Microsoft word - winning essays on principles and practices of corporate governance in bangladesh.doc

House # 20, Road # 5, Gulshan-1, Dhaka-1212, Bangladesh, Phone: 9892662-3, Fax: 9888583 E-mail: [email protected]; Website: www.bei-bd.org Essay Competition (Exam Based Written)
“Principles and Practices of Corporate Governance in Bangladesh”

Rules & Regulations:

Please write your registration code clearly in Bold. Please complete your essay within 3 hours No additional time will be allocated to the candidates who arrive late. You must stop writing as soon as you are told to do so. If you do not stop writing when told, the invigilator will report your actions to the organizer. Mobile phones must be switched off for the duration of the competition. You must ensure that you fasten all additional papers with your main paper before the invigilator collects it. Principles and Practices of Corporate
Governance in Bangladesh
Mr. Suborna Barua
Department of Finance
University of Dhaka
May 25, 2007

Structure of the Essay:

1. Introduction 2. What is Corporate Governance? 4. Corporate Governance and Bangladesh: Principles Overviewed 5. Practice of good corporate governance in Bangladesh 1. Introduction
After the East Asian Crisis in 1998, when many corporate houses especially financial institutions failed, defaulted and got bankrupt, a new dimension was necessary to stop these types of crisis. Corporate governance has therefore been a critical pathway through which corporate sector failures could be prevented and the performances of the corporations could be regulated. A corporate entity is an interest centre for different related groups and these groups are to be satisfied when it operates in the society. Therefore, the legitimacy theory suggests that corporate houses have to be legitimate which means they have to justify their existence in the society positively contributing to every group of people in the society which we call the stakeholder groups. 2. Corporate Governance: More Focus on Stakeholders
Corporate governance means a framework which ensures the satisfaction or trade off of every stakeholder group – shareholders, employees, community, customers, government, suppliers etc. The aforementioned stakeholders have different goals while they engage with a corporation. Corporate Governance ensures that there is congruence of goals – the organization’s goal is set considering the individual goal of every stakeholder. The goal congruence leads the corporation to tradeoff among all stakeholder groups. By a good corporate governance framework, an organization is administered and operated in a transparent, accountable and responsible way. Thus, it helps the stakeholders to protect their interest in a corporation and exercise their every right which they deserve. 3. Why Corporate Governance?
What happened in December 2001 when Enron in USA was declared bankrupt? The top management admitted that they had misstated their income and that the company’s equity value was a couple of billion dollars less than its balance sheet said. In many ways, WorldCom is just another case of failed corporate governance, accounting abuses, and outright greed. Giants failed. Why? For insider trading, lack of transparency through material misstatement of actual information, and intentional fraudulency. What the result came out? The stakeholders of the organizations had to bear great losses. Thousands of people were thrown out of work, and thousands of investors -- including most of the company's employees -- lost billions of dollars as the companies’ shares shrank to penny- stock levels and there was the room where corporate governance had its own importance. To protect the stakeholders’ interests, to ensure they can exercise their rights properly, to ensure information regarding the corporations’ activities and performances are adequately and properly disseminated to every related party and last but not least, to ensure a transparent, responsible & caring way out for the progress of the corporations there must be well clarified, well defined and generally accepted principles & guidelines. As a corporation is a member of the society, accepted as a citizen of the country, its failure affects adversely every part of the society. A good corporate governance framework helps to protect this collapse. 4. Corporate Governance and Bangladesh: A Brief Overview of Principles
There has been a momentum for Bangladesh for the last couple of years. The issue of corporate governance has been largely discussed, analyzed, propagated in many ways by specialists, researchers, government bodies and also development partners. In the existence of weak form of efficiency of financial market, the emergence of corporate governance framework for the financial sector of Bangladesh has been well acknowledged. Since information asymmetry, moral hazard – these two major but common problems of our financial sector is prevailing at large, ensuring corporate governance has become more in light with the growth of the country. Practitioners and specialists therefore have devoted their efforts to formulate some basic principles and guidelines to ensure a strong corporate governance framework for Bangladesh. In 2005 March, a conference, first of its kind labeled “International Conference on Corporate Governance in Bangladesh” was organized jointly by Dhaka Stock Exchange, Center for Corporate Governance and Finance Studies at Department of Finance of the University of Dhaka, the Organization for Economic Co-operation and Development (OECD) and The Asia Foundation. This was one major and well organized effort for promoting corporate governance in Bangladesh to come up with some recommendations, OECD has proposed some principles on corporate governance to strengthen the corporate sector. These are known as OECD Principles of Corporate Governance. The 2004 document shows the principles are