneration committee

21

13.55

24. Any other committee

38

24.52

25. Composition of the committee

51

32.90

26. Functioning of the committee

43

27.74

27. Organizational code of ethics

25

16.13

28. Biography of the board members

10

6.45

29. No. of directorship hold by individual members

29

18.71

30. No. of board meeting

63

40.65

31. Attendance in board meeting

38

24.52

32. Director stock ownership

79

50.97

33. Director remuneration

149

96.12

D. Members of the Board and key executives:

E. Material issues regarding employees, environmental and social stewardship: 34. Employee relation/Industrial relation 137 88.39 35. Environmental and social responsibility 63 40.65 F. Material foreseeable risk factors: 36. Risk assessment and management 36 23.23 37. Internal control system 52 33.55 G. Independence of Auditors: 38. Auditor appointment and rotation 155 100 39. Auditor fees 155 100 III. Annual General Meeting: 40. Notice of the AGM 152 98.06 41. Agenda of the AGM 152 98.06 IV. Timing and means of disclosure: 42. Separate Corporate Governance statement/ 56 36.13 separate section for corporate governance 43. Annual report through internet 68 43.87 44. Any other event 114 73.55 V. Best practices for compliance with corporate governance: 45. Compliance with SEC notification 52 33.55 Source: Compiled and Computed from the Annual Reports of different companies listed with DSE

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Journal of Business Studies, Vol. XXVIII, No.1, June 2007

Exhibit-A3 Descriptive Statistics N

Minimum Maximum Mean Std. Deviation

Total Score

155

15

40

25.22

7.74

CGDI

155

33.33

88.89

56.04

17.20

Financial Disclosure Score

155

22.22

100.00

61.93

18.04

Non-financial Disclosure Score

155

30.56

91.67

54.33

18.68

Financial organizations

44

40.00

88.89

62.42

13.45

Non-Financial organizations

111

33.33

88.89

53.51

17.878

Source: Compiled and Computed from the Annual Report of the Concerned Company

Exhibit-A4 Statistics of Test of Randomness (Run Test) of CGDI Test Value of CGDI 55.86

Cases < Test Cases >= Test Value Value 95

60

Total Cases

Number of Runs

Z

P-Value

155

64

-1.792

.073

Source: Test result of data collected from the Annual Report of the Concerned Company

Exhibit-A5: Test for equality of variances and equality of means

Avg. Financial Disclosure Score (µ1) and Non-financial Disclosure Score (µ2)

Levene's Test for Equality of Variances

t-test for Equality of Means Sig.

t

df

Sig.

0.188

3.643

308.00

0.00

3.643

307.624

0.00

F Equal variances assumed

1.741

Equal variances not assumed

Financial Sector avg. score (µ1) and Non-financial Sector avg. Score (µ2) Equal variances assumed

4.486

Equal variances not assumed Source: SPSS output using data from Annual Reports.

0.036

3.073

153.00

0.00

3.468

104.305

0.00

Corporate Governance and Reporting: An Empirical Study

31

Exhibit-A6 Descriptive Statistics of CGDI relating to Financial and Non-financial Disclosure Items CGDI

Kolmogorov-Smirnov z

P value

Financial Disclosure Items

1.891

0.002

Non-Financial Disclosure Items

2.289

0.000

Financial sector

0.917

0.370

Non-Financial sector

2.012

0.001

Source: Compiled and Computed from Exhibit- A2 in the Annexure.

Exhibit-A7 Wilkoxon Rank Sum W test of equality of means Components of Hypothesis

W

Z

P value

Avg. Financial disclosure Index (µ1) and Avg. Non-financial disclosure Index (µ2)

26948.50

3.622

0.000

4330.5

3.58

0.000

Financial Sector avg. score (µ1) and Non-financial Sector avg. Score (µ2)

Source: SPSS result using data of Exhibit-A2 in the Annexure.

Exhibit-A8 ANOVA Table Source of Variation

SS

df

MS

F

P-value

F crit

Between Groups

9751.961

10

975.196

3.918

0.000243

1.897007

Within Groups

35840.051

144

248.889

Total

45592.012

154

Source: SPSS result using data of Table 7 and Exhibit-A2 in the Annexure.

32

Journal of Business Studies, Vol. XXVIII, No.1, June 2007

Exhibit- A9: Descriptive Statistics of dependent and independent variables Minimum

Maximum

Mean

Std. Deviation

Skewness

Kurtosis

33.33 4.84 .04 .00 .00 1.00 .00 3.00

88.89 17.46 1.00 1.00 1.00 45.00 1.00 37.00

56.04 12.22 .5420 .0581 .17 17.30 .61 9.28

17.20 2.12 .19 .23 .38 8.83 .49 6.4

.48 -.49 .09 3.82 1.8 .61 -.47 2.17

-1.10 -.03 .61 12.73 1.24 .141 -1.80 5.34

CG LNSA LOCAL MNC FIN AGE NOTI BOD

Exhibit-A10: Correlation Matrix CG CG

LNASST

LNSA

LOCAL

MNC

FIN

AGE

NOTI

BOD

1

LNASST .528**

1

LNSA

.413**

.704**

1

LOCAL

-.220**

-.065

-.054

1

MNC

.198*

.095

.267**

-.318**

FIN

.349**

.675**

.276**

-.070

-.105

1

AGE

-.003

-.060

.151

-.037

.277**

-.255**

1

NOTI

.500**

.333**

.128

-.014

.127

.360**

-.032

1

BOD

.094

.270**

-.092

-.117

-.033

.250**

-.135

.137

1

1

** p < 0.01; * p < 0.05

Exhibit-A11: Coefficients Unstandardized Coefficients B Std. Error (Constant) LNSA LOCAL MNC FIN AGE NOTI BOD

23.164 2.648 -16.498 1.142 3.834 -.050 14.669 .056 R = 0.649;

Standardized Coefficients Beta

8.035 .574 6.041 5.635 3.514 .134 2.412 .176 R2 = 0.421;

.328 -.185 .015 .084 -.026 .420 .021

t

Sig.

2.883 4.616 -2.731 .203 1.091 -.373 6.082 .316

.005 .000 .007 .840 .277 .709 .000 .753

Collinearity Statistics Tolerance VIF

Adjusted R2 = 0.393

.785 .868 .738 .666 .843 .834 .893

1.274 1.152 1.356 1.502 1.186 1.199 1.120