Corporate Governace Practice in the Financial Sector of Bangladesh
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Transcript of Corporate Governace Practice in the Financial Sector of Bangladesh
CORPORATE GOVERNACE PRACTICE IN THE FINANCIAL SECTOR OF BANGLADESH
Submitted To
Dept of Accounting & Information Systems
University of Dhaka
Submitted By
Md. Aslam HossainRoll # 13010
BBA 13th Batch, Section: A
Dept of Accounting & Information Systems
University of Dhaka
Supervisor
Dr. Riazur Rahman Chowdhury
ProfessorDept of Accounting & Information Systems
University of Dhaka
Date of submission: 10th August, 2011
Letter of TransmittalLetter of Transmittal
10th August, 2011
Riazur Rahman Chowdhury
Professors
University of Dhaka
Subject: Submission of study report on Corporate Governance Practice in the financial sector of
Bangladesh.
Sir,
I have the honor to state that I am submitting a study report to you named “Corporate
Governance Practices in the financial sector” due on 10th August, 2011.
In this report, I have discussed the corporate governance, it objectives, the practice of it in the
Banking sector of Bangladesh, different variables of corporate governance etc in four chapters.
For any question or comment regarding to this report, I request you to call me at any time you
desire. I thank you to provide me necessary support for completing this challenging and
interesting issue as my research work.
Yours sincerely,
Md. Aslam Hossain
BBA 13th Batch,
Section- A, Roll-13010
AbstractAbstract
Corporate governance (CG) is an important effort to ensure accountability and responsibility and
is a set of principles, which should be incorporated into every part of the organization. This study
focused on the state of Corporate Governance (CG) in financial sector of Bangladesh.
To understand the state of CG, three broad aspects of governance and management issues were
studied. These are: a) shareholders’ rights, b) public disclosure of information, c) effectiveness of
the Board. Within each of these many sub-categories were studied which were discussed in this
paper.
The study used interviews with key stakeholders, experts and executives of these types of
companies, a questionnaire survey and also group discussions.
From the result of the interviews, a comparative analysis about the practice of corporate
governance has been made between the nationalized financial institutions and the Private
financial institutions.
In this report focus has been given on the practice of corporate governance in the financial sector
of Bangladesh and the total things have been covered in four broad chapters. In the first chapter
introduction of the corporate governance has been given and the methodology that have been
followed to prepare this report has also been stated here. In the literature review part, the detail
discussion on the present scenario of corporate governance practice in Bangladesh has been
made. In the third chapter, analysis of the responses of questionnaire and assessment of the
corporate governance practice in different financial institutions have been stated. In the last
chapter, the recommendations about the scope of improvement of practice of corporate
governance in different financial institution and the conclusion have been stated.
Table of ContentsTable of Contents
Chapters Contents Page No.
Chapter-1: Introduction
1.1 Introduction 1
1.2 Aims & Objectives of the report 21.3 Research Background 31.4 Problem statement and the significance of the study 41.5 Limitations of the study 41.6 Methodology of the study 5
Chapter-2: Literature Review
2.1 Corporate Governance 8
2.2 What does good governance involve? 92.3 Objectives of the Corporate Governance 102.4 Corporate Governance: The Conceptual Framework 122.5 Corporate Governance scenario in Bangladesh 132.6 Need for Corporate Governance in Bangladesh 142.7 Code of Corporate Governance in Bangladesh 152.8 The concept of Corporate Governance and financial institutions 162.9 Deficiencies and weaknesses in Corporate Governance within financial institutions
18
2.10 Corporate Governance in financial enterprises in Bangladesh 222.11 Corporate Governance-Best practices and Guidelines 232.12 Challenges ahead to the banking sectors for the implementation of Corporate Governance
28
Chapter-3: Analysis & Findings
3.0 Analysis & Findings 30
Chapter-4: Recommendations & Conclusions
4.1 Recommendations 39
4.2 Conclusions 444.3 References 464.4 Appendix 48
1.1 Introduction:
The need for corporate governance arises from the potential conflicts of interest among
stakeholders in the corporate structure. These conflicts of interest often arise from two main
reasons. First, different stakeholders have different goals and preferences. Second, the
stakeholders have imperfect information as to each other’s actions, knowledge, and preferences.
(Osman 2006)
Corporate governance (CG) is an important effort to ensure accountability and responsibility and
is a set of principles, which should be incorporated into every part of the organization. Though it
is viewed as a recent issue, there is, in fact, nothing new about the concept. Because it has been
in existence as long as the corporation itself-as long as there has been large – scale trade,
reflecting the need for responsibility in the handling money and the conduct of commercial
activities.
In the wake of accounting, leadership, and governance scandals at such large companies as
Enron, Tyco, and WorldCom, corporate governance has succeeded to attract a great deal of
interest as it focuses not only the long term relationship, which has to deal with checks and
balances, incentives for managers and communications between management and investors but
also the transactional relationship, which involves dealing with disclosure and authority.
Numerous works, studies, and researches have been conducted to enact principles, codes, and
guidelines for ensuring good corporate governance systems and culture within the organizations.
Sir Adrian Cadbury in 'Global Corporate Governance Forum’ defined corporate governance as:
"Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The corporate governance framework is there
to encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society" (Cadbury, 2000)
The Dhaka Chamber of Commerce and Industry (DCCI) has been implementing a project,
entitled Economic Reform and Research Enterprise, in co-operation with The Center for
International Private Enterprise (CIPE) – an affiliate of the US Chamber of Commerce,
Washington D.C.
One of the objectives of this project is to prepare economic policy papers on selected business
sectors. DCCI requested to prepare a paper on “Principles of Corporate Governance for Public
and Private Enterprise in Bangladesh.”
According to the Term of Reference (TOR) the scope of the study was limited to analyze the
situation of corporate governance in the Public Limited Company- Financial Institutions.
1.2 Aims & Objectives of the Report:
The recent corporate collapses in the business world, such as Enron and WorldCom, have
increased interest on corporate governance. As it was mentioned earlier, the corporate
governance is a set of rules that is exclusively made to regulate and monitor a firm’s business
activities and reporting. The intention is to ensure whether the managers are taking good care of
the stakeholders’ wealth. Business is run by the management; as a result, it is extremely
important for them that their stakeholders rely upon them in terms of their managerial
capabilities and reporting.
The broad objective of the research is to understand the state of corporate governance in practice
in banking sector of Bangladesh.
In particular, the research is expected to describe the followings:
Understand the meaning of good corporate governance
The current practice of Corporate Governance in terms of accountability to its
stakeholders in financial institutions of Bangladesh
How far the current practice of Corporate Governance passes the test of fairness?
Whether Corporate Governance system in Bangladesh is transparent for all stakeholders.
How does Corporate Governance affect firm performance?
Evaluation how and who would be benefited if proper adoption of corporate governance
is made by the banks of Bangladesh.
So serve these purpose, it has been tried that this paper seeks to examine the relationship
between four corporate governance mechanisms (board size, board composition, chief executive
status and audit committee) and performance measures of firms (return on equity, ROE, and
profit margin, PM).
1.3 Research Background:
According to Barker (2010), corporate governance deals with the safety of a firm’s financiers
who are mainly its investors, lenders and creditors. In the modern era, in relation to Zinkin
(2010) definition, corporate governance can be referred to as a set of rules and regulations that
are exclusively there to be practiced by a firm in order to maintain a good relationship with all its
stakeholders through transparency. This gives birth to some key concerns such as:
Segregation of duties
Internal control system
Audit committee
Transparency of disclosure etc.
Principle objective of this study is to identify and facilitate the initiatives to institutionalize CG.
With this objective, this study paper is structured as follows. First it gives an overview of
corporate governance, as that determines the scope of the issues. It briefly describes the growth
of international practices to institutionalize CG.
Then a short description of the evolution of Corporate Governance is given. The current state of
CG practices in Bangladesh, India, Sri Lanka, Pakistan, Thailand and Hong Kong are discussed
briefly. From the outset, it has been observed that Bangladesh lagged behind its neighbors and
important trading partners with regard to CG standards and practice.
A comparative analysis provides regional examples of initiatives that could be applied in
Bangladesh to improve the situation.
1.4 Problem Statement and the Significance of the Study:
The world has experienced an economical calamity and corporate breakdowns in the past couple
of years, exposing the extent of problems in corporate governance. It was noticed that governing
corporations was not an easy task in any way. This lack of management capability has raised
quite a few eyebrows in the field of corporate governance that needs to be rectified in order to
allow smooth operation in any business across the globe (McGee, 2008). There seems to be
difficulties for firms to organize their business since most of them are busy laying numerous
strategies, planning and budgeting, information systems, performance management, accounts,
etc. Furthermore, this phenomenon can be observed in the companies of banking sector. These
companies engage themselves in compiling data from a wide range of the above mentioned
sources that eventually makes the gathered information so complex that it ends up compounding
the problem of corporate governance. This paper attempts to seek out the corporate governance
problems, state the importance of it and establish the positive impacts of it once it is applied
correctly. This is going to assist not only the banking sectors applying corporate governance the
right way but also help out other researches that would be conducted further on this topic in
future (Zinkin, 2010).
1.5 Limitations of the Study:
This study has certain limitations that need to be taken into account when considering the
recommendations and its implications. Some of these limitations can be seen as fruitful avenues
for future research under the same theme.
This study has focused on a phenomenon that is a very extensive and major one, i.e. corporate
governance. In this paper, assessment of this complex phenomenon has been studied from a
rather narrow empirical perspective.
