Corporate Governance Practices in Bangladesh

Abstract: Corporate governance is a concept about the way in which boards oversee
the running of the company by its mangers and how board members are in turn
accountable to shareholders and the company. Good corporate governance has
implications for company behavior towards employees, shareholders, customers and
banks. The paper tries to identify best practices of corporate governance and the steps
that organizations can take to improve the situation of corporate governance in
Bangladesh. Improving corporate governance can provide sign rewards to both
individual companies and the country. The paper also tries to identify critical areas
where institutions, regulations or other economic factors could be strengthened to
improve corporate governance.

INTRODUCTION
Corporate governance has become increasingly important in todays global
markets especially for the growing demand from businesses for external domestic
and international capital. The rise in demand for and supply of private capital is
broadening and deepening the markets for corporate finance and corporate control,
and is providing investors with a wide array of choices. Providers of corporate finance whether individuals, banks, institutional investors or other financial institutionsrequire assurances that their investments will generate reasonable returns and be
protected. Increasingly they base their investment decisions not just on a companys
outlook, but also on its reputation and governance. Recent financial scandals
associated to accounting and other frauds allegedly blamed to top company managers
(e.g. Enron, WorldCom) have brought into public light the recurring question of
whether companies are managed in the best interests of shareholders and other
company stakeholders, such as workers, creditors and the general community. A point
that has been made frequently is that top managers may possess too much power inside
their companies and that a general lack of accountability and control of their activities

is prevalent in companies with wide ownership diffusion. (Farhina, 2003). Weak

corporate governance has consistently been seen as a major contribution that needs to
be addressed to revive investors confidence and decrease the impact and likelihood of
future shocks from economic and financial crises.
As the global markets have re-evaluated corporate governance practices in
developed countries, awareness of the need for corporate governance in Bangladesh has
gained momentum (Sobhan 2002). There needs to be a systematic effort undertaken to
develop and improve the quality of corporate governance in the South Asian region.

CONCEPT OF CORPORATE GOVERNANCE

Agency theory, human behavior theory, market failure theory suggest that
an organization must have control mechanisms that help mitigate agency costs and
improve firms efficiency. Control mechanisms are necessary to reduce divergence of
managers interests from shareholders interests. Corporate Governance (CG) is
probably the widest control mechanism used for efficient utilization of corporate
resources. It can be defined as an organizational control devise, which is a hybrid of
internal and external control mechanisms with a view to achieving efficient utilization
of corporate resources. It is a network among various corporate players such as
shareholders, managers, employees, leaders, governments, suppliers and consumers for
increasing the value of the firm (Chowdhury, 2004). In this report, we define
corporate governance as ensuring that the business is run well and that
investorsreceive a fair return. It is about giving overall direction to management and
ensuring accountability to shareholders, other external providers of funds and
stakeholders.
In a proprietary firm, the owners-managers efforts are directed at maximizing
the firms value. This relationship becomes complicated when corporations are owned
by multiple shareholders (principals) but run by managers (agents). The need for

corporate governance arises from the potential divergence of interests between those
who have control over a firm and those who provide its external financing. This
divergence can be described as a principal-agent problem (also known as agency
costs).

Without governance protections, capital providers (owners, creditors, or

taxpayers) who lack control over the corporation will find it risky and costly to protect
themselves from opportunistic behavior by managers or controlling shareholders.
The objectives of the study are to (i) define best practices of corporate
governance; (ii) identify the major features of the corporate governance scenario in
Bangladesh, including its strengths and weaknesses; and (iii) specific steps and
suggestions that organizations need to take in order to improve corporate governance in
the country. The study is based on review of existing literature and published
documents, periodicals, books, reports and other related materials. Corporate
governance can be defined as a combination of fairness, precision, ccountability and
sustainability of corporate behavior. Good Corporate governance is a key factor to
achieve the improved performance of an organization. It is fundamental element to
safeguard interest of shareholders. For continuous and sustainable growth of an
organization, there is no alternative to effective Corporate Governance.The positive
effect of corporate governance on different stakeholders ultimately is a strengthened
economy, and hence good corporate governance is a tool for socio-economic
development The modern era of Corporate Social Responsibility (CSR) concept was
evolved in 1950s when it was more commonly known as social responsibility. CSR has
been defined as the integration of business operations and values whereby the interests
of all stakeholders, including customers, employees, investors, and the environment are
reflected in the organizations policies and actions. By CSR practices an organization
can improve communication with the community and other stakeholders, ensure
accountability and transparency in its operation, improve internal decision making and
cost saving, enhance corporate image, improve reputation and ability to enlarge market
share and Enhancement of customer true worthiness, profitability and sustainable
development.

