Co rporate Governance and its Implication in Bangladesh

Abstract:

Bangladesh is one of the third world countries having many opportunities in

corporate sector. Today, Business has to some dynamism with their products

otherwise consumer will not attract of their product. E-business, e-commerce,

and e marketing have been promoted as the rescuer of the business world and a

catalyst to twenty-first century performance in the global marketplace. Now we

have new word corporate Governance in the Bangladesh context. This paper

presents the meaning, scope, importance and the implementation of corporate

governance practices in Bangladesh. It also examines the internal mechanisms

like the board of directors, their independence, the challenges faced by

institutional investors, the role of internal and external communication

mechanisms, whistle blowers and th e legal protection needed for them to ensure

corporate governance practices. Successful corporate governance depends

largely of trade-off among the various conflicting interest groups like

Government, Society, Inventors, Creditors, and Employees of the org anization.

The basic governance issues related to the effectiveness and accountability of

board of directors. This paper further examines the external mechanisms

through like corporate forums, media analysts, structural reforms and

governance ratings to incorporate corporate governance codes into

corporations. In addition, the researchers try to recommend regarding

governance that can help a lot for developing corporate sectors in Bangladesh.

Key Words: Corporate Governance, Implication, Bangladesh

Objectives of the study

1. To know what is all about corporate governance.

2. To recommend regarding implication of good governance in corporate sector in

Bangladesh

Scope & Methodology of the study

The proposed study will cover several public sectors organization like Railway, BTTB,

Medical Hospitals and educational institutions specially Universities which may need the

good governance for its own development. The proposed study would be empirical one.

Primary and secondary both kinds of data would be used in this study. The secondary

data would be collected from various books, reference Journal, seminar papers and

articles.

Rationale of the study

In the early part of the 21st century, the technologies emerging from the information

technology and biotechnology revolutions will present unprecedented governance

challenges to national and international political systems. These technologies are now

shifting and will continue to affect the organization of society and the ways in which

norms emerge and governance structures operate. How policymakers respond to the

challenges these technologies, including the extent to which developments are supported

by public research funds and whether they are regulated, will be of increasing concern

among citizens and for governing bodies. New governance mechanisms, particularly on

an international level, may be needed to address these emerging issues. In Bangladesh,

some sort of problems is going on regarding responsibility and accountability of each

sector. That is why the researcher find some interest to do research on this topics and try

hard to unearth the answers that why corporate governance did not apply everywhere

specially public sectors.

Introduction

Corporate governance has recently become a key debate and discussion item for the

restructuring of state owned enterprises and the development of a modern enterprise or

corporate system. Governance serves as an essential foundation for better quality

Performance. If organization structure or managerial accountabilities and rewards are

inconsistent with value creation, effectiveness will decrease. Governance identifies rights

and responsibilities, legitimizes actions and determines accountability. It is concerned

with the source, use and limitation of power. Corporate governance is concerned with the

process by which corporate entities are governed, that is, with the exercise of power over

the direction of the enterprise, the supervision of executive actions, the acceptance of a

duty to be accountable and the regulation of the corporation within the jurisdiction of the

states in which it operates.

What is All about Corporate Governance?

According to the Oxford English Dictionary states governance to be ‘‘the act or manner

of governing, the office or function of governing, sway, control’’. In this definition it is

not to government and such but rather to management as ‘‘handle, administer, run,

supervise, look after, watch over, direct, head, oversee, superintend, preside over, be in

charge of . . .’’ This all seems to make sense to the lay user of such words. (Kenneth

Tombs, 2002). According to Tricker [1994], corporate governance is an umbrella term

that includes specific issues from interactions among senior management, shareholders,
board of directors, and other corporate stakeho lders. In its narrowest sense, the term may

describe the formal system of accountability of senior management to the shareholders.

At its most expansive, the term is stretched to include the entire network of formal and

informal relations involving the corporate sector and their consequences for society in

general. The issues and challenges confronting business corporations have rarely been as

turbulent and unpredictable as they are today. Although the Nineteenth century concept of

corporate entity as distinct person still holds good and exercises influence over business

affairs every where. The concern about Corporate Governance which includes changing

pattern of distribution of share ownership, large scale corporate collapses in recent past,

auditing and accounting standards, lack of accountability, disclosures and transparency,

adequacy of board structures and processes, quality of directorial competencies, apparent

lack of corporate social responsibility, destabilizing impact of growth of the mergers and

acquisitions, increasing incidents of corporate fraud and the weakness of corporate self

regulation have become more pressing than at any time since the evolution of the joint

limited liability concept. Shleifer and Vishny state that “Corporate governance deals with

the ways in which suppliers of finance to corporations assure themselves of getting a

return on their investment.” (1997, p.737), while Blair (1995, p.3) argues that corporate

governance implicates “ the whole set of legal, cultural, and institutional arrangements

that determine what publicly traded corporations can do, who controls them, how that

control is exercised, and how the risks and returns from the activities they undertake are

allocated.” There are many definitions to the term ‘Corporate Governance.’ For instance,

