Determinants of Board Independence in the Banking Sector of Bangladesh

Journal of Economics and Business

ISSN 2615-3726 (Online)

ISSN 2621-5667 (Print)

Published: 20 January 2020

Determinants of Board Independence in the Banking Sector of Bangladesh

Md. Rezaul Karim, Ranjan Kumar Mitra, Ibrahim Khan

University of Dhaka, Bangladesh

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10.31014/aior.1992.03.01.178

Pages: 65-81

Keywords: Board Independence, Corporate Governance, Banking Sector, Bangladesh

Abstract

This paper examines the determinants of board independence in the banking sector of Bangladesh. The study applies a multivariate panel regression analysis for the thirty banks listed with DSE covering the period from 2006 to 2016. We use the proportion of independent directors to total number of directors on the board to measure board independence. Findings of the empirical analysis show that a board is likely to be more independent when independent directors have relevant skill and knowledge as required by prevailing corporate governance regulation. Besides, this paper finds that the boards of larger firms are more independent than those of smaller firms. Moreover, the boards of the levered firms tend to be more independent because debt holders exert intense pressure to implement stringent monitoring mechanisms. Another vital finding of this paper is that board independence is lower for older firms. A plausible reason might be that matured firms devise stricter and more efficient internal control mechanisms that offset the need for independent board. This study also reports findings that are contrary to the traditional belief. For example, we find that longer tenure and prior relationship of independent directors with the firm increases board independence by developing a sense of dedicative attachment of the independent directors with the firm. On the other hand, larger and active boards tend to be an impediment for board independence. Finally, we find no association of board independence with growth opportunity, profitability, and board gender diversity. The findings will have policy implications in designing the role of board independence.

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