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Accounting in Asia

ISBN : 978-1-78052-444-3 , eISBN : 978-1-78052-445-0

Publication date: 15 December 2011

Purpose – This study aims at presenting an overview, development, and process of current corporate governance practices in Bangladesh.

Design/Methodology/Approach – Based on New Institutional Sociology (NIS) as a theoretical framework and by using archival data, this study highlights the roles of key institutional forces in reinforcing the existing corporate governance practices in Bangladesh.

Findings – This study notes that corporate governance practices in Bangladesh are still at infancy. While Bangladesh is trying to adopt many international corporate governance best practices for institutional legitimacy, the weak institutional enforcement regime, along with the absence of an effective check and balance, poses serious challenges to the firm-level good corporate governance practices in Bangladesh. The absence of isomorphic pressures to regulate the firms leads to many incidences of noncompliance.

Practical implications – This study takes part in the following global debate: whether corporate governance in an emerging economy is a reality or an illusion.

Originality/Value – This study seeks to contribute to the increasing literature by recognizing the interest of readers, academics, practitioners, and regulators to gain more insight and understanding of corporate governance practices in an emerging economy, such as Bangladesh.

• Corporate governance
• New institutional sociology

Rashid, A. (2011), "Corporate Governance in Bangladesh: A Quest for the Accountability or Legitimacy Crisis?", Susela Devi, S. and Hooper, K. (Ed.) Accounting in Asia ( Research in Accounting in Emerging Economies, Vol. 11 ), Emerald Group Publishing Limited, Leeds, pp. 1-34. https://doi.org/10.1108/S1479-3563(2011)0000011006

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The Practice of Corporate Governance in Bangladesh: A Short Overview

--> Repoter : News Room Published: 9 May, 2022 12:13 pm

Bijoy Chakraborty: Corporate Governance is the set of rules, regulations, laws, or a process by which internal and external factors of a company are directed, operated, monitored, and regulated to protect the interest of outside investors and minority shareholders from the opportunistic behavior of the board of directors or majority shareholders. Here, internal factors of a company consist of the company’s policies, strategies, reporting system, chairman, board of directors, chief executive officer, the appointment of independent directors, employees, establishing audit committee and executive committee, etc. On the other hand, external factors consist of suppliers and distributors, customers, markets, legal authorities, financial institutions, society, government, etc. Thus, the fundamental object of corporate governance is to protect and satisfy the claims of creditors, employees, minority shareholders, customers, and suppliers and achieve the long-term strategic goals of a company by fulfilling all the legal and regulatory requirements and taking an independent, accountable, fair and transparent decision.

There are numerous models of corporate governance in the world. But among these two most dominant models of corporate governance are the Anglo-American Model and the Control Based Model. Under the Anglo-American model, the investors’ interests are recognized and given more importance than other factors of a company, where the board of directors of a company shall be comprised of a certain number of independent directors besides executive directors to protect the rights of the investors. USA, UK, New Zealand, Australia, Canada, India, etc., are those countries that follow this model to govern their corporate environment. On the other hand, in the Control-based model, the corporate structure, particularly the company’s board, is dominated and controlled by the family members where the appointment of the independent directors on the board is the discretion of the executive directors. Under this model, all the executive directors of a company come from a particular family or people with close ties. Ultimately, they are the only authority who take decisions and manage the day-to-day affairs to protect the interests of investors. This model is well-practiced in Bangladesh, Pakistan, France, Italy,  etc.

We know Bangladesh is a common law country. The present legal and judicial system has its foundation mainly in 200 years of British rule. However, it passed through various stages, and the process of evolution has been partly indigenous and partly foreign. The present-day legal system emanates from a hybrid system with structure, legal principles, and concepts modeled on both Indo-Mughal and English law. For being a hybrid legal system, there is also some influence of the British and Indian legal systems in the CG-related laws of Bangladesh. To govern the corporate environment in Bangladesh, some legal measures are in practice. These are the Securities and Exchange Ordinance 1969, the Bangladesh Bank Order 1972, the Bank Companies Act, 1991, the Financial Institutions Act, 1993, the Securities and Exchange Commission Act, 1993, the Companies Act, 1994, the Bankruptcy Act, 1997, the Insurance Act, 2010, the Corporate Governance Guidelines, 2016, the Corporate Governance Code, 2018, etc.