divided into two parts. The Principles presented in the first part of the document cover the following areas: I) Ensuring the basis for an effective corporate governance framework; II) the rights of shareholders and key ownership functions; III) the equitable treatment of shareholders; IV) the role of stakeholders; V) Disclosure and transparency; and VI) the responsibilities of the board. Each of the sections is headed by a single Principle that appears in bold italics and is followed by a number of supporting sub-principles. In the second part of the document, the Principles were supplemented by annotations that contain commentary on the Principles and are intended to help readers understand their rationale. The annotations may also contain descriptions of dominant trends and offer alternative implementation methods and examples that may be useful in making the Principles operational. Another specialist institution Bangladesh Enterprise Institute (BEI) has detailed a full code of corporate governance for Bangladesh. This code presented in 2004 shows 3 major divisions of principles such as board issues, role of shareholders, financial reporting, auditing and non-financial disclosures. The codes also show sector specific principles and guidelines such as for Sate Owned Enterprises (SOEs), Private Enterprises etc. As a matter of fact, BEI has been working with deep insight of the principles related to every stakeholder. Some major areas covered in these principles are stated below: • Duties, Responsibilities and formulation of Board of Directors of a Corporation: These include nomination of a board, directors’ qualifications and qualities, inclusion and no. of Non-Executive Directors (NEDs) or Independent Directors (IDs), duties and responsibilities of the EDs and NEDs, ensuring CEO and Chairman are separate persons to remover one man show etc. These in fact provide strong guidelines to structure an efficient board which would be benefiting every stakeholder group. There are guidelines sought to ensure adequate, accurate and reliable information flow to the stakeholder groups. Adoption of appropriate reporting system, quality of reports, more financial and non financial disclosures are also emphasized in the codes. Codes detail on how to stop the insider trading for example there should be no fiduciary relationship of an NED before joining the corporation, ownership holding limit in a There are more than 45 principle formulations by BEI. In addition to the above, there are principles regarding voting rights of shareholders, appointment of auditors, and ethical Finally, even though there are principles and codes formulated by BEI and OECD, problem lies with their application. Yet now formal pressure has not been created by the 5. Practice of Corporate Governance in Bangladesh
Corporate sector in Bangladesh is yet to be capable enough to provide a setup for good corporate governance institutionally. Most importantly, the listed companies do not supply actual and adequate information to the investors, employees and other stakeholders. This is causing a severe crisis in the market. Traditionally, this information asymmetry has not been wiped out from Bangladesh. Therefore, what the corporations are doing in terms of decision making, voting rights, duties to society, distribution of profits and actual information flow, are simply depriving the stakeholders. In many cases, thus stakeholders’ interest is overlooked and not given preference by the very common nature of morale hazard. Some problems associated with the governance of corporation Private information supply by the management of the corporations for individual benefit are benefiting their own interest but at the same time damaging the corporations’ and stakeholders’ interests. • Fabricated Financial Statements There are many companies who provide financial statements prepared at the management discretion where numbers and figures are artificial and fabricated that do not represent the true and real picture of the firm. • Disseminating Inadequate Information Corporations in Bangladesh do not tend to let free flow of information and hence do not intend to provide much information to the related stakeholder groups. This violates the norms to protect the stakeholders’ interests and value their goals. In Bangladesh this is very common that when management sets the goal of an organization it does not take all the stakeholders into account and therefore arises agency conflicts. This increases the cost of the firm. Many public listed companies are closely held and thus closely held owners hold majority share of the ownership which gives them the power to decide for their own Corporations make profit in Bangladesh; do not engage themselves much in the community movements. Most of the companies do not respect their responsibility towards the society and the community. Moreover, when green movers or environmentalists create pressures, corporations either do not pay attention or try to Listed companies in Bangladesh are often accused of non-compliance with the rules, regulations and laws enforced by the regulatory agencies like Dhaka Stock Exchange (DSE) or Securities Exchange Commission (SEC).In many cases, listed public limited companies do not provide dividend regularly, do not hold AGM for years or do not send financial statements to the stakeholders. However, the list can be prolonged with numerous problems associated with the governance status of corporations in Bangladesh. But the most important fact is that, the principles have addressed very successfully almost all key aspects though corporations in Bangladesh are still reluctant to follow those. Therefore, principles are there, but even the government regulatory authorities like DSE or SEC are also not acting to the desired level and efficiency to induce the companies to adopt the principles. 6. What is needed to be successful?
