Relationship between Internal Corporate Governance Mechanisms and Shareholder Value in the Banking Sector in Bangladesh: The Mediating Effect of Non-Equity Stakeholders

Abstract

Contemporary corporate governance models, namely the shareholder and stakeholder models, offer different advice on how best to manage and maximise the interests of the shareholders in a firm. While the shareholder model of corporate governance emphasises shareholder value maximisation, the stakeholder model of corporate governance emphasises value maximisation for all stakeholders (both equity and non-equity stakeholders). Over recent decades, economists, academics, corporate executives, corporate and non-corporate policy-makers and special interest groups have been involved in a high-stakes debate over the most appropriate corporate governance model for firms. Specifically, the debate concerns whether corporate governance arrangements should be merely oriented to shareholder value or stakeholder value. Both models recognise the significance of the economic success of a firm, but they prescribe different approaches to achieve it. This study aims to shed light on this debate and, hence, advocates an alternative model, namely the “Non-Equity Stakeholder Model of Corporate Governance”, which argues that corporate governance arrangements should be oriented to the value of non-equity stakeholders (e.g. customers, suppliers, employees, society and similar), instead of being oriented exclusively to shareholder or stakeholder value. Accordingly, the proposed model suggests that internal corporate governance mechanisms should be developed in such a way that they positively influence firms’ non-equity stakeholders, which, in turn, have an effect on shareholder value. Hence, the hypothesis of the proposed model is that there is no direct relationship between internal corporate governance mechanisms and shareholder value; rather non-equity stakeholders mediate the relationship. Based on this hypothesis, this study attempts to examine for the first time the mediating effect of non-equity stakeholders on the relationship between internal corporate governance mechanisms and shareholder value in listed banking companies in Bangladesh. There are three key variables associated with this study. Firstly, the “internal corporate governance mechanisms”, which are required of listed banks in Bangladesh under the framework of “comply or explain”, are the independent variables of this study. This study examines nine internal corporate governance mechanisms including: board size, sponsor-directors’ shareholding, institutional shareholding, general public shareholding, independent non-executive directors, CEOs’ compensation, presence of the independent audit committee, size of the audit committee and the frequency of the audit committee meetings. Secondly, “shareholder value” is the dependent variable of this study, measured from three perspectives: (1) from an accounting return perspective, which is termed “accounting return-based shareholder value” and measured by return on equity; (2) from a market return perspective, which is termed “market-based shareholder value” and measured by Tobin’s Q; and finally (3) from an economic profit perspective, which is termed “value-based shareholder value” and measured by economic value added. Finally, non-equity stakeholders are the mediating variables of this study. Four key non-equity stakeholders, namely depositors, borrowers, employees and society associated with commercial banks, are incorporated in this study as mediating variables.