During this study, it has been found that not much of research has been conducted on the CG
landscape in banking sector of Bangladesh. Indeed, there are ample of studies available on the
methods and principles of CG from Bangladesh’s perspectives but there is a substantial lack of
sector specific empirical and real- life studies. There is an absence of credible data and relevant
information on the real CG concerns in Bangladesh. The Annual Reports don’t showcase all the
information. Many aspects required clarifications directly from the company personnel which
was difficult and quite impossible to obtain.
Again the issue is too broad to complete within the stipulated time period. Hence in some cases
scheduled walk in interviews could not be so successful. Moreover, things are changing apart
from time to time. So, it has not always been possible to produce enough information for
comparison. Given the time limitation, comprehensive access to information was a difficult task.
A systemic and periodic survey of CG practices in Bangladesh has thus become an important
task for the organizations like DCCI, BEI, and SEC.
1.6 Methodology of the report:
1.6.1 Sources of information:
For the preparation of the report, Information sources were identified first. Information is mainly
collected from two sources. They are Primary sources: Primary data has been collected from
direct interview with some professional of the banks. The secondary sources of information were
the Annual Report, and several publications like books, magazines, trade journals & websites of
the company etc.
Sources of information can be summarized as follows;
1.6.2 Methodology of the Report:
Sources of Information
Primary sources- Direct interview with the
personnel- Data collection through
questionnaire
secondary sources
-Annual reports of different banks- Newspapers- Megazines
- Other publications
The following structured methodology has been followed while preparing the report.
This structured format helps to make analysis in a better manageable way. All the above
mentioned steps were undertaken to perform the calculations and to prepare the Final report. A
brief description of all the above stages is given below:
Selection of specified sector:
For the preparation of this report the sectors or area of research have been determined at first. As
the report serves the purpose of Corporate Governance disclosure, I have selected the banking
sector. A set of banks has been taken as the sample for exploring the research.
1.6.3 Collections of Data:
It was an extensive research and hence much importance has been given on collection of data &
analysis of data. The primary method of data collection was preparation of questionnaire and
direct interview with the managers of different banks and collection of information on the
disclosure of Corporate Governance and the related matters.
A great source of information was the DSE Training Academy Programs held on a regular basis
on “Corporate Governance & related disclosure, Accountability in Accounts and Compliance of
Listing Regulations, Role of Company Secretary in Compliance with Corporate Governance &
extent of Compliance of Corporate Governance Guidelines by Listed Companies.”
The annual reports of different banks were collected from the Dhaka Stock Exchange. Then
related literatures were collected from the secondary sources. All the related books, magazines
were thoroughly reviewed to grab all the related information. The news paper that were
especially used were ‘The Financial Express, Banik Barta, The daily star.” Moreover a great deal
of information of primary source was the teachers, clients of the banks, shareholders of different
companies as well as students of different institutions specially students from business
background.
1.6.4 Analysis of Data:
Then the research was developed based on some hypotheses. The hypotheses were developed
firstly to find the correlation between Corporate Governance and Firms performance and then
again hypotheses were developed again to find the rate of Corporate Governance disclosures.
Both dependent variables and independent variables were developed and then the variables were
used to test the hypotheses. Statistics was used to make perform the test. And finally the all these
tests were used to draw the conclusion & give the research result.
1.6.5 Findings:
From the analysis findings were highlighted on the Corporate Governance and the performance
of the banks in Bangladesh.
1.6.6 Giving Recommendations:
The work finally seeks to recommend the best practices for the banks and then shows how it
might be beneficial for them. The recommendations are given mainly on the view of the different
Corporate Governance Personnel, regulatory bodies (i.e. SEC, DSE, CSE etc) and also from the
enlightened society. Last but not the least a powerful group of stakeholders were also given
significant consideration for the preparation of the report.
1.6.7 Drawing Conclusions:
From the summarized results the conclusions are drawn regarding the Corporate Governance
and firm performance and all significant aspects and issues were properly resolved.
2.1 Corporate governance:
Different authors view the meaning of corporate governance differently. For example, one school
of thought describes corporate governance as a “system” by which companies are directed and
controlled (Cadbury and Greenbury Report, CFACG 1992);
Another school views corporate governance as “structures and processes for decision making,
accountability, control and behavior at the governing body” (Public accounts and Estimates
Committee, 2002); to others corporate governance is about “finding ways” to ensure effective
decision making (Pound 1995). But it must be kept in our mind that the fundamental concern of
corporate governance is to ensure the conditions whereby a firm’s directors and mangers are held
accountable, ensure better and effective protection to all stakeholders. The World Bank argues
that the framework of corporate governance should be based on four “pillars” – of
Responsibility, Accountability, Fairness and Transparency (RAFT).
However, Kocourek (2003) believes that to counter the accounting, leadership, and governance
scandals, organizations are rushing to institutionalize corporate governance, which may be even
be counterproductive. The drive to more tightly regulate the membership and functions of
corporate boards is already encouraging companies to view governance as a legal challenge
rather than a way to improve performance.
By reducing the critically important issue of corporate governance to what amounts to box-
checking exercise, corporate directors and senior executives are addressing the symptoms, not
the root cause, of the governance crisis. Kocourek states that governance begins at home – inside
the boardroom, among the directors. It is embedded in how, when, and why they gather, interact,
and work with one another and with management… in other words, the “soft” stuff. But
qualitative reforms to the behaviors, relationships, and objectives of the directors and CEO are
meaningless unless they are subject to the “hard” mechanisms of performance criteria, processes,
and measurement. According to Kocourek, this combination of soft and hard solutions can turn
corporate governance from vague concept into a means to deliver organizational resilience,
robustness, and continuously improved performance.
2.2 WHAT DOES GOOD GOVERNANCE INVOLVE?
The Board Members are qualified for their positions, have a clear understanding of their
role in corporate governance and are not subject to undue influence from management or
outside concerns
The Board must play a leadership role in approving the objectives, strategy and business
plans of the bank, monitoring the performance of management and ensuring that the
internal control and risk management systems of the banks are effective. The strategy,
vision, missions, goals and the values should be communicated throughout the
organization.
The Board must also make sure that the Bank conducts its affairs with integrity and in
accordance with high ethical standards. The Board is part of the system of checks and
balances that ensure that neither large shareholders nor management abuse their power
and that decisions are taken with the Bank’s best interests in mind. If the Board does not
play its full part, a vacuum in leadership will be created. This vacuum may be filled by
the shareholders becoming directly involved in running the Bank’s affairs or by the
Executive Management acting more or less in isolation. In either case, the Board of
Directors is bypassed and checks and balances are lost.
The day-to-day running of Banks should be left in the hands of the Management but the
Board should set and enforce clear lines of responsibility and accountability throughout
the organization. The Board must also ensure that there is appropriate oversight by
Senior Management.
The Directors should have fair understanding of the banking business, the nature of its
risks and its strategic direction. It should be clear that ultimate responsibility for ensuring
that risks are properly identified monitored and controlled lies in the Boardroom.
There is considerable importance attached to having an adequate representation of non-
executive and independent directors on the Board and a clear separation of the position
of Board Chairman and Chief Executive Officer.
Directors should ensure individually and collectively that potential conflicts of interest
are avoided or, at least, managed in ways that do not compromise the interests of the
company.
Rigorous and independent internal and external audit arrangements are at the heart of
corporate Governance debate. The work conducted by internal and external auditors in
performing an important control function should be effectively utilized by the Board in
discharging its oversight function.
Strong emphasis should be placed on regular, timely, comprehensive, meaningful and
reliable financial disclosures of affairs. This disclosure should specify the following
information:
- Board structure (size, membership, qualifications and committees);
- Senior management structure (responsibilities, reporting lines, qualifications and
experience);
- Basic organizational structure (line of business structure, legal entity structure);
- Information about the incentive structure of the Bank (remuneration policies,
executive compensation, bonuses, stock options);
- Nature and extent of transactions with affiliates and related parties.
-
2.3 OBJCETIVE OF CORPORATE GOVERNANCE:
There is a global consensus about the objective of ‘good’ corporate governance: maximizing long
term shareholder value. Since shareholders are residual claimants, this objective follows from a
premise that, in well performing capital and financial markets, whatever maximizes shareholder
value must necessarily maximize corporate prosperity, and best satisfy the claims of creditors,
employees, shareholders, and the State. Since the concept of government controlling the
economy is gradually eroding, it has made the market a decisive factor in settling economic
issues. This has also coincided with the thrust given to globalization because of the setting up of
the WTO and every member of the WTO trying to bring down the tariff barriers.
CG represents the value framework, the ethical framework and the moral framework under
which business decisions are taken. In other words, when investments take place across national
borders, the investors want to be sure that not only is their capital handled effectively and adds to
the creation of wealth, but the business decisions are also taken in a manner which is not illegal
or involving moral hazard.
Corporate governance therefore calls for three factors:
1. Transparency in decision-making;
2. Accountability which follows from transparency because responsibilities could be
fixed easily for actions taken or not taken, and;
3. The accountability is for the safeguarding the interests of the stakeholders and the
investors in the organization.
Over the last few years different country groups have been establishing their own common set of
benchmarks for corporate governances, for instance, the OECD Council called upon the OECD
to develop a set of CG standards and guidelines and published in May 1999 a common set of
guiding principles on corporate governance for all OECD member countries.