Objective of the study

Primary Objective
To observe the current status of Corporate Governance and Corporate Social
Responsibility (CSR) and their relationship with organization performance.
Secondary Objective

To see the Corporate Governance guidelines of Bangladesh

To see the Corporate Social Responsibility (CSR) practice by the listed

companies.

To see the risk-return features of security stocks and their relationship with
Corporate overnance practices.

To see the Corporate Governance practices of other countries.

Scope of the study

The scope of the study has been the listed companies of Dhaka Stock Exchange
(DSE) specifically banking sector. Corporate Governance and Corporate Social
Responsibility (CSR) practices by the banks in the year 2008 were the main ingredient
of the report. Stock performance of the bank for the sake of calculating return and risk
has been taken up to 2014.
Methodology
Type of research
The research is both exploratory and descriptive in nature. To serve the objective
to see the Corporate Governance practices and to explain the relationship between
Corporate Governance and firms performance we have gone for descriptive discussion
on corporate governance and corporate social responsibility disclosure. To see the
relationship between return and corporate governance disclosure and risk and corporate
governance disclosure we have used correlation study.
Data source
4

Since the study was made on the listed banking companies in Bangladesh, it was
conventionally correct to use the secondary sources of information. The study has been
primarily based upon information extracted from secondary sources like published
annual reports, data base of Dhaka Stock Exchange (DSE), websites, books, journals etc
Report Design
Chapter one includes prefatory parts of the report. Chapter two includes
definition and concept of Corporate Governance and Corporate Social Responsibility
(CSR). Chapter three includes Corporate Governance practices around the world.
Chapter four includes of Corporate Governance and Corporate Social Responsibility
(CSR) disclosure by the Banks.
Limitation
There were some limitations of the study among which non availability of data
was the Most, especially for the non listed companies. Another limitation was least
amount of disclosure regarding Corporate Governance. Corporate Social Responsibility
(CSR) activities of the banks were very limited, as well as the disclosure regarding
CSR.
PRINCIPLES OF CORPORATE GOVERNANCE
Corporate governance can be viewed as the dynamic interplay of internal and
external incentives that affect the performance of all corporations whether private,
publicly traded or state-owned. Good corporate governance is important, because it not
only protects the interests of shareholders of companies but it is essential for the
efficient mobilization and allocation of capital and efficient monitoring of corporate
assets. How a corporation is governed affects the efficiency with which a firm employs
assets, its ability to attract lower cost of capital, its effectiveness in meeting societys

expectations and its overall performance. The internal incentives are the organizational
arrangements within a corporation that allows owners to direct managers to pursue
goals the owners set. The external incentives are the regulatory structures, voluntary
standards and competitive market forces that, while not under the direct control of
owners, exert discipline on the performance of owners and managers from the outside.
Internal mechanisms for good governance:
Any well-governed corporation needs to balance the roles of four groups which
are an integral part of the organization: i) shareholders; ii) board of directors; iii)
managers and iv) stakeholders.
Shareholders provide (risk) capital in return for the opportunity to benefit from
profits and increases in corporate value. Shareholders may have a range of rights and
powers under laws and regulations that include (1) the right to elect and remove
directors and auditors; (ii) to appoint and approve or disapprove of fundamental
changes and (iii) allow shareholders to register and transfer shares in a corporation,
protect shareholders rights, including their rights to buy, own, sell and transfer stocks.
The board of directors (BOD) represents the interests of shareholders and may
have obligations to other stakeholders under various statutory and voluntary
provisions. BOD is the core internal governance mechanism, because they provide the
bridge between management and owners, other stakeholders and the outside world.
The BOD need to be independent, particularly of management, and its members
should be well-versed in the firms line of business.
Below are the best practices for board of directors: (a) Board-size should reflect
the complexity of the corporation and the need for effective decision-making; 15
members is the upper limit for board effectiveness in most cases; (b) Boards should
include a significant proportion of independent directors who are likely to make
objective judgments because they have no ties with management; (c) Boards should meet
often enough at least once a quarter to do their job effectively; (d) Agenda and
6