It has been 50 years since our country got its independence, yet corporate governance practices in Bangladesh are not satisfactory and absent in most companies and organizations. Many corporate bodies, including the banking and jute sectors, paper and textile mills, etc., presented a harrowing experience to the nation since its inception. For example, the Adamjee Jute Mills Corporation Ltd., the largest jute mill in the world, collapsed in 2002, costing the jobs of 17,000 workers because of a failure of corporate governance in terms of mismanagement and corruption. Between 2010 and 2012, ‘Sonali Bank Ltd’ the largest state-owned commercial bank, illegally distributed loans of BDT 36.48 billion (US$460 million), which was the largest financial fraud in the banking sector of Bangladesh. Then, Shajalal Islami Bank, South-East Bank, Jamuna Bank, Premier Bank, and Janata Bank were involved with the BDT 200 crore loan scam of the Bismillah Group. The Basic Bank also scammed BDT 4,500 crore loan approvals without proper documentation and security. The board of directors and the bank’s top management were found guilty as they helped those offenders steal the money. Such fraudulent practices suggest a lack of proper corporate governance and inappropriate mechanisms. One of the principal reasons behind the lack of proper corporate governance practice in Bangladesh is that our laws regarding corporate governance are theoretically designed based on the Anglo-American model. Because these laws reflect the shareholder-outside investor perspective of governance enacted based on British and Indian laws. For example, in Bangladesh, the companies are governed by the Companies Act, 1994, which is based on the English Companies (consolidation) Act, 1908. But in practice, most of the companies of Bangladesh follow the control-based model as the board of the Bangladeshi companies, and the corporate structure is mostly family-dominated, and executive management is family-aligned. A few researches have been conducted regarding the control-based model where most of the authors try to establish that this model cannot ensure corporate governance as the appointment of the independent directors is optional on the board. Here the executive directors can exercise extensive discretion and influence on the board decision-making process and customize the governance mechanism according to their own needs, which ultimately curtail the overall interest of the investors even; such practice hinders the level of fairness, accountability, and transparency. Another reason is that there are some lacunas in our corporate legal framework. For instance, In Bangladesh, corporate governance practices in banking companies are mainly controlled and regulated by the Bank Company Act, 1991, which also provides some mechanisms for ensuring transparency, accountability, and better corporate governance in the banking sector. However, the definition of the deliberate loan defaulters and actions against them are not much clear, and some definitions like Loan, Money Laundering, Fiduciary Duties, Financial Offences, and Terrorist Financing are ambiguous and do not maintain an international standard of practice and principle. Then, there is no Nomination and Remuneration Committee and Ethics and Compliance Committee to deal with the relevant matters in the said Act. It does not require a personal guarantee and security before getting a grant of Loan or Advances. Besides, the Act contains some arbitrary provisions that directly contradict with the Right to Justice. For example, when officers are disqualified over allegations of financial offenses, they cannot challenge the decision in the court. More importantly, there is a lack of the proper requirement of academic, professional, and practical qualifications of the directors, a lack of provisions for irregularities of bankers to face criminal charges, and a lack of strict punishment/penalties mechanisms as it still represents 1991’s social and economic context of the country. Then the Companies Act, 1994 is the main governing law for the companies in Bangladesh, which regulates the relationship between shareholders and a company, the audit system, transparency, disclosure procedure, and the jurisdiction of the courts in relation to companies, but this Act does not say anything regarding the ultimate share ownership, director’s qualifications, age, the composition of the board, and the leadership structures in the board and management, particularly the role of chairperson and CEO, director’s responsibility, etc. instead, the law is very much concerned with the formation, management, and liquidation of companies. Besides this, some accounting requirements mentioned in the Act are inconsistent with International Accounting Standards (IAS); as a result, both the Act and IAS make conflict with each other at the time of application. For example, the Company Act requires capitalizations of gains and losses arising from changes in foreign exchange rates under all circumstances which are contrary to IAS. Another inconsistency is that the Company Act does not require preparing and presenting a Consolidated Balance Sheet for a holding company, but it is required under the IAS. Though this Act contains some strict provisions regarding breach of the fiduciary relationship of the director or officer with the company, these provisions provide huge scope to breach as these are more honored in the breach than the observance. In 2016, revised Corporate Governance Guidelines 2016 was issued by the Bangladesh Securities and Exchange Commission (BSEC) for the publicly listed companies under the power vested on the commission by section 2CC of the Securities and Exchange Ordinance, 1969. The aim was to improve the CG situation and thereby better protect the interests of outside investors and minority shareholders and systematically develop Bangladesh’s capital market, but there was no provision for punitive measures for non-compliance. Under these guidelines, the companies should comply with at least one-tenth (1/10) of the total number of the company’s board of directors, subject to a minimum of one, should be independent directors to ensure better governance, but most of the listed companies in Bangladesh does not fulfill this requirement as this guidelines provide comply or explain approach. Even, there is no information about the qualifications of independent directors, tenure of office, and remuneration of the directors, including independent directors, besides at the time of appointment of director, the company need not disclose any brief resume of the director to the shareholders under the Corporate Governance Guidelines, 2016 which were mandatory in the Corporate Governance Guidelines, 2012. However, both the Corporate Governance Guidelines, 2012 and the Corporate Governance Guidelines, 2016, are almost silent on protecting the minority shareholders’ rights. Then to eradicate those lacunas, some crucial governance issues have been introduced by enacting the Corporate Governance Code, 2018 (CGC). Still, this code is also not well-practiced as it is voluntary in nature. It also contains some gaps, like it does not focus on female participation in the Board of Directors. It does not include the formation of the Executive Committee and Stakeholders Relationship Committee, environmental and social policies, rewarding and punitive measures as per the governance performance. Even there is no specific provision requiring disclosure of risk type and risk tolerance limit. So, this code remains some areas that are yet to be incorporated into the best practices recommendations. More importantly, the Code and the Guidelines both are issued by the BSEC only to govern the listed companies, and these are completely denied the existence of non-listed companies like many State-owned Enterprises (SOEs), Small and Medium Enterprises (SMEs), and Non-Governmental Organizations (NGO). So, to enhance accountability, transparency, and sustainability in the corporate sector, non-listed companies also should introduce both the code and guidelines. However, according to the Extent of Corporate Transparency Index, 2020, Bangladesh got 42.86 points out of 100. Then, the World Bank Report on the Observance of Standards and Codes Bangladesh argues that the framework of corporate governance should be based on four pillars. These are Responsibility, Accountability, Fairness, and Transparency (RAFT), but both accounting and auditing practices in Bangladesh are institutionally weak in terms of their regulation, compliance, and enforcement of the accounting standards and professional rules. In addition to these problems, there are other deficiencies in shareholders’ rights in Bangladesh, like inaccessibility of information, the unclear process of electing directors, no rights on approving directors’ remuneration, and no restrictions on informing shareholders before any related party transactions happen, etc. Besides all of these, an independent survey was conducted in our domestic jurisdiction with the help of the BSEC where it revealed that about 55 percent of companies do not comply with the corporate governance guidelines and only about 33 percent of companies appointed independent directors, where most of the cases independent directors are influenced and gratified by the executive directors as their remuneration is low.