To institutionalize CG practice, OECD has introduced following principles:
Rights of
shareholders
1.Recognition of basic shareholder rights
2. Shareholders have the right to participate in decisions concerning
fundamental corporate changes
3. Voting rights of shareholders
4. Disclosure of disproportionate voting rights of certain shareholders to
obtain a degree of control
5. Markets for corporate control should be allowed to function
6. Shareholders should consider the costs and benefits of exercising their
voting rights
Equitable
treatment of
shareholders
1. All shareholders of the same class should be treated equally 2. Insider
trading and abusive self-dealing should be prohibited 3. Board members and
managers should disclose material interests
Role of the
Stakeholders
Assure that rights of stakeholders are protected by law
2. Stakeholders should have the opportunity to obtain effectiveness redress for
violation of their rights
3. Permit performance-enhancing mechanisms for stakeholder participation
4. Stakeholders should have access to relevant information in the corporate
governance process
Disclosure and
transparency
1. Scope of material information to be disclosed
2. Information should be prepared in accordance with high accounting
standards
3. Annual audit should be conducted by an independent auditor
4. Fair, timely and cost-effective means of disseminating information
Responsibilities
of the board
1.Board members should act on the best interest of the company with due
diligence and care
2. The board should treat all shareholders fairly
3. The board should ensure compliance with the law and take account the
interest of stakeholders.
4. Definition of key functions of the board
5. The board should exercise objective judgment independent from
management
6. Board members should have access to accurate, relevant & timely
information.
Source: OECD Principles of Corporate Governance (1999).
2.4 CORPORATE GOVERNANCE: THE CONCEPTUAL FRAMEWORK:
The essence of corporate governance is about how owners (principals) of firms can ensure that
the firm’s assets (and the returns generated by those assets) are used efficiently and in their best
interests by managers (agents) delegated with powers to operate those assets. This problem is
intrinsic to any arrangement where owners themselves do not undertake the management
functions directly. The corporate governance problem arises due to the existence of separation of
ownership and control rights, informational asymmetry, and incomplete or state-contingent
contracts (Lin, 2001:5). In such a regime, the prerequisite for effective corporate governance
involves: Alignment of risk-bearing and control (e.g. rights of shareholders in appointing
management, approval of strategy and cash-flow); Monitoring and oversight of management and
firm’s performance based on transparency, regular and reliable disclosures, and internal checks
and balances; and Incentives (managerial incentives to enhance effort and align interests of
management with those of owners).
It is generally accepted that the governance problem entails a tension between accountability and
managerial initiative i.e. between the need for directors or management to be accountable to
shareholders on one hand and the need for management to have the discretion to maximize
profits. An apt analogy (with apologies to the Cadbury Report) is in terms of unleashing the tiger
(management) into the jungle of the market to seek and exploit opportunities while ensuring that
the tiger brings home the meat without consuming it all himself, or that it does not eat up the
owner in the process (Lin, 2001:6). To address the corporate governance problem in practice,
owners (and stakeholders) need to devise a governance system comprising effective mechanisms
of control, oversight and monitoring over management and of incentives for management to
behave in the owners’ interest. Such corporate governance system can be perceived as
institutional attempts to create a structured dialogue between companies and their shareholders
and stakeholders with the purpose of paving the way for understanding the company’s strategic
and operational goals, including critical success factors for achieving those goals (Parum, 2005).
2.5 CORPORATE GOVERNANCE SCENERIO IN BANGLADESH:
Corporate governance practices in Bangladesh are quite absent in most companies and
organizations. In fact, Bangladesh has lagged behind its neighbors and the global economy in
corporate governance (Gillibrand, 2004). One reason for this absence of Corporate Governance
is that most companies are family oriented. Moreover, motivation to disclose information and
improve governance practices by companies is felt negatively.
There is neither any value judgment nor any consequences for corporate governance practices.
The current system in Bangladesh does not provide sufficient legal, institutional and economic
motivation for stakeholders to encourage and enforce corporate governance practices; hence
failure in most of the constituents of corporate governance is witness in Bangladesh.
Poor bankruptcy laws, no push from the international investor community, limited or no
disclosure regarding related party transactions, weak regulatory system, general meeting
scenario, lack of shareholder active participations are some of the individual constituents that
have been identified by Mamtaz Uddin Ahmed and Mohammad Abu Yusuf in their research
study “Corporate Governance : Bangladesh Perspective” (Mamtaz and Yusuf, 2005).
2.6 NEED FOR CORPORATE GOVERNANCE IN BANGLADESH:
The history of corporate governance in Bangladesh is not very old. About 60 years back from
now, the land, which is now Bangladesh, had a few bodies incorporated under the Companies
Act. At the time of independence of Bangladesh, many industries and business houses owned by
non-locals were abandoned and the government of Bangladesh took possession of these
industries by establishing corporate bodies like BCIC (Bangladesh Chemical Industries
Corporation) and BSEC (Bangladesh Steel and Engineering Corporation). During 80s,
Bangladesh Govt. took privatization policy and since then, private sectors have a substantial
impact on the pace and pattern of economic growth (ICAB, 2003:6-7). In Bangladesh, though no
remarkable corporate scandals emerged to feel the necessity of corporate governance, yet the
stock market crush of 1996 is worth remembering.
Above scenarios suggest that for effective CG in Bangladesh; it requires a clear understanding of
the respective roles of the board and of senior management and their relationships with others in
the corporate structure. Removing these weaknesses requires appropriate reform and
implementation thereof are highly necessary in Bangladesh.
Following policy is intended to clarify these relationships and responsibilities and to promote
effective CG:
Disclosure of information should be the pre-requisite for the shareholders or for the
capital market to act against errant managements. The regulator can enhance the scope,
frequency, quality and reliability of the information that is disclosed.
Regulatory measures that promote an efficient market for corporate control would create
an effective threat to some classes of dominant shareholders as discussed earlier.
Reforms in bankruptcy and related laws would bring the disciplining power of the debt
holders to bear upon recalcitrant managements.
Large blocks of shares in corporate Bangladesh are held by public sector financial
institutions who have proved to be passive spectators. These shareholdings could be
transferred to other investors who could exercise more effective discipline on the
company managements. Alternatively, these institutions could be restructured and
privatized to make them more vigilant guardians of the wealth that they control.
2.7 CODE OF CORPORTATE GOVERNANCE IN BANGLADESH:
Since the early 1990s, CG has been receiving increasing attention from regulatory bodies and
practitioners worldwide. Corporate sectors are still in its initial stage; nevertheless awareness of
the importance of CG is growing. Bangladesh's small size and lack of natural resources have
necessitated an open trade policy. Bangladesh also has a liberal policy towards foreign direct
investment (FDI). However, when compared to those of the India, Sri Lanka, Pakistan, Thailand
and Malaysia, CG in practice and philosophy have up till now remained relatively under-
developed in Bangladesh. Further, there appears to be a lack of either market or structural
governance mechanisms to discipline errant managers. To govern the corporate environment in
In Bangladesh, the following legal measures are in practice:
• Securities and Exchange Ordinance 1969
• Bangladesh Bank Order 1972
• Bank Companies Act 1991
• Financial Institutions Act 1993
• Securities and Exchange Commission Act 1993
• Companies Act 1994
• Bankruptcy Act 1997
However, to institutionalize the practice of CG in Bangladesh, first initiative was undertaken by
the Securities and Exchange Commission (SEC). SEC issued a notification on Corporate
Governance Guidelines (CG Guidelines) for the publicly listed companies of Bangladesh under
the power vested on the Commission by Section 2CC of the Securities and Exchange Ordinance,
1969. The CG Guidelines were issued on a ‘comply or explain’ basis, providing some ‘breathing
space’ for the companies to implement on the basis of their capabilities. Nevertheless, the overall
framework for investor protection and CG has a number of important weaknesses that have
hindered the capital market development. Most of the companies depend on the banks as their
major source of financing. Capital market in Bangladesh is still at an emerging stage with market
capitalization amounting to only 6.5% of GDP with low investor confidence on corporate
governance and financial disclosure practices in many companies listed in the stock exchanges.1
The neighboring countries are well ahead vis-à-vis Bangladesh in terms of depth of capital
market. For example, in India, Pakistan and Sri Lanka, the market capitalization is 56%, 30%
and 18% of their GDP respectively.
CG practices in Bangladesh are gradually being introduced in most companies and organizations.
66.7 percent of the companies have adopted CG and 43.3 percent have compliance policy with
national or international benchmarks. A considerable percentage of the top management does not
fully understand the concept of CG. However, Bangladesh has lagged behind its neighbors and
the global economy in CG. One reason for this slow progress in adopting CG is that most
companies are family oriented. Such concentrated ownership structures affects the effectiveness
of corporate governance mechanisms, which weaknesses cannot be rectified by laws and
regulations. Motivation to disclose information and improve governance practices by companies
is also felt negatively. There is neither any value judgment nor any consequences for CG
practices. The current system in Bangladesh does not provide sufficient legal, institutional and
economic motivation for stakeholders to encourage and enforce CG practices.
2.8 THE CONCEPT OF CORPORATE GOVERNANCE AND FINANCIAL
INSTITUTIONS:
The traditional definition of corporate governance refers to relations between a company's senior
management, its board of directors, its shareholders and other stakeholders, such as employees
and their representatives. It also determines the structure used to define a company's objectives,
as well as the means of achieving them and of monitoring the results obtained.
