Research Paper

On

“Codes of Corporate Governance: DSE Listed Companies in Banking, Non-Bank Financial

Institutions and Textile sector Compliance Status in Bangladesh”

Prepared for

Department of International Business

Faculty of Business Studies

University of Dhaka

Prepared By

Al-Amin
Department of International Business
BBA 6thBatch ID: 255
Session: 2012-13
Faculty of Business Studies
University of Dhaka

Date of Submission: 23rd May, 2017

 i

Table of Contents

1 Introduction ............................................................................................................................. 1

1.1 Background ...................................................................................................................... 1

1.2 Research Objectives ......................................................................................................... 3

1.3 Scope of the Study............................................................................................................ 3

2 A Review of Literature ........................................................................................................... 4

2.1 Introduction ...................................................................................................................... 4

2.2 Theoretical Framework .................................................................................................... 4

2.2.1 Agency theory and Shareholder Perspective of Corporate Governance ................... 5

2.2.2 Stakeholder Theory and Stakeholder Perspective of Corporate Governance ........... 7

2.2.3 The Institutional Theory ........................................................................................... 8

2.3 Concept of Codes; Compliancewith Codes; Corporate Governance Code Compliance in

Bangladesh .................................................................................................................................. 9

2.3.1 Compliance with Codes of Corporate Governance ................................................ 10

2.3.2 Corporate Governance Code Compliance in Bangladesh ....................................... 11

2.4 Summary ........................................................................................................................ 13

3 Corporate Governance in Bangladesh .................................................................................. 14

3.1 Corporate governance In Bangladesh Overview ............................................................ 14

3.1.1 Historical, Political and Social Background of Bangladesh ................................... 14

3.1.2 Corporate Legal framework in Bangladesh and Key Institutions ........................... 14

4 Research Methodology ......................................................................................................... 17

 ii

4.1 Sample ............................................................................................................................ 17

4.2 Construction of Compliance Sheet ................................................................................. 17

4.3 Quantitative Data Analysis............................................................................................. 18

4.4 Data Analysis Tools ....................................................................................................... 18

5 Compliance of Codes by Textile companies listed in DSE .................................................. 20

5.1 Introduction .................................................................................................................... 20

5.2 Compliance level of textile Industries ............................................................................ 21

5.3 Compliance Trend of Textile Industries......................................................................... 21

6 Compliance of Codes by Banks listed in DSE...................................................................... 23

6.1 Introduction .................................................................................................................... 23

6.2 Compliance level of Banking Industry........................................................................... 23

6.3 Compliance trend of banking industry ........................................................................... 24

6.4 Most non-complied Important Provisions by Banking Industry .................................... 24

7 Compliance of Codes by Non-Bank Financial Institutions listed in DSE ............................ 25

7.1 Introduction .................................................................................................................... 25

7.2 Compliance level of Non-banking Industry ................................................................... 25

7.3 Compliance trend of banking industry ........................................................................... 26

8 Comparative compliance status level of Banking, Non-Banking Institutions and Textile

Industries listed in DSE ................................................................................................................ 28

8.1 Introduction .................................................................................................................... 28

9 Findings................................................................................................................................. 32
 iii

9.1 Introduction .................................................................................................................... 32

9.2 Most non-complied Important Provisions by Banking Industry .................................... 32

9.3 Other Compliance Related Issues .................................................................................. 32

10 Conclusion ............................................................................................................................ 34

10.1 Concluding thoughts ................................................................................................... 34

10.2 Limitations of the study .............................................................................................. 34

11 Bibliography ......................................................................................................................... 35
 iv

Letter of Transmittal

23rd May, 2017

Department of International Business
University of Dhaka

Subject: Submission of Research Report

Dear Madam/Sir,

With humble respect I would like to convey your knowledge that I have prepared internship
report under the topic of “Codes of Corporate Governance: DSE Listed Companies in Banking,
Non-Bank Financial Institutions and Textile sector Compliance Status in Bangladesh”. I would
like to thank you for giving me such a fantastic opportunity to make an internship report on this
topic. I would like to say that this paper is helpful for me to gather knowledge about compliance
of codes by the listed companies. I have tried my best to prepare the thesis paper in consistence
with the optimal standard valuable direction.

I would be very grateful if you kindly accept this paper. I tried heart and soul to make this paper
as a complete one. It would be pleasure for me if this paper can serve its purpose.

______________
Al-Amin
ID: 255
IB (BBA) - 6thBatch
Session: 2012-13
Department of International Business
University of Dhaka
 v

Abbreviation

BB The Bangladesh Bank

BEI Bangladesh Enterprise Institute
BAS Bangladesh Standards for Auditing
BSEC Bangladesh Security Exchange Commission
CFO Chief Financial officer
CG Corporate Governance
CGCI Corporate governance compliance index
CSE Chittagong Stock Exchange
DFID Department for International Development
DSE Dhaka stock Exchange
GDP Gross Domestic Product
IAS International Accounting Standards
ICAB Institute of Chartered Accountants in Bangladesh
ICMAB Institute of Cost and Management Accountants of
Bangladesh
IFRS International Financial Reporting Standards
FDI foreign direct investment
NBFI Non-Bank Financial Institutions
NBR National Board of Revenue
OECD Organisation for Economic Co-operation and
Development
RJSC Registrar of Joint Stock Companies and Firms
SEC Securities and Exchange Commission of
Bangladesh
SOE State Owned Enterprises
vi
 vii

List of tables
Table 4-1: Samples Taken for the Study ..................................................................................................... 17

Table8.2 Comparison of the CGCI Across industries-three major categories ............................................ 28

Table8.3Descriptive Statistics fot the CGCI of the Sample Companies ..................................................... 28

 viii

List of Figures
Figure5.1Textile Industries compliance 2007-2015 .............................................................................................. 21

Figure6.2Banking Industry Compliance 2007-2015 .............................................................................................. 23

Figure7.3Banking Industry Compliance 2007-2015 .............................................................................................. 26

Figure8.4 Three Industry Compliance Percentage ................................................................................................ 29

Figure8.5 Frequencies of the CGCI of the Sample Companies .............................................................................. 30

 ix

Acknowledgement
Thanks to Almighty Allah for giving me the opportunity and ability to pursue this Thesis
Research Paper. First of all, I would like to express my deepest gratitude to my supervisor,
Associate Professor Dr. Chowdhury Saima Ferdous, Department of International Business
Department, University of Dhaka for her brilliant guidance, enormous intellectual support,
constant co-operation, and constructive criticism throughout the period of my research paper.
Without her supervision, kindness and care this thesis would not have been possible. I also
convey my deepest gratitude to Assistant Professor Ms. Hazera-Tun-Nessa, Department of
International Business Department, my second supervisor, for her insightful guidance which
helped me to diversify my thoughts and analyze the research paper from a different perspective.
Finally, I am indebted to my parents who kept me in their prayers day and night, – without their
relentless support and warmth this work couldn’t be accomplished.
 x

Abstract
This thesis investigates the compliance of the Code of Corporate Governance of Bangladeshi
industries by examining the level of compliance level of Banking, Non-bank financial
institutions and Textile industries. With a view to get depth understanding of the Code, this study
analyzed the Code provisions given by BSEC. Comparing firm’s compliance with BSEC codes
we found the compliance level of the listed companies in DSE. By calculating the compliance
level for 9 years of each company we have shown the trend of compliance among the 3 different
industries. By analyzing the compliance level of 3 industries we have also shown the
comparative compliance level among the industries. In the end, we have shown the most non-
complied important provisions of the BSEC codes.

The study uses a Corporate Governance Compliance Index (CGCI) analysis technique for the
listed companies in DSE, Bangladesh. We collected the related data from company’s annual
reports.

The findings suggest that the level of compliance amongst the sample companies is at a higher
level. The most and least complied with provisions of the Code are compared with the BSEC
regulatory provisions, the study indicates that the companies are actually following the
regulatory provisions due to the mandatory compliance.

Regulatory authority took many initiatives such as the new BSEC guideline 2012, in recent
year’s corporate governance practices increased. IN spite of new initiatives by weak legal
system, a lack of knowledge and competence amongst company managers and its stakeholder
groups, political and some other socio-economic factors are also working as barriers to the
improvement of the corporate governance standards in Bangladesh.

At last we can say that if compliance with the Code is to be ensured in developing countries like
Bangladesh and then such codes need to address the country specific issues appropriately, whilst
attention must be given to communicate it appropriately to companies and making them well
aware about the benefits of compliance.
 1

1 Introduction

The purpose of this research paper is to investigate the compliance level of BSEC and BEI codes
In Bangladeshi corporations and to identify the trend among the firms in different sectors
compliance or non- compliance of Codes. This study will draw comparison between three
industry based on the firm’s compliance with the codes of corporate governance. The
introductory chapter is organized as follows. In the section 1.2 the background of the study is
discussed to indicate the motivation for this research. In section 1.3 the research objectives are
explained. In section 1.4 the scope of research is identified. Finally this chapter concludes by
outlining the framework of the overall study.