The prior and prime requirement is “Proper Action”. It means inducing the corporations to comply with the principles. This may be made also mandatory. DSE or SEC or the government regulatory agencies can create pressure to implement the actions required. Moreover, all stakeholders should also be aware in doing business with the corporations. 7. Some Proposals and Recommendations for Better & Effective
Understanding
Stakeholders in a country like Bangladesh are not much aware of what is happening in and outside the corporations. They do not get much information and also do not want to pay much effort regarding the status of transparency and accountability of the corporate entities. Therefore, awareness among the stakeholders group must be induced regarding For better understanding, when general people cannot learn all the principles and examine critically the corporate governance compliance by the companies, some additional efforts may be given to develop some common practices to indicate the status of corporate governance in a company. Some of my recommendations are listed below. • Suggestion I: Corporate Governance Rating (CGR)
General people may not know every of the hundreds of principles. So to evaluate a company whether performing well complied with a good corporate governance practice, a corporate governance rating can be introduced. To construct a corporate governance rating, a generalized framework is given below in brief. Stakeholder Code
Stakeholder Title
Key Aspects of Interest
Voting Rights, free, accurate and adequate information flow, contribution level in decision making, companies’ profitability, shareholders’ wealth, value of the firm etc. Ethical stand of the company, ethical treatments towards employees, behavior quality between management and employees, financial and non financial benefits given to the employees, value and priority given the employees in firm’s decision making etc. Customers feelings and attitude towards the company, client feedback on the products or services, satisfaction level, ethical operation of the company, quality of the products and services etc. organizational decisions, regular and adequate payment to the creditors, morale hazard faced by the suppliers, degree of leverage in the company, risks associated with the company etc. development, degree of corporate social responsibility maintained, protection of environment, etc. Regulatory Agencies or Degree of compliance with the regulations, regular payment of taxes, holding AGMs regularly etc. Table 1 shows 6 key variables as inputs for the rating. For every key input there should be a detailed analysis on the key aspects shown at the right column. Then there will be scores assigned depending on the condition of every variable. This process is very
Stakeholder Group
Shareholders
Employees
Customers
Suppliers
Moderate
Community
Regulatory
Very Good
Agencies or
Government
For every stakeholder group a score or point will be assigned to the company which will indicate how much the company is entertaining the needs and rights of the particular stakeholder group. At the final stage, just get the simple average of the 6 scores that have been derived from individual stakeholder assessment and get a final simple average score. This final score will tell the overall degree of corporate governance existing in the Points from
Overall Status
Shareholder
Employees
Customers
Simple or
weighted
Suppliers
Moderate
Community
Regulatory
Very Good
Agencies or
Government
Implication of the Model:
A single number can say the whole set of conditions prevailing in the corporation. The status regarding maintenance of corporate governance is better revealed when general people would know low score means low rating and indicates worse condition of corporate governance status and vice versa. Therefore, this makes the assessment and Who will do this?
This rating can be done by SEC or DSE. Then just like a credit rating on which a company’s fortune will depend. Any third party like the credit rating agencies also can do this rating. This rating also have to be mandatory, recognized and published regularly. Government has to make it mandatory. A company’s functioning like access to finance, issuing securities, operating business, everywhere this rating would help to go for any deal. Investors in the stock market should also take decision to investment considering • Suggestion II: Third Party Web Based Solution
Employees think that their company is not doing good, not treating fairly, they feel deprived. But they might not have a way to raise their voices in the fear of getting fired. Companies do not like to hear from the shareholders. They always try to avoid green groups who they think, might create obstacles in making profit. Consequently we see the stakeholders do have much scope to express their views, interests, complains and Now if there is a third party – who may be the government or any regulatory agency or any private initiative, which will provide a room for the stakeholder groups to express themselves, it would really work a lot. Let’s have a look how third party solution system 1. This service would be basically web based. 2. Every public listed company will include their updated detail in the website. 3. For every company there are stakeholders. Therefore any stakeholder with a confidential password can access the information and express his or her comments, complains, opinions on any issue of a company 4. For membership, stakeholders have to be registered with third party who will be handling the whole service with proof that he or she is not a part of the management or beneficiary of the management. 5. This third party would then accumulate all queries, views, opinions, complains after a certain interval (may be monthly, weekly or daily) for every particular company category and a report on every company would be prepared. The report would incorporate all comments of the stakeholders, hence the satisfaction of the 6. Finally these reports would be sent to the regulatory authorities like Dhaka Stock Exchange (DSE) or Securities Exchange Commission (SEC) or other government offices as may be necessary. After due investigation, these comments would be published publicly in the market through different media with valid proof. The Third Party can be authorized for primary investigation or the whole investigation duty would lie with the regulatory agencies. 7. The stakeholder who will provide their opinions or comments or complains would be required to meet physically, would not require giving any personal detail like Photo or others. Therefore they would be secured from any possible future Thus, we see that this approach of third party web service where registered stakeholders’ information would be fully confidential may gather the real information from them which normally they would not reveal. • Suggestion III: Establishing Separate Monitoring Unit
A separate “Corporate Governance Monitoring Cell” can be set with DSE or SEX which would closely observe the listed company activities. The previous web base solution can also be monitored by this cell. • Suggestion IV: More Issues in CG Assessment
Today good corporate governance can bring sustainable development for a country. Therefore some factors like uses of natural resources, renewable resources, environment pollution etc should be considered while we are assessing a firm’s corporate governance status. Importantly these factors also can be incorporated to the corporate governance rating previously proposed and then we can get a combined • Suggestion V: Corporate Governance Report And CSR