Milton Friedman (A famous economist, recipient of the 1976 Nobel Memorial Prize for

Economic Science) has defined Corporate Governance as “Conducting business in

accordance with owners’ or shareholders’ desires.” The Auditor General of Australia, Pat

Barrett in November 2000 stated, “Corporate governance is largely about organizational

and management performance. Simply put, corporate governance is about how an

organization is managed, its corporate and other structures, its culture, its policies and the

ways in which it deals with its various stakeholders.” Corporate Governance is that

which deals with the ways in which suppliers of finance to corporations assure

themselves of getting a return on their investment (Shleifer & Vishny, 1997). This

definition is very relevant because in the emerging markets, before making an investment,

the investors generally like to ensure that not only the capital markets or enterprises with

which they are investing competently, but they also have good corporate governance. In

other words, when investments take place, the investors want to be sure that not only is

their capital handled effectively and adds to the creation of wealth, but the business,

decisions are also taken in a manner that is not illegal or, that which does not involve a

moral hazard. In a nutshell, we can conclude that corporate governance is a topic recently

conceived, yet ill defined and consequently blurred at the edges. Having a common global

definition and a common global approach for corporate governance is very difficult as the

legal framework varies from country to country. However, it is high time to define

corporate governance as a subject, as an objective, or as a regime to be followed for the

welfare of the shareholders, employees, customers, bankers and indeed for the reputation

and surveillance of ones’ nation and its economy.

Scope of Corporate Governance

The basic objectives of corporate governance is to ensure that the directors of a company

are subject to their duties, obligations and responsibilities, to act in the best interest of the

company, to give direction and to remain accountable to the shareholders and other

beneficiaries for their actions. Though these definitions aims to identify all business

organizations to which corporate governance should apply, in practice its coverage has
been very limited. At least the enforcement has been restricted only to specific types of

corporations in Bangladesh. While those left out who realize the long term benefits

accrued by adopting corporate governance practices take them up voluntarily, there are a

few, who move Scot free and pose a threat to fair competition.

Corporate Governance in Global Scenario

With the enactment of joint Stock Companies Act in 1844, the English Company Law

became one of the most permissive in the world and the concept in subsequent years

became the basis of Corporate Governance and framework for company law in many

jurisdictions. Company law in the United States evolved along similar lines. Development

in Continental Europe followed a different path. The regulations of corporate entities in

Germany adopted far more prescriptive and tightly controlled modes. In Japan,

shareholders virtually played no role except to provide capital. Sri Lanka and Malaysia

also realized the importance of corporate governance in the wake of changed international

trade scenario. A study of US corporations found that 90 percent firms fail to survive

beyond 210 years of their inception. In 1982, peter and Waterman found that two-thirds

of the total organizations were no longer excellent. Eight of them were in deep trouble.

An other report in Forbes found that only 22 of the 100 largest US companies of 1917

figured in the list of 1987. There were about half a million business bankruptcies in the

world in 1988. Between 35 and 85 per cent of new products fail to ever make a profit.

Over the past 20 years, more than 350 major firms have failed in the computer industry.

In 1989, there was a loss of more than $7 billion among the top 200 worked banks. In the

aut0omobile industry, over 1,500 firms failed in the past.(shukla 1994 aqnd Makridakis

