“Иқтисодиёт ва инновацион технологиялар” илмий электрон журнали. № 5, сентябрь-октябрь, 2017 йил
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CORPORATE GOVERANANCE THEORIES APPLIED TO SUPERVISORY
BOARDS OF COMMERCIAL JOINT-STOCK BANKS IN UZBEKISTAN
Makhkamov Temur Rustamovich,
Masters in International Business and Management,
Associate lecturer, Westminster International University in Tashkent,
Abstract:
The current situation of corporate governance in Commercial Joint-
stock Banks in Uzbekistan tells us that state-owned banks tend to disclose more
information compared to privately owned banks. Although CEO duality is prohibited by
law, independence of supervisory boards is biased because of lack of disclosure about
the relationships of board members to the management.
Key words:
corporate governance, banks, theories, board of directors
Introduction
The main focus of this paper is to analyze the mainstream academic thoughts on
the roles of governing boards. Six major roles are identified: linking, coordinating,
control, strategic, maintenance and support roles. These roles are consistent with, and at
the same time reflecting one of the main arguments of six different schools of thoughts:
resource dependency theory, stakeholder theory, agency theory, stewardship theory,
institutional theory and managerial hegemony. A classification of the relationship
between these theories and the six identified roles is made by using a typological
approach. The typological parameters used are extrinsic and intrinsic influences, the
impact of external and internal environments, as well as functional and behavioral
approaches. The typology gives rise to the need of a new theory on the roles and
functions of governing boards.
In the first part of this article we will shortly list the corporate governance theories
that are linked with board roles. The second part will describe the current situation of
boards in commercial joint-stock banks in Uzbekistan. We will conclude our paper by
giving some recommendations to improve the board composition according to the
existing theories.
Literature review
Although a considerable amount of efforts have been spent on studying governing
boards, there is no single competent and integrative theory or model to explain the roles
played by governing boards. From a legal perspective, the American Law Institute
defines the functions of a governing board as follows:
1. Select, regularly evaluate, fix the compensation of, and, where appropriate,
replace the principal senior executives.
2. Oversee the conduct of the corporation's business to evaluate whether the
business is being properly managed.
“Иқтисодиёт ва инновацион технологиялар” илмий электрон журнали. № 5, сентябрь-октябрь, 2017 йил
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3. Review and, where appropriate, approve the corporation's financial objectives
and major corporate plans and actions.
4. Review and, where appropriate, approve major changes in, and determinations
of, other major questions of choice in respect of the appropriate auditing and accounting
principles and practices to be used in the preparation of the corporation's financial
statements.
5. Perform such other functions as are prescribed by law, or assigned to the board
by the charter of the corporation.
Scholars comment that statements such as that of the American Law Institute,
while ``better capturing reality than those in traditional language'', are nevertheless
vague. They do not provide much guidance as to what a governing board is actually
supposed to do. The Australian Independent Working Party into Corporate Governance
recommends that the board's key role is to ensure that the corporate management is
continuously and effectively striving for above-average performance, taking account of
risk. This is not to deny the board's additional role with respect to shareholder
protection. In this connection, the Working Party proposes that the functions of a
governing board should cover the following:
1. The appointment of the CEO (chief executive officer) and human resources
issues.
2. Formulation of strategies and policies.
3. Budgeting and planning.
4. Reporting to shareholders on regulatory compliance.
5. Ensuring the board's own effectiveness.
This is somewhat different from that of the American Law Institute's definition by
the attempt of operationalizing the functions into more observable action. In both cases,
governing boards are considered to have the ultimate responsibility for corporate
performance. From an agency theory perspective, Fama and Jensen (1983) propose that
the role of the governing boards is to act as a ratifier of the decision to be implemented
and a controller in monitoring the implementation and performance of the decisions.