Due to the nature of their activities and interdependencies within the financial system, the
bankruptcy of a financial institution, particularly a bank, can cause a domino effect, leading to
the bankruptcy of other financial institutions. This can lead to an immediate contraction of credit
and the start of an economic crisis due to lack of financing, as the recent financial crisis
demonstrated. This systemic risk led governments to shore up the financial sector with public
funding. As a result, taxpayers are inevitably stakeholders in the running of financial institutions,
with the goal of financial stability and long-term economic growth.
Furthermore, the interests of financial institutions' creditors (depositors, life insurance policy
holders or beneficiaries of pension schemes and, to a certain extent, employees) are potentially at
odds with those of their shareholders. Shareholders benefit from a rise in the share price and
maximization of profits in the short term and are potentially less interested in too low a level of
risk. For their part, depositors and other creditors are focused only on a financial institution's
ability to repay their deposits and other mature debts, and thus on its long-term viability. As a
result, depositors can be expected to favor a very low level of risk.
Largely as a result of the particularities relating to the nature of their activities, most financial
institutions are strictly regulated and supervised. For the same reasons, financial institutions'
internal governance cannot be reduced to a simple problem of conflicts of interest between
shareholders and the management. Consequently, the rules of corporate governance within
financial institutions must be adapted to take account of the specific nature of these companies.
In particular, the supervisory authorities, whose mission to maintain financial stability coincides
with the interests of depositors and other creditors to control risk-taking by the financial sector,
have an important role to play in shaping best practices for governance in financial institutions.
Various legal instruments and recommendations at different level applicable to financial
institutions and in particular banks, already take account of the particularities of financial
institutions and the role of supervisory authorities.
However, the existing rules and recommendations are based first and foremost on supervisory
considerations and focus on the existence of adequate internal control, risk management, audit
and compliance structures within financial institutions. They did not prevent excessive risk
taking by financial institutions, as the recent financial crisis demonstrated.
2.9 DEFICIENCIES AND WEAKNESSES IN CORPORATE
GOVERNANCE WITHIN FINANCIAL INSTITUTIONS:
An effective corporate governance system, achieved through control mechanisms and checks,
should lead to the main stakeholders in financial institutions (boards of directors, shareholders,
senior management, etc.) assuming a higher degree of responsibility. Conversely, the financial
crisis and its serious economic and social consequences have led to a significant loss of
confidence in financial institutions, particularly with regard to the following.
2.9.1 The question of conflicts of interest:
The questions arisen by the issue of conflicts of interest and management of such conflicts are
nothing new. Indeed, the issue arises in every organization or company. Nonetheless, given the
systemic risk, the volume of transactions, the diversity of financial services provided and the
complex structure of large financial groups, the issue is particularly pressing in the case of
financial institutions. Potential conflicts of interest can arise in a variety of situations (for
example, exercising incompatible roles or activities, such as providing advice on investments
while managing an investment fund or managing for one's own account, incompatibility of
mandates held on behalf of different clients/financial institutions). This problem can also arise
between a financial institution and its shareholders/investors, particularly where there is cross
shareholding or business links between an institutional investor (for example through the parent
company) and a financial institution in which it is investing.
2.9.2 The problem of effective implementation by financial institutions of corporate
governance principles:
The general consensus is that the existing principles of corporate governance, namely the OECD
principles, the recommendations of the Basel Committee, and Community legislation14, already
cover to a certain extent the problems highlighted by the financial crisis. In spite of this, the
financial crisis revealed the lack of genuine effectiveness of corporate governance principles in
the financial services sector, particularly with regard to banks.
Several theories have been put forward to explain this situation:
- The existing principles are too broad in scope and are not sufficiently precise. As
a result, they gave financial institutions too much scope for interpretation.
Furthermore, they proved difficult to put into practice, in most cases leading to a
purely formal application (i.e., a box-ticking exercise), with no real qualitative
assessment.
- The lack of a clear allocation of roles and responsibilities with regard to
implementing the principles, within both the financial institution and the
supervisory authority.
- The non-binding nature of corporate enterprise principles: the fact that there was
no legal obligation to comply with recommendations by international
organizations or the provisions of a corporate governance code, the problem of
the neglect of corporate governance by supervisory authorities, the weakness of
relevant checks, and the absence of deterrent penalties all contributed to the lack
of effective implementation by financial institutions of corporate governance
principles.
2.9.3 Boards of directors:
The financial crisis clearly shows that financial institutions' boards of directors did not fulfill
their key role as a principal decision-making body. Consequently, boards of directors were
unable to exercise effective control over senior management and to challenge the measures and
strategic guidelines that were submitted to them for approval.
The failure of the board to identify, understand and ultimately control the risks to which their
financial institutions were exposed is at the heart of the origins of the crisis. Several reasons or
factors contributed to this failure:
Members of boards of directors, in particular non-executive directors, devoted neither
sufficient resources nor time to the fulfillment of their duties. Furthermore, several
studies have clearly demonstrated that, faced with a chief executive officer who is
omnipresent and in some cases authoritarian, non-executive directors felt unable to raise
objections to, or even question, the proposed guidelines or conclusions due to a lack of
technical expertise and/or confidence.
Boards of directors, in particular the chairman, did not carry out a serious performance
appraisal either of their individual members or of the board of directors as a whole.
Boards of directors were unable or unwilling to ensure that the risk management
framework and risk appetite of their financial institutions were appropriate. To provide
sufficient information upstream to their supervisory authorities. Furthermore, even where
effective dialogue existed, corporate governance issues were rarely on the agenda.
.
2.9.4 Risk management:
Risk management is one of the key aspects of corporate governance, particularly in the case of
financial institutions. Several large financial institutions no longer exist precisely because they
neglected the basic rules of risk management and control. Financial institutions have too often
failed to take a holistic approach to risk management. The main failures and shortcomings can be
summarized as follows:
A lack of understanding of the risks on the part of those involved in the risk management
chain and insufficient training for those employees responsible for distributing risk
products;
A lack of authority on the part of the risk management function. Financial institutions
have not always granted their risk management function sufficient powers and authority
to be able to curb the activities of risk-takers and traders;
Lack of expertise or insufficiently wide-ranging experience in risk management. Too
often, the expertise considered necessary for the risk management function was limited to
those categories of risk considered priorities and did not cover the entire range of risks to
be monitored;
A lack of real-time information on risks. To allow those involved to react quickly to
changes in risk exposures, clear and correct information on risk should be available
rapidly at all relevant levels of the financial institution. Unfortunately, the procedures for
getting information to the appropriate level have not always functioned. Furthermore, it is
crucial to upgrade IT tools for risk management, including in highly sophisticated
financial institutions, as they are still too disparate to allow risks to be consolidated
rapidly, while data are insufficiently consistent to allow the evolution of group exposures
to be followed up effectively in real-time. This concerns not only the most complex
financial products but all types of risk.
2.9.5 The role of shareholders:
The financial crisis has shown that confidence in the model of the shareholder-owner who
contributes to the company's long-term viability has been severely shaken, to say the least. The
growing importance of financial markets in the economy, due in particular to the multiplication
of sources of financing/capital injections, has created new categories of shareholders. Such
shareholders sometimes seem to show little interest in the long-term governance objectives of the
businesses/financial institutions in which they invest and may be responsible for encouraging
excessive risk-taking in view of their relatively short, or even very short (quarterly or half-
yearly) investment horizons.
In this respect, the sought-after alignment of directors' interests with those of these new
categories of shareholder has amplified risk-taking and, in many cases, contributed to excessive
remuneration for directors, based on the short-term share value of the company/financial
institution as the only performance criterion. Several factors can help to explain the disinterest or
passivity of shareholders with regard to their financial institutions:
- Certain profitability models, based on possession of portfolios of different shares, lead to
the abstraction, or even disappearance, of the concept of ownership normally associated
with holding shares.
- The costs which institutional investors would face if they wanted to actively engage in
governance of the financial institution can dissuade them, particularly if their
participation is minimal.
- Conflicts of interest– the lack of effective rights allowing shareholders to exercise
control, the maintenance of certain obstacles to the exercise of cross-border voting rights,
uncertainty over certain legal concepts and financial institutions' disclosure to
shareholders of information which is too complicated and unreadable, in particular with
regard to risk, could all play a part, to varying degrees, in dissuading investors from
playing an active role in the financial institutions in which they have invested.
2.9.6 The role of supervisory authorities:
Generally speaking, the recent financial crisis revealed the limits of the existing supervision
system: in spite of the availability of certain tools enabling them to intervene in the internal
governance of financial institutions, not all supervisory authorities, either at national or
Furthermore, the supervisory authorities also failed to establish best practices for corporate
governance in financial institutions.
In many cases, supervisory authorities did not ensure that financial institutions' risk management
systems and internal organization were adapted to changes in their business model and financial
innovation. Supervisory authorities also sometimes failed to adequately enforce strict eligibility
criteria for members of boards of directors of financial institutions.
2.10 Corporate Governance in Financial Enterprises in
Bangladesh:
As in many developing countries, banks play a vital role in Bangladesh economy, as the
dominant financier for the industrial and commercial activities. Since the independence in 1971,
the government until 1982, when the ‘ownership reform’ measures started in the financial sector,
had carried out the regulation and ownership of all the financial institutions. During the reform
period, two out of six National Commercial Banks (NCBs) were denationalized and private
commercial banks were allowed to operate in the country. In 2003, out of the 49 banks operating
in Bangladesh, 9 belong to the public sector, 30 are local private and 10 are foreign owned banks
(Bangladesh Bank, 2003).