1.1 Background

Corporate governance (CG) is the set of process, customs, policies and laws that affects the way
a corporation is directed, administrated or controlled. The term CG is now a buzz word in
today’s business world. The global financial recession and collapses of big financial institutions
such as Barings Bank in 1995, Enron in 2001, Royal Ahold in 2003, had opened the door of
thinking more about the corporate governance practices in business organizations (Ullah, 2009).
These notable corporate failures in different parts of the world during the early 2000s raised
widespread community concerns about inadequate governance standards. Over the last 20 years
the economy of Bangladesh has made commendable progress. Many Bangladeshi companies are
now involved with international business. With the progress of economic condition many more
companies are incorporating. With corresponding to the increasing number of companies the
merit of corporate governance is also increasing. Because over the last decade the country has
witnessed some significant company scandals (e.g. Oriental Bank, Modern Food Ltd, Hallmark
group, Bismillah group, Sonali Bank) along with massive capital market crashes. Therefore the
scholars and policy makers raised concern about the accountability, transparency and fairness of
the operating corporate firms. To counter the scandals, fraudulence and failures of the corporate
firms; good corporate governance framework establishment and implementation plays significant
role. Corporate governance is a key element in improving the economic efficiency of a firm.
Good corporate governance also helps to ensure that corporations take into account the interests
of a wide range of constituencies as well as of the communities within which they operate.
Further, it ensures that their Boards are accountable to the shareholders.

Furthermore Bangladesh was being pressurized by International community to ensure

International compatible corporate governance framework. Following the footsteps of the
developed nations, Bangladesh had taken some major initiatives to reform its corporate
governance policies, capital market and financial system. Prioritizing the global need of aligning
corporate governance standards according to best practice recommendations, the first voluntary
 2

code, namely the Code of Corporate Governance for Bangladesh (hereafter ‘the Code’) was
developed in 2004. But due to less participation of corporate firms accepting the voluntary
codes; later in 2006, to institutionalize the corporate practice of corporate governance in
Bangladesh, the Securities and Exchange Commission (SEC) issued a notification on Corporate
Governance Guidelines for the publicly listed companies on ‘comply or explain’ basis.

Bangladesh corporate sector is dominated by Banking and Non-Banking Financial Institutions.

Good Corporate governance in the Banking and Non-banking sector is considered to be an
integral part of the development of sound, transparent and properly functioning money by
inspiring investor confidence. (Mahmud, 2015) Moreover, it is a very essential element for the
banking system because bank and financial institutions depend on Other Peoples’ Money.
(Abbasi, 2012). Banks and other financial institutions corporate governance is particularly
important in less developed countries like Bangladesh because economic development and
growth is dependent on a large extent of well-functioning, stable and soundly managed system.
Most of the companies depend on the banks and finance institutions as their major sources of
financing. (Sarkar, 2014). Good governance in the banking and financial industry is required to
maintain public trust and confidence in the banking and financial industry; to run an efficient
financial system without excessive risk exposures; to establish an efficient and reliable
depository and financing system to fuel the wheels of the economy.

Another most important sector in Bangladesh is Textile and clothing industry. The textile and
clothing industries provide the single source of growth in Bangladesh's
rapidly developing economy. Exports of textiles and garments are the principal source of foreign
exchange earnings. But many irregularities have been seen Bangladesh textile sector due to poor
governance. . Good governance in textile sector is important to cater the foreign buyers. If the
textiles firms follow the corporate guidelines it will help to attract the foreign direct investment
in this sector. Additionally the buyer’s compliance is also a form of governance framework.
Companies failing to meet the criteria’s buyers won’t do business with them. Maintaining a good
corporate practice in these firms will help to enhance the performance of the textile sector in
Bangladesh.

Recent scandals such as Hallmark group, Bismillah group, Sonali Bank, BASIC Bank and Share
market collapse has shown the importance of proper implementation and monitoring of corporate
governance practices among the various sectors. To keep up with the new frontiers of corporate
governance Bangladesh Security Exchange Commission (BSEC) further amended the corporate
governance guidelines on August, 2012. The new notification is issued where 'comply' is
mandatory. They prepared the codes reflecting country specific needs and which addresses
international expectations corresponding with BEI and OECD codes.
 3

Now the study is carried out to understand the extent of compliance and non-compliance level of
the firms within the three industries after the introduction of the new amended BSEC Corporate
governance guideline in 2012 corresponding to the previous guideline.

1.2 Research Objectives

This research paper is intended to investigate the compliance status of different companies to the
code of corporate governance in Banking, Non-banking Financial Institutions and Textile sector
in Bangladesh. For the purpose of the study, this broad research objective has been broken down
into specific objectives as outlined below:

 To identify the level of compliance of the Bangladeshi listed companies following the BSEC
Codes.
 To identify the trend of compliance among the Banking, Non-bank Financial Institutions and
Textile Industries.
 To identify the comparative compliance status level of Banking, Non-banking Financial
Institutions and Textile industries listed in DSE.
 To identify the most non-complied important provisions.

1.3 Scope of the Study

This study will help for several issues related to corporate governance in Bangladesh. The
research is solely conducted on Bangladeshi perspective. This study will add some value with the
present knowledge of corporate governance code compliance and contributes to the existing
literature on corporate governance comparative compliance status in Bangladesh especially in
Banking, Non-Banking Financial Institutions and Textile sector. This study will help the other
researchers to gain the recent information about the firm’s code compliance status. Moreover
other fellow researchers will get the necessary information about the textiles industry’s code
compliance status from this paper. It is also expected that findings of the study might be helpful
to the specific industry in Bangladesh to implement the good corporate governance practices and
help the policy planner to take suitable policy measures to further strengthen the corporate
governance.
 4

2 A Review of Literature
2.1 Introduction

This chapter will provide the theoretical aspects of corporate governance and literature review on
the study of compliance of codes of corporate governance. This literature review will help to
relate the present work with the previous works done in this topic. This literature review involves
three sections. The following sections discuss different theoretical approaches, mainly agency
theory, stakeholder theory and institutional theory of corporate governance which are important
to understand the corporate governance framework in Bangladesh. The later sections describe a
brief history of codes, and prior literature on code compliance of developing economies
including Bangladesh. And in last section the whole literature review is summarized and
important issues are shown for this study.

2.2 Theoretical Framework

The definition of corporate governance has been given by different authors in respect of various
issues. Sir Adrian Cadbury defined corporate governance “as a system by which companies are
directed and controlled. Boards of directors are responsible for the governance of their
companies. The responsibilities include setting the company’s strategic goals, providing effective
leadership, supervising and reporting management issues to stewards. The board’s action is
subject to laws, regulations and the shareholders in general meeting (Cadbury, 1992).

The Organisation for Economic Co-operation and Development (OECD)defines corporate

governance as: “a set of relationships between a company’s management, its board, its
shareholders and other stakeholders. It also provides the structure through which the objectives
of the company are set, and the means of attaining those objectives and monitoring performance
are determined” (OECD, 2004, p.11).

Some other scholars rather preferred to view corporate governance from a wider perspective to
incorporate various stakeholder groups into the company’s objectives. They argued that it is not
only for shareholders, rather as a social entity, a company should be accountable to its various
stakeholder groups who have a long term relationship with the company and who have the
potential to impact firm performance. (Saima, August,2012, p. 15)

Although most of the definitions emphasize on the rights and responsibilities of different
stakeholders in a company, they differ due to the diversity of corporate practices around the
world (Aguilera R. a., 2003). Mallinalso (Mallin, 2010) suggested that, many disciplines like
law, economics, finance etc. have influenced the development of corporate governance and thus
theories that have fed into it are quite varied. Thus being driven from different theoretical
 5

perspectives, corporate governance has been illustrated in different ways and stylized in different
structures for identifying the purpose of the corporation, deciding who should have the control,
identifying the problems or finding an optimal solution. (Letza, 2008).

However, despite of many doctrines of the corporate governance theories the perspectives of CG
can be classified into two contrasting theories: shareholder and stakeholder perspective. (Steve
Letza*, 2004). From the perspective of shareholding camp, corporate governance is seen as a
mechanism to deal with these issues by narrowing its vision to satisfy the needs of only
shareholders, the opposite camp advocates having much wider vision to satisfy the needs of
stakeholders.

2.2.1 Agency theory and Shareholder Perspective of Corporate Governance

Agency theory is the most used theory of corporate governance. Most of the countries both
developed and developing are following the agency theory. In the modern corporation, in which
share ownership is widely held and management roles are separated from ownership functions,
managerial actions may depart from those required to maximize shareholder returns. (Berle,
1932). In agency theory terms, the owners are principals and the managers are agents and there is
an agency loss which is the extent to which returns to the residual claimants, the owners, and fall
below what they would be if the principals, the owners, exercised direct control of the
corporation. (Meckling, 1976).

“Principal-agent” framework state that agency theory identifies the agency relationship where
one party, the principal, delegates work to another party, the agent; the agency relationship is
thus seen as a contractual link between the principals and the agents who are appointed by the
principals and delegate some decision making authorities. (Shankman, 1999).

Agency problems arise because individuals are opportunistic and individuals in an agency
relationship have different interests. It is very unlikely that agents will always act in the best of
the principal (Jensen, 1976) Agents want to maximize their own interests, thus the agency
relationship may bring potential for losses to shareholders. Agency theory thus suggests that
managers/agents must be monitored and institutional arrangements must provide some check and
balances to make sure they do not abuse the power.