briefing materials should be sent to the board members before meetings to give members
time to prepare; and (e) Board meetings should be used for discussion, and not lengthy
management presentations. Managers report to the board of directors and are
responsible for day-to-day operations and for implementing strategy. Their business
objectives include financial issues and such non-financial issues as environmental
protection and employee training. Where the interest of managers, shareholders or public
diverges, a governance problem arises. Stakeholders including workers, banks, creditors,
suppliers, customers and communities also influence corporations. Stakeholdersinterests
are reflected in a rich variety of formal and informal provisions, such as creditors rights
and insolvency laws, labour policies, labour practices, consumer rights, legislation and
environmental regulations.
The OECD Principles
The OECD Principles of Corporate Governance provides specific guidance for
policymakers, regulators and market participants in improving the legal, institutional and
regulatory framework that underpins corporate governance. The OECD Principles were
originally issued in 1999, and have since become the international benchmarks for
corporate governance, forming the basis for a number of reform incentives, both by
governments and the private sector. The Principles were revised in 2003 to take into
account developments since 1999, through a process of extensive and open consultations
and drawing on the work of the Regional Corporate Governance Roundtables for nonOECD countries. The new principles were agreed by OECD governments in April 2004.
The major issues addressed by revised Principles include:
(i)

New chapter on promoting transparency and effective performance;

(ii)

Stronger role of shareholders;

(iii)

Preventing conflicts of interest and self-dealing; and

(iv)

Role of stake-holders.

The main areas of the OECD Principles are:

a. Ensuring the basis for an effective corporate governance framework. The

corporate governance framework should promote transparent and efficient markets, be
consistent with the rule of law and clearly articulate the division of responsibilities
among different supervisory, regulatory and enforcement authorities.
b. The rights of shareholders and key ownership functions. Protection of shareholders
rights to share in company profits, receive information about the company and
influence the firm through shareholders meetings and voting.
c. Equitable treatment of shareholders. The corporate governance framework should
ensure the equitable treatment of all shareholders, especially minority and foreign
shareholders, with full disclosure of material information and prohibition of
abusive self-dealing and insider trading. All shareholders should have the opportunity
to obtain effective redress for violation of their rights.
d. The role of stakeholders in corporate governance. The corporate governance
framework should recognize the rights of stake holders established by law or
through

mutual

agreements

and

encourage

active

co-operation

between

corporations and stakeholders in creating wealth, jobs and the sustainability of

financially sound enterprises.
e. Disclosure and transparency. The corporate governance framework should ensure
that timely and accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance.
f. The responsibilities of the board. The corporate governance framework should
ensure strategic

guidance of the company, the effective

monitoring

of

management of the board, and the boards accountability to the company and the
shareholders.

The internal incentives are necessary for efficiency but they are not sufficient
for good governance, and corporations in market economies need to be disciplined
externally. The basic requirements of institutional and legal/regulatory framework
needed to support effective corporate governance are an integral part of the Principles.
It includes:
The discipline of a well functioning regulatory system:
Formal legal and regulatory obligations are part of the external incentive
structure designed to ensure that competing companies abide by common standards of
fairness, transparency, accountability and responsibility to protect shareholders,
consumers, workers, the environment and competitors from abusive practices.
Other external elements are developed by national and international bodies on best
practices (quality of disclosure, accounting and auditing standards, labor rules,
environmental standards,) and other areas of practices that are qualitative and
evolutionary.

The discipline of competitive financial markets:

Both equity and debt markets impose substantial discipline on management.

The day-to-day performance of a companys shares on stock exchange is a transparent
reminder to management and owners of the companys perceived viability ad value.
But, share prices can be an effective measure of performance only if equity markets are
deep and wellregulated to ensure fairness, efficiency, liquidity and transparency. The
discipline of other competitive markets: A competitive product market forces
management to adopt the most efficient methods of production since competitive
markets expose inefficient firms. Increasingly, firms must compete on price and
quality with products and services produced internationally. Effective
promotes accountability

and

transparency,

and

competition

minimizes corruption, lobbying

and rent-seeking which are there among the weaknesses of corporate governance in

developing countries.