From the discussion mentioned earlier, it is clear that corporate governance practice is not well-established. It is still in its initial stages in Bangladesh; nevertheless, it is receiving greater attention from the corporate sector day by day. So, some initiatives must be taken to enhance the present condition and raise awareness of good corporate governance practices. This article recommends some initiatives that must be taken to improve the corporate governance scenario in Bangladesh. Firstly, as a regulatory body, the Registrar of Joint Stock Companies and Firms (RJSC), the Bangladesh Bank (BB), the Bangladesh Securities and Exchange Commission (BSEC), the National Board of Revenue (NBR), and the Institute of Chartered Accountants of Bangladesh (ICAB) must have extended its effective and strict watchdog mechanism in the corporate sectors throughout the country to implement the Anglo-American Model for ensuring corporate governance in their corporate environment because we know that Bangladeshi laws regarding corporate governance theoretically follow Anglo-American Model, but it practically follows the Control Based Model which ultimately curtails the main object of CG as under this family-controlled model the board members are not regarded themselves as representing the interests of the minority shareholders; instead, they customize the governance mechanism according to their own needs or sometimes represent the interests of the controlling owners who appointed them. Even in the absence of proper monitoring by the regulators, many of the companies are defaulting in holding Annual General Meeting (AGM) in due time and submitting false reports of compliance. There is also a lack of proper appointment procedure of independent directors and auditors and lack of independence, lack of shareholders’ active participation, non-disclosure of material facts, and unavailability of information to investors for the absence of their active and strict mechanisms. Secondly, the practical implementation of the existing legal provisions relating to corporate governance must be ensured. Although some loopholes exist in the existing regulatory framework, these laws still contain some good provisions to ensure corporate governance. But these legal provisions are not properly implemented to govern Bangladeshi corporate sectors. Thirdly, existing corporate laws, especially the Bank Companies Act, 1991, the Companies Act, 1994, the Corporate Governance Guidelines, 2016, and the Corporate Governance Code, 2018, should be revised in accordance with the International Accounting Standards (IAS) and Bangladesh Accounting Standards (BAS) to eradicate all sorts of lacunas and best practice of corporate governance culture since these laws are directly connected with the corporate environment of Bangladesh. So, removing lacunas there should include more issues in the existing corporate legislation, such as the Companies Act, 1994 should include the definition, qualifications, age, extent of power, roles and responsibilities of the chairperson, CEO, and independent directors; the composition of the board and the leadership structures in the board and management, audit practices, auditors’ independence, auditor’s pay; individual and overall performance analysis and true independence of the board and independent directors; separate nomination and remuneration committee, ethics and compliance committee, compensation committee, audit committee, preparation and presentation of a Consolidated Balance Sheet, ultimate share ownership, risk management and reporting system, tax management, and reporting system, etc. In the same way, the Bank Company Act, 1991 should include the definition of the loan, deliberate loan defaulters, money laundering, fiduciary duties, financial offenses, and terrorist financing; then, it should also incorporate the nomination and remuneration committee and ethics and compliance committee, the formal requirement of academic, professional, and practical qualifications of the directors, provisions for irregularities of bankers to face criminal charges, strict punishment mechanisms for non-compliance, etc. Similarly, qualifications of independent directors, tenure of office, remuneration of the directors, including independent directors, minority shareholders’ rights, etc., should insert in the Corporate Governance Guidelines, 2016. And then the Corporate Governance Code, 2018 also should focus on some crucial issues like female participation in the BoD, the formation of the Executive Committee and Stakeholders Relationship Committee, environmental and social policies, and rewarding and punitive measures as per the governance performance. So, I think these issues need to be taken to overcome the inadequacies of the current legislation and ensure a higher quality of corporate governance and transparency. Fourthly, separation of ownership and control mechanisms in the corporate structure of Bangladesh should be ensured. It is said fairness, accountability, responsibility, and transparency are the four core principles of corporate governance, but when the corporate structure like in  Bangladesh is owned and controlled by the family members or people of their close ties, this directly affects the level of fairness, accountability, responsibility, and transparency because the family board members can control the actual executive functions of the company here, as they do not keep any scope for the independence of the board. Fifthly, a mandatory code and guidelines should be introduced in Bangladesh for both listed and non-listed companies since the Corporate Governance Code, 2018 and the Corporate Governance Guidelines, 2016 suggest a voluntary mechanism of compliance and comply-or-explain mechanism of compliance, respectively, which are ultimately applicable only on the listed companies and where the listed companies have the chance to escape easily from its obligations just showing a simple ground as the Code and the SEC Guidelines both suggest non-binding obligations on a company, in fact, non-listed companies get actual benefits from here since these companies do not fall under the purview of the Corporate Governance Guidelines, 2016, and the Corporate Governance Code, 2018. So, the Code and the SEC Guidelines both need to be revised. Sixthly, academic and professional institutions should include corporate governance principles in their syllabus to develop a good corporate governance culture by expanding the knowledge and competence amongst top executives, middle-level managers, and the general workforce because the absence of proper knowledge, competence, professional ethics, ineffective and poor quality of professional education contribute to unsatisfactory corporate governance practice in Bangladesh. Seventhly, institutionalized corruption should be abolished from the corporate sector. In most cases, independent directors are influenced and gratified by the executive directors as their remuneration is low, which leads them to take bribes and do unlawful activities for extra income to support their families. So, the appointment and remuneration of the independent directors must be based on their impartiality, legal knowledge, expertise, foresight, management quality and ability to understand financial statements, etc.

