CEO duality and agency cost: evidence from Bangladesh
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CEO duality and agency cost: evidence from Bangladesh Afzalur Rashid
Springer Science+Business Media, LLC. 2012
Abstract This study examines if Chief Executive Officer (CEO) duality reduces the firms’ agency cost in Bangladesh. The agency costs are measured as two efficiency ratios: ‘expense ratio’ and ‘asset utilization ratio’. The finding is that, there is no significant relationship between CEO duality and agency costs. These findings imply that, duality may have given the CEOs enormous powers; it may have reduced the check and balance or board’s ability to exercise the governance (monitoring) function, which is not helpful to enhance firm efficiency. This study contributes to the global debate on CEO duality and provides a new avenue of knowledge on CEO duality and firm efficiency in the context of an emerging economy. Keywords Agency Theory Bangladesh Board CEO Power Stewardship Theory
1 Introduction There is a considerable debate in corporate governance literature on the role of board in disciplining the firm management. The board’s ability to exercise the governance function depends on a number of board attributes, such as the distribution of powers between the board Chair and the Chief Executive Officer (CEO) (Pearce and Zahra 1991; Finkelstein and Hambrick 1996; Kakabadse et al. 2006); board size (Chaganti et al. 1985; Zahra and Pearce 1989; Jensen 1993; Hermalin and Weisbach 2003); board of directors’ ability to choose CEO with A. Rashid (&) School of Accounting, Economics and Finance, University of Southern Queensland, Toowoomba, QLD 4350, Australia e-mail: [email protected] URL: www.usq.edu.au
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standard managerial competencies who may demonstrate ‘‘integrity, provide meaning, generate trust, and communicate values’’ (Bennis and O’Toole 2000, p. 171); board independence (Rosenstein and Wyatt 1990; Zahra and Pearce 1989; Gopinath et al. 1994; Dalton et al. 1998; Maassen 2002; Raheja 2005); the extent of influence of external environment (Pfeffer and Salancik 1978). The board’s ability to monitor management attracted attention following the collapses of Maxwell Publishing Group, BCCI and Poly Peck in the United Kingdom. The Cadbury Code, developed and published in response to these collapses (see OECD 2004; Jonsson 2005), made a number of recommendations for boardroom reforms including the structural independence of the board. It recommends that, ‘‘there should be clearly accepted division of responsibilities at the head of the company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decisions.’’ The board’s ability to monitor management attracted renewed attention following the wave of mega corporate collapses that broke out in early 2000s, such as the collapse of Enron, WorldCom and HIH insurance (see Mizruchi 2004, p. 614; Brick et al. 2006, p. 421; Braun and Sharma 2007). It is alleged that board’s inability to monitor management within these corporations was due to insufficient monitoring as the management
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