Milton Friedman takes a shareholder approach to social responsibility. This approach views
shareholders as the economic engine of the organization and the only group to which the firm
must be socially responsible. As such, the goal of the firm is to maximize profits and return a
portion of those profits to shareholders as a reward for the risk they took in investing in the firm.
He advocates that the shareholders can then decide for themselves what social initiatives to take
part in rather than having their appointed executive, whom they appointed for business reasons,
 6

decide for them. (Freeman E. , 1988).Shareholders are the primary stakeholders of a company,
and any act for social purposes beyond the shareholder’s interests will create scope for managers
to abuse their power and this will create agency cost. It will result in government to intervene in
corporate decisions and thus there is a possibility that corporate resources will be allocated in an
inefficient way. (Steve Letza*, 2004).

The shareholder approach is most compatible with Anglo-American model of corporate

governance. Being predominant in the common-law countries (e.g. US, UK, Canada, Australia,
New Zealand), shareholding views of corporate governance are also known as the Anglo-
American model of governance (Aguilera R. a.-C., 2009).

The Shareholding theory advocates camp of governance argues that the best solution to the
agency problem is to supervise the principal-agent relationship and to align the behavior of the
managers with the interest of owners. (Steve Letza*, 2004, p. 248) In addition, to secure
shareholder’s interests and to ensure a better governance standard in companies, a three tier
hierarchical governance mechanism 1. Shareholder's general meeting. 2. The board of directors.
3. Executive managers is designed asa check and balances mechanism in the corporate structure.
The shareholder perspective of CG also considers that hostile takeovers, mergers and
acquisitions are some of the most effective mechanisms through which the market can control
under-performing corporations and thus protect the rights of its investors (Rwegasira, 2000).

Despite its dominance, many researchers’ casts doubt on the ability of agency theory to
understand the corporate governance issues around the world. For instance, many researchers
disagreed with the proposition of the self-interest nature of the agents and argued that managers
are trustworthy and should be fully empowered, (Davis, 1994) whilst (Charkham, 1994)(Sykes,
1994) and(Moreland, 1995)opined that the fundamental shortcomings of agency theory and the
shareholder perspective of governance is its excessive short term market orientation, whilst it
ignores certain long-term expenditures and capital-investment which are fundamental for the
long term sustainability of an organization.

Thus, based on the agency theory another theoretical model emerged which is known as “myopic
market model” that argues shortsighted markets forces managers to overemphasize the short-
term return (e.g. current share price) and or take decision against the threat of hostile takeover at
the expense of shareholders interest (Steve Letza*, 2004). According to the myopic market
model, corporate governance can be improved by ensuring an environment in which long-term
performances prioritized by shareholders and also managers.

Despite of having criticism against Agency theory it has its own theoretical grounds. The
significance of this model cannot be ignored; similarly this goes same for the Anglo American
 7

model. Anglo American model have a certain weight in dealing with real life issues of good
governance.

2.2.2 Stakeholder Theory and Stakeholder Perspective of Corporate Governance

The stakeholder perspective of governance was emerged in late 20th century. Stakeholder theory
focuses to a wider external stakeholder’s interests rather focusing on merely shareholders wealth
(Steve Letza*, 2004, p. 243). The concept of “stakeholder” first appeared in the management
literature in 1963.The concept of “stakeholder” refers to as those groups or individuals who can
affect, or are affected by, the achievement of the organizations objectives (Sternberg, 1997); and
it includes different interest groups such as employees, customers, suppliers, government, and
society at large.

Jones and Wicks have summarized four major propositions of stakeholder theory, i) the firm has
relationships with many constituent groups that affect and are affected by its decisions; ii) the
theory is concerned with the nature of these relationships in terms of both processes and
outcomes for the firm and its stakeholders; iii) the interests of all (legitimate) stakeholders have
intrinsic value and no set of interests is assumed to dominate the others; and finally, iv) the
theory focuses on managerial decision making (Jones, 1999).

Donaldson and Preston extend this understanding by identifying that the stakeholder approach of
governance can be categorized into two groups: normative and instrumental. Normative
approach emphasizes intrinsic value in stakeholder and views stakeholders as ends. The
instrumental approach is only interested in how stakeholder’s value can be used for improving
corporate performance and efficiency and regards stakeholders as means (Donaldson, 1995).

Scholars like Letza et al., (2004a) state that “the abuse of executive power model” also takes
stakeholder perspective of governance because this model also emphasizes stakeholder welfare.

Overall, stakeholder perspective of governance says that corporate governance issues canbe
better resolved through increasing stakeholder’s participation and by establishing an environment
where business ethics, employee’s participation, inter-firm co-operation, trust and long term
relationships are encouraged (Blair, 1995). If implemented properly, the advocates of the
stakeholder model believe this wide approach of governance is able to offer a certain competitive
edge to companies.

Stakeholder theory also has some criticisms as well. Criticizing the stakeholder model of
governance, many studies have been done, for instance Antonacopoulou and Meric, 2005; Plaza-
Ubeda et al., 2010; Sternberg, 1997; Tse, 2011 etc. They said that unlike shareholder or agency
theory, stakeholder theory is incomplete in terms of under-specification of the corporate purpose
 8

or setting specific mechanisms for sound governance. The theory does not guide managers in
handling these issues; neither has it provided any idea of how to make the trade-offs among
stakeholders. Moreover interest varies from group to group and even within members of a single
group. This situation gets further complicated when managers are left without clear ideas for
individualizing, addressing and prioritizing stakeholders claims (Tse, 2011).

The theory does not fully specify what to do if the status of a stakeholder changes. While there is
no unified method for identifying who is a stakeholder, scholars opine, it would be tough for a
manager to decide an optimal method for deciding whose interest should they prioritize and to
what extent; what to do if the stakeholders status changes, for example, what to do if suppliers
becomes competitors and thus their participation become a threat for company’s
competitiveness. (Antonacopoulou, 2005).

2.2.3 The Institutional Theory

One of the major limitations of existing studies of governance is its excessive dependence on
agency theory to outline the rationale of the governance model. Some authors argue that social
aspects of evolution of governance have received mall attention in agency theory; some others
(Siddiqui, Development of corporate governance regulations: The case of an emerging economy,
2010)opine that it is ineffective to explain major corporate governance issues in developing
countries (Yoshikawa, 2007). These limitations have forced researchers) to explore alternative
theoretical frameworks, and amongst them institutional theory has been a very popular choice.

Institutional theory explains “why so many businesses have similar organizational structures and
cultural elements even though they are separate entities, and how organizations as institutions
shape the behavior of individual members”(Chua, 2011). In simple words, it explains why
different organizations structure themselves in a similar manner. Institutional theory emphasizes
the fact that many dynamics in the corporate environment may stem from cultural norms, values
and rituals. Thus the social and cultural environment should also be taken into account in
understanding corporate governance practices. Institutional theory explores the role of extra-
organizational institutions in developing organizational structures, policies; and the ways firms
respond to such external, macro pressures for receiving support and legitimacy. However,
companies may also seek legitimacy to ensure persistence, credibility and validity (DiMaggio,
1983).

These three mechanisms are of great interest amongst researchers. In the case of Bangladeshi
few studies (e.g. Belal and Owen, 2007; Mir and Rahaman, 2005;Siddiqui, 2010) have also
adopted an institutional approach to understand corporate governance developments in the
country. Siddiqui investigated the development of corporate governance standards in Bangladesh
 9

and reported that “the major actors of governance are exposed to different levels of legitimacy
and threat, and behave accordingly” (Siddiqui, Development of corporate governance
regulations: The case of an emerging economy, 2010). Mir and Rahman who investigated the
International Accounting Standards (IAS) adoption process in Bangladesh and report that
isomorphic pressure forced the country to ‘carbon copy’ most of the IAS and labeled them as
‘Bangladesh Accounting Standards’, which are less likely to ensure efficiency for companies.
(Mir, 2005).

These findings provide an important beginning of the understanding of the Code/standard

development process in Bangladesh, this study intends to extend the understanding through the
observation of the Code provisions of BSEC and BEI and analyzing the compliance status of the
companies in Banking, Non-banking Financial Institutions and Textile sector listed in Dhaka
Stock Exchange (DSE).

2.3 Concept of Codes; Compliance with Codes; Corporate Governance Code

Compliance in Bangladesh

Corporate governance code is generally a voluntary set of principles, recommendations,

standards, or best practices, issued by a collective body, and relating to the internal governance
of corporations within a country (Chizema, 2008). Codes are introduced to fill up the
deficiencies in the corporate legal system. Codes establish clear-cut information requirements
and recommend the adoption of organizational structures that are more transparent. Codes of
corporate governance are aimed at to enhance the company performance, enhance reliability and
thereby to restore investor’s confidence. (Akkermans, 2007)

Corporate governance code issuance increased rapidly after the publication of Cadbury Report in
1992. The Last decade witnessed the issuance of a large number of codes of best practices. At
present time 95 countries are using codes of corporate governance (ECGI, 2017), suggesting an
increasing interest of countries in code development.

Organization for Economic Cooperation and Development (OECD) is developing codes since
1996. “OECD Principles of Corporate Governance” were issued in 1999 and amended in 2004
and eventually that has become a widely accepted global benchmark. OECD principles have
been working as a guide for much of the corporate governance reforms, especially in developing
countries. In fact, existing literature states that in the case of developed countries too, along with
other external factors, these best practice recommendations set by international organizations are
one of the major reasons behind the similarities in code contents around the world (Aguilera and
Cuervo-Cazurra, 2009).
 10

Country specific forces also have significant influences over the code development; domestic
pressure groups create divergence among the codes. Groups such as political, business
institutions, legislators, stakeholders are the major forces which cause the existing divergence
among code contents.