In conclusion, the study’s overall findings indicate that the practice of corporate governance in Bangladesh is vulnerable and still in its initial stages as the corporate legal environment has not been widely recognized by the companies in Bangladesh for its numerous weaknesses. Removing these weaknesses requires appropriate reform, and implementation is highly necessary for Bangladesh. So, if the policymakers adopt and then properly implement the recommendations mentioned above, undoubtedly, a better Corporate Governance environment will prevail in Bangladesh as those recommendations are provided after considering the country’s socio-economic conditions.

Writer: Bijoy Chakraborty; Student, Department of Law & Human Rights, University of Asia Pacific.

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Corporate governance reforms in emerging countries: A case study of Bangladesh

• Original Article
• Published: 12 September 2013
• Volume 12 , pages 1–28, ( 2015 )

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• Pallab Kumar Biswas 1  

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This article considers three related research questions, all in the context of an emerging economy, Bangladesh: What is the history of corporate governance (CG) reform in Bangladesh? What explains the introduction of CG guidelines in Bangladesh? and How have the country-level initiatives to improve CG influenced the firm-level practices of CG? By analysing the agency environment and CG reforms in Bangladesh, this article finds that, in spite of the number of reform initiatives undertaken since the early 1990s, there is substantial scope for further improvement, particularly in monitoring and enforcement by regulators, both external bodies, particularly the International Financial Agencies, and domestic forces have both affected the extent of CG reform in Bangladesh; and CG regulations take effect over time as companies gradually update their CG practices to comply with the national guidelines. The introduction of annual awards by the professional institutions also seems to have motivated companies to improve their governance practices.

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INTRODUCTION

Governance arrangements observed today in a particular country have evolved over many years, even over centuries, although country-wide changes may be introduced in response to a spate of corporate failures or a systemic crisis. For example, a well-documented governance failure in the 1700s, the South Sea Bubble, revolutionized the then business laws and practices in England while much of the securities laws in the United States date from the stock market crash of 1929 and the accounting scandals of 2001 ( Iskander and Chamlou, 2000 ; Thompson, 2003 ). Although corporate failures or systemic crises are often considered to be the major drivers of corporate governance (CG) reforms in many countries, it would be unreasonable to think that, in order for change to happen, there must be a crisis. In addition to scandals and corporate crises, Steger and Amann (2008) , for example, identified a number of drivers of CG reforms in France, Germany, the United Kingdom, and the United States: (a) internationalized capital markets; (b) the harmonization of capital markets through political power; (c) the growing emphasis on investment for a broader part of the population and (d) privatization. It is to be noted that drivers of CG reforms extend beyond these factors ( Hermes et al, 2006 ).

The factors identified by Steger and Amann (2008) and others apply across jurisdictions. As countries differ in terms of their economic, social, cultural, political and legal development, the drivers of CG reforms may also differ from one country to another. Interesting questions, therefore, remain as to how CG reforms take place, which factors are driving such reforms and how firms adapt to developments at the national level. Consequently, some researchers have examined the worldwide diffusion of CG codes ( Aguilera and Cuervo-Cazurra, 2004 ; Cuervo-Cazurra and Aguilera, 2004 ; Zattoni and Cuomo, 2008 ; Aguilera and Cuervo-Cazurra, 2009 ; Haxhi and van Ees, 2010 ) while others have examined the degree of compliance by firms with national CG standards ( Werder et al, 2005 ; Arcot and Bruno, 2006 ; Goncharov et al, 2006 ; Gupta and Parua, 2006 ; Nowak et al, 2006 ; Cleyn, 2008 ; Arcot and Bruno, 2009 ; De Castro, 2009 ; Arcot et al, 2010 ; Henry, 2010 ) and some have concentrated on drivers of CG reforms in the context of a mature capital market ( Hermes et al, 2006 ). Understanding the diffusion of CG standards in emerging markets is also important, since they can present stridently different socio-political and economic environments in comparison with developed countries and therefore the drivers of CG reform may differ ( Daniel et al, 2011 ; Adegbite, 2012 ).

Because little is known about the drivers of CG reforms in an emerging markets, this article addresses three related research questions: (i) What is the history of CG reform in Bangladesh? (ii) What explains the introduction of CG guidelines in Bangladesh? and (iii) How have the country-level initiatives to improve CG influenced the firm-level practices of CG? This study is important in the sense that it will contribute to our understanding on how reform takes place, the principal drivers and how they affect firm-level CG practices, in an emerging market.

The remainder of this article is organized as follows. The next section discusses the agency environment and different country-level CG reforms undertaken in Bangladesh. Drivers of CG reforms in Bangladesh are discussed in the subsequent section. The latter section discusses the implications of external CG reforms for firm-level practices. The last section concludes the article.

THE AGENCY ENVIRONMENT AND CORPORATE GOVERNANCE REFORMS IN BANGLADESH

Most publicly listed companies in Bangladesh are controlled by families. Footnote 1 Family members in Bangladesh tend to exercise control through direct and indirect (sometimes called ‘beneficial’) ownership, and by being actively involved in company management either personally or through family ties. Different reasons have been offered in the literature for such extensive family control. Burkart et al (2003) , for example, propose three broad theories to explain family control. The first is called the ‘amenity potential’ of family control, where the founder, typically a male, enjoys mental satisfaction when he finds his children running the business bearing the family name or when the business sponsors or influences major social, political or cultural events. In such circumstances, families will try to maintain control as long as they can. The second is ‘reputational benefits’, which would be diluted if control is surrendered to outsiders. The third theory relates to the possibility of expropriation of ownership rights by professional managers when control is surrendered.