Corporate Governance Report and Corporate Social Responsibility Report must be made mandatory to publish by the companies which would be considered in valuing the company by the stakeholders for a particular period. The society would also value the company based on these statements. The reports should be made specific for example – a report must be of at least 2 pages or 2500 words that would specify the actions to ensure corporate governance and corporate social responsibility by the company for a given financial year. These parts would be annexed to the annual • Suggestion VI: Mandatory Separate Environmental Reporting
In today’s world, there are many organizations simply damaging the environment in different ways but also overlooking it and making profit. This information is not properly accumulated and disseminated. Therefore there should be mandatory Environmental Reporting in the annual report stating what damages have been done by the company and what measures have been taken to recover and compensate the damages. This report would also detail about the results or outcomes of already taken actions. In Australia, Canada this has been made mandatory for all publicly listed • Suggestion VII: Punishment for Non-compliance
If any company doesn’t comply with the basic codes and principles to corporate governance, there may be provision for punishments. Penalties may include – - Closed observation on the management for a given period until improves - Financial penalty or charge on the management body. However, there may be low or high degree and many more types of punishments, but these punishments would induce the companies to act better on the issue of corporate 8. Conclusion
At the end, the summary is, corporate governance is extremely important nowadays. Without a holistic approach for good corporate governance, an organization’s success will not far worse. In Bangladesh, companies have realized this fact even though there are many principles given by OECD or BEI. Still now adoption of these principles is far away. Yet our corporate sector is fragmented. And mostly our stakeholders are deprived. It indicates the practice of corporate governance is poor in Bangladesh. To recover from this situation we need proper action immediately now without any delay. The government as the regulator is expected to lead the way on. To make the general people understand clearly about the status of corporate governance of a corporation, the corporate governance rating, third party web service and many other issues can be focused immediately. As the rating indicates through a single number of the whole situation consisting CSR, internal governance of the company, environmental actions etc., this may be a very useful way to implement immediately. For non compliance with principles or corporate governance punishments would be tough. With all these, I hope the future corporate world of Bangladesh would be very strong, transparent, responsible, caring and Principles and Practices of Corporate
Governance in Bangladesh
Mr. Ibrahim Mohammad Siraj
Department of Economics
University of Dhaka
May 25, 2007
Introduction of Corporate Governance
‰ Definition: corporate governance is an issue that is concerned about the transparency and accountability of the work and dealings of corporations. It incorporates the issue of supervisory and regulatory body, the distribution of profit among the shareholders and stakeholders, the structure of ownership, etc. In a broader view, it entails every agent related to the activities of the incorporated entities. For example, if we consider an industry, say for example, ABC Leather Industry where a lot of agents are related to their production and selling activities directly and indirectly. From supply side, the people who provide the raw materials, production of labor, in management the Chairman, Managing Director, as a whole the board of directors, the employees, the sellers, everyone including the people living beside the factory or tannery who are suffering from the pollution created by ABC also the agents come under the issue of corporate governance. An immature view about corporate governance – There is prevailing a narrow view
about corporate governance mostly due to popularly marketed definition from U.S.A. and U.K. about corporate governance like “It is the issue of maximizing profit of the shareholders.” The theory of free market economy is partly the reason behind this immature view. This theory states that the market is efficient when it is totally free and the matter of welfare depends on the rational choice of the buyers and sellers. So then, concentrating on the profit maximization of shareholders becomes very relaxing and But now, it is proved that the free market is not fully efficient without proper intervention from government timely. And the matter of the distribution of profit among the stakeholders is also very important. In developing economies, inequality of income is rising rapidly and the pollution created from the industries is also an unavoidable issue So, I think, the broader view of corporate governance that incorporates all directly and indirectly affected agents of a corporate entity is much more acceptable. Besides, in economics, we know the impact of negative and positive externality. The matter of externality and removing the externalities that is inefficient for an economy also should be included in the definition of corporate governance. If we search the history of corporate governance, then it will be uncomplicated to realize why a broader view of that Before the recessionary period of 1929 in U.S.A., the economists riding on the free market economy concept were in a very much confidant state of mind. But after the crisis, they could not find any solution to redress the problem. Then Keyes came out of the light with new macroeconomic theoretical framework where he asserted the need of government intervention in the free economy for ensuring the efficiency. After the crush of Soviet Union, the world became more inclined to the market economy and thereby started to suffer from that economy. The recent problem from this was in 1997, when, Malaysia, Thailand, Philippines, Indonesia fell into a severe financial crisis. The most of the foreign investors of their country went out with their asset. Then after the shocking scandal of Enron, and other big giants of world economy, the policy makers began to think about the corporate governance in a more disciplined and academic way. Actually, I think the issue of corporate governance started to address the policy maker from the beginning of institutionalized economy or from 1776. Since after the industrial revolution, the economy is moving faster and faster and in everyday numerous kinds of products and services have been producing. The growing complicated economy demands more attention to make viable contracts, more feasible laws and regulations. Even, the theory of class conflict of Karl Marx also aroused from bad corporate governance. So, if we keep our minds in a deeper sense about the development economics, the matter of corporate governance has been evolving for a long time. Approaches and concepts of corporate governance: -
There are mainly two factors which contains most of the interest of corporate governance. 1. The process of distribution of wealth and profit among the shareholders of the company and the accountability and transparency of the financial activities of the 2. The rules and regulations imposed by the authorized controlling body, their Besides, there are another two approaches to corporate governance. A. Shareholder approach – It is concerned about ensuring the rights of B. Stakeholder approach – It is concerned about ensuring the profits of the We will take both of the matter of shareholder and stakeholder for a standard definition Why corporate governance is so important?