Codes are providing the guidelines to follow the standard of corporate operations. Many argues
that code development only cannot ensure better governance standards; nor can even a best
model serve as the best solution for ever. For a code to be effective, it is vitally important that its
implementation and level of compliance is monitored; measured to identify gaps between
standard and reality; and amended to accommodate changes needed. That is why research on
measuring code compliance is encouraged throughout the world.

In present measuring compliance with codes has gained momentum because many corporations
mostly in developing countries are not following the codes properly despite of adopting the
codes. In the case of Bangladesh the BSEC rule after amendment in 2012 the compliance of
codes is mandatory which was previously comply or explain; where BEI codes are voluntary.
There is a gap between the rate of compliance with the codes provided by SEC and BEI. Some
study has been done to study to investigate the compliance status from Bangladeshi perspective.
(Reaz, 2006) (Rezwana, James Bakul, & Fowzia, 2010)(Saima, August,2012) (Siddiqui,
2010)(Shakhawat Hossain, 2014) (Moudud-Ul-Huq, 2014)

2.3.1 Compliance with Codes of Corporate Governance

Many researchers have suggested that corporate governance practices are an integral part of the
overall success of a company. Measuring and evaluating company’s corporate standard against
an accepted standard of practices in developed and developing countries is increasing. The
studies measuring compliance are predominantly based on developed countries code. In
developed countries the level of compliance with the code is very high. EU nations such as UK,
Germany shows highest level of compliance with codes (Werder, 2005).

Consistent with the higher degree of compliance, developed countries codes seem to yield
positive impact on firm performance too. Empirical findings indicate that good-governed
companies performs better than the poorly governed firms from the market since the equity
return of good-governed companies is much higher than the poorly-governed companies.
Improvement in corporate practices and in many aspects compliance yields a positive impact on
firm performance. Greater compliance with best practices concerning board structure and
functioning is also positively related with operating level performance.

The compliance status in developing economies is sharply lagging behind with that of the
developed countries. Developing countries are far behind from complying of the codes than the
 11

developed countries. Klapper, Love and Gompers gathered data from 14 emerging markets and
finds that the level of compliance is a major issue for emerging markets. The study also indicates
that there is wide variation in firm-level governance among sample companies and that the
average firm level governance is lower in countries with weaker legal systems (Klapper, 2004).

Non-compliance with codes of corporate governance has been found from the studies on South
Asian developing countries. Developing countries share some commonalities in the socio-
economic and governance reformulation structure, corporate governance framework and
framework related problems. Studies done in Pakistan such as “The impact of corporate
governance on the cost of equity:empirical evidence from Pakistani listed companies”(Shah,
2009) and in India “Independent directors: time to introspect, suspect, respect – an Indian
perspective”.(Aggarwal, 2010) And “Corporate Governance Compliance Practices of Indian
Companies” (Raithatha, 2012) shows low level of compliance or to certain cases non-compliance
with Code of corporate governance. The reasons behind non-compliance were low disclosure of
information and weak regulatory supervision or poor internal compliance or control of
compliance. Many developing Asian countries also portray similar pattern of non-compliance
scenario. But the researchers are optimistic because they have found that the level of compliance
is increasing over time in the respective countries. However to ensure high level of code
compliance motivation for compliance is more important than putting pressure for compliance.
This motivation may come from a proper understanding of the necessity for compliance,
incentives and evidence of the benefit of compliance for companies. Compliance with codes is
expensive; so unfortunately, developing countries seem to be facing more difficulties in this
regard. On one side Codes are demanding full compliance to yield their best; on the other hand,
due to lack of motivation companies are not ensuring full compliance and thus the compliance
with codes become even more challenging.

2.3.2 Corporate Governance Code Compliance in Bangladesh

Corporate governance is a growing and relatively newer concept in the context of Bangladesh;
thus the area of good governance in Bangladesh has not been studied as intensively as in other
developing countries. Nevertheless awareness of the importance of CG is growing. Bangladesh's
small size and lack of natural resources have necessitated an open trade policy. Bangladesh also
has a liberal policy towards foreign direct investment (FDI). However, when compared to those
of the India, Sri Lanka, Pakistan, Thailand and Malaysia, (United Nations Public Administration
Network, 2010). However, in recent years, several scholarly papers have emerged understanding
different dimension of corporate governance in the country. Most of the research has emerged in
the area of accounting, auditing practices and CG model. Siddiqui and Podder(2002) for
instance, studied 14 banks of Bangladesh to examine the effectiveness of audit and found that the
banking companies were misstating their profits in their financial statements and their audit firms
 12

are certifying these financial statements as true and fair. Finding that only 3 out of 7 default
companies’ auditors have placed a modified statement, the authors raised concerns about the
competence and independence of auditors in Bangladesh. Similarly many other authors
examining listed companies of Dhaka Stock Exchange found a lack of compliance. The non-
compliance provisions were competence and independence of auditors, audit reports financial
reporting quality, audit fee, ineffective enforcement mechanism, poor quality accounting
education and training, and inadequate adherence to professional ethics are also considered to
have contributed to the weakness of the financial reporting regime in Bangladesh. (Saima,
August,2012, p. 51)

Most of the studies focus on the reporting of the social disclosure, less work has been done
comparing the compliance status with the codes. Akhtaruddin investigated the extent to which
the listed companies in Bangladesh comply with the mandatory disclosure rules of three
influential regulatory bodies. By examining 94 annual reports published in the year 1999, the
study finds that companies in general do not comply with mandatory disclosure requirements of
the regulatory bodies (Akhtaruddin, 2005).

To put emphasize in complying the codes, regulatory institutions introduced many new steps.
BEI was the first introducer of codes in Bangladesh. Those codes were voluntary. Companies
didn’t take them properly, resulted in poor governance in corporate operation. On 9 January
2006, the Commission issued an order requiring the listed companies to follow a number of CG
related conditions. The aim was to improve the CG situation and thereby, better protect the
interests of minority shareholders and develop Bangladesh capital market. The Commission
revised its order by a notification dated 20 February 2006.

Prior studies show that listed companies in Bangladesh have accepted the notification with
positive intent but failed to comply with codes properly; which resulted in many corporate
scandals such as Share Market scandal, Bank scandals etc. In order to further improve the CG
situation, the Commission issued the revised CG guidelines through a notification on 7 August
2012 (BSEC, 2012) replacing its previous notification issued in 2006 in this respect. Although
the notifications are similar in some key areas, they differ in other aspects. In the following
sections, the differences between the notifications are discussed.

After the recent notification, very little study has been done to see the compliance status of codes
in Bangladesh. A significant gap in the literature emerges from this period. Compliance or
disclosure has been measured against mandatory provisions. None of the studies has measured
the extent to which companies of Bangladesh are complying with the voluntary Code of
Corporate Governance for Bangladesh given BEI.
 13

At last to how far the Codes has been complied by the companies in Banking, Non-banking
Financial Institutions and Textile sector of Bangladesh with respect to the BSEC codes, the trend
among Bangladeshi company’s complying the codes, finding these answers are the prime
research criteria. Finding out whether the firms are following the voluntary codes of BEI is
another major criterion of this research paper.

2.4 Summary

In the previous sections the theoretical framework of the study and discussed literature review
about the status of codes in Bangladesh will help to identify the new scope and the gaps in this
present study. From the discussion it shows that agency theory/Shareholder perspective and the
stakeholder theory have their own merits and criticisms in providing an understanding of
corporate governance. Arguments in favor of both these theories have been shown and criticism
against both these theories has also been shown.

The discussion on the previous literature on code compliance helps in understanding the codes of
corporate governance, identifying the most appropriate method of measuring compliance. Study
of those literature based on codes will help to measure the appropriateness of code compliance
both in developed and developing countries. In case of Bangladesh, the compliance of code is
more critical due to many factors. The future economic development is critically dependent on,
among other things, the ability to attract investment such as FDI and increase capital funds. One
of the major outcomes of such ability would be to bring order in the capital market and an overall
corporate structure which will be effective enough to ensure a healthy growth of business and
this is one of the major reasons why an appropriate code of corporate governance is important for
Bangladesh.

By addressing all of these issues the present study intends to fill the gap in the literature on
compliance in Bangladeshi Companies and to identify the trend of code compliance among the
companies.
 14

3 Corporate Governance in Bangladesh

3.1 Corporate governance In Bangladesh Overview

This chapter will discuss the context in which corporate governance operates in Bangladesh. The
development of corporate governance practice in Bangladesh and the prime elements and key
institutions that have an influence over its development are discussed in the following sections.