1991). A survey sponsored by the Financial Executive Institute(USA) found that an

average of 72 per cent of the board members of nearly 800 representing publicly held
companies were outside directors. In U.S.A, U.K. and Germany guidelines and code for

good Corporate Governance have been formulated for the companies. The international

accounting standard committee has been working towards harmonization of accounting

statements so that performance reports of the companies are useful to users across the

world. Survey reports presented at the Academy of Management Meetings (USA) states

that 60 percent of the infant food items surveyed had no therapeutic effect at all, and

hence, were withdrawn from American markets. These infant food brands were, however,

exported to the developing countries. Multi-National drug giants have now captured the

worked markets and become the richest corporates, yet they do not hesitate to exploit

people and play with their lives. Recently (1998) a crack down by the Income-tax

department on some big MNCs revealed a very large-scale evasion of tax by flouting the

rules regarding TDS provisions. The report says, it has emerged during the inspections

that these companies had been depriving the national exchequer of crores of rupees by

adopting certain unethical methods. Records show very meager salary payments to

employees in Bangladesh but huge payments wer e actually made in dollars into the

employees’ foreign bank accounts thereby evading the tax to be deducted at source. This

indicates that managerial manipulations in the spheres of accounting and finance lead to

the creation of unaccounted wealth and black money. Tax evasions and law escaping

have become the corporate styles of functioning. Publicity and marketing functions of the

business are galore with unethical practices.

Corporate Governance and Reality

Table 1 Average Premium Investors are willing to pay for Good Governance (Selected

Countries)

Country Premium %
 Venezuela 28

Indonesia 27

Malaysia 25

Thailand 26

United States 18

Germany 20

Italy 22

Japan 20

Source: Coombes P. and M. Watson (2000), Three surveys on corporate governanc e,

McKinsey Quarterly, 4.

The above survey provides some evidence of the importance of corporate governance. It

is also tempting to say that corporate governance does not matter. Because crooks will

find ways to perpetrate, their corporate frauds and less than scrupulous managers will find

ways to manipulate accounting numbers, no matter what academics or regulators say or

do about the quality of corporate governance. This response is of course an

oversimplification of the debate, but with at least a grain of truth. We also have come to

accept that in countries where powerful business grouping dominate, such as the Japanese

keiretsu or the Korean chaebols, corporate governance standards remain weak or

ineffective in protecting minority shareholders. However, the scale of the cover up at

Enron strikes to the heart of the home of capitalism.

Corporate Governance in Bangladesh

In Bangladesh, corporate sector is at cross roads as far as legal structure and internal

management, control and administration of corporations is concerned .a it is faced with

numerous issues demonstrating the ineffective implementation of laws and code of

business ethics. If at all certain instances of malpractices tax, evasion, Tax avoidance,

earn black money and management infighting are any evidence, the corporate sector and

the Government need to have an urgent look at the whole scenario prevailing in the

country to ensure good corporate governance. Qualitative improvement in corporate

governance in Bangladesh is based on a code of good corporate practices and meaningful

disclosure of information to shareholders hold the key to corporate success. This is

necessary in the context of changing profile of corporate ownership with increasing flow

of foreign investment, preferential allotment of shares to the promoters of companies and

the new role being given to mutual funds. This means better governance and management

of corporate bodies, prompt compliance of legal and financial obligations and adherence

to ecological and environmental standards. The benefits of such governance must accrue

to the investors, customers’ lenders of finance and thee society. Most of the public

companies in Bangladesh particularly suffering from good governance due to ill practices

of its executives and users. The scenario is deteriorating day by day because of the

emergence of governance.

Key Elements of Corporate Governance

The main actors in the stage show of corporate governance are Directors, shareholders,

employees, Government, institutional investors and banks and the community. The basic

framework is provided by the legal regulatory, financial and business requirements in the

emerging context. In a globally competitive world, the interdependence between the

corporate sector and its stakeholders has become a necessity and every corporate entity
has to pursue a broad stakeholder approach, attempting to balance the often-conflicting

interest. Issues like environment standards, labor standards, infrastructure, R&D, effects

of technology, quality and value sys tems, must receive increasing attention of corporates.

Only then, the shareholder value can be sustained. Therefore, the corporate sector has to

function as a trustee of the stakeholders while managing its business.

Implementation of Corporate Governance

Before covering the implementation of the various governance concepts, Bangladesh

should make out the prevailing models. These models for corporate governance can be

broadly classified in three ways: (1) Outsider Model followed in the Anglo American

countries which separates ownership and management; (2) Insider Model followed in the

European countries where shareholders exercise control in management; (3) Founding

Family Model prevalent in the East Asian countries which has family oriented ownership.