Competition for corporate control (takeovers) creates the

possibility of acquiring shares at a discount, replacing managers with more efficient

ones and taking steps to maximize shareholders value can be done by providing
incentives for efficiently managing corporations and by providing .a market
mechanism for replacing underperforming management.

The discipline of reputation agents:

These are the broad array of professional watchdogs who report to the
investment community and keep a close eye on corporate performance. They include
lawyers, investment bankers, investment analysts, credit rating agencies, consumer
activists, environmentalists and accounting and auditing professional. They exert
enormous pressure on companies to disclose accurate information to the market, to
improve human capital and to align the interest of managers, shareholders and other
stakeholders. Their approval implies to the investing public that they have carried out
due diligence and that the company is in compliance with regulations and standards
of behavior and boosts its reputation.
APPLICATIONS OF THE PRINCIPLES - PUTTING PRINCIPLES
INTO PRACTICE:
Through its Steering Group on Corporate Governance and the Regional
Corporate Governance Roundtables, the OECD serves as the international nexus for
policy discussions in corporate governance. In co-operation with the World Bank, the
OECD Regional Roundtables have used the principles as a framework for policy
dialogue to promote regional corporate reforms in Asia, Latin America, Eurasia,
Southeast Europe, Russia and recently Middle East, North Africa. This activity has
resulted in regional White Papers, which develop common policy objectives and
highlight recommendations for policy action.

10

The Asia Roundtable on Corporate Governance was launched in Korea in 1999, and
has held regional meetings in Hong Kong (2000), Singapore (2001), Mumbai (2002),
Kuala Lumpur and Tokyo (2003), Seoul (2004) and Bali (September 2005). The
roundtable participants representing diverse interests agreed in 2003 on the Asia White
Paper setting out six priorities and 36 recommendations specific to the region. The
White Paper builds upon the original OECD Principles of Corporate Governance
adopted in 1999. Solid enforcement, effective disclosure and proper functioning of
boards are all essential for market integrity that encourages investment. In order to
improve the general quality of Corporate Governance in Bangladesh, the Code of
Corporate Governance for Bangladesh has been adopted in April 2004. Also applying
the White Paper priorities and recommendations and the 2004 OECD Principles
involves further prioritization which include:
(i)

Enforcement;

(ii)

Increasing board effectiveness

(iii)

Improving information disclosure and

(iv)

Promoting shareholder activism.

(role of independent directors);

In response to the growing interest in corporate governance in OECD countries and

sparked by the Asian financial crisis, the OECD Principles have been formulated so
that they are both applicable to OECD member countries and non-OECD member
countries. Many countries have been applying these principles and following are some
highlights of corporate governance practices by these countries.
Malaysia: Many improvements have been made regarding increased partnership
between government and private sector with greater separation of ownership and
management. Authorities have pressured boards to respect shareholders interests.
Effective legal systems and adequate legislation have been implemented to protect
private property and unique systems for training directors. Investors recognize
improvements made by the government, regulators and corporations, but challenges
11

still remain. A convergence in regulation, attitudes and pressures from institutional

investors and shareholders needs to continue. Strong supervision and enforcement of
the new and the standard is essential for success. Also, the market state of mind must
firmly recognize and put into practice the precepts of accountability, transparency and
integrity.
India: Corporate governance in India was not triggered by any serious nationwide
financial crisis, banking or economic collapse, but rather the initiative was driven by
the industry association, the confederation of India industry. The Indian listed
companies have been legally mandated to follow fairly strict standards of corporate
governance and disclosures. The standards in India are far stronger than all Asian
countries, and in general stronger than most OECD countries (Goswami, Omkar,
2002).The

Indian corporate sector regulators and companies have been quick to

incorporate some of the best international corporate governance and disclosure

practices. The need of the day is more training of directors, audit committees
members and senior executives of companies. The challenge is to design and sustain
a system that imbibes the spirit of corporate governance, and not merely the letter of the
law.
Indonesia: Indonesia has taken important steps since 2000 to address weaknesses
in its corporate governance framework, and now has in place an elaborate system of
formal corporate governance rules. But, efforts need to be taken by Indonesia to
strengthen the independence and enforcement capacity of the securities regulator,
clarify and reinforce the legal responsibilities of directors and company managers,
improve the transparency and reliability of annual reports and financial statements and
the quality of public company audits, strengthen the process for appointing
independent board members and enhancing the rights of minority shareholders.