Corporate governance is needed for sustainable development. Because, 1. It ensures a strong capital market - With good corporate governance, people are more keen to invest in capital market and the producers become interested to raise 2. It ensures strong financial backbone - If better corporate governance exists, thereby the banking and non banking financial institutions can operate their work more efficiently. They can manage their credit risk in a better format. 3. It helps for industrial development – In the presence of better corporate governance, it helps the industry to raise their capital and minimize their risk and 4. It minimizes the cost of doing business – As in the presence of better corporate governance, the rules and regulations are in favor of doing business efficiently, the cost of starting a business, the cost of fulfilling the legal requirements become 5. It ensures the strong property right. 6. It attracts more foreign direct investment. 7. It decreased the amount of pollution. 8. As a whole, it helps to remove the negative externality in an economy. Principles of corporate governance
There are a lot of principles about corporate governance. But Organization of Economic Cooperation and Development or OECD gives the standard one that is mostly acceptable in the world. Below I am going to write down their confined principles about corporate 1. Ensuring the basis for good corporate governance: - The number one principle is, at first, we must have to ascertain the basis for good corporate governance. For that purpose, we know that for good CG system, the supervisory and regulatory body is very important. It must be written down evidently about the required law and order, the extent of exercising the power of regulatory body, the minimum requirement to be fulfilled by corporation. So, for a good CG, the judicial system, transparent legal system and its responsible authorities are the most important. 2. Ensuring the rights of the shareholders – Then we must have to ensure the rights of the shareholder. Whether the shareholders get their profit-stake or not, whether they can exercise their power on the board of directors or not, have to be monitored. Besides they have the voting rights. They can appoint or remove the director by applying their vote, they are the ones, who get the right to participate 3. Evidently stating the structure of ownership. 4. Ensuring the rights of owners and stakeholders: - There is a difference between the owners and the stakeholders. But the interest of the stakeholders must have to be fulfilled by the owners. The investors, whether they are getting the maximum returns or not, the employees whether they are exploited or not, these have to be 5. Equal treatment of the shareholders: - There are various kinds of shareholders in the company. Any kind of illegal influence or exploitation on a shareholder must 6. Transparency and accountability: - Every transaction of a corporation, including its dealings, revenues, profit and loss, its financial activities, audit reports must have to be in transparent to the shareholders. 7. Ensuring a good audit report: - The company will provide the authentic report as required by the auditors. The auditors have the right to check every kind of Corporate governance in Bangladesh: Principles and practices
I want to show the principles and practices of corporate governance simultaneously. At first I will focus on the law related to this subject. The main laws are – ‰ The company act 1994: - Under this law, a company can be formed or can be closed. The articles of association of the company will be written down. The member of the boards will appoint the board of directors. ‰ Securities and Exchange Ordinance 1969 and Securities and Exchange Commission Act 1993: - Under the Securities and Exchange Commission act 1993, the SEC or Securities and Exchange Commission has formed. Under this act, the SEC can issue the share; they monitor the activities of the public listed companies. They can exert their influence on the company for proper activities, even they can charge fine for illegal or transparent less act of a company. Their range of power is so broad that they can impose any restriction on the market if they consider that will be good for the wealth of capital market. ‰ Bangladesh Bank order 1972 and Bank act 91: - Under the bank act 1991, the new bank can be formed. Bangladesh bank under the order of 1972 monitors every kind of activities of the bank and non-bank financial institution. Under the bank act 1991, the bank got the power of doing financial activities. Bangladesh bank or central bank will monitor the banks and they can decide about the monetary ‰ Bankruptcy act 1997 and Artho Rin Adalat Ain 2003: - Under the bankruptcy act 97, the bank can take the legal step against the classified client. Artho Rin Adalat Ain 2003 is very much strong act on bankruptcy. Practices
1. Under the company act, the activities of most of the companies are not so 2. The audit reports are not totally transparent. The board of directors exercises their 3. Like other government agencies, the Bangladesh Bank is not occupied with 4. In an AGM or annual general meeting, the shareholders tend to create pressure on the director to announce greater dividend for them. 5. Recently, on 22nd May, 2007, SEC charged fine for 16 directors of some companies. This is an unequivocally laudable step taken by SEC. 6. The incentive of coming to capital market is not enough here in our country. But we know that, the better the capital market, the better the health of the economy will be. The contribution of our capital market in GDP is 6.5% where in India it is 7. Recently government has taken steps to include the share of the telecommunication industry in the capital market. 8. The ministry of industry also has taken steps to make for each garments firm to start to maintain Effluent Treatment Plant or ETP. 9. State owned enterprises are not interested about the corporate governance in 10. The practice of independent director is not efficient. Because most of the independent directors come from the government agencies and they are used to be 11. The mindset of the board of directors is very much family oriented. That’s why 12. The banks are reluctant to go to the court for legal complexities and fear of 13. Recently, the Oriental bank has been closed for illegal practices. This is a very big example of bad corporate governance in banking sector. 14. The bankers are tending to sanction loan to the interested group. The position of the pressure group: - The government agencies for corporate governance are Bangladesh Bank, SEC and the registrar of joint stock companies. All of these institutions are suffering from inadequate supply of expert. Moreover, the nongovernmental agencies like DSE, CSE, ICAB (Institute of Chartered Accountants of ICAB cannot comply with the rule of International Standard Accounting (ISA). Concluding points and recommendation