Despite the expansion, the operational efficiency of the banking institutions has continued to be
dismal (Sayeed, 2002; Raquib, 1999). The sector witnessed decreasing profitability, increasing
non-performing assets, provision and capital shortfalls, eroded credit discipline, rampant
corruption patronized by political quarters, low recovery rate, inferior asset quality, managerial
weaknesses, excessive interference from government and owners, weak regulatory and
supervisory role etc (Hassan, 1994; USAID, 1995).
Internal control system along with accounting and audit qualities are believed to have been
substandard (World Bank, 1998; Raquib, 1999; CPD, 2001). Many of the problems have been
attributed to lack of sound corporate governance among the banks. The reports by the Banking
Reform Commission (1999) and BEI (2003) raises serious concerns on the banking sector and
criticize the quality of governance that prevails in the banking sector in Bangladesh, which
provides an impetus to explore the governance issues in detail in this paper.
However, there are some additional reasons that are unique to the financial sector which
necessitate attention to this issue.
These are:
The rapid changes brought about by globalization, deregulation and technological
advances are increasing the risks in banking systems.
The failure of a bank affects not only its own stakeholders, but may have a systemic
impact on the stability of other banks. All the more reason therefore to try to ensure that
banks are properly managed.
Private sector banks are motivated by profit maximization and their own financial stakes
are limited and relatively low and they are therefore prone to excessive risk taking with
the depositors’ money. Strong corporate governance is, therefore, required to discourage
them from following this course.
2.11 Corporate Governance - Best Practices and Guidelines
Public Limited Company – Financial Institutions:
Given the important financial intermediation role of banks in an economy, their high degree of
sensitivity to potential difficulties arising from ineffective corporate governance and the need to
safeguard depositors’ funds, corporate governance for banking organizations is of great
importance to the international financial system and merits targeted supervisory guidance. The
Basel Committee on Banking Supervision published guidance in 1999 to assist banking
supervisors in promoting the adoption of sound corporate governance practices by banking
organizations in their countries. This guidance drew from principles of corporate governance that
were published earlier that year by the Organization for Economic Co-operation and
Development (OECD) with the purpose of assisting governments in their efforts to evaluate and
improve their frameworks for corporate governance and to provide guidance for financial market
regulators and participants in financial markets.
Banking companies pose unique corporate governance attention as they differ greatly with other
types of firms in terms of broader extent of claimants on the banks assets and funds. A group of
entrepreneurs and/or executives could set up a banking business by putting very little equity from
their own pocket as the nature of business itself guarantees flow of enormous amount of funds in
the form of deposits. The general approach to corporate governance argue in favor of the
shareholders rights only, as managers/executives may not always work in the best interest of the
shareholders (Henderson, 1986; Jensen and Meckling, 1976; Fama and Jensen, 1983). But the
shareholders actually account for a very tiny portion of the bank’s assets and funds. Rather
almost every bit of banks’ investments are financed by the depositors’ funds. In case of losses or
failures it will be depositors’ savings that the banks would lose. Such risks demand priority in
protection of depositors that ushers in a broader view of corporate governance that suggests the
interest and benefits of the suppliers of funds for a firm should be upheld (Shliefer and Vishny,
1997; Vives, 2000; Oman, 2001).
Macey and O’Hara (2001) also argue that a broader view of corporate governance should be
adopted in the case of banking institutions, arguing that because of the peculiar contractual form
of banking, corporate governance mechanisms for banks should encapsulate depositors as well as
share holders. Arun and Turner (2003) supported the need for the broader approach to corporate
governance for banking institutions and also argue for government intervention to restrain the
behavior of bank management. In many countries, deposit insurance is used as a mechanism to
safeguard the banking system as well as the depositors. However, Macey and O’Hara (2001)
argues that in many instances, the presence of deposit insurance mechanism by the governments
may encourage many bank insiders to embark upon self-benefiting risky deals taking the
advantage of insurance protection. The self-dealing activities by the bank insiders are very
dangerous to the performance and survival of the banks as scores of previous bank failures have
been caused by risky self-dealing by the bank insiders (Jackson and Symons, 1999; Clarke,
1988). The presence of heavy liquid assets and potential lack of depositors’ interest to actively
control and monitor banks’ risky decisions as a result of the insurance guarantees simplifies and
aggravates the sharking in the banking firms.
Banks in developing countries are faced with high risk of sharking as a result of heavy
government ownership, lack of prudential regulation, weak legal protection and presence of
special interest groups ((BCBS, 1999; Arun and Turner, 2003). The independent regulatory
agencies are important in developing countries to act against the frequent collusion among
government, businesses and bankers to serve special interest groups (Shleifer and Vishny, 1997;
Arun and Turner, 2002). However, there is an argument that active role by regulators may cause
problems as well, as regulators may not have a convincing/sufficient motivation to monitor the
banks as they do not have much at stake in case of bank failures (Macey and Garrett, 1988).
Recently, the financial markets of developing economies have experienced rapid changes due to
the growth of wider range of financial products. As a result of this, banks have been involved
with high risk activities such as trading in financial markets and different off-balance sheet
activities more than ever before (Greuning and Bratanovic, 2003), which necessitates an added
emphasis on quality of corporate governance of banks in developing economies.
Asian Roundtable on Corporate Governance (ARCG) Task force developed the Policy Brief on
Corporate Governance of Banks in Asia (June 2006). The main issues and priorities for reforms
in CG of banks in Asia that were identified are:
The responsibility of individual board members – fiduciary duties of bank’ board
members, need of skills, personal abilities, training programs on integrity and
professionalism.
The roles/functions of the board – guiding, approving and overseeing strategies/policies
rather than being immersed in day-to-day operations. Creating clear accountability lines
and internal control systems. Sufficient flows of information and managerial support.
The composition of the board – banks are more encouraged to have independent
directors than other firms. Separation between Chairman and CEO.
The committees of the board – audit committee, the Risk Management Committee, The
Governance Committee with combined responsibilities of Nomination, remuneration,
succession planning, training, performance evaluation, etc.
Preventing abusive related party transactions – inspection of the existing firewall.
Creation of specialized committee to monitor and approve relatedpart transaction.
Publicly disclose such transaction.
Bank holding companies and groups of companies holding banks – a bank’s parent
company should not impede the full exercise of the CG of the bank within the banking
group.
Disclosure – effort on convergence into international standards on accounting, etc.
should be encouraged.
Bank’s autonomy in relation to the state – state as owner should respect the legal
corporate structures of State Owned Commercial Banks (SOCB).
Bank’s monitoring of the CG structure of its corporate borrowers – Extent to which
banks should assess/monitor CG of their corporate borrowers or seek to improve it.
Public Limited Company – Non Financial Institutions
In practice, corporate governance and monitoring mechanism recently focused on matters like
the composition of the Board of Directors, the duties and responsibilities of the executive
directors, regular monitoring by shareholders, voting rights of shareholders and detailed
disclosure of company information that are material for decision making by interested parties.
The guideline that good corporate governance frameworks project and facilitate is the exercise of
shareholders’ rights. Shareholders should have right to participate in, and to be sufficiently
informed on, decisions concerning fundamental corporate changes. The equitable treatment of all
shareholders, including minority and foreign shareholders should be ensured by corporate
governance also. Stakeholders, including individual employees and their representative bodies,
should be able to freely communicate their concerns about illegal and unethical practices to the
board and their rights should not be compromised for doing this. Another important
responsibility of corporate governance is time and accurate disclosure of all matters regarding
the corporation. Information should be prepared and disclosed in accordance with high quality
standards of accounting and financial and non-financial disclosures. Board members should act
on fully informed basis, in good faith, with due diligence and care, and in the best interest of the
organization and shareholders.
The board of Directors is the central entity in a functioning corporate governance system, since it
is the governing body of any organization. The board is accountable to the shareholders and/or
stakeholders of the organization. To meet its organizational objectives the board must provide
strategic policy and directions to the management, but should not involved in day-to-day
operational decisions. Management is accountable to the board, and therefore information
systems that provide relevant, transparent, and material information to the board are imperative.
(The Code of Corporate Governance For Bangladesh, Mar 2004, BEI)
The board size should be optimal with diverse expertise and experience to ensure a well
functioning and involved board. BEI guidelines states that ideally internationally successful
corporate boards have memberships of 7 to 15 directors. BEI also stresses the need for
mandatory retirement by rotation of 20% of the board; and the vacancies to be filled at the AGM.
SEC in the their notification dated 20th March 2006 in order to enhance corporate governance in
the interest of investors and the capital market, imposes the some further conditions to the
companies listed with any stock exchange in Bangladesh. These conditions are imposed on
‘comply or explain’ basis. The companies listed with any stock exchange in Bangladesh should
comply with these conditions or shall explain the reasons for non-compliance. Board size
propose by SEC is not be less than 5 (five) and not more than 20 (twenty). Cadbury report,
Sarbanes-Oxely Act, BEI, SEC and other major works on CG also emphasizes on the importance
of independent directors in the board. All companies should encourage effective representation
of independent directors on their Board of Directors so that the Board, as a group, includes core
competencies considered relevant in the context of each company. For this purpose, the
companies should comply with at least one tenth (1/10) of the total number of the company’s
board of directors, subject to a minimum of one, should be independent directors.