12

CORPORATE GOVERNANCE IN BANGLADESH

This part is segregated into two sections. Firstly, a discussion is made on the state
of corporate governance practices in Bangladesh. Corporate governance is a term that
describes

the

interaction

of

the

government regulators, shareholders, board of

directors, independent observers, auditors, accountants and managers to provide quality

information to shareholders, the market and society at large. Individual companies and
the country as a whole can gain sufficient rewards from improving corporate
governance. In the light of this, the present state of corporate governance of Bangladesh
remains weak. One of the leading causes of the feeble state of corporate governance is
the fact that the principles of corporate governance have not been approved, nor
recommended by the Government of Bangladesh. In addition to this, there is a lack of
stake holders awareness regarding CG issues. However, among different sectors banking
sector is in a better position than others in this respect. Recently, a significant step was
taken by Bangladesh Bank to begin to rationalize the banking sector and improve
financial reporting by banks. From December 31, 2000, banks and financial institutions
were required to comply with lAS 30 (BRPD circular no. 3 (March 18, 2000). On the
contrary, insurance sector lacks sufficiently on these issues. Despite these shortcomings,
awareness towards corporate governance has risen recently especially by the efforts
made at the non-governmental level. It is generally accepted that good governance is
vital for the economys basic development. One of the initiatives that have been taken
recently to improve the present situation is the establishment of the Center for Corporate
Governance and Finance Studies (CCGFS) at the University of Dhaka. This is a research
institution with the objective to contribute to the process of strengthening and
coordinating efforts through dissemination of new knowledge, and being an agent of
change in the legal framework and governance structure. For the first time, an
international conference was organized in Bangladesh on 30-31 July 2005 by CCGFS,
Dhaka Stock Exchange (DSE), the OECD and the Asia Foundation. Another conference
was held on this topic which was initiated by the Federation of Bangladesh Chamber of
Commerce and Industries (FBCCI). Moreover, Bangladesh Enterprise Institute

13

(BE!) has provided a set of Code of Corporate Governance for Bangladesh in April, 2004.
This institute also publishes a quarterly newsletter in the name of BEI Corporate
Governance. These steps taken at the non-governmental level have brought about
awareness of the need for corporate governance and its implementation in the various
sectors of the economy.

Corporate Governance Practices in Bangladesh

The corporate governance landscape examines the major internal and external
factors that affect it. Firstly, we examine the legal framework in which corporate
entities operate. The financial sector scenario explains the market in which
corporations

and

financial institutions operate in Bangladesh. The accounting

standards and disclosures include both disclosures required by statutory requirements

and level of disclosure in everyday practice. Also the function and role of independent
regulators have been explored. The section of judiciary and existence and role of
pressure points examines the external actors that can enforce or encourage good
corporate governance practices.

i. Companies and Corporate Laws:

To understand the corporate environment of Bangladesh, a review of legal
requirements relating to corporate entities is necessary. The Companies Act 1994 is the
law which governs incorporated entities in Bangladesh. Companies Act 1994 defines
the rights of both majority and minority shareholders. The act provides for certain
supervisory functions to be undertaken by the shareholders in the form of these rights to
attend meetings, appoint and remove directors and to obtain financial information as
well as approve the balance sheet annually. It also provides for various mechanisms for
shareholders to enforce these rights, the principal among them being a suit for
minority protection under section 233 of the Act (Sobhan, Farooq, et al., 2002).