3.1.1 Historical, Political and Social Background of Bangladesh

Bangladesh is a developing country in South Asia. It was liberated in 1971 after fighting a
liberation war. After independence, the government had the challenge of developing and
diversifying its economy and attracting investment in Bangladesh. To improve the economic
condition Government of Bangladesh in an order in1972 nationalized all large and medium sized
industries. Through nationalization, the government gained control over 92% of the total
industrial assets in the country (Islam, 1999). These industries were most commonly known as
the State Owned Enterprises. Nationalization policy of the then government in Bangladesh
failed. State Owned Enterprises (SOEs) suffered from huge accumulated losses because of
corruption, mismanagement and a lack of effective monitoring. However the new government
took measures to rehabilitate the private sector and facilitate industrialization, they revised the
investment policy and reduced charges on industrial loans by the Development Financing
Institution (DFI) to help the private sector entrepreneurs on a priority basis. The
denationalization of the public sector enterprises and adoption of the market economy by that
government brought in the new era of industrialization. The effort of government initiatives
along with the support of private sectors has been successful in changing the pessimistic opinion
on the possibilities for Bangladesh. Political instability posed great challenges to the country
throughout its development. Manipulation of political power, erratic policy reform, less influence
over company decisions and an unpredictable business environment are some of the major
consequences which seem to be repeatedly cited by the studies on Bangladesh.

3.1.2 Corporate Legal framework in Bangladesh and Key Institutions

The corporate legal framework in Bangladesh consists of certain Acts and Ordinances, numerous
subordinate legislative instruments such as orders, notifications, rules, regulations and circulars,
amendments which are issued by the Government, the Bangladesh Bank, Registrar of Joint Stock
Companies and Firms (RJSC),the Securities and Exchange Commission (SECB), the National
Board of Revenue (NBR).

Registrar of Joint Stock Companies & Firms (RJSC) registers the companies under the
Companies Act 1994. It is administered by the Ministry of Commerce. The Companies Act 1994
 15

empowers the Company Registrar in relation to registration of companies, societies, trade

organizations, partnership firms and filing of statutory returns and authority to call for
information and explanation. In 2005it initiated its automation process and implemented partially
in 2008 with customized software developed by the IT division of the office (The Dailystar,
2013). Digitization of RJSC has helped in escalation of doing-business indicators of Bangladesh
in the WB report.

Bangladesh Bank (BB) is the Central Bank of Bangladesh. Bangladesh bank regulates the banks
and non-banking financial institutions (NBFI). Along with the power to regulate commercial
banks and banking institutions, Bangladesh Bank also deal with all the traditional central
banking functions including the sole responsibility of issuing currency, keeping the reserves,
formulating and managing the monetary policy and regulating the credit system of Bangladesh.
BB operates with the overriding aim to stabilize the domestic and external monetary value of
Bangladesh.

The Bangladesh Securities and Exchange Commission (BSEC) was established on 8th June,
1993 as the regulator of the country’s capital market through enactment of the Securities and
Exchange Commission Act 1993. Through an amendment of the Securities and Exchange
Commission Act, 1993, on December 10, 2012, its name has been changed as Bangladesh
Securities and Exchange Commission from previous Securities and Exchange Commission.
BSEC holds very wide-ranging powers and regulates the activities of the capital market in
Bangladesh including licensing and regulation of capital market participants and intermediaries
such as stock exchanges, brokers and dealers, merchant banks and portfolio managers. Much of
the powers of the BSEC are aimed at proper disclosure to investors, which is at the heart of good
corporate governance. The Commission has overall responsibility to formulate securities
legislation and to administer as well. Besides regulating the capital markets, the BSEC has the
other objectives of promoting investors‟ awareness including investment guidelines and the
correct format for lodging a complaint, caution notices regarding the circulation of fake shares,
an investor’s education program and the provision of training for intermediaries of the securities
market.

Stock Exchanges play important role in shaping corporate governance framework in Bangladesh.
Bangladesh has two stocks Dhaka Stock Exchange (DSE); and Chittagong Stock Exchange
(CSE).Dhaka Stock Exchange is a self-regulated non-profit organization. Its activities are
regulated by its Articles of Association‟ and rules and regulations‟ and by-laws‟ along with the
Securities and Exchange Ordinance, 1969, Companies Act 1994 and Securities and Exchange
Commission Act, 1993.By the 25th April 2017 there were 562 companies listed with DSE with a
market capitalization of Taka 3713.683429 billion (DSE, 2017).
 16

The Chittagong Stock Exchange (CSE) was established as a Public Limited Company in April
1995. Similar to Dhaka Stock Exchange, the activities of Chittagong Stock Exchange are
regulated by its Articles of Association and rules and regulations‟ and by-laws‟ along with the
Securities and Exchange Ordinance, 1969, Companies Act 1994 and Securities and Exchange
Commission Act, 1993.By the 25th April 2017 there were 302 companies listed with DSE with a
market capitalization of Taka 3039.415 billion (CSE, 2017).

Two professional accounting bodies, the Institute of Chartered Accountants of Bangladesh

(ICAB) and the Institute of Cost and Management Accountants of Bangladesh (ICMAB) regulate
the accounting profession in Bangladesh. ICAB is the national professional accounting body of
Bangladesh established under the Bangladesh Chartered Accountants Order (Presidential Order
Number 2 of 1973).

The Institute of Cost and Management Accountants of Bangladesh (ICMAB) was established in
1977 under the „Cost and Management Accounting Ordinance‟ mainly to regulate the Cost and
Management Accounting profession in Bangladesh. Both the accounting bodies are fostering the
acceptance and observance of International Accounting Standards (IAS) and International
Financial Reporting Standards (IFRS) and their adoption as Bangladesh Accounting Standards
(BASs). The Companies Act 1994 allows the members of both ICAB and ICMAB to audit
companies to ensure that their accounts conform to all Bangladesh Accounting Standards.

To ensure the transparency, accountability and good governance in the corporate sector effective
from February 2000, the Securities and Exchange Commission Bangladesh by a notification on
29th December 1997 required all listed companies to abide by Accounting Standards‟ adopted
by ICAB and ICMAB as Bangladesh Accounting Standards (BASs). Thus these accounting
standards are mandatory for all companies listed in Dhaka and Chittagong Stock Exchanges
(Afzalur, Anura De, & Rudkin, 2015).

Bangladesh Enterprise Institute (BEI) is a donor-funded private institution actively involved in

shaping the corporate governance regulations in Bangladesh. BEI was established in 2000 as a
non-profit, non-political research center. BEI provides training to directors of companies,
conducts dialogue with policy-makers and different stakeholder groups. Being initiated by donor
agencies, in 2004BEI has made a remarkable step in corporate governance by developing the
voluntary Code of Corporate Governance for Bangladesh in 2004, which was the only voluntary
code for Bangladesh and more comprehensive than the corporate governance guidelines which
were introduced by the SEC of Bangladesh (Saima, August,2012, p. 78).
 17

4 Research Methodology

This research focuses quantitative data as a methodology. To answer the research questions
quantitative data has been collected from annual report of the sample companies.

4.1 Sample

For sample of our study 20 companies have been selected randomly from three industries, all are
listed in Dhaka Stock Exchange (DSE) the largest stock exchange of Bangladesh. The three
industries are textile, bank, and financial institutions. Annual reports of the sample companies
have been downloaded from a third party website1 for the year of 2007 to 2015. As of April,
2017 there are 562 companies listed in DSE in 22 sectors. Table 4-1 details industry type and
sample companies. Out of 30 bank (5% of total listed companies), 10 (50%) of total sample), 5
(25%) financial institutions out of 23 (4%), and 5 (25%) textile companies out of 47 (8%) have
been selected as sample.

Table 4-1: Samples Taken for the Study

Industry Type Total Companies in % of Total Sample Taken % of Total

the Industry Population Sample

Bank 30 5% 10 50%
Financial Institutions 23 4% 5 25%
Textiles 47 8% 5 25%

4.2 Construction of Compliance Sheet

The questionnaire includes objective provisions which are based on objective facts that can be
verified from companies’ published documents. The provisions are generally applicable to all
companies, comprehensive and less ambiguous, and desirable according to OECD principles.
The code includes provisions of BSEC guidelines of 2012 combined with the BSEC 2006
guidelines and BEI codes.

1
lankabd.com
 18

The compliance sheet has been constructed with binary ‘YES’/‘NO’ answers where ‘YES’
means complied and ‘NO’ means not complied with the particular code.

As mentioned earlier the data is collected form company annual reports, the secondary sources.
Annual reports of the company include a section dedicated for corporate governance that has
been analyzed for our information. Other sections such as directors’ statement are important
areas for finding required information. Annual reports of several years of a company were not
found on the website or in other sources and much information was not disclosed on the annual
report by some companies. This study considers those as non-compliance with those particular
provision or company (Saima, August,2012). Some particular provisions are not applicable for
some particular years or particular companies. This study considers them as ‘not applicable’ for
that particular year or company.

4.3 Quantitative Data Analysis

To acquire data we analyze annual reports of the sample companies in make a compliance sheet
in accordance with the codes. For each item of the provisions, each sample company if complied
scores 1 and 0 in case of non-compliance. The scores will be summed up and a corporate
governance compliance index (CGCI) will be developed.

According this method, each company’s CGCI is defined as:

∑Ci
𝐶𝐺𝐶𝐼 = × 100
𝑛

Where,

Ci = 1 if ith provision of the code is complied with; 0 if not complied.

n = number of applicable provisions.