According to SEC “Independent Director means a director who does not hold any share in the
company or who holds less than one percent (1%) shares of the total paid-up shares of the
company, who is not connected with the company’s promoters or directors or shareholder who
holds one percent (1%) or more than one percent (1%) shares of the total paid-up shares of the
company on the basis of family relationship; who does not have any other relationship, whether
pecuniary or otherwise, with the company or its subsidiary/associated companies, who is not a
member, director or officer of any stock exchange, and who is not a shareholder, director or
officer of any member of stock exchange or an intermediary of the capital market.” The
independent director(s) should be appointed by the elected directors.
Few other guidelines and best practices on corporate governance which receive considerable
emphasize are:
The position of the Chairman of the Board and CEO should be filled by different
individuals.
A company should appoint Chief Financial Officer (CFO), a Head of Internal audit and a
Company Secretary.
A company should have an audit committee as a subcommittee of the board.
Directors, in the Annual Report, should give representation of the true and fairness of
accounts, compliance with accounting standard and proper internal control.
2.12 Challenges ahead to the Banking sectors for implementation
of corporate governance:
The most pressing challenges facing the banking sector arise mainly from the adoption of Basle
II Accord and consequential management of risks. Early adoption of the Basle II Accord presents
an unparalleled opportunity for banks. Those that embrace the new standard will find they enjoy
a distinct competitive and high-performance advantage in international markets. Idle capital is
freed up, ready to be put to best use. The main challenges ahead are:
Induction and retention of highly skilled human resources and keeping their skills in
hone will be the number one priority for all of us – the regulators, the shareholders, the
educational institutions and the Chief Executive Officers. In this respect, those of you
who are aspiring to join the financial sector have to equip yourselves with the
knowledge, skills and attitudes required for professionalism. The difference between the
successful and not so successful graduates will lie in the acquisition for life long and
continuous learning. Those who keep up with the times and strive to improve themselves
throughout their career, through learning, will have bright and promising future. Those
who become smug and complacent and adopt short cuts may have immediate gains but
will find it hard to survive in competitive financial markets over the long run.
The other challenge is that the banks will have to automate and reengineer their business
processes, move to E-banking and multi channel delivery modes and use technological
solutions to reduce transaction costs providing satisfaction to the customers. The record
of the banking system in adoption and diffusion of technology has been mixed so far but
greater efforts will have to be made in the future.
Credit, market and operational risks should be identified, quantified and mitigated
instead of dealing with credit risks only as was the case under Basle I. Strong Internal
Rating Systems and Management Information Systems are essential for managing these
risks.
The increased transparency provided by Basle II means that clients, regulators and
investors all will have a clear understanding of the institution’s operations. Consumers
and commercial clients will benefit from more timely and accurately assessed lending
decisions leading to increased customer satisfaction and loyalty in a highly competitive
market. The fog created by best guesses has to be replaced by an objective historical
track record and reliable data on which future decisions can be made. Regulators will
also have access to stronger sets of historical data and transaction trails for detailed
examination and policy decisions. Finally, investors will reward banks that capitalize on
the advantages afforded by the Accord.
Market discipline will have to be strengthened to make governance effective in Banks.
Credit ratings, listing on the Stock Exchanges, raising funds through capital markets are
some of the mechanisms that can fortify market discipline.
Lower capital requirement for lending to good rated borrowers will improve the overall
Governance emphasis amongst the corporations.
Good internal controls will be established which are essential for capital assessment
process.
To conclude, good Corporate Governance is something we have to live with and in the financial
sector the imperatives are even stronger than the rest of the corporate sector. In Bangladesh, we
have made a modest beginning but the challenges ahead are still quite daunting. We have to
continue the journey on the path we have chosen i.e. to strengthen the Corporate Governance in
our Financial Sector.
3.0 Analysis & Findings:
The state and nature of corporate governance has been studied under some general headings. For
this analysis the financial institutions like banks which are listed in the Stock Exchange have
been chosen.
The specific aspects of good corporate governance practices that are examined are briefly
explained in the following sections.
3.1 Responsibilities of the Board:
For the fair operation of the company the members who are in the Board must know what the
responsibilities they have in the organization. If the board members are not aware of their actions
they will not be able to perform the right job in right time and will not be able to provide proper
directions to the management.
The result of the questionnaire indicates that most of the respondents strongly agree that those
members of the board of their respective organization are very aware of the responsibilities.
3.2 External auditor of the company:
It has been found from the results of the questionnaire that in all the organizations, there is the
presence of external auditors. This may be the reason of statutory requirement to have the
financial statements audited by the qualified independent auditors. The most of the respondents
opines that the works of the external auditors are reviewed properly. But the real picture may be
different. Most often the external auditors are influenced to give the results desired by the
authority. This tendency is seen more in the Private Commercial Banks than that of Nationalized
Commercial Banks.
It is also opined by the respondents that financial statements made by the company will not be
same if made by the independent auditors. The reason may be that the directors and management
company will try to maximize its interest and for this they will compromise their independency
and integrity.
Internal auditor of the company:
Internal audit is an independent, objective assurance and consulting activity designed to add
value and improve an organization’s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control and governance processes.
This definition recognizes two roles for internal audit:
To provide an independent assurance service to the board, audit committee and
management, focusing on reviewing the effectiveness of the governance, risk
management and control processes that management has put into place.
To provide advice to management on governance risks and controls, for example, the
controls that will be needed when undertaking new business ventures.
The most of the respondents informs that they have internal auditors in the organization and the
internal auditors’ works are routinely reviewed. The internal auditors of these banks help the
external auditors and the audit committee providing necessary information focusing on
reviewing the effectiveness of the governance, risk management and the control process that
management has put in place.
3.3 Shareholder Rights and Disclosure of Information:
On the issue of shareholders’ rights and disclosure, the study investigated several key issues: i)
the practice of voting in the Annual General Meeting of the companies, ii) disclosure of
information in terms of knowing the agenda, iii) lead time to analyze information, iv)
information on equity of major shareholders, v) practice of nomination and disclosure of director
candidates in the meeting, vi) rights of the minority shareholders in nominating candidates, and
vii) rights of the shareholders in terms of opposing candidates nominated by the management.
To understand shareholders’ rights the study used several proxy variables like a) length of the
meeting, and b) attendance in the meetings. Duration of the meetings indicates whether
shareholders’ are given opportunities to debate on issues related to their interest or not. Similarly,
higher attendance of the meeting indicates presence of a pluralistic environment in the decision
making process. It was found that duration of the AGMs in these companies were mostly
between 2-3 hours. For these companies number of shareholders attended the last AGM are
between 300 and 6000.
It is found from the questionnaire analysis that the companies have own disclosure policies about
which type of information will be disclosed and which one is not. It is also found that the
shareholders are provided adequate information in the agenda of shareholders’ meeting.
It is also found that the all the PCBs disclose quarterly, semi-annual financial statements to make
the stakeholders know about the interim performance of the banks. But the NCBS do not disclose
the quarterly or semi-annual financial statements to the stakeholders on a routine basis.
3.4 Review of the management performance:
For ensuring the better performance of the company, the performance of the management of the
company should be reviewed on a regular basis. From the questionnaire analysis it is found that
the performance of the banks management is reviewed on a routine basis. It is also found from
the discussion that this review is done in more proper way in the private commercial banks that
that of the NCBs.
3.5 Participation of independent directors in the board discussion:
For ensuring the transparency and fairness the active participation of the independent directors in
the board discussion should be ensured. The independent directors will give their opinion while
decision regarding anything is being made by the executive directors in the board meeting.
From the analysis of the questionnaire it is found that there is no active participation of the
independent directors in the board’s discussion. For this reason, the executive directors get the
scope to adopt unfair means in case of decision making. They try to maximize their own interest
ignoring the interest of different stakeholders.
3.6 Right way to go in terms of corporate governance for a company:
It was wanted to know from the respondents about the right way to ensure the good governance
for a company. The respondents replay that good business management with established long
term strategies plan and successful implementation of those plans and fair view company reports
and disclosure to focus on investors could be right way to ensure the good governance for the
companies. The respondents argue that the successful implementation of the good governance
practice will help the company ensure accountability of the persons who are involved in the
strategic decision making of the organization.
3.7 Ease of participation in voting by shareholders
Figure 1 illustrates that in terms of ease of participating in the meetings, shareholders used
several options to express their opinion. Most of the shareholders either participate in person or
nominate an individual to vote.
3.8 Knowledge on AGM Agenda and Equity of Major Shareholders:
It is important that shareholders’ know the agenda of the meeting well in advance, can discuss
their views in the meeting and have knowledge about the equity position of the major
shareholders. These are important elements for ensuring good governance at the corporate level
to safeguard rights of the smaller investors in the company. Figure 2 shows that except for equity
of the major shareholders, this is not of a matter of concern in Bangladesh.
3.9 Nomination of Director’s Candidate:
Nomination of candidates in the meeting is an important element to ensure transparency in the
governing the company. Study result shows that while a majority of the shareholders knew about
the Director’s candidate prior to the AGM, however, some had no idea about it. This information
should have been known to all. A failure implies lack of transparency in the corporate
governance.
Similarly, only 50% of the shareholders mentioned that minority shareholders could nominate
their candidates.
Table: Disclosure and Rights of the Shareholders-nomination of candidates.
3.10 Public disclosures and transparency:
Public disclosure in an important element of governance in the corporate world because it builds
trust, helps brining new investors and ensures smooth functioning of the capital markets and
excels the company growth. It is, therefore, a requirement in our SEC’s code of conduct.
Figure: Public Disclosure through different modes
Seven different aspects of corporate governance with respect to public disclosure were studied.