14

The Act has some inbuilt protection for shareholders in requiring companies to
file periodic returns with the registrar of joint stock companies (RJSC.), failing which
the directors and management of the defaulting company are liable to various
penalties such as fines and some cases, imprisonment (World Bank, 2002). The right to
dividends is perhaps the right that most concerns shareholders, and has recently been
in public focus. In accordance with the law, dividends are declared by the shareholders
in general meeting, but may not exceed the amount recommended by the directors. The
Act has specific provisions targeted at protecting the interests of minority shareholders.
Minority shareholders holding at least 10% of the shares may seek remedies in court,
if they feel the affairs of the company are being conducted in a manner prejudicial to
one or more of its members or the company is acting in a manner discriminatory
towards any member or debenture holders. If the court is of the opinion that the
interests of the applicant(s) are being prejudicially affected, it may pass any order it
deems fit including canceling or modifying any resolution or transaction, regulating the
affairs of the company in future as specified in the order or amending any provision of
the memorandum or articles of the company.
The primary avenue for companies to communicate with their shareholders is
the annual general meeting (AGM). A company must hold at least one general meeting
of its shareholders, normally called the AGM, in every calendar year. If an AGM is not
duly called, then the RJSC or the court may authorize the holding of the meeting out
of time. Articles of Association or holders of not less than 10% of the shares of a
company can require an extra-ordinary general meeting to be called and held. In an
AGM, the agenda must include the following items as necessary: (i) Approval of the
annual report and audited accounts of the company; (ii) Appointment of auditors and
(iii) Resignation by rotation and appointment of directors (as required). One function
of AGM is to elect the companys board of directors. Members of a company elect the
directors of a company from among their numbers in a general meeting. There is no
further requirement of law regarding the composition of the board of directors,
although the Securities and Exchange Commission (SEC) has recently been imposing a
condition on public issues of shares that directors be elected in proportion to

15

shareholdings of institutional investors. One issue of establishing good corporate

governance is the inclusion of independent directors on the board of directors. In the
context of Bangladesh, persons that would fit the definition of independent

in

Bangladesh are often current or former government officials or bureaucrats. They

are appointed to help the company get licenses or as payback for previous favors. When
boards need an independent opinion they rely on employing outside consultants or
advisors (BE! Corporate Governance, January 2005). Therefore, in the context of
Bangladesh, independent directors do not usually serve as an advocate for minority
shareholders or as a source of new and different ideas.
Once elected to a board, the Act imposes certain responsibilities and rights upon
directors who are interested in any contract or arrangement entered into by or on behalf
of the company are required to disclose their interest and, in some cases, to desist
from voting on any such decision. However, the penalty for contravention is a fine not
exceeding Tk. 5,000, a fine which cannot be considered to be a sufficient deterrent to
such actions. The Board of Directors of the company are obliged to submit to
shareholders a balance sheet together with the profit and loss account at every AGM.
The companys auditors must audit the financial statements and the auditors report
must be attached. The Boards report must also be included, and it should provide
information regarding the companys affairs, the amount the Board proposes to reserve
in the balance sheet, the amount recommended to be paid out as dividend and any
material change and commitments which may change the financial position of the
company.
The information that is required to be disclosed by a company to its
shareholders and to members of the public in accordance with the law is practically the
only tool shareholders and investors have to judge the performance of a company and
monitor the activities of the directors and management. A companys auditors, as per
the Companies Act, must be Chartered Accountants and are appointed in the AGM.
The auditors should have access to all books and papers whether kept at the
registered office or elsewhere. The scope of inquiry of the auditors has been

16

elaborately spelt out in the Companies Act as well as the nature of the certification the
auditors must provide. An auditor must specifically state whether, in his opinion and to
the best of his information and according to the explanation given to him, the said
accounts provide a true and fair view of the companys affairs.
The CG practices in Bangladesh have been largely limited to financial sector. It is
because of major modification in the Banking Companies Act.

ii. Financial Sectors:

The debt market is non-existent, and insurance market is not a major force in the
financial sector. Therefore, primary stakeholders in corporate governance are creditors,
particularly lenders because the capital market is not a preferred source of funds for
corporations. The banking sector can serve as a motivation for better corporate
governance through its requirements and procedures for approving and monitoring
loans. Unfortunately, these procedures to date have not provided sufficient oversight
of credit assessment and asset management.
Beginning in the year 2001, banks were required to comply with the
International Accounting Standard-30 (IAS-30). The accounting standard requires
banks to classify their loans (sub-standard, doubtful, or bad) based on their default
activity and make a loan loss provision especially for classified loans, as well as make a
general provision for loans that are unclassified. Full and accurate compliance with the
disclosure requirerncm of IAS-30 will begin to provide more information to bank
stakeholders and hopefully create a consensus for reform. (Saha, et al 2002).
Bangladesh Bank (BB) is the central bank of Bangladesh, and the primary
regulator of banks and non-banking financial institutions. BB has taken a number of
recent steps to improve the health of the banking sectors, but the central bank still
suffers from a lack of personnel possessing adequate formal training and education in
banking and central bank functions. Recently, the Governor has been a professional