As the controlling owner and the manager are often the same person in family-controlled firms, their shareholders may be better protected from managerial abuses. In addition, a controlling family is likely to commit more talented human capital to the firm, and generally cares more about the firm’s long-term prospects ( Bertrand and Schoar, 2006 ). Although some of the more common agency conflicts between owners and managers may not arise in family-controlled firms, there is another type of agency problem involving the controlling shareholder(s) and the minority shareholders, which is likely to appear because of managerial entrenchment. Through the board of directors (BOD), ownership concentration enables controlling shareholders to exercise their authority and to use corporate resources for their own personal benefit. Examples are tunnelling via related party transactions not at arm’s length, inappropriate allocation of intangible assets and liabilities, and excessively generous compensation paid to family members ( Enriques and Volpin, 2007 ). At the same time, the controlling families cannot be ousted through normal mechanisms such as a hostile takeover bid or by being voted out of office at a shareholders’ meeting ( Rousseau, 2003 ; Enriques and Volpin, 2007 ).

In such an environment, private contracting and social norms are unlikely to resolve the agency problems. Consistent with the predictions in the literature ( La Porta et al, 2002 ), weak investor protection in Bangladesh has resulted in a less-developed financial market which is likely to have resulted in a higher cost of capital.

Enriques and Volpin (2007) indicate a number of legal tools that can be applied in situations like this to protect minority shareholders’ interests. These tools are discussed in the following sub-sections, with particular reference to reform initiatives introduced in Bangladesh.

Strengthening internal governance mechanisms

The BOD is generally considered to be the primary institution of CG. It hires and monitors management on behalf of the shareholders and can monitor related party transactions. However, in a family-controlled firm, the board members may not regard themselves as representing the interests of the minority shareholders; rather, they represent the interests of the controlling owners who appointed them.

Regulations give the BOD power to challenge controlling owners by: requiring a higher proportion of independent directors on the board; defining the board’s roles, responsibilities and authority, particularly in relation to auditing; determining the form and amount of executive compensation; monitoring related party transactions; and disclosing information ( Enriques and Volpin, 2007 ). However, uncertainty remains about the extent to which these reforms do curb abuse of other shareholders’ rights by controlling shareholders. Chen et al (2011) , for instance, report that governance reforms, such as appointing an active BOD, separating the chairperson from the position of Chief Executive Officer (CEO) or appointing a majority of outside directors, fail to deal effectively with the negative consequences of controlling owners’ expropriation of the rights of others in China. They expected this result because reforms like these tend to resolve conflicts between shareholders and management but not between controlling and minority shareholders. Chen et al (2011) suggest that reforms that aim at improving the independence and monitoring power of boards of directors can be more effective in curbing expropriation by controlling shareholders.

In Bangladesh, a number of steps have been taken over the last 10 years to improve internal CG. Table 1 summarizes the main points. Of the various steps taken, the CG reform of 2006 is noteworthy. In 2006, the Securities and Exchange Commission Bangladesh (SECB) issued its ‘Corporate Governance Guidelines’, Footnote 2 which sought to improve internal CG by requiring listed firms in Bangladesh to comply with several governance conditions on the size, composition and leadership of the board; employment of a Chief Financial Officer (CFO), Head of Internal Audit (HIA), and Company Secretary (CS); the establishment, size, composition and activities of an Audit Committee (AC); and restrictions on the employment of statutory auditors in some activities. According to the guidelines, the board size should be between five and 20 with at least one-tenth (a minimum of one) being an independent director. To be independent, the guidelines provided that a director:

must hold less than 1 per cent of the total paid-up shares of the company;

must not have any family relationship with the company’s promoters, directors or shareholders holding at least 1 per cent of shares in the company;

must not have any relationship (pecuniary or otherwise) with the company or its subsidiary or associated companies;

must not be a member, director or officer of any stock exchange;

must not be a shareholder, director or officer of any member of any stock exchange or of an intermediary in the capital market.

The guidelines suggest a clear division between the roles of Chairman and CEO, and a clear definition of their respective roles. The guidelines require listed companies in Bangladesh to appoint a CFO, an HIA and a CS, and to clarify their respective roles, responsibilities and duties (guidelines 2.1 & 2.2). Regarding board committees, the CG guidelines require the establishment of an AC to ‘assist the BOD in ensuring that the financial statements reflect a true and fair view of the state of affairs of the company and in ensuring a good monitoring system within the business’ (guideline 3.00). In Bangladesh, a listed company’s AC should comprise three members with at least one independent director. The guidelines require a professional qualification on the part of the Chairman of the AC but do not specify any similar requirement for the other committee members (guideline 3.2(ii)):

The Chairman of the audit committee should have a professional qualification or knowledge, understanding and experience in accounting or finance.

The guidelines require the AC to play an important role in ensuring a sound CG system within the firm. In addition to its regular reporting to the board, the AC is required to report immediately to the board any findings of a conflict of interest, deficiency in internal control systems, suspected infringement of laws and regulations, and any other matter the committee considers appropriate. The committee is also authorized to report its findings to the SECB when the board fails to act upon the committee’s findings within a reasonable time (after reporting to the board three times or 9 months from the date of first reporting to the board, whichever is earlier).