These are:
i) Directors’ selling and/or buying shares of the company,
ii) Background of the directors,
iii) Remuneration of the directors,
iv) Fees paid to consultants,
v) Policies on risk management,
vi) Significant changes in the ownership, and
vii) Governance structure and policies.
Above figure shows Annual Reports, and Reports to Regulatory Agencies consist the bulk of the
disclosure tool for these companies. In other words, companies used ‘box checking’ method to
provide information to the regulatory agencies rather than understanding the essence of public
disclosure as a whole. On four of the aspects (stated above), some companies had zero
disclosure. The study found that 17% of the companies did not disclose director’s selling or
buying of shares, 14% did not disclose background or profile of the directors, 14% did not
disclose remuneration paid to the directors and 37% did not disclose significant changes in the
ownership of the company. These are contrary to the principles adopted in the best practice of
CG.
3.11 Transparency and fairness in the organization:
It has been opined by the respondents of the questionnaire that if the fairness and transparency
could be ensured in the governance of the organizations the performance of the organizations
will improve and at the same time, potential investors will be interested to enter in this sector.
3.12 Effectiveness of Board:
On this issue, to determine the effectiveness of the board several factors were examined:
a) Size of Board and structure
b) Presence and effectiveness of the independent directors
c) Separation of chairman and CEO
d) Performance evaluation of the CEO by the board.
In the SOEs, on an average eight out of nine directors are independent directors, in public limited
companies – financial and non-financial institutions, board size and number of independent
directors were found to be within the statutory requirement stated by SEC. Study found that
CEOs and the Chair of the Board are always separate individuals in all cases.
3.13 Role of the Independent Directors:
On the issue of active participations of the independent directors in the board meetings, State
Owned Enterprises had a better rating than others. This is possibly due to the fact that at SOEs
the Board mostly consists of independent directors. In the financial sectors, the study did not find
a significant role of independent directors whereas in the nonfinancial public limited enterprises
the role of independent directors is intermediate in nature.
Factors that were investigated to measure the role of independent directors in the board meeting
in
i. Altering the agenda set by CEO,
ii. Participating discussions,
iii. Disapproving the agenda, and
iv. Recording opinions in the minutes.
The stated figure shows that in 20% of the cases, cases, independent directors were never active
in the meetings of the board. In another 20% of the cases, independent directors rarely intervened
to alter the agenda of the meetings and in 40% of the cases; they rarely disapproved the agenda
placed in the board. Independent directors rarely participated in the meeting of the private
companies.
Figure: Role of Independent Directors in the AGM
( Source: State of Corporate Governance in Bangladesh by Enamul Haque)
3.14 Committees:
Interests of the investors and other stakeholders in the company are safeguarded through various
committees. In the best practice guideline, three major committees are recommended. These are:
a) Audit committee,
b) Remuneration committee and
c) Nomination committee.
From the result of the questionnaire it is found that all three committees are found to be present
in both private commercial banks and Nationalized Commercial Banks (NCBs). But from the
discussion with the managers of the some Private commercial banks and NCBs, the committees
of the PCBs are more active than that of NCBs. It is also been found that audit committees are
more active than other committees in the organizations. The existence of the audit committee in
all companies may be in the effect of the statutory requirement for the all the public limited
companies to have.
To measure the effectiveness and independence of the audit committee several variables were
used.
i) presence of expert domain knowledge
ii) chairing by the independent directors
iii) recording of the minutes
iv) approval of remuneration by the shareholders, and
v) presence of an audit rule of companies,
vi) use of external auditor were investigated, and
vii)use of internal auditors by the company,
Above figure shows that in the audit committee, members have requisite knowledge to work in
the committee and it is valid for all types of enterprises. It has been observed that in the
organization the audit committees are most often chaired by the independent directors.
Interestingly, on the remuneration of the members of the audit committee discusses the matter in
the AGMs separately in the PCBs while for NCBs generally there is discussion on the
remuneration issue. The respondents tell that the remuneration committee reviews the
performance of the boards to while fixing remuneration for them.
What is more interesting is that all non-financial enterprises (listed companies) did not have
written audit rules; neither had they regularly reviewed functions of the external and the internal
auditors. This shows a weakness in the function of the audit system in nonfinancial enterprises
public limited companies.
4.1 Recommendations:
To implement reforms in CG, with a view to have good corporate governance in Bangladesh, the
following proposals/recommendations can be put forward:
4.1.1 Short-term:
Code of Corporate Governance and Best Practice Recommendations:
The current status is that many Asian countries have adopted governance guidelines and codes of
best practice. Like these countries, Bangladesh needs to have a “Code of Corporate Governance
and Best Practice Recommendations” which can be either rule based or principles based.
Bangladesh Enterprise Institute (BEI), Corporate Governance Committee of ICAB, and SEC
have developed separate Codes for Corporate Governance for Bangladesh. The Government
must take initiatives to make these implemented by making necessary changes in the Companies
Act.
Implement Competition Policy:
An effective competition policy fosters a flexible, dynamic, and competitive private sector that
leads to sustain and widely shared economic development. Bangladesh needs to formulate a
Competition Policy which will ensure a culture of good corporate governance to thrive.
Competition policy helps bring about efficiency, reduce price distortions, lower the risk of poor
investment decisions, promote greater accountability and transparency in business decisions, and
lead to better corporate governance.
4.1.2 Medium-term:
Introduction of the legal and regulatory framework to protect the right of minority
shareholders:
Government should introduce measures, or enhance existing measures, to provide non-
controlling shareholders with adequate protection from exploitation by controlling shareholders.
These measures may include, among other things: (i) strengthening disclosure requirements
(particularly of self-dealing/related-party transactions and insider trading) (ii) ensuring that
regulators have the capacity to monitor companies for compliance with these requirements and to
impose substantial sanctions for wrongdoing; (iii) clarifying and strengthening the fiduciary duty
of directors to act in the interest of the company and all of its shareholders; (iv) prohibiting
indemnification of directors by companies for breaches of fiduciary duty; and (v) providing
shareholders who suffer financial losses with private and collective rights of action against
controlling shareholders and directors.
Improve the capacity of the Boards of directors:
The directors must improve their participation in strategic planning, monitoring of internal
control systems and independent review of transactions involving managers, controlling
shareholders and other insiders. There is a need for director training, voluntary codes of conduct,
expectations for professional behavior and directors’ resources and authority vis-à-vis
management. Also it is required to reduce or eliminate loopholes by tightening standards for
director “independence”, by making “shadow” directors liable for their actions, by increasing
sanctions for violations of duties of loyalty and care and by advocating delineation of a core set
of related-party transactions (such as company loans to directors and officers) that should be
prohibited outright. It is important to facilitate mechanisms to adequately empower the
shareholders to seek redress for violations of their rights and to ensure director accountability.
The most vital thing that can ensure good CG is high standards of ethical and personal behavior.
This can only be ensured if the value system of society imposes this on their people as the norm
in every aspect of life. Good CG must become an unshakable social and moral imperative.
4.1.3 Long-term:
Strengthen the Capacity of the Government to Monitor and Enforce the Implementation of
Corporate Governance:
The Securities and Exchange Commission (SEC) of Bangladesh need to be strengthened so that
it can devise and enforce a code for good CG. The Companies Act has to be amended and
updated to have consistency with Bangladesh Accounting Standards (BAS), SEC requirements
and the Bank Companies Act. Independent Audit Committee should be made compulsory for all
listed companies. Strict implementation of accounting and auditing standards are very important.
As the lead regulatory body overseeing corporate accounting and reporting, the SEC has a
critical role to ensure that public co mpany boards are properly structured and organized and
have the resources to accomplish the objectives of adding value to shareholders, minimize risk of
key shareholders and hold management responsible for corporate results. Ruthless monitoring of
compliance and severe punishment of transgressors can ensure good CG. But Bangladesh has to
wait a lot to ensure enforcement of any corrective measures properly. If the policymakers
implement the recommendations suggested above, undoubtedly a good CG environment will
prevail in Bangladesh.
Strengthen the Capacity of Public–Private partnership:
Public- and private -sector institutions should continue to raise awareness among companies,
directors, shareholders and other interested parties of the value of good CG. Bangladesh has
made little progress in raising awareness of the value of good CG. To Achieving the desired
CG framework in Bangladesh requires not only a strong national commitment to CG, but one
that is also broad based.
Government should intensify its efforts to improve the regulation and corporate
governance of SOEs:
Shortcomings in the governance of SOEs and FIs not only lower returns to the bank’s
shareholders, but, if widespread, it destabilizes the financial system. To restore confidence to
both debt and equity markets, policy- makers and regulators need, in addition to ensuring
adequate banking laws and regulations and supervision of banks’ operations, to promote sound
corporate-governance practices in the banking sector. Ownership and financial relationships
should be disclosed. Self-dealing/related-party transactions should be subject to both banking
and corporate-governance restrictions. Bank directors should be able to pass “fit and proper”
tests for service. These directors should also assume responsibility for bank systems and
procedures that ensure sound lending and monitoring practices, as well as the capacity to handle
distressed debt. Lastly, local insolvency systems must protect and enforce creditors’ rights and
provide efficient liquidation of debtors which cannot be expeditiously restructured into
commercially viable enterprises.
Introduction of Good Governance Practices in SOEs:
In order to provide a strong demonstration effect, CG reforms in strategic SOEs that handle
electricity gene ration and distribution, gas distribution, telecommunications, and air
transportation can be undertaken. These enterprises are fully owned by the Government.