17

from the private sector and, for the first time, an outsider and a former CEO of a foreign
bank has been appointed as a Deputy Governor. These steps are measures to inject
experienced professionals into Bangladesh Bank and gradually instill appropriate
managerial skills in running what is essentially a bank. Although BB has introduced a
Lending Risk Analysis (LRA), procedure for loans above a certain amount, smaller
loans do not require mandatory credit assessment before sanction or disbursement
of credit facilities, which is a recognized factor contributing to difficulties in
recovery of defaulted loans. Although there are dedicated courts for debt recovery by
banks and financial institutions, Money Loan Courts, as well as Bankruptcy Courts, the
implementation of creditors rights in Bangladesh remains weak. Money Loan Courts
suffer from a shortage ofjudicial officers and delays in executing decisions. In
Bangladesh, the fundamental spokes of an efficient capital market wheel are not in
place. The average non-controlling shareholders in this country are an individual who
does not possess sufficient level of education, understanding and sophistication required
to exert pressure on a company to change behavior. Institutional investors like mutual
funds and pension funds are too small or disinterested to adopt a strong activist
position. One of the necessary conditions of effective CO is adoption of lAS and
disclosure of accounting information.
iii. Accounting Standards and Disclosures:
Accounting practices in Bangladesh suffer from two major weaknesses. First,
accounting standards are not in compliance with international standards in a number of
material aspects. Second, corporate compliance with Bangladesh Accounting
Standards (BAS) is inconsistent. The Institute of Chartered Accountants of
Bangladesh (ICAB) has adopted 30 of the 41 International Accounting Standards ( as
BAS. However, in many cases, the lAS has been adopted in its original from, and
subsequent amendments have not been adopted. As a result, lAS and BAS differ in a
number of material aspects. Accounting standards in Bangladesh allow for considerable
discretion by the company and do not require disclosure of the financial and nonfinancial details necessary for a full assessment of a companys operations, financial

18

situation and prospects. Standards regarding

subsidiaries,

associates

and

the

lack

accounting

for

investment

in

of consolidated accounts are particular

shortcomings (Sayeed, Yawer 2002). A review of available literature and annual reports
suggest that compliance with disclosure requirements under the relevant laws and BAS
is inconsistent. Here the culture of disclosure by corporate body is mainly influenced
by the requirements of the Companies Act and the regulations of the Security and
Exchange Commission (Mahboob et al. 2004). The consequences for non-compliance
are virtually non-existent, and weak auditing and regulation allow this situation to
continue unabated. Even companies that do comply with statutory requirements often
do not provide other relevant and material information. Reforms

in

laws

and

disclosure requirements are not effective unless there are independent regulatory
agencies.
iv. Independent Regulators:

The primary independent regulators relevant to corporate governance in

Bangladesh include government and non-government entities. Government regulators
include the RJSC, the SEC and Bangladesh Bank. Government regulators include
ICAB, Chittagong Stock Exchange (CSE) and Dhaka Stock Exchange (CSE).
Government regulators particularly do not provide efficient services or easily
enable companies to fulfill their regulatory or statutory requirements. As it is the case
with many Government agencies, government regulatory agencies do not have
sufficient number of qualified, experienced personnel to oversee companies actions.
Regulators also expand their scope of authority and actions through regulation and
practice, which companies feel has led to misuse of their powers and to unfair
harassment. (World Bank, 2002). The SECs interventions have forced listed companies
to be much more regular in holding annual general meeting, declaring dividends
and disseminating

price

sensitive information. The ICAB is a non-governmental

regulatory agency which certifies and oversees accountants and auditors. ICAB must

19

ensure that accountants and auditors prepare and audit financial statements that
provide full and true disclosure of a companys financial position and operations.
vi. The Judiciary:

