Where Institutional Logics of Corporate Governance Collide: Overstatement of Compliance in a Developing Country, Bangladesh

• Published date: 01 November 2016
• Author: Abdus Sobhan
• DOI: http://doi.org/10.1111/corg.12163
• Date: 01 November 2016

Where Institutional Logics of Corporate

Governance Collide: Overstatement of

Compliance in a Developing Country, Bangladesh

Abdus Sobhan*

ABSTRACT

Manuscript Type: Empirical.

Research Question/Issue: How do conf‌licting institutional logics predict and explain the overstatement of corporate gover-

nance compliance in a developing country?

Research Findings/Insights: A unique opportunity to study overstatement of compliance is available through checklists pub-

lished in annual reports by companies in Bangladesh. A data set contrasting with that availablefrom checklists is collected by a

conf‌idential surveyof company secretaries. Overstatement of compliance with the country’s Corporate Governance Guideline

issued in 2006 is measured by comparing thepublished compliance with that revealed by the survey. There is signif‌icant over-

statement of compliance in annual reports, particularly withrespect to the less directly observable provisionsof the Guideline.

The overstatementis positively associated with controlby a sponsor family and is negatively associated with the presenceof an

institutional investor on the board of directors.

Theoretical/Academic Implications: The logic associated with the regulative framework of an Anglo-American-based corpo-

rate governance model conf‌licts with the logic of a cultural-cognitive institutional framework in a developing country. The

resulting contest of legitimacy motivates f‌irms to overstate compliance with the Corporate Governance Guideline 2006 in an-

nual reports.

Practitioner/Policy Implications: This study highlights the challenges of introducing an Anglo-American model of corporate

governancein a developingcountry. Nationaland international investors shouldseek to understand the reality of the corporate

governance structure of f‌irms in developingcountries, rather than relying solely on compliance reported in annualreports. For

researchers,there may be limitations in usingthe compliance reported in annualreports as a measure of corporate governance.

Keywords: Corporate Governance, Competing Institutional Logics, Overstatement of Compliance, Family Control,

Bangladesh

INTRODUCTION

In Bangladesh, as in otherdeveloping countries, a corporate

governance (CG) guideline has been introduced based on

an Anglo-American approach (Siddiqui, 2010). This brings a

regulative institutional context to the implementation of CG.

In contrast, the country’s traditional governance of family-

controlled f‌irms is based within a cultural-cognitive context

(Uddin & Choudhury, 2008). In this paper, the regulative

and cultural-cognitive contexts and their respective logics,

which Scott (2014: 60) describes as instrumentality and ortho-

doxy, are contrasted in order to predict and explain observed

overstated reporting of CG compliance in Bangladesh.

Prior f‌irm-level studies on CG codes mostly investigate the

level of compliance with nationalcodes and on the association

between the level of compliance with codes and f‌irm perfor-

mance (see the recent review by Cuomo, Mallin, & Zattoni,

2016). In the works on compliance with CG codes,skepticism

is evident around congruity between compliance as stated in

compliance statements and actual governance arrangements.

For example, Akkermans et al. (2007: 1109) cautioned that

compliance rates based on public information may overstate

actual compliance. The level of overstatement could be

signif‌icant in developing countries because institutional

characteristics of developing countries (e.g., cultural

characteristics and the existence of institutional voids) are

not supportive of effective implementation of an Anglo-

American model of CG (Wanyama, Burton, & Helliar, 2009).

Theoretical development also suggests that organizations

choose “window-dressing”to conceal non-conformity with a

formal compliance program when they face competing insti-

tutional logics (Greenwood, Raynard, Kodeih, Micelotta, &

*Address for correspondence: Abdus Sobhan, Department of Accounting and Financial

Management, Newcastle Business School, Northumbria University, Newcastle upon Tyne

NE1 8ST, United Kingdom. Tel: +44(0)1912274272; E-mail: abdus.sobhan@northumbria.

ac.uk

© 2016 JohnWiley & Sons Ltd

doi:10.1111/corg.12163

599

Corporate Governance: An International Review, 2016, 24(6): 599–618

Lounsbury, 2011: 349; Oliver, 1991; Pache & Santos, 2010).

However, investigation of overstatement of compliance with

a national code has not featured to any meaningful degree in

empirical work. The suspicion around the congruity between

compliance as stated in compliance statements and actual

governance arrangements, together with the above-men-

tioned theoretical development, provide the motivation for

the investigation of overstatement of compliance in a develo-

ping country.