4.4 Data Analysis Tools

The data has been analyzed and presented using MS Office Excel program.
19
 20

5 Compliance of Codes by Textile companies listed in DSE

5.1 Introduction

The textile and clothing industries provide the single source of growth in Bangladesh's rapidly
developing economy. Exports of textiles and garments are the principal source of foreign
exchange earnings. By 2002 exports of textiles, clothing, and ready-made garments (RMG)
accounted for 77% of Bangladesh’s total merchandise exports. In 1972, the World Bank
approximated the gross domestic product (GDP) of Bangladesh at USD 6.29 billion, in 2014, the
GDP stood at USD 173.82 billion, growing by almost 27 times in a matter of four decades.
Bangladesh's exports industry alone comprised USD 31.2 billion in FY 2014-15, 81.69% of
which was made up by ready-made garments. On its own, the knitwear sector encompasses
39.83% of total exports—a staggering USD 12.43 billion. Bangladesh is, second only to China,
the world's second-largest apparel exporter of western brands. Sixty percent of the export
contracts of western brands are with European buyers and about forty percent with American
buyers. Only 5% of textile factories are owned by foreign investors, with most of the production
being controlled by local investors.

Bangladesh's textile industry has been part of the trade versus aid debate. The encouragement of
the garment industry of Bangladesh as an open trade regime is argued to be a much more
effective form of assistance than foreign aid. Tools such as quotas through the WTO Agreement
on Textiles and Clothing (ATC) and Everything but Arms (EBA) and the US 2009 Tariff Relief
Assistance in the global clothing market have benefited entrepreneurs in Bangladesh's ready-
made garments (RMG) industry. In 2012 the textile industry accounted for 45% of all industrial
employment in the country yet only contributed 5% of the Bangladesh's total national income.

After several building fires and collapses, resulting in the deaths of thousands of workers, the
Bangladeshi textile industry and its buyers have faced criticism. Many are concerned with
corporate governance application, code of compliance of BSEC in Textile Industry, possible
worker safety violations and are working to have the government increase safety standards. The
role of women is important in the debate as some argue that the textile industry has been an
important means of economic security for women while others focus on the fact that women are
disproportionately textile workers and thus are disproportionately victims of such accidents.
Measures have been taken to ensure better worker conditions, but many still argue that more can
be done.

In order to verify corporate governance principles, financial position and performance in textile
Companies the annual report study method was chosen providing insights into the annual
activities of the company based on data gathered from the annual report between 2007 and 2015.
 21

5.2 Compliance level of textile Industries

This section will discuss the compliance level of textile industry listed in DSE.

Figure5.1Textile Industries compliance 2007-2015

Textile Industry Compliance 2007-2015

120%

96% 96% 97% 96%

100% 91%
83% 83%
79% 79%
80%

60%
Level

40%

20%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015

From the figure 5.1 we have found that the cumulative compliance level of Textile Industries
from the selected samples. In 2007 the compliance level is 79% whereas the non-compliance is
21%. The cause of non-compliance is Independent Director Issue and Audit Committee Issue.
The compliance level in 2008 is as the same in 2007. The compliance level in 2009 is 83%
whereas the non-compliance is 13%. The cause of non-compliance is the same problem
Independent Director and Audit Committee Issue. The compliance level in 2010 is same like
2009. The compliance level in 2011 has been increased because the issue of Independent director
and Audit Committee has something solved. For this reason the compliance level has increased
91% whereas the non-compliance is 9%. The compliance level from 2012-2015 has been
constantly increased because the BSEC codes has been made mandatory for all listed company
and the compliance has been reached nearly 100%.

5.3 Compliance Trend of Textile Industries

From the figure 5.1, we have noticed the trend of rising compliance among the Textile Industries
from 2007 to 2015. The compliance increased to 97% from 79%. The Compliance Trend also
shows that for two years the compliance is same till 2010. But from 2011 the compliance is
 22

increased 8% in 2011, 5% in 2012, 0% in 2013, and 1% in 2014 and at last 0% in 2015 in total.
So we have found find that the company are highly complied.
 23

6 Compliance of Codes by Banks listed in DSE

6.1 Introduction

The banking sector of Bangladesh is severely faced with the challenge of developing good
governance practices because of its dominance in the entire financial system of the country. The
financial system in Bangladesh continues to be predominantly bank based. Good corporate
governance (CG) for banks, therefore, becomes critical in ensuring solvency and stability of the
financial system as effectively governed banks are most efficient and cautious in directing their
resources. The CG framework should, therefore, ensure aligning the interests of the management
with equity and debt holders. Ensuring good governance at corporate level helps in protecting
bank's interest by upholding operational and financial discipline. Therefore, regulators in
developing countries like Bangladesh have become more concerned about the financial heath and
governance of banking industry.

Now how far is Bangladeshi banks are complying with the corporate governance practices is first
the objective of this paper. In the following sections the compliance level, trend of compliance
among the industry, most non-complied provisions will be discussed.

6.2 Compliance level of Banking Industry

This section will discuss the first research objective of extent to which the listed companies of
Bangladesh are complying with the Codes. Following previous studies compliance framework
the sample companies are considered to be highly compliant if the compliance score is 80% or
more, moderate compliance between 60% and 79%, low compliance between 40% and 59%and
below 40% reflects a substantial gap between company compliance and the particular provisions
(Saima, August,2012, pp. 167-168).

Figure6.2Banking Industry Compliance 2007-2015

Bank Industry Compliance 2007-2015

150%

91% 95% 96% 96%

100% 79% 80% 82% 83%
67%
Level
50%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015
 24

From the figure 5.1 we have found that the cumulative compliance level in banking industry
from the selected 10 samples in 2007 was 67% which means that non-compliance was 33%. In
2007 the reasons for non-compliance was mostly for independent directors and reports to
director’s issue, as a result the some provisions of audit committee ware also non-complied. In
2008 the compliance level was 79% and non-compliance was 21%. The compliance level
increased in 2008 due to the complying with the provision of director’s report. In 2009 the
compliance level was 80% and non-compliance was 20%. In 2010 the compliance level was 82%
and non-compliance was 18%. In 2011 the compliance level was 83% and non-compliance was
17%.

The reasons for the non-compliance were mostly related with important provisions of
independent directors, duties of CEO and CFO and audit committee. And another reason for less
compliance was the non-mandatory BSEC codes. In 2012 the BSEC corporate governance code
was made mandatory. After this amendment the compliance level among the banks increased
more rapidly. In 2012 the compliance level was 91% and non-compliance was 9%. In 2013 the
compliance level was 95% and non-compliance was 4%. In 201 the compliance level was 96%
and non-compliance was 5%.In 2015 the compliance level was 96% and non-compliance was
4%. From 2012 most companies started to complying provisions related with the independent
directors. So as a result the provisions of independent directors and audit committee compliance
increased.

6.3 Compliance trend of banking industry

From the figure 1 we have noticed the trend of increasing compliance among the banking
companies from 2007 to 2015. Figure 1 shows that the compliance level increased to 96% from
67%. In 2007 the compliance level was 67%. In 2008 the compliance was level raised by 12% in
total. In 2009 the compliance increased by1% standing at 80%. In 2010 the compliance stood on
82%, more than 2% from the previous year. In 2011 the compliance level increased by 1%,
becoming 83%. In 2012 the compliance level increased by 8% and the compliance level was
91%. In 2013 the compliance level raised to 95% increased by 4%. In 2014 and 2015 the
compliance level was 96%.

6.4 Most non-complied Important Provisions by Banking Industry

As we prepared the compliance sheet from the BSEC corporate governance codes all of the
provisions were included in this compliance sheet. These provisions include most important and
not so important. By scrutinizing the annual reports we have prepared the compliance sheet. In
the annual reports we have found that companies are following the most simple and non-
significant provisions. To ensure good corporate governance BSEC introduced the provisions
 25

related to independent directors and audit committee. But most of the companies did not
complied with these important provisions. The list of most non-complied important provisions
are given bellow

7 Compliance of Codes by Non-Bank Financial Institutions listed in DSE

7.1 Introduction

The non-bank financial institutions (NBFIs) comprise a rapidly growing segment of the financial
system in Bangladesh. The NBFIs have been contributing toward increasing both the quality and
quantity of financial services and thus mitigating the lapses of existing financial intermediation
to meet the growing needs of different types of investment in the country. Non-banking financial
companies/institutions, or NBFIs, are financial institutions that provide financial services
including banking but do not hold a banking license. These institutions are not allowed to take
deposits from the public. The development of non-bank financial institution as financial
intermediaries balancing to commercial banks is noticeable in Bangladesh.

Though the major business of most NBFIs is leasing some are also diversifying into other lines
of business like term lending, housing finance, merchant banking, equity financing and venture
capital financing. They facilitate bank-related financial services, such as investment, risk
pooling, contractual savings, and market brokering. Obviously, they too need to have a sound
corporate governance system in operation for they function on depositors’ funds.

Due to the unique position occupied by Non-bank financial institutions in an economy, a country
like Bangladesh can strengthen its economic position by ensuring implementation of corporate
governance in all its financial institutions. Keeping in consideration the growing significance of
Non-Bank Financial Institutions (NBFIs) in the financial system and their interconnectedness
with the banking sector there is a strong case for strengthening their governance framework.

Further, NBFCs have exposures to sensitive sectors such as real estate and capital markets and
they also rely on wholesale funding, all of which point to the requirement of robust internal
controls and governance framework to ensure their stability.

