Nonexecutive directors in large companies are either secretaries of various ministries, senior officials of government organisations, or professionals, particularly chartered accountants. Although many of the nonexecutives in our companies have required expertise, they are not independent in the sense that they have positional power. Companies want 'real life and real business experience' but this is one thing and independence is another. A practical (professional) nonexecutive will look particularly for the shareholders' interest like profit and wealth maximisation. But companies have other stakeholders like employees, government and the society at large. An independent nonexecutive, in addition to owners' interest, will have to look for the right amount of taxes given to the government, a good balance of executive and workers' remuneration, and environment-friendly company practices. This vast task and social responsibility is hard to expect from a professional only. High intellect, independence from management and owners, and some global knowledge and culture are also necessary for this task.
The Managing Director of the Investment Corporation of Bangladesh (ICB) is the nonexecutive director of several companies like GSK and BAT, two large multinational companies and many others. ICB is a state-owned investment corporation which is one of the largest investors in the share market of Bangladesh. Investing in share market, providing loans and advances, acting as manager/trustee/custodian of mutual funds are some of main activities of ICB. So there is conflict of interest between ICB and the companies. Importantly, in a country with democracy and competitiveness score at the bottom, bureaucracy is not always merit based. So they are not sufficiently independent. I have browsed annual reports of the first 5 companies alphabetically from each industry such as pharmaceuticals, engineering, cement, food, and textile industry (Total 25 companies). None of the companies have nonexecutives from the universities where there are internationally celebrated professors. A celebrated professor does not have to follow hierarchy, has neither subordinates nor bosses, and does not work for profit for any particular organisation. This environment helps them become independent. Their main duty is thinking independently and making new ideas that nourish the welfare for the greatest number. They are deemed socially obligated as regards diverse aspects of the public sphere. That is why, in UK and USA, there are professors as nonexecutives in corporate boards alongside the professionals.
A study by Bill Francis et al. published in the Financial Management on September 2015 found that directors from academia served on the boards of around 40 per cent of S&P-- 1,500 firms over the 1998-2011 period. The paper investigates the effects of academic directors on corporate governance and firm performance. They find that companies with directors from academia are associated with higher performance and this relation is driven by professors without administrative jobs. They also find that academic directors play an important governance role through their advising and monitoring functions. Specifically, their results show that the presence of academic directors is associated with higher acquisition performance, higher number of patents and citations, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO-forced turnover-performance sensitivity. Overall, their results provide supportive evidence that academic directors are valuable advisors and effective monitors and that, in general, firms benefit from having academic directors. Another study finds that firms with professor-directors do exhibit higher CSR performance ratings (donations, employee benefits and community diversity) than those without. However, the influence of professor-directors on firm CSR performance ratings depends on their academic background-the positive association between the presence of professor-directors and firm CSR performance ratings is significant only when their academic background is specialised (e.g., science, engineering, and medicine). Finally, this positive association weakens when professor-directors hold an administrative position at their universities. Professors provide three functions to biotech firms: (1) knowledge transfer, (2) signaling the quality of the firm's research to both capital and resource markets, and (3) helping chart the scientific direction of the firm. The likelihood of having professors on the board is, however, affected by geographic proximity to a university and to an industry. It should be noted that there are studies also which assert that business schools professors are, at worst, guilty of being active accomplices and co-conspirators in corporate scandals.
In the light of the above, reviewing the overall situation deserves consideration.
Dr Dhiman Chowdhury is Professor of Accounting, Dhaka University.