Effective implementation and enforcement of corporate-governance laws and regulations:
Over the past several years, most South Asian countries have substantially revamped their laws,
regulations and other formal corporate-governance norms. Bangladesh is still lagging behind in
this matter. Leadership from the uppermost reaches of government is necessary to promote
public confidence in the state’s commitment to the rule. In this regard, adoption of international
accounting, audit and financial disclosure standards and practices will facilitate transparency, as
well as comparability, of information across different jurisdictions. Such features, in turn,
strengthen market discipline as a means for improving CG practices.
Institutional Capacity Building:
There is a need for disseminating CG and enterprise restructuring principles and for
implementing the related guidelines and standards. Public awareness and development of
governance structure i.e., enforceable regulation, ensuring financial transparency, stop financial
malpractice and any form of market manipulation are essential for enabling a sound framework
for CG. It is, therefore, required to educate the public about their rights as shareholders and about
the work of modern corporations through our own specialized publications and through the
national and regional l mass media.
Improving the quality of Financial Reporting:
In Bangladesh, quality of financial reporting needs to be improved. This requires a robust
regulatory regime and effective enforcement of the accounting and auditing standards. True
independence of the auditor is at the crux of good CG. Auditors need to be able to function with
real independence and without fear or favor. Simultaneously, auditors also need to be monitored
through strict enforcement of professional code of ethics of auditors. In the long run, auditors
will become irrelevant if they fail to act independently. 63 There must be a consolidating
financial report for the group of companies.
4.2 Conclusion:
Corporate governance is a system by which the companies are directed and controlled. The good
governance in the organization ensure the protection of the right of minority shareholders,
equitable treatment of shareholders, recognition of the roles of stakeholders, the proper
disclosure and transparency and the clarification of the responsibilities of the board of the
company
Every organization operates its business in a business environment and every organization is a
part of a society. Both the stockholders and stakeholders group have impact on the smooth
functioning of the business. Proper functioning of the organization is must to ensure the
betterment of this stakeholder group. Practice of good governance in the organization can ensure
this betterment.
In my research, I have tried to focus the corporate governance practice in the financial sectors of
Bangladesh.
For this I have prepared a questionnaire and tried to get an idea about the governance of different
financial institutions.
I tried to know about whether the boards of directors understand their responsibilities, the
different committees in the organization, the audit procedures or systems, auditors, number of
independent and executive directors, disclosure policy of the organization. On the basis of these
responses, I have tried to evaluate the extent of corporate governance practice in different
financial institutions.
I have analyzed the replies obtained on the questionnaire by the respondents of different banks
and accumulated the findings in my report.
Corporate Governance is vital for growth and stability of various economic sectors. Amongst
them the banking sector, which happens to be the engine behind developing country’s economic
activities, is in utmost need for prudent and effective regulation both at firm and macro level. At
a time when Bangladesh is making all out effort to achieve higher economic growth through
expanding export and industrial base of the economy, an efficient, stable banking sector is of
huge importance for the country for its role to facilitate efficient resource allocation and flow of
economic activities.
However, the literature and evidence clearly suggests that the quality of the regulation in
Bangladesh banking system stands at a very unsatisfactory level. Government ownership,
political interventions, concentrated ownership of the private banks, lack of accountability of
public sector bankers, faulty, incomplete and ineffective audit and disclosure have led to
widespread corruption in the banking sector which saw banking assets and depositors fund
waning away in the pockets of interest group. Such widespread corruption and lack of other
weak infrastructural back up to banning scoter absolutely demanded a strong and effective
monitoring and control the competitive activities in the banking sector has threatened the
stability of the banking sector as well as the safety of millions of depositors.
4.3 References:
1. Osman, Mahmood (2006) ‘Seminar Paper on Firm Performance and Corporate
Governance through ownership Structure: Evidence from Bangladesh Stock Market’, 14-
15 March, Bangladesh China Friendship Conference Center.
2. Cadbury, Sir Adrian., 2000, The Corporate Governance Agenda, , Blackwell Publishing,
Vol-8, Number 1, pp. 7- 15(9)
3. Cadbury Committee (1995), Cadbury Reports, London Stock Exchange London.
4. Khan, Zaman. Habib-uz-Zaman., Ghosh, Kumar. Sunto., Akter Shahriar (2006)
‘Corporate Governance Reporting as a Voluntary Disclosure: A Study of the Annual
Reports of Square group’ BRAC University Journal,Vo.III No.2,2006,pp.10
5. Bangladesh Enterprise Institute (BEI) (2003) ‘A Comparative Analysis of Corporate
Governance in South Asia: Charting a Roadmap for Bangladesh BEI’, Dhaka,
Bangladesh.
6. Bangladesh Enterprise Institute (BEI) (2004) The Code of Corporate Governance For
Bangladesh, Department for Development (DFID) ISBN: 984-32-1353-X
7. Ahmad, M.U., Yusuf .M.A (2005), Corporate Governance: Bangladesh Perspective, The
Cost and Management, Vol. 33, pp. 18-26.
8. Bangladesh Enterprise Institute (BEI) (2006) ‘Round Table Discussion on the OECD
guideline on Corporate Governance for SOE’, Nov-14-15, 2006,(BEI) Conference Room.
9. Cadbury, A. (2003), Corporate Governance – An Indian Perspective: Diverse Demands;
Disciplined Approach, The Instituteof Chartered Accountants of India (Publication of the
125th All India Conference of Chartered Accountants, January, Delhi).
10. Ahmed, Muzaffar (2003): Seminar Paper on Corporate Governance Bangladesh financial
Sector: Bangladesh China Friendship Conference Center.
11. Sang-Woo Nam, IL Chory Nam (2004): Corporate Governance in Asia, Annual
Development Bank Institute.
12. Chaudhury, A.M. (2004) ‘Corporate Governance – An Industry Perspective’, The
Bangladesh Accountant, October-December
13. Khalily, B. (2005), Views expressed in the International Conference on Corporate
Governance in Bangladesh, held at Dhaka.
14. Shleifer, A. and R, Vishny (1997) ‘A Survey of Corporate Governance’, Journal of
Finance, Vol. 52, pp. 737-783
15. Fama, E. and M, Jensen (1983) ‘Seperation of Ownership and Control’ Journal of Law
and Economics, Vol. 26, pp, 301-325.
16. Fan, J (2004) ‘What Do We Know About Corporate Governance of Banks’, Presented at
Asian Development Bank Institute Seminar on Corporate Governance of Banks in Asia,
June 10-11, Tokyo.
17. Hassan, K (1994) ‘The Financial Sector Reform in Bangladesh’ in Hassan, K Banking
and Finance in Bangladesh, Dhaka, Bangladesh.
18. Basel Committee on Banking Supervision (BCBS) (1999) ‘Enhancing Corporate
Governance for Banking Organizations’, Bank for International Settlement.
19. Bangladesh Enterprise Institute (BEI) (2003) ‘ A Comparative Analysis of Corporate
Governance in South Asia: Charting a Roadmap for Bangladesh’ BEI, Dhaka,
Bangladesh.
20. Haque, Enamul. A. K., Jalil, M. B., Naz. Farha (2007) ‘State of Corporate Governance In
Banladesh’ Cetre For Research and Training.
4.3 Appendix
Questionnaire on Corporate Governance Practice
Q1: Do you think members of the board understand their responsibilities?
Strongly
agree
agree Somewhat
agree
disagree Strongly
disagree
Q2: Is there any Audit committee in the company?
Yes No Don’t know
Q3: Is there any remuneration committee in the company?
Yes No Don’t know
Q4: Is there any Nomination committee in the company?
Yes No Don’t know
Q5: Is there an external auditor of the company?
Yes No Don’t know
Q6: Does your company make a proper review of external auditor’s work?
Very much so To some extent Hardly
Q7: Does the board remuneration committee formally evaluate the CEO’s performance?
Yes, as a
routine
Sometimes Rarely never
Q8: The financial statement made by Company itself would be exactly the same had it been
made by independent auditors
Strongly
agree
agree Somewhat
agree
disagree Strongly
disagree
Q9: Does your company approve the appointment of the internal auditor and supervise his
work routinely?
Actively Occasionally Never
Q10: Is there any information disclosure policy which dictates the type of information that
could be disclosed to the stakeholders?
Yes No Don’t know
Q11: Shareholders are provided with the adequate information on the agenda items of the
shareholder’s meeting:-
Strongly
agree
agree Somewhat
agree
disagree Strongly
disagree
Q12: Is the management of the Company reviewed on its performances?
Yes No Don’t know
Q13: Do you believe that greater transparency and fairness brings in prosperous investors
into a business?
Strongly
agree
agree Somewhat
agree
disagree Strongly
disagree
Q14: Does your company disclose semi-annual reports and quarterly financial statements?
Yes No Don’t know
Q15: Independent directors participating actively in board discussion
Often Sometimes Rarely never
Q16: Does corporate governance have anything to do with...
Strategic decision making and accountability
Enhancing the organization performance
Ensuring more transparency and fairness
Accomplishment sustainable development
None of the above
Q17: What is the right way to go in terms of corporate governance for a Company?
Good deliberation for stuff
Good business management with established long term strategic plan and successful
implementation
Good relation with trading partner
Fair view company report and disclosure to focus on investor
None of the above
Q18: How many directors does your board have in total?
Q 19: How many independent directors does your board have?