We need some necessary steps to achieve better corporate governance 1. A better auditing system. We must have to comply with the ISA. 2. The companies, banks should be freed from any political and family pressure. 3. The government agencies should be occupied with a lot of experts to monitor 4. E-governance should be number priority in government agenda to get transparency and accountability everywhere. 5. For a better capital market, we have to make sufficient incentives to induce the companies to come to the capital market. 6. The independent directors should be really independent. 7. The judiciary system should be straighter looking about CG behavior. 8. Government should create a high-powered committee with experts under a ministry to monitor the CG situation of Bangladesh centered on some universal 9. There is a code of corporate governance of Bangladesh made by ICAB. We have 11. To create awareness among the people about CG. 12. We have to make a smooth independent judiciary body in conducting the case 13. Our shareholders are not so conscious and educated. We can make them more conscious about their rights through media. 14. Directors should be freed from the influence of the investors. 15. Our regulators are not well concerned about the issue of CG. The government should take some steps to remove that problem. 16. To make SEC and RJSC more efficient. For that purpose, they have to be 17. Government can get help from the academicians, educationalists, and practitioners of CG to make their monitoring body stronger. 18. Again and again, the auditing system is important on for ensuring CG. We have to make sure that the chartered accountants are not influenced by the interest of the directors. For Islamic banking, they should comply with appropriate auditing system for their different kind of modes of financing. The Islami banks tend to not to comply with shariah. Oriental bank is an example. So, Bangladesh bank should 19. We have to make the board of investment stronger. Our complicated legal system and bureaucratic problems increase the cost of doing business here. We have to ensure that the cost of doing business will be decreasing. Most of all, I think, we should concentrate on acquiring economic efficiency for the society rather than just maximizing profit. Principles and Practices of Corporate
Governance in Bangladesh
Mr. Miraj Hossen
Department of Management Studies
University of Dhaka
May 25, 2007
“Principles and practices of Corporate Governance in Bangladesh”
(1) Introduction:
The Corporate Governance is a set of processes, customs, rules and regulations by which the companies or business corporation are controlled and maintained. In Bangladesh, we are not a country, where the practices of corporate governance are poor. Bangladesh is typically a developing country in South Asia with a large population low per (capita income and the standard of living is not satisfactory. So, we need to improve our economy and also the repaid growth & development of our country. To develop our country, we should emphasis on the development of our industrial sectors. In case of industrial or corporation level we need to practice more corporate governance. 2. What is corporate Governance?
Corporate governance is the process through which an organization or corporation goes on. It indicates the rules, regulations, customs, principles, practices, and the structure of an organization through which the organization carry on its activities. It may be defined by the following ways from different views- I. “Corporate governance is a system which ensures the investors to get returns
from their investment.” The Journal of Finance, Shearer & Vinashey, Page: 737
II. “Corporate governance is the process, narrowly it can be said the relationship
between the corporations and the shareholders and broadly the relationships between the corporations and society”. The Financial Times 1997
III. Corporate governance is a system which is accommodating the practices of
corporations’ transparency responsibilities and accountability.” James Wolfensohn (21 June 1999), WB president (former)
IV. “Corporate governance is the relationship between the shareholders,
“Managers Board of Directors, Chief executive officer, employees, customers, suppliers and other stakeholders with a view to corporations activities. It also deals with the rules, regulations, principles, strategies & others activities of an organization.” --Sir Adrin Cadbury, Global corporate Governance Forum (GCGF), 2002
V. “Corporate government is the relationship between the shareholders, BOD, CEO
and other stake holders.” ----Arthur Levitt (109:2002)
VI. “Corporate governance is the set of process rules & regulations. Customs and
other strategies of an organization on which ensure the investors to the corporations to get return and also ensure the management of the corporation will not misuse their capital (investment).” ----American Management Association
So, by corporate governance we mean the organizational rules regulations, relationships between the parties and the organizational goals, objectives and planning Levels and sides of CG:
We can find the following levels and sides of corporate governance: Corporate Governance
3.1 Levels:
Country level:
In country level corporate government mean the good governance and governing rules, regulations of a country. Corporation level:
In corporation level, corporate governance means governing rules and 3.2 Sides of CG:
Behavioral side:
It is the relationship between the BOD, CEO, Management and employers, employees, customers and also suppliers. It is called the ‘Behavioral side’ of Normative side:
Rules, regulations of a corporation through which an organization is moving 4. Parties of corporate governance:
Corporate Governance
Shareholders
Shareholders
The major parties of corporate governance are the shareholders and the stakeholders who are involved in the activities in the corporation. 4.1 The interests/benefits of the parties:
The parties of corporate governance have the following interests: BOD, CEO, Management – receive benefits, salary, reputations
Customers
Suppliers - receive compensations for their good & services.