In relation to internal control, the CG guidelines require the board to be held responsible for implementing and monitoring an effective system of internal control. Following the guidelines, the board needs to declare that the system of internal control is sound in design and has been effectively implemented and monitored (guideline 1.4(e)).

To ensure independence of the external auditor(s), the CG guidelines restrict listed companies from employing statutory auditors in a number of other services, such as appraisal or valuation services or providing fairness opinions, accounting information system design and implementation, book-keeping or other accounting-related services, broker-dealer services, actuarial services, and internal audit services (guideline 4.00). Also, the SECB has prohibited the appointment of an auditor for more than three consecutive years (condition (b) in ):

The issuer company shall not appoint any firm of chartered accountants as its statutory auditors for a consecutive period exceeding three years.

However, the SECB has added an interesting proviso:

Provided further that the issuer may continue with the existing statutory auditor subject to the clearance of the Commission if it recommends at least 10% dividend on the face value/paid-up capital or 7.5% on the net-worth whichever is higher for the year immediately preceding the year for which the statutory auditor is appointed.

It seems that the SECB views disbursement of a minimum percentage of dividend as a reasonable substitute for auditor independence. However, auditor independence could be compromised even if a company meets these dividend criteria. A similar view is also expressed in the World Bank Report (2003) , and by Kabir (2006) and Rashid (2011) .

There remain a number of challenges to internal governance reforms. For example, the existing CG guidelines are not ideal by international standards. Regarding board independence, the current provision requires the inclusion of a minimum of one independent director (in practice, it has been found that except in rare circumstances companies adopt the minimum requirement), raising questions about their ability to be an effective monitor. Footnote 3 In addition, the guidelines only require the establishment of an AC, with no requirement to establish, say, a remuneration or nomination committee. Hence, a company in Bangladesh can comply with the guidelines by appointing just one independent director to the board and appointing that independent director to the AC. Such a committee structure raises the question of the AC’s independence as the board Chairman and any other executive director, including the CEO, can be the AC Chairman. In addition, there is no qualification requirement in the guidelines for AC members or for a rotation policy for its members. Furthermore, there is no specific requirement regarding directors’ educational and service background ( Rahman and Azim, 2007 ).

Whistle-blowers (such as employees) can be a critical source of corporate information because of their ability to reveal improper conduct in the organization but they need adequate legal protection to become effective. Neither the CG guidelines nor other CG reforms recognize the role of employees and there is little legal protection for them ( Kabir, 2006 ; World Bank, 2009 ). The perhaps inevitable outcome is that few employees risk revealing misconduct by their employers in Bangladesh ( World Bank, 2009 ).

Minority shareholder protection and shareholder empowerment

The law generally empowers shareholders by enhancing their rights to sell, sue and have a say in their company’s affairs ( Enriques and Volpin, 2007 ). Where ownership is dispersed, the shareholders’ right to sell their shares allows for the emergence of a market for corporate control that limits abuse by insiders. In countries like Bangladesh, with concentrated ownership, an active market for corporate control does not exist. The law may empower shareholders by giving them the right to sue the company and its directors in specified situations. The effectiveness of such a possibility will depend on the incentives of the minority shareholders, the cost of litigation and the efficiency of the legal system. The law can also empower shareholders by giving them a say over key issues, such as the appointment and remuneration of directors and auditors, approval of dividends, the issuance of additional shares, or the sale of substantial parts of the company.

In Bangladesh, different steps have been taken in this regard. For example, stock exchange trading of securities was fully automated in 1998, replacing the 44-year-old ‘outcry’ system. Automation has facilitated trading of securities from decentralized places and enhanced the volume of transactions ( Siddiqi, 2007 ). It has been further facilitated by the creation of the Central Depository of Bangladesh Limited (CDBL), which is entrusted with ‘… the efficient delivery, settlement and transfer of securities through computerized book entry system, that is, recording and maintaining securities accounts and registering transfer of securities; changing the ownership without any physical movement or endorsement of certificates and execution of transfer instruments’ ( http://www.cdbl.com.bd/overview.php , accessed 16 December 2011).

Shareholders in Bangladesh have rights under the Companies Act (CA) of 1994 to attend and participate in company meetings either in person or by proxy. They elect and remove directors [Sections 91 and 106], appoint the company’s auditor and approve their remuneration [Sections 210 and 211], and their approval is needed to change the company’s articles of association [Section 20], authorize new share issues or reductions of share capital [Sections 56 and 59], authorize the amount of dividend recommended by the directors [Section 96 of Schedule I], and vote on major governance issues [Section 12]. Shareholders with a minimum of 10 per cent ownership can request an extraordinary general meeting to discuss any issue of concern [Section 84]. They can also go to court to protect their interests [Section 233], or request the Registrar of Joint Stock Companies (RJSC) to investigate the affairs of their company [Section 195]. Furthermore, shareholders have the pre-emptive right to subscribe to any additional capital the company wishes to raise [Section 155].

Besides shareholders’ rights to sell, sue and to have a say, other reform programmes have been instituted by the regulators in Bangladesh. For example, a credit rating was made mandatory for all public offers of debt instruments and any public issue of shares (including a rights issue) at a premium by a publicly listed company, through ‘Credit Rating Companies Rules, 1996’. Footnote 4

The Dhaka Stock Exchange (DSE) classifies securities into different groups based on their regular holding of annual general meetings (AGMs) and their dividend payment record. A total of five categories have been introduced at different points in time. The categorization is intended to help general investors to choose appropriate securities based on their risk-taking preferences. The criteria for different categories and their settlement system are shown in Table 2 ( DSE, 2007 ).