According to Aram and Cowen (1986), the primary role of a corporate board of directors
is to be the supporter of management in increasing the economic value of the firm. Mills
(1981) argues convincingly that the outcomes of corporate performance responsibility
should include the corporation's impact on the society at large: the customers, the
shareholders, and the creditors and lenders. While the targets of corporate performance
seem slightly clearer than before, management scholars have not yet reached a general
conclusion on the real roles and functions of a governing board. Mintzberg (1983)
attempts to fill the gap by providing a comprehensive overview on the issue and thus
identifying 7 roles of a governing board:
Role 1: Selecting the chief executive officer
Role 2: Exercising direct control during periods of crisis
Role 3: Reviewing managerial decisions and performance
Role 4: Co-opting external influences
“Иқтисодиёт ва инновацион технологиялар” илмий электрон журнали. № 5, сентябрь-октябрь, 2017 йил
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Role 5: Establishing contacts (and raising funds) for the organization
Role 6: Enhancing the organization's reputation
Role 7: Giving advice to the organization
These roles, according to Mintzberg, will depend on the situations and
environments the boards are facing. He argues that boards are places where ``internal
and external coalitions'' meet face to face. A board's structure and functions are
determined by power politics in the form of a complex network of power relations. This
is consistent with his view on emergent and realized strategies. Zahra and Pearce (1989),
having reviewed the relevant published research of the past 25 years, identify three sets
of interrelated roles played by governing boards: strategy, control and service. The first
role is to formulate and disseminate corporate goals and policies as well as the allocation
of the resources necessary to implement the board's strategies. The second role is
corporate control which includes monitoring and rewarding executive action and
performance. The last but not the least role is related to its institutional function which
includes representing the organization's interest in the society, linking the firm with its
external environment, and securing critical resources. While acknowledging the
multifunctional aspects of governing boards, scholars have yet to identify the inter-
relationship among the diversity of these functions. An attempt is made in this paper to
synthesize the various theories to explain the roles of governing boards.
Figure 1. A typology of the theories relating to roles of governing boards
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Theoretical framework
Theoretically, the board of directors is responsible to shareholders and must
manage the company’s management. But in many cases, the board became the servant
of the chief executive officer (CEO), who, as a rule, is also the chairman of the board of
directors. The role of the board of directors has increasingly become the subject of close
attention in the light of corporate scandals such as Enron, WorldCom and HealthSouth,
in which the board of directors is not able to act in the interests of investors. Although
the Sarbanes-Oxley Act of 2002 made corporations more responsible, investors should
still pay attention to the intentions of the board of directors. Here we will show you what
the board of directors can tell you about how the company is managed.
The board has different roles and below we will try to link each of these roles to a
theory.
Coordinating role
can be linked to
stakeholder theory
, where the theory suggests
that governing boards are responsible to all parties in society, such as, employees,
customers, suppliers, stockholders, environmentalists, government and other groups,
rather than just owners. Sternberg (1997) however thinks that the theory is
“fundamentally misguided, incapable of providing better corporate governance, business
performance or business conduct” although she admits that it may be valuable as the key
to “social responsibility”.
The
control role
of the board can be associated with the
agency theory
. Eisenhardt
(1989) describes the bases of agency theory as the relationship between a principal and
an agent, who are engaged in corporate behavior but have different interests and attitude
toward risk. According to Jensen (1983), agency theory attempts to reduce agent
opportunism by limiting the agent’s self-interest behavior in situations which the
principal and agent have conflict goals.
The stewardship theory
emphasizes the
strategic role
of the governing board.
Unlike agency theory which takes managers as opportunistic shirkers, stewardship
theory assumes that their intention is to set strategies (Donaldson, 1990).
The support role
of the board is usually used as a managerial tool to support the
decisions of professional managers.
Managerial hegemony
refers to a situation when the
board is dependent on information from the top managers, therefore acting just like a
rubber stamp to approve whatever professional managers decide. Mace (1971), found
that board of directors never get involved in strategic decision making unless faced with
a crisis. The support role of boards arises because of the fact that directors decline to
make independent from managers decisions because most directors are appointed by the
management and thus subject to managerial discretion if they want continuation of their
appointment, and because they have to rely on information supplied by the management.
In many cases, the directors have a relative lack of required knowledge to make
effective decisions.
Methodology
In order to assess the current situation of boards in commercial joint-stock banks
in Uzbekistan, we collected data from twenty-one commercial joint-stock banks listed in
“Иқтисодиёт ва инновацион технологиялар” илмий электрон журнали. № 5, сентябрь-октябрь, 2017 йил
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Tashkent stock exchange. The data was collected manually from banks’ web-sites and
by calling the bank if the data was not available in their website.
The date was collected on: direct and indirect state ownership, board size, board
independence, board diversity (percentage of female directors in the board), number and
the name of committees under the board and CEO duality.
In the Uzbek model of corporate governance, the board of directors is called a
supervisory board and the law does not allow the CEO to occupy the position of chair of
the board, so no bank practices CEO duality.