In Bangladesh, however the corporate governance system is a hybrid of the outsider

dominated market-based systems of the UK and the US, and the insider-dominated bank-

based systems of Germany and Japan. Various mechanisms are framed to ensure good

corporate go vernance practices. As said above, legislation does not cover governance for

all the corporate. However, very few organizations take voluntary measures, within their

system to ensure good practices. Such practices are framed within the organization in the

form of rules, regulations and policies, codes of conduct, which holds everyone, right

from the Board to the individual low -level worker, accountable for their actions. But still

this is not enough to bring in the needed changes because there lays a major conflict of

goals. The organization might vie for growth, which is projected as the ideal and

achievable, however pressures to achieve within and across the industry pushes them to

stretch these goals. Thus, implementation is hindered due to the conflict in goals. There
should be ways through which such pressures are eliminated. Effective internal

communication might help in bringing a consensus in the goals, which are ideal and

acceptable and achievable by one and all. Unions also can play a vital role in this. Other

topics to be covered in the internal mechanisms are:

Recommendations

In Bangladesh, corporate governance implication is the greatest challenge for the

authority. However, some practices also going on regarding corporate governance. Here

the some recommendations for Bangladeshi corporates in the shed light of UK, USA and

Indian literature regarding corporate governance practices in particular these three

countries is as follows:-

1. The mission, vision and the procedures of all function of the company should be

transparent to its shareholders.

2. The Board must meet at least three or four times a year.

3. In case of the appointment of a new director or reappointment of a director, the

shareholders must be provided with a brief resume of the director, his/her

expertise and the names of companies in which (s) he holds directorship and the

membership of committees of the Board.

4. The Board of a company should have an optimum combination or mixture of

executive and non-executive directors.

5. The number of non-executive directors on the board should be at least 40-60% of

its total power.

6. The management must make disclosures to the Board, relating to all matter,

financial and commercial transactions, where they have personal interest.

7. There should be a separate section on Corporate Governance in the Annual

Reports of the companies. In addition to the Directors’ Report, Management

Discussion and Analysis should form part of the annual report.

8. A certificate from the auditors on compliance of conditions of corporate

governance should be annexed with the Directors’ Report forming part of Annual

Report and must be sent to all the shareholders of the company.

9. A board committee should be formed to look into the redressed of shareholders’

complaints like transfer of shares, non-receipt of balance sheet, dividend etc.

10. To expedite the process of share transfers, the board should delegate the power of

share transfer to an officer or a committee or to the Registrar and Share Transfer

Agents. And the delegate or hand over authority should attend to share transfer

formalities atleast once in a fortnight.

11. The Board should set up a qualified and an independent Audit Committee. A

majority of these directors should be independent, and at least one director should

have sound financial and accounting knowledge. The Chairman of the Audit

Committee should be an independent director.

12. The Chairman of the Audit Committee should be present at Annual General

Meetings to answer shareholder-queries.

13. The Audit Committee should have powers to inves tigate any activity within its

terms of reference, to seek information from any employee, to obtain outside

legal or professional advice, and to secure attendance of outsiders, if necessary.

The Audit Committee should discharge various roles such as reviewing any

change in accounting policies and practices; compliance with accounting

standards; compliance with Stock Exchange and legal requirements concerning

 financial statements; the adequacy of internal control systems; the company’s

financial and risk management policies etc.

14. The Board of Directors should decide the remuneration of the non-executive

directors. Full disclosure should be made to the shareholders, regarding the

remuneration package of all the directors.

15. A director should not be a member in more than five to seven committees or, act

as the chairman of more than three to five committees across all companies to

which he is a director.

16. The financial institutions should be under normal circumstances, have no direct

role in the decision making of the board of the company. They should not have

nominees on the board, merely by virtue of their financial exposure in the

company. There is however a ground for the term lending financial institutions to

have nominees on the boards of the borrower companies, to protect their interests

as creditors.

17. Privatization can be the key decision for the sake of transparency and liability

towards shareholders.

18. Government should encourage to the corporates to open up their information to

its shareholder by imposing rules, law or ordinance in the time of registration.

These recommendations can change the scenario of good corporate governance

situation in Bangladesh.

Conclusion

Bangladesh is suffering from good governance in public sector specially. But it is not an

extremely hard task for Bangladeshi government and other private agencies to implement

good corporate governance in their own operations. Corporate survival largely depends
on discipline placed on managers. Discipline can come from the marketplace or it can

come from inside the firm through corporate governance structures. A great deal of

research denotes that privatization can be helpful for economic development but

effectiveness of privatization is greater when corporate governance works well. Effective

laws are the important requirement for corporate governance because law implementation

and launch is the roadway for better governance. However, if public and private

companies will follow the recommendations then transparency and liability will come

forwards to the authority and shareholders. Therefore effective laws, privatization and

intension of the government bodies can be the three key things to implement authentic

good corporate governance in Bangladesh.

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