The context of Bangladesh is chosen as an example of a

developingcountry because of the interesting datasource that

is available. Although the CG guideline is based upon the

principle of “comply or explain”, the regulator requires a

checklist to be published in annual reports, specifying

“compliance”or “non-compliance with an explanation”with

each provision of the Bangladesh Corporate Governance

Guidelines-2006 (BSEC, 2006). Having observed in a prelimi-

nary review of corporate annual reports that compliance

reported in the checklists appeared to be uniformly high, a

questionnairesurvey was used to establish whether such high

compliance existedin reality. In priorresearch on Bangladesh,

Uddin and Choudhury (2008) used interviews to show that a

traditionalist culture mediates the rationalist/legalist frame-

work of CG. The respondents indicated that it was not

unusual, in family-controlled businesses, to f‌ind family mem-

bers were instructing their accountants to prepare favorable

reports for important stakeholders such as creditors, the

Bangladesh Securities and Exchange Commission (BSEC)

and stock exchange off‌icials. However, the World Bank

(2009) reported a signif‌icant improvement in CG practices,

f‌inding an averagelevel of 82 percent compliance basedupon

information reported in annual reports. Comparing thesetwo

sources indicates a high probability of overstatement of

compliance in annual reports. Overstatement behavior is

hypothesizedin this paper, in terms of competinginstitutional

logics, as the orthodoxy logic of a cultural-cognitive pillar is

competing withthe instrumentality logic of a regulativepillar.

Overstatementis investigated by matching the responsesto

survey questions put to 91 companies in 2012 with the

published accounts of their CG compliance. Results show a

statistically signif‌icant overstatement of CG compliance in

the annual reports. Control by the sponsor family is directly

associated with overstatement. The presence of an institu-

tional investor representative on the board of directors is

inversely associated with overstatement. In both cases the

overstatement is more pronounced in respect of those CG

requirements that are not directly observable externally.

The contribution of the paper is to demonstrate that

observed overstatement behavior can be an outcome of

conf‌lict at the organizational f‌ield level, organizational level

and actor level.On the one hand, the regulativelogic of instru-

mentality causes f‌irms to report high compliance in order to

achieve legallysanctioned legitimacyin the eyes of the domes-

tic regulatory agencies and internationalf‌ina ncial institutions

(IFIs) such as the World Bank, the Asian Development Bank

(ADB), and the International Monetary Fund (IMF). On the

other hand, the cultural-cognitive logic of orthodoxy causes

businesses to avoid implementing CG procedures in reality.

Family-controlled businesses overstate compliance more due

to the “cognitive consistency”of organizational structures of

family-controlled f‌irms and in orderto protect private benef‌its

of control afforded by controlling shareholder family due to

the existence of “institutional voids”. The maintenance of

“cognitive consistency”is explained by Scott (2014: 74) as

the legitimation of the “structural template.”Thepresenceof

an institutional investor representative on the board of direc-

tors modif‌ies the power structure and encourages more com-

pliance with the Anglo-American model. However, even here

overstatementremains, albeit reduced.The instrumental logic

of institutional investors is an incomplete challenge to the

orthodoxy of family-controlled f‌irms. The f‌indings of this

paper suggest that due to coercive pressures from the IFIs

and BSEC, companies attempt to maintain regulative legiti-

macy by overstating compliance in annual reports as they

cannot implement the recommended CG practices due to the

orthodoxy logic of cultural-cognitive institutions. Thus, two

apparently contradictory f‌indings reported by Uddin and

Choudhury (2008) and the World Bank (2009) are reconciled

by this paper.

CORPORATE GOVERNANCE IN

BANGLADESH

This section describes the process of adoption of an Anglo-

American-based CG guideline in Bangladesh, highlighting

aspects of the cultural-cognitive framework of Bangladesh

that were in conf‌lict with an Anglo-American style of CG

guideline.

Following the Bangladesh stock market crash of 1996, the

ADB funded an $80 million project to transform the country’s

capital markets (ADB, 1997). One objective was to produce a

comprehensive manual of CG for public limited companies

and issuers of securities. That project was assisted by a US

consultant,The Aries Group Ltd, who formulateda CG guide-

line consistent with the Principles of Corporate Governance

1999 (OECD, 1999) of the Organization for Economic Coo-

peration and Development (ADB, 2005). The BSEC adopted

the guideline in 2006 (BSEC, 2006). It is described hereafter

as the BCGG-2006 (Bangladesh Corporate Governance

Guideline 2006). The BCGG-2006 is recognized in the listing

rules of both the Dhaka and Chittagong Stock Exchanges, in

a manner typical of an Anglo-American governance code

(Uddin & Choudhury, 2008). Siddiqui (2010: 269) noted that

the BCGG-2006 was “remarkably similar”to the voluntary

Bangladesh Corporate Governance Code-2004 (BCGC-2004)

previously issued (BEI, 2004) by the Bangladesh Enterprise

Institute (BEI). The BEI is a private-sector think-tank, which,

funded by the IFIs, f‌irst studied the CG practices in

Bangladesh (BEI, 2003) and subsequently issued the BCGC-

2004 (BEI, 2004) as an initiative to improve CG practices.

Siddiqui (2010) argued that by adopting the BCGG-2006,

which resembled the BCGC-2004, the BSEC demonstrated its

legitimacy to the IFIs.

However, wider cultural, social, regulatory, and political

factors in Bangladesh may lead to tensions with such Anglo-

American-based CG practices. Bangladesh is characterized

as a country with high levels of collectivism and power

distance (Hofstede, Hofstede, & Minkov, 2010). The promo-

tion of incompetent family members and associates at the

expense oftalented individuals (Ahsan,2010), and the concen-

tration of authority and power at the top is evident in every

600 CORPORATE GOVERNANCE: AN INTERNATIONAL REVIEW

© 2016 JohnWiley & Sons LtdVolume 24 Number 6 November 2016