Table 1: Board composition of Uzbek JS Banks
State ownership
Direct
Indirect
B_size
B_ind
B_fem
1
<Ipoteka-bank> ATIB
21.32
NA
9
1.00
0.11
2
<Asia Alliance Bank> ATB
0
0
5
1.00
0.00
3
<Agrobank> ATB
60.08
27.31
8
1.00
0.00
4
AT <Aloqabank>
56.6
0
8
1.00
0.13
5
<Asaka> bank
54.14
42.06
8
1.00
0.00
6
<Hamkorbank> ATB
0
0
9
1.00
0.00
7
ATB <InFinBank>
0
0
5
1.00
0.00
8
AITB <Ipak Yo''li>
0
0
NA
NA
NA
9
<KDB Bank O''zbekiston> AJ
0
10.31
5
1.00
0.00
10
ATB <Qishloq qurilish bank>
78.88
NA
11
1.00
0.00
11
<Kapitalbank> ATB
0
0
5
1.00
0.11
12
<Orient Finans> XATB
0
0
5
1.00
0.20
13
<Ravnaq-bank> XATB
0
0
5
1.00
0.20
14
<O''zsanoatqurilishbank> ATB
64.33
26.01
9
1.00
0.00
15
AT <Savdogarbank>
0
0
9
1.00
0.11
16
<Turkiston> XATB
0
0
5
1.00
0.20
17
<Turonbank> ATB
63.15
NA
11
1.00
0.00
18
<Trastbank> XAB
0
0
5
1.00
0.00
19
<HI-TECH BANK> XATB
0
0
3
1.00
0.00
20
<Mikrokreditbank> ATB
87
NA
9
1.00
0.00
21
XATB <Universal bank>
0
0
7
1.00
0.00
Source: Obtained from the official websites of commercial banks and through telephone
conversation with bank representatives
Concerning the state ownership, eight out of 21 banks are directly owned by the
state, and the average share of state in these banks is 61%, ranging from 21.31% of
direct state ownership in Ipoteka bank, to 87% of direct state ownership in Microcredit
Bank. The state also has about 20% of indirect shares in these eight banks. KDB bank
Uzbekistan is the only foreign bank that is indirectly owned by the state, through the
National Bank of Uzbekistan (10.3%).
“Иқтисодиёт ва инновацион технологиялар” илмий электрон журнали. № 5, сентябрь-октябрь, 2017 йил
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State-owned banks in Uzbekistan tend to have larger boards, consisting of average
of 9.1 members, while private banks have smaller size boards on average consisting of
5.7 members. The average size of all boards is 7.05 members, ranging from 3 in High-
Tech bank (private) to 11 in Qishloq Qurilish Bank and Turon Bank, both are state
owned.
All of the listed banks are presented to have entirely independent from
management boards, that is none of the managing directors are in the supervisory board.
However, we cannot claim that there is no managerial hegemony, since we do not
possess any information about the relationships between the managers and board
members. The possibility of managerial hegemony is greater in private banks, because in
state owned banks, almost all of the supervisory board members are appointed by state.
Gender diversity of the board is believed that higher proportion of women in
board is more likely to bring international diversity, which in turn brings a unique set of
human capital resources, such as expertise, reputation and his/her networks and ties to
other organizations and nations, which is beneficial for the company. In the case of
Uzbek listed banks, only 7 out of 21 banks have at most one woman in their boards,
which comprises only 5% of all boards.
It is suggested that boards must consist of a remuneration and audit committees,
where all members of these two committees must be completely independent from the
management in order to avoid conflict of interests. From the date available for us, 18 out
of 21 banks have audit committees in their supervisory boards, while one bank (Asaka
Bank) does not have any committees in its board and other two banks does not have this
information available for public. The remuneration committee operates only in two of
the bank’s boards while in other banks the remuneration policies are decided in other
committees.
Conclusion and recommendations
Based on the available information to public, it can be noted that state owned
banks have larger boards (up to 11) vs private banks (starting from 3). Although CEO
duality is prohibited by law, the board independence of banks is biased because no
detailed information is available about its members, their experience and relationships
with the management. Shortage of publicly available information in websites, very
closed or unexperienced call center staff of private banks leads us to conclude that
private banks are less transparent which is not a good indicator for potential investors.
Based on the knowledge from existing theory, we would recommend banks in
Uzbekistan to increase the importance and performance of their supervisory boards by
increasing the number of skilled board members who have expertise, reputation and
their networks and ties to other organizations and nations and are able to make decisions
independently from bank management. Concluding our small research, we would
recommend the banks to open a position of corporate governance clerk and hire a well
trained and highly skilled specialist who would work with potential investors,
shareholders and coordinate the process of information sharing.
“Иқтисодиёт ва инновацион технологиялар” илмий электрон журнали. № 5, сентябрь-октябрь, 2017 йил
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