Society - receive services & goods.
By getting these services and benefits the individual do his work for the corporation by providing human skills and applying managerial and technical knowledge. Individual person are the driving force of Corporate Governance 5. Models of Corporate Governance:
The corporate Governance model can be shows in the following way- CG Models
5.1 Stakeholders Vs Shareholder Models:
It indicates the BOD, CEO, Mgt, customers, suppliers, employees, and other related actors. Who are engage in the organizational activities? 5.2 Behavioral Vs Normal Models:
Behavioral model represents the relationships among the parties (shareholders & stakeholders) and the normative model represents the rules, regulations, laws, process of 6. Factors of corporate governance:
The corporate governance has the following two major factors: The commitment of the management of the corporations. The rules, regulations of the government of a country. According to the organization for Economic Corporation & Development (OECD)
According to World Bank Booklet it has the following four pillars:
7. Principles of Corporate Governance:
7.1 A number of multinational organizations (UNDP, WB, and OECD) suggest the
following general principles must be in the form of corporate governance 7.2 The OECD specifies the following principles of Corporate Governance:
Rights of shareholders:
The rights of shareholder are to get the return from their investment. They can attend the general meeting and also can play role in AGM. Equitable treatment of stakeholders:
The stakeholders have the right to get equal treatment from the CG and the CG’s duty to treat its stakeholder equally. Accountability and responsibility:
It is one of the principles of corporate governance to maintain accountability and responsibility property to the stakeholders, society and within the Transparency:
The activities of the corporate governance should be transparent and fair which is helpful to the economical development of the country. Honesty and fairness :
The corporate governance should be honest and fair in their activities which are good for the society & for the stakeholder as will as shareholders. Openness and integrity:
The corporate governance should have the integrity and open to the parties which can help to carry on their activities. Good ethics & behaviors:
The corporate governance should be show good ethics and behavior which can help to raise the investment and also increase the private sectors. Mutual respects to the parties:
The shareholder and the stakeholders both have some rights and duties in the corporation. So, it should show mutual respect to each other. 7.3 Some other common principles of CG:
ƒ It should have an oversight about the countries economy. ƒ It must play welfare role to the society. ƒ It should be independent and fair in preparing financial statement. ƒ It should be equally treated to all the employees and other related parties. 8. Roles of Corporate Governance:
The major role plays by the CEO, BOD and the management in the corporations. The 8.1 CEO, BOD roles:
In case of Corporate Governance the chief executive officer and Board of Directors have The CEO, BOD need to plan for the annual budget and other strategy Take the succession planning in case of organizational management and other top Take strategic plan go to deal with the customers, suppliers and others. Prepare and maintain accurate financial statement. Give suggestions to the management about what to do. Take necessary steps in case of any loss or damage of the corporation. Attend and arrange annual general meetings and give reasonable speech to the 8.2 Roles of Management in CG:
In case of Corporate Governance the management has to play the following roles in the The managers’ major role is to operate the corporation nicely with prosperity. The manager plays role to prepare financial statement. They help the BOD and CEO to set the plan for budget and other issues. Take initiative to do betterment for the organizations. Appoint the entry level and midlevel executives for the corporation. Prepare monthly and yearly statement of finance. Give suggestions to the down chairs for doing their jobs properly. Monitoring the day to day words of the corporation and take necessary steps Make sure that the branch or office has a good working environment. Maintain good ethics, integrating which helps to maintain better relationship These are the roles play by the CEO, BOD and Management in case of CG. 9. Practices of CG in Bangladesh:
In Bangladesh the scenario of practicing the Corporate Governance is poor because of the I. Family orientation:
Most of the corporations of our country is family oriented. So, there is a lack of outside shareholders and also the practices of Corporate Governance. II. Poor Bankruptcy Laws:
The Bankruptcy laws in our country are back-dated and poor in its applicability, which may create some problems in practicing the Corporate Governance. III. Independent corporation system:
Our private organizations are inadequate to practice Corporate Governance because of their BOD, CEO and top mgt are their own relatives. IV. Inconsistency with BAS, IAS, company Act: Most of the corporation of our
country drive its activities which are inconsistent with Bangladesh Audit Standard (BAS), companies Act requirement. So, it is impossible to practice CG in this V. Non- Practice of Companies Act: The corporations in our country most of the
time operates in its own way. They do not follow the rules, regulations of the company act 1994 which may create problems to practice Corporate Governance culture and activities in their organizations. VI. Lack of proper control:
Our private corporations are out of government control which may create some problems to practice Corporate Governance. VII. Inappropriate rules in capital market:
Our capital market is totally maintained by the two stock exchanges: DSE and CSE. So, it is difficult to maintain the whole process of the all organizations by them. VIII. Lack of pressure group:
We do not have a lot of pressure groups who create pressure to the corporation to practice CG which is also a problem to implement CG. IX. Lack of shareholder Activism:
In case of our country most of the shareholders are not perfectly educated and X. Lack of awareness of public:
In our country, we have the lack of public awareness among the mass people. So, it plays an important role not practicing CG. XI. Lack of good Governance:
In our country, we do not have the good political governance that can play role to implement the CG. So, it is a cause for not practicing the Corporate Governance XII. Low per capital income & economic development:
Most of the people of our country live under poverty. So, they are not conscious of CG, for this reason the corporations get a change to avoid the CG practices. These are the major impediments to practice CG in our country. 10. Why we need Corporate Governance:
Bangladesh is a developing country. We need to practice Corporate Governance to get rapid economic development. And also implement the equal treatment among the employees in the organizations. The following are the reasons why we need Corporate I. Economic development:
To get rapid economic growth and also the national development we need to practice Corporate Governance in our corporations which can ensure us the development of our culture & economy. II. Equal treatment among the employees:
To ensure equal treatments among the employees of the organizations we need to III. Democratic practice:
We need Corporate Governance to ensure the participative management in the IV. Maintain good relations:
To maintain good relationship among the organizational parties we need to V. Keep shareholders rights:
The shareholders are the key persons for the corporation. But, because of lack of CG practice in the corporation they can’t play a sufficient role in the AGM. VI. Improve employee Behavior:
To get good ethics, integrity and good behavior from the employees we need to ensure the practice of good Corporate Governance in the corporations. VII. Increase firm’s performance:
To increase the performance of the firm we need motivated and satisfied employees. Proper practices of the firm we need motivated and satisfied employees. Proper practice of CG can ensure the satisfaction of employees which VIII. Maintain the capital market structure:
The structure of the capital market of our country controls by two stock exchange commissions, it is difficult for them to maintain it properly. So, we need to IX. Maintain gook org relationship:
The proper use of Corporate Governance can ensure the good relationship among the organizational parties. So we need to practice CG in our organization or every X. Attract foreign investment:
To attract foreign investment we need to show we have the proper practice of CG. XI. Adequate plan & strategy:
To implement plans and strategy of the organization we need to practice CG. XII. Independent Auditors:
To get fair and reliable financial statement we need true independence of auditors which can be gives by the proper use of CG. XIII. Proper audit report:
Proper audit report is needed to get the real picture of the organization. By practicing CG and giving independence to the auditors we can get proper audit For these reasons we need Corporate Governance in our corporations 11. How can we improve our CG practices?
We need to practice Corporate Governance in our corporations. So, to get good practices in CG in the orgs we can follow the following ways: I. Properly follow the SEC rules:
In our capital market we have two stock exchange commissions (DSE, CSE). We need to practice & follow the rules & regulations of our SEC to get proper II. Obey and maintain companies Act:
We have latest companies Act 1994. For proper practices of CG we need to follow the companies Act 1994 for all the provisions of the organization such as recruitment, selections, competition and performance appraisal. By practicing this provision, we can ensure a good Corporate Governance. III. Identify a national champion:
To get proper treatment of our employees we can follow a national champion. Like as company acts, Bank laws and other acts. IV. Maintain good industrial relations:
We need good industrial relations to get good CG in our Corporation. V. Corporate Governance:
We need a good political governance to improve the CG in the corporation. VI. Independent Audit committee:
We need independence of our audit committee to censure fair and transparent financial statement and also ensure the practice of CG. VII. Increase the BOD & CEO’s power:
To improve the present condition of our CG practice we need to increase the power of CEO’s and Bud’s which can help us to practice more dynamic way of VIII. Increase the relationship:
By increasing the relationship among the parties of CG in our corporations we can improve the practice of our Corporate Governance. IX. Taking help from global organizations:
We can increase the present condition of practicing CG by getting help or support from World Bank, UNDP, OECD, and GCGF. They arrange international seminars and also roundtable conference which can be helpful for us. X. Taking new actions by the authority:
By taking new actions by the proper authority of corporation in case of practicing CG, we can get a good Corporate Governance in our corporation which will be helpful for us and also for our economic development. Conclusion:
Corporate Governance is an important issue in the present business world. So, we need to practice Corporate Governance more in our organizations to get the economic development and also ensure the equal treatment of rights and responsibilities of the employees. It will play a vital role in our economic development if we are able to practice

Source: http://www.bei-bd.org/images/publication/whc4f4b6a59754fe.pdf