Under the current SEC regulation (Acquisition and Takeover Rules, 2002), a public notice is necessary if a person is trying to obtain more than 10 per cent ownership interest. At the end of the offer, if less than 10 per cent of the issued shares remain with the public, the person is bound to buy those shares when offered. Moreover, ownership of more than 10 per cent must be disclosed to the company, the Stock Exchange and the SEC.

To ensure effective functioning of the AGM, the SECB has issued a notification and an order. According to the notification, no gift or benefit in cash or kind other than a cash and/or stock dividend shall be paid to equity holders for attending the AGM ( BSEC, 2000 ). The SECB has also instructed companies to submit an audio visual recording of the AGM to the Commission (condition (c) in ):

The issuer shall make continuous and uninterrupted audio visual recording of the entire proceedings of its annual general meeting and shall furnish a copy of the same in unedited form within the shortest possible time but not later than three working days from the date of the said annual general meeting to the Commission and the Stock Exchange(s).

One important reform in the Bangladesh capital market to empower shareholders is the availability of education and training courses. Currently, the SECB, the stock exchanges and merchant bankers arrange regular training programmes for investors in related areas ( BSEC, 2011 ). To conduct a deeper level of training, an institute named ‘Bangladesh Institute of Capital Market’ was approved on 25 May 2008 and it began training operations on 9 December 2010 ( Chowdhury, 2010 ).

In order to involve the investment community and other stakeholders more in the rule-making process, the SECB from time to time seeks comments on its amendment proposals. According to the SECB website ( www.secbd.org/comments_page.htm ), from 2009 to 27 April 2012, comments have been sought on a total of 27 amendment proposals, including a proposal to amend the current CG guidelines.

Despite the above reforms designed to protect basic shareholder rights, Bangladesh lags behind other jurisdictions in a number of ways ( World Bank, 2009 ). For example, related party transactions do not need approval by shareholders, and there has been no prosecution for insider trading. An ownership threshold of 10 per cent to take legal action against the company is relatively high for a country with highly concentrated ownership. The World Bank Country Study report identifies other areas where weakness remains ( World Bank, 2009 , p. 3):

The information that shareholders can demand is not always free and easily accessible. The process to elect directors is rarely clear and shareholders do not approve director remuneration…Shareholders cannot vote in the GMS [general meetings] electronically or by post…The rules [for taking control of a company] are proscriptive, and many have limited certain control transactions. There is no general requirement for control offers to be for all shares in the company. Their scope is also narrow. The CA [Companies Act] has distinct, and not entirely harmonized, rules for mergers and acquisitions. There is little guidance on board members’ duties during control transactions or when a major shareholder wishes to sell a large block of shares.

Table 3 summarizes the relevant reforms in the area of investor empowerment.

Enhancing disclosure requirements

Shareholders’ ability to sell, sue and have a say depends on their access to information ( Enriques and Volpin, 2007 ). It is generally argued that an extensive regime of disclosure can help alleviate agency problems. For example, mandatory disclosure requirements for related party transactions and directors’ compensation can be an important tool for alleviating self-dealing. Disclosure of price-sensitive information also helps prevent insider trading ( Enriques and Volpin, 2007 ), with Kothari (2001) reporting that mandatory disclosure through financial reports provides new and relevant information to the investment community.

Regulatory reforms to disclosure requirements in Bangladesh mainly cover four spheres: (1) CG arrangements; (2) financial reporting and timeliness; (3) self-dealing and insider trading; and (4) executive compensation. These are discussed in more detail below.

Under the CG guidelines, directors of listed companies in Bangladesh are required to disclose additional material in the annual report. This includes, among other things, information concerning fair presentation in the financial statements, maintenance of proper books of accounts, consistent application of accounting policies, adoption of all applicable international accounting standards, implementation and monitoring of a sound system of internal control, ability of an entity to continue as a going concern or the reasons for not being able to continue as a going concern, any significant deviation in operating results from the prior year, and reasons explaining the non-payment of any cash or stock dividend. Key operating and financial data for at least the three previous financial years, number of board meetings held during the year and attendance by individual director at those meetings, and the pattern of shareholdings Footnote 5 must also be disclosed by the directors under the governance guideline conditions. An AC report (signed by the AC Chairman) mentioning the committee’s activities should be disclosed in the annual report. Minority shareholders and general investors are expected to benefit from such reporting.

Like many countries, Bangladesh has adopted International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS). The local name of IAS is Bangladesh Accounting Standards (BAS) and IFRS is Bangladesh Financial Reporting Standards (BFRS). According to the ICAB website ( www.icab.org.bd ), as of 15 December 2011, Bangladesh has adopted 28 IASs and 8 IFRSs. Under the Securities and Exchange Rules, 1987, ‘the financial statements of an issuer of a listed security shall be prepared in accordance with the requirements laid down in the Schedule and the International Accounting Standards as adopted by the Institute of Chartered Accountants of Bangladesh’ [Rule 12(2)].

Timely reporting by listed companies in Bangladesh is governed by the provisions of the Companies Act of 1994, the Listing Regulations of the DSE Limited of 1996 and the Securities and Exchange Rules of 1987. Currently a listed company in Bangladesh is required to have its financial statements audited within 120 days of the financial year-end date, and to hold its AGM and to have the audited accounts approved at the AGM within nine months of its financial year-end date under normal circumstances. A listed company is also required to prepare and communicate quarterly financial statements to the SECB and security holders ( BSEC, 2009 ).