7.2 Compliance level of Non-banking Industry

Compliance with codes is one of the ways to measures industries corporate governess
effectiveness. This section will discuss the compliance level of non-banking financial industry
compliance level from 2007-2015.

From figure 6.2, we have found that the cumulative compliance level in non-banking industry
from the selected 5 samples in 2007 was 69% which means that non-compliance was 31%. In
 26

2007 the reasons for non-compliance was mostly for independent directors, directors retirement
and reports to director’s issue, as a result the some provisions of audit committee ware also non-
complied. In 2008 the compliance level was 69% and non-compliance was 31%. In 2009 the
compliance level was 72% and non-compliance was 28%. In 2010 the compliance level was 74%
and non-compliance was 26%. In 2011 the compliance level was 77% and non-compliance was
23%. The reasons for the non-compliance were mostly related with important provisions of
independent directors, duties of CEO and CFO and audit committee. And another reason for less
compliance was the non-mandatory BSEC codes. In 2012 the BSEC corporate governance code
was made mandatory. After this amendment the compliance level among the banks increased
more rapidly. In 2012 the compliance level was 84% and non-compliance was 16%. In 2013 the
compliance level was 86% and non-compliance was 14%. In 201 the compliance level was 85%
and non-compliance was 15%.In 2015 the compliance level was 89% and non-compliance was
11%. From 2012 most of the non-bank financial companies started to complying the provisions
related with the CEO and CFO.

Figure7.3Banking Industry Compliance 2007-2015

Non-bank financial Industry Complaince 2007-2015

100%
86% 89%
90% 84% 85%
74% 77%
80% 72%
69% 69%
70%
60%
50%
Level
40%
30%
20%
10%
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015

7.3 Compliance trend of banking industry

From the figure 6.2 we have noticed the trend of increasing compliance among the non-banking
finance companies from 2007 to 2015. Figure 2 shows that the compliance level increased to
89% from 69%. In 2007 the compliance level was 69%. In 2008 the compliance was level raised
by 2% in total. In 2009 the compliance increased by3% standing at 72%. In 2010 the compliance
stood on 74%, more than 2% from the previous year. In 2011 the compliance level increased by
 27

3%, becoming 77%. In 2012 the compliance level increased by 7% and the compliance level was
84%. In 2013 the compliance level raised to 86% increased by 2%. In 2014 the compliance level
decreased by 1% which stood at 85% and in 2015 the compliance level was 89% increased by
4%.
 28

8 Comparative compliance status level of Banking, Non-Banking

Institutions and Textile Industries listed in DSE
8.1 Introduction

In this section, we will try to show the comparative compliance status among the three Industries
aims to identify the extent to which the listed companies of Bangladesh are complying with the
Code.

Table8.2 Comparison of the CGCI Across industries-three major categories

Industry classification(Three major N Mean Range

Categories)

Textile Industries 5 67.28 55.6-78.8

Bank 10 67.15 46.6-83.9

Non-Banking Finance 5 61.17 43-80.6

Table 8.2suggests that the Textile sector tends to exhibit relatively higher governance quality
compared with. The mean score of Textile Industries is 67.28(88.88%) which is the highest
amongst all followed by the Bank with a mean of 67.15 (85.44%) and at the last the Non-
Banking financial Institution with a mean of 61.17 (78.33%). The Textile industry seems to be
continuing in ranking the highest in ensuring compliance with governance standards.

Following previous studies’ compliance framework(Saima, August,2012) the sample companies

are considered to be highly compliant if the compliance score is 80% or more, moderate
compliance between 60% and 79%, low compliance between 40% and 59% and below 40%
reflects a substantial gap between company compliance and the particular provisions.

Table8.3Descriptive Statistics fot the CGCI of the Sample Companies

N Minimum Maximum Mean Std.Deviation Variance Skewness

 29

CGCI 20 43 83.9 65.2 0.369465 .136505 -1.824041

Table 8.3 presents the descriptive statistics of the percentage of the compliance level or in other
words the corporate governance compliance index (CGCI) of the 20 listed companies. The mean
value is 65.2 (84.21% of the required provisions), indicating that on an average the sample
companies have a high level of compliance with the Code. Table 8.3 also shows that the standard
deviation is .369465, indicating that the CGI of some firms are close to the average governance
index. Skewnessis -0.518. The range 32 implies that the distribution is likely to have resulted
from a widespread difference in governance qualities (e.g. maximum score is 83.9 (96%), whilst
the minimum is 43 (69%)) among the sample companies.

Figure8.4 Three Industry Compliance Percentage

Percentage

78.33
88.88

Textile
Bank
Non-bank Institutions

85.44
 30

However the above Pie-Chart we have found that 20 companies of 3 Industries has different
Figure8.5
level of Frequencies
compliance.of theThe
CGCItextile
of the Sample Companies
Industry has moderate level of compliance (60%-79%) for
2(2007-2008) years and has high level of compliance above 80% for 7 years (2009-2015). The
Banking Industry has moderate level of compliance (60%-79%) for 2 years and has high level of
compliance above 80% for 7 years (2009-2015). The Non-Banking Finance Industry has
moderate level of compliance (60%-79%) for 5 years (2007-2011) years and has high level of
compliance above 80% for 4 years (2012-2015).

Figure8.5 Level of Compliance across Different Industries

Level of Compliance Across Different Industries

Bank Financial Textile

120%

100% 96% 95% 96% 96% 97% 96% 96%

91% 91%
89%
84% 86% 85%
83% 82% 83% 83%
79% 79% 79% 80%
80% 77%
74%
72%
69%
67% 69%

60%

40%

20%

0%
2007 2008 2009 2010 2011 2012 2013 2014 2015

This bar diagram (Figure8.5) shows the comparative compliance level of three industries along
with. At first in 2007 the textile industry was 79%, the financial industry was 69% and banking
 31

industry was 67%. In 2008 the textile industry was same 79% and the Financial also remain
same but bank industry increase to 79%. In 2009 all industry increases the bank 80%, the
financial industry 72% and the textile industry increase 91%. In 2010 bank industry increase
82%, financial industry increase 84% and textile industry remain same. In 2011 bank industry
increase 83%, financial industry increase 77% and textile industry increase to 91%. In 2012 bank
industry increase 91%, financial industry increase 84% and textile industry increase to 96%. In
2013 bank industry increase 95%, financial industry increase 86% and textile industry remain
same 96%. In 2013 bank industry increase 95%, financial industry increase 86% and textile
industry remain same 96%. In 2014 bank industry increase 96%, financial industry decrease to
86% and textile industry increase to 97%. In 2015 bank industry remain same 96%, financial
industry increase to 89% and textile industry decrease to 97%. From the graph it is quite clear to
that all three industries tend to increase to the compliance.
 32

9 Findings
9.1 Introduction

This research paper is based on secondary data and conducted by descriptive research approach.
To conduct this research paper we selected 20 companies from 3 different industries. We
gathered the data of the sample companies from their annual reports. We thoroughly analyzed
each company’s 9 years annual report. In total we analyzed 180 annual reports years ranging
2007 to 2015. By analyzing the reports we have found many issues, they will be discussed in the
following sections.

9.2 Most non-complied Important Provisions by Banking Industry

As we prepared the compliance sheet from the BSEC corporate governance codes all of the
provisions were included in this compliance sheet. These provisions include most important and
not so important. By scrutinizing the annual reports we have prepared the compliance sheet. In
the annual reports we have found that companies are following the most simple and non-
significant provisions. To ensure good corporate governance BSEC introduced the provisions
related to independent directors and audit committee. But most of the companies did not
complied with these important provisions. The list of most non-complied important provisions is
given bellow:

1. The provision of retirement of 20% board members annually by rotation is not complaint
by the banking companies from 2007 to 2015.
2. The provision of independent director is the least compliant important provision. All the
three industry companies did not complied with independent director’s provision. As a
result all other provisions related independent director was also not compliant.
3. Shareholders holding ten percent (10%) or more voting interest in the company
disclosure are less complied by the 3 industries.
4. Another most important provision of Independent director being the committee chairman
is less complied by the 3 industry.

9.3 Other Compliance Related Issues

While doing this research paper we have found some irregularities related to the
compliance of codes. Those are given bellow.
1. Most of the companies do not follow the provision “20% retirement of board member”. If
they retire in one year they are re-hired within the same year.
2. The companies reluctant to follow the provision of independent director. The same
independent director is performing for the same companies at a stretch 8 years. Which is
 33

contradict to the provisions of “The tenure being of 3 years period; can be extended only
for 3 years”.
3. The remuneration of Directors wasn’t disclosed clearly by the industries.
4. Most of the companies didn’t comply with provision of “Independent director as the
committee chairman.
5. One particular banking company had the least level of compliance. They did not provide
any dividend to shareholders from 2007 to 2015. And the independent director had
pecuniary interests in the company.
 34

10 Conclusion
10.1 Concluding thoughts

This paper showed optimistic scenario corporate governance compliance. All three industries
show development in corporate governance practice. They all have very high level of compliance
status with code.

Though it is sanguine that all the listed companies in Dhaka Stock Exchange are in the practice
of reporting corporate governance in the annual reports and the level of disclosure also provides
an optimistic picture of corporate governance practice, there is still room for development of
corporate governance practice in terms of its quality. Business people should cultivate ethical
standards, nurture moral values, feel accountability and comply with corporate governance rules
in the true spirit of the term. As even 100 percent compliance with the letter of every governance
rule on paper but not with the substance may be possible. It is also evident that regulation
functions better in the practice of corporate governance in Bangladesh. The author did not make
any attempt to examine these qualitative aspects of corporate governance reporting, which can
create an avenue for further research.