As a support mechanism to enforce or impose regulations or rulings that support

corporate governance, the judiciary suffers from a large backlog of cases and lack of
specialist knowledge of financial laws and corporate concerns. There is a Company
Bench at the Supreme Court, which serves as the company court and attends to cases
under the Companies Act. There is also Money Loan Court to hear cases of loan
default. Proposals continue to be made for a separate bench at the High Court Division
level to dispose of financial cases and their appeals. (Mahmood, Wahiuddin, 1999).

vii. Existence and Role of Pressure Points:

External pressures that often demand information and more transparent
corporate governance practices are lacking in Bangladesh. (CPD, 2002). There are few
financial media outlets or knowledgeable financial journalists. Apart from a few
enterprising journalists, the financial press consists mainly of press releases from
companies. Shareholders do not join together in shareholders associations to demand
better company performance or to assert their share holders rights. In Bangladesh, there
are only a few institutional investors, most of which are state-owned enterprises. A few
private investors do not put enough clout to force large scale changes in the corporate
sector. Most companies are not candidates for significant foreign investment; so, there
is no push from the international economic community for better corporate governance.

ANALYSIS, FINDINGS AND CONCLUSION

20

Failings in institutions, government agencies, legal enforcements and market

behavior have resulted in weak corporate governance in Bangladesh. In many cases, the
current system in Bangladesh

does not provide sufficient legal, institutional or

economic motivations for stakeholders to encourage and enforce good corporate

governance practices. As a result, there are few rewards for companies that institute
good corporate governance practices and no penalties for failing to do so.
Targeted reforms in institutions or sectors can begin to provide the internal and
external motivation for transparency and accountability that will lead to better
corporate governance.

The institutions or sectors should be examined to develop

reform.
Recommendations:
Formulate a complete code of corporate governance at the governmental level to
improve disclosure standards and ensure transparency in the corporate sector. A legal
framework promotes the emergence of credible and effective governance practices for
the benefit of the economy and society as a whole.
Independent regulators in Bangladesh relevant to corporate governance consist
primarily of the RJSC, SEC, Bangladesh Bank, CSE, DSE and ICAB. The RJSC and
SEC are two government agencies which should be studied further to develop
recommendations for reform. These regulatory bodies should exercise the enforcement of
standards for accounting, audit and non-financial disclosure. These bodies should have
authority to impose appropriate sanction for non-compliance. Regulatory bodies should
take a tough stance against public listed companies to bring back public confidence.
They should send the right signal through exemplary punishment. Honest and good work
should be positively reinforced, and dishonesty punished that should be the basic
principle of business. For instance, Saifur Rahmans initiatives to convert black money
put honest people who have pail their taxes so far at a disadvantage.

21

Proper mechanism should be developed for monitoring the management of the

board and monitoring of the board by the shareholders. AGMs should be an effective
forum for communication between boards and shareholders. Directors should be
educated, qualified and independent. Furthermore, there should be an outline for
professional qualification requirements

or

prerequisite

training

for

directors,

although banks have begun to introduce some requirements. There should be

requirements that allow boards to include independent directors.
Conclusion:
Finally, business ethics and corporate awareness of the environmental standards
and other societal interests of the communities in which they operate sometimes
called good corporate citizenship - also can have an impact on the reputation and
long-term success of a company.
Corporate governance issues are receiving greater attention in both developed
and developing countries as a result of the increasing recognition that a firms corporate
governance affects both its economic performance and its ability to access long term,
low cost investment capital. The ultimate impetus for better corporate governance must
come from domestic forces and institutions. Unlike some other developing countries,
pressure from international portfolio investors or the hope of assessing international
equity market is not a realistic objective for a majority of corporate bodies in
Bangladesh. Corporate governance reform can only take place where there are
powerful champions. While it is unrealistic to expect that all members of the business
community will endorse CG reforms, government leaders are unlikely to pursue
reforms without some backing from business community. Social activities need to
recognize the importance of capital and the efficiency of its investment for poverty
alleviation and support reforms that aim for transparency and non-discrimination.

22

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Ahmad, Jamal Uddin et al, Corporate Governance for Transparency and

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Chowdhury, Dhiman, 2004, Incentives, Control and Development- Governance

in private and

public sector wit special reference to Bangladesh, Dhaka,

Viswavidyalay Prakashana Samstha,.

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Governance:

Framework for Implementation

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literature)

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23

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