10.2 Limitations of the study

 This research has some limitations as it is common for all studies. Firstly, this research
takes only 20 samples out of 562 listed companies.
 Secondly, the data has been collected from disclosed information in the annual reports by
the companies. As the information provided may be biased and misleading, this research
may lack authenticity and reliability of the data can be challenged.
 Thirdly, generalization of the research findings is also a limitation. And fourthly, the
method of collecting data can present limitations. Annual report may contain illusory
information about the company. However, precautions have been taken to accept
information and some data are cross-checked from other sources.
 35

11 Bibliography

Abbasi, M. K. (2012). “The Impact of Corporate Governance on Chief Executive Officer (CEO)
Duality in Iranian Banking Sector”. Kuwait Chapter of Arabian Journal of Business and
Management Review .

Afzalur, R., Anura De, Z., & Rudkin, K. (2015). CORPORATE GOVERNANCE IN
BANGLADESH: AN OVERVIEW. JEL Classification: G32, G34 .

Aggarwal, R. (2010). Independent directors: time to introspect, suspect, respect – an Indian

perspective. Journal of Indian Business Research , 2: (2): 123-132.

Aguilera and Cuervo-Cazurra, A. (2009). Codes of corporate governance. Corporate

Governance: An International Review , 17: (3): 376-387.

Aguilera, R. a. (2003). The cross-national diversity of corporate governance:. Academy of

Management Review , 28: (3): 447–465.

Aguilera, R. a.-C. (2009). Codes of corporate governance. Corporate , 17: (3): 376-387.

Akhtaruddin, M. (2005). Corporate mandatory disclosure practices in Bangladesh. The

International Journal of Accounting , 40: 399-422.

Akkermans, D. E. (2007). Corporate governance in the Netherlands: an overview of the

application of the Tabakslat Code in 2004. Corporate Governance: An International Review , 15:
(6): 1106-1118.

Antonacopoulou, E. a. (2005). A critic of stakeholder theory: management science or a

sophisticated ideology of control. Corporate Governance: An International Review , 5: (2): 22-
33.

Berle, A. a. (1932). The Modern corporation and private property. New York.:McMillan.

Blair, M. (1995). Ownership and Control:Rethinking Corporate Governance for the Twenty-first
Century. Twenty-first Century .

BSEC. (2012, August 12). www.secbd.org/Notification%20on%20CG-07.8.12-Amended.pdf.

Retrieved from http://www.secbd.org/: http://www.secbd.org/Notification%20on%20CG-
07.8.12-Amended.pdf.
 36

Cadbury, A. (1992). Report of the committee on the financial aspects of corporate. The Code of
best practices .

Charkham. (1994). Keeping Good Corporation: A Study of Corporate Governance in Five

Countries. Oxford: Clarendon.

Chizema, A. (2008). Institutions and voluntary compliance: The disclosure of individual

executive pay in Germany. Corporate Governance: An International Review , 16: (4): 359-.

Chua, F. a. (2011). Institutional pressures and ethical reckoning by business corporations.

Journal of Business Ethics , 98: 307–329.

CSE. (2017). cse.com.bd. Retrieved from http://www.cse.com.bd/historical_market.php

Davis, D. a. (1994). The stakeholder theory of the corporation: concepts,. Academy of

Management Review , 20: (1): 65-91.

DiMaggio, P. a. (1983). The iron cage revisited: institutional isomorphism and collective
rationality in organizational fields. American Sociological Review, , 48: 147–.

Donaldson, T. a. (1995). The stakeholder theory of the corporation: concepts, evidence and
implications. Academy of Management Review .

DSE. (2017). Dhaka Stock Exchange. Retrieved from http://www.dsebd.org:

http://www.dsebd.org/recent_market_information.php

ECGI. (2017). Index of Codes. European Corporate Governance Institute. Retrieved from
http://www.ecgi.org: http://www.ecgi.org/codes/new_codes.php

Ferdous, C. S. (2012). Compliance With The Codes Of Corporate Governance In Developing

Economies: The Case Of Bangladesh. University of Birmigham Reseach Archive .

Freeman, E. (1988).

Islam, M. F. (1999). The Emergence of Market Oriented Reforms in Bangladesh: A Critical

Appraisal. Journal of Business Studies 1 (1) .

Jensen, M. a. (1976). Theory of the firm: managerial behaviour agency costs and ownership
structure. Joumal of Financial Economics , 3: (4): 305-360.
 37

Jones, T. a. (1999). Convergent stakehodler theory. The Academy of Management Review , 24:
(2): 206-221.

Klapper, L. a. (2004). Corporate governance, investor protection and performance in emerging

markets. Journal of Corporate Finance , 10: 703–728.

Letza, S. K. (2008). Corporate governance theorising: limits, critics. International Journal of

Law and Management , 50: (1): 17-32.

Mahmud, S. (2015). CORPORATE GOVERNANCE PRACTICES IN BANGLADESH: AN

OVERVIEW OF ITS PRESENT SCENARIO IN BANKING INDUSTRY. International
Journal of Economics, Commerce and Management Vol. III, Issue 12, .

Mallin, C. (2010). Corporate Governance. Oxford University Press.

Meckling, J. a. (1976).

Mir, M. a. (2005). The aoption of international accounting standards in Bangladesh. Accounting,

Auditing & Accountability Journal , 18: (6): 816-841.

Moreland. (1995). Alternative disciplinary mechanisms in different corporate systems. Journal

of Economic Behaviour and Organisation , 26: 17–34.

Moudud-Ul-Huq, S. (2014). Corporate Governance Practices in Bangladesh: A Comparative

Analysis between Conventional Banks and Islamic Banks. Int. J. Manag. Bus. Res., 5 (1), 53-60,
Winter 2015 © IAU .

Raithatha, M. (2012). Corporate Governance Compliance Practices of Indian Companies.

Research Journal of Finance and Accounting .

Reaz, M. (2006). Corporate governance of banking institutions: A case study of Bangladesh.

Doctor of Philosophy, University of Manchester .

Rezwana, K., James Bakul, S., & Fowzia, R. (2010). Corporate Governance Practices in
Bangladesh with Reference to SEC Corporate Governance Guidelines. ASA University Review
Vol. 4 No. 2 .

Rwegasira, K. (2000). Corporate governance in Emerging capital markets: whither Africa?

Corporate Governance: An International Review , 8: (3): 258–267.
 38

Saima, F. C. (August,2012). COMPLIANCE WITH CODES OF CORPORATE

GOVERNANCE IN DEVELOPING ECONOMIES: THE CASE OF BANGLADESH.
University of Birmingham Research Archive e-theses repository , 14-15.

Sarkar, S. H. (2014). Scenario of Corporate Governance Practices in Bangladesh: A Study on

Dutch Bangla Bank Limited (DBBL). European Journal of Business and Management ISSN
2222-1905 (Paper) ISSN 2222-2839 (Online) , Vol.6, No.37.

Shah, S. a. (2009). The impact of corporate governance on the cost of equity:empirical evidence
from Pakistani listed companies. The Lahore Journal of Economics , 14 (1): 139-171.

Shakhawat Hossain, S. (2014). Scenario of Corporate Governance Practices in Bangladesh: A

Study on Dutch Bangla Bank Limited (DBBL). European Journal of Business and Management
.

Shankman, N. (1999). Refraining the debate between agency and stakeholders theories of.
Journal of Business Ethics , 19: (4): 319-334.

Siddiqui, J. (2010). Development of corporate governance regulations: The case of an emerging

economy. Journal of Business Ethics , 91: 253-274.

Siddiqui, J. (2010). Development of corporate governance regulations: The case of an emerging

economy. Journal of Business Ethics , 91: 253-274.

Siddiqui, J. (2010). Development of corporate governance regulations: The case of an emerging

economy. Journal of Business Ethics , 91: 253-274.

Sternberg, E. (1997). The defects of stakeholder theory. Corporate Governance: An

International Review , 5: (1): 3-10.

Steve Letza*, X. S. (2004). Shareholding Versus Stakeholding:A critical review of corporate

governance. Corporate Governance: An International Review , 244-245.

Sykes. (1994). Proposals for internationally competitive corporate governance in Britain and
America. Corporate Governance: An International Review , 2: 187–195.

The Dailystar. (2013, November 20). Magic of automation.

Tse, T. (2011). Shareholder and stakeholder theory:after the financial crisis. Qualitative
Research in Financial Markets , 3: (1): 51-63.
 39

Ullah, M. (2009). Corporate governance practices in Bangladesh: A case study on Trust Bank
Limited. Southeast University Journal of Business Studies .

United Nations Public Administration Network. (2010). Corporate Governance in Bangladesh:

How Best to Institutionalize it Critical Practices and Procedures.

Werder, A. T. (2005). Compliance with the German Corporate Governance Code: an empirical
analysis of the compliance statements by German listed companies. Corporate Governance: An
International Review , 13: (2): 178-187.

Yoshikawa, T. T.-A. (2007). Corporate governance reforms as institutional innovation. The case
of Japan Organization Science , 18: (6): 973-988.