‘Related Party Disclosures’ is one of the adopted IASs (BAS 24) in Bangladesh. This standard requires detailed and specific disclosure of related party transactions. The effective date of BAS 24 is 1 January 2007. In addition to the provisions in BAS 24, several other stipulations exist in Bangladesh. Rule 10 of Public Issue Rules, 2006, requires a company to disclose all related party transactions that have taken place during the 2 years prior to the issue of a prospectus. Under Section 37 of the Listing Regulations of the DSE, all listed companies are required to disclose all related party transactions in the annual published accounts.

Insider trading is prohibited in Bangladesh. Insiders of a company are not allowed under the Listing regulations of the DSE Limited [Section 43(6)] to buy or sell the company’s shares based on material information generated within 5 market days following public dissemination and evaluation of such information. According to Section 43(7) of the Listing Regulations of DSE of 1996, insiders of a company must give at least 4 market days’ notice to the Exchange and the Commission before trading in the company’s shares. Listed companies in Bangladesh are required to submit the month ending shareholdings of their insiders (sponsors and/or directors) and 10 per cent or greater owners in the company by the 10th day of the following month. Such statements must include an explanation for the difference in shareholding, if any, from the information provided for the previous month (SECB order dated 29 August 2004).

The BOD of a listed company must not meet as a board to consider price-sensitive information during trading hours (11:00 to 15:00 as of 31 March 2012) of the stock exchanges ( BSEC, 2009 ). Listed companies are required to publish price-sensitive decisions in two widely circulated daily newspapers, one in Bangla and the other in English ( BSEC, 2000 ).

Disclosure regarding the compensation of directors and executives is governed by the Securities and Exchange Rules, 1987 and Public Issue Rules, 2006. Rule 11 of Public Issue Rules, 2006 requires a company to disclose in its prospectus information on: (a) the total amount of remuneration paid to the top five salaried officers in the company in the last accounting year; (b) aggregate amount paid to all directors and officers as a group in the last accounting year; (c) amount of remuneration paid to any non-executive director; (d) future compensation contracts with any director or officer; and (e) the intention of the issuer to substantially increase the remuneration of directors and officers with sufficient explanation. According to Rule 4(i) in Part II of the Securities and Exchange Rules, 1987, listed companies in Bangladesh are required to disclose separately the full particulars of the aggregate amounts paid during the past financial year to the directors including the managing director, managing agents and officers under appropriate headings such as fees, remuneration, pensions, gratuities, company’s contribution to provident, superannuation and other staff funds, compensation for loss of office and in connection with retirement from office, allowances, commission, perquisites or benefits in any other form or manner and for any services rendered.

Table 4 summarizes major governance reforms over the past several years in Bangladesh.

Monitoring and public enforcement

The success of any reform depends on the effectiveness of the monitoring and enforcement mechanisms. Enriques and Volpin (2007) argue that public enforcement such as by a fine or imprisonment may be an effective tool in preventing specific forms of expropriation, such as insider trading.

In Bangladesh, enforcement of corporate and securities laws is generally shared by the SECB, the DSE, the RJSC, professional accounting bodies and the judiciary.

Bangladesh has reshaped and strengthened its enforcement structures over the past 40 years. Most of the reforms have taken place in the area of its supervisory authority’s power to supervise the securities markets. The SECB regulates the securities market through the Securities and Exchange Ordinance of 1969 and the Securities and Exchange Rules of 1987, and various orders and notifications issued under the Securities and Exchange Ordinance of 1969. The DSE mainly regulates companies through its Listing Regulations of 1996. The RJSC is entrusted to administer and enforce the relevant statutory provisions of the Companies Act 1994. The Institute of Chartered Accountants of Bangladesh (ICAB), on the other hand, is responsible for ensuring that its members maintain the highest professional standards in conducting their professional duties.

Under the Securities and Exchange Commission Ordinance, 1969, the SECB is empowered to impose administrative sanctions as well as penalties for non-compliance with securities laws. If a party is found guilty after investigation, a show cause notice is sent. Where the explanation is not satisfactory, the accused party is provided with an opportunity to be heard under the Code of Civil Procedures, 1908, and, finally, depending on the severity of violation, the Commission may either impose administrative sanctions or a penalty or both ( Siddiqi, 2007 ). The minimum penalty is set at Tk. 100 000 where the party fails to furnish any document, paper or information required under the Ordinance [Section 22]. In case of continuing default, a further penalty of Tk. 10 000 per day is imposed. The penalty for market manipulation of security prices has been increased from 3 years to 5 years’ imprisonment and the penalty from 10 000 Taka to a minimum of 500 000 Taka [Section 23].

Under the Securities and Exchange Commission Rules of 1987, the Commission (the SECB) has made provision to discipline statutory auditors in case of their failure to discharge their professional responsibilities [sub-rule 3(B) of Rule 12]. Under this sub-rule, the Commission can declare a Chartered Accounting firm ineligible to conduct an audit in a listed security for a period of a maximum 5 years if the Commission finds the audit firm to be seriously liable for not conducting an audit in the legally prescribed manner.

To monitor and ensure the publication of quarterly reports on company websites as well as on stock exchange websites, the SECB has instructed the stock exchanges (at present there are two stock exchanges in Bangladesh: the DSE and the Chittagong Stock Exchange) to submit compliance reports in this regard to the Commission on a quarterly basis ( BSEC, 2010 ).

The above discussion suggests there are some monitoring and enforcement mechanisms in place in Bangladesh to support CG reform initiatives. Whether they are effective in carrying out the intended functions is an open question. Although the SECB, the exchanges and the ICAB have taken legal actions against wrongdoers from time to time, these actions are viewed by some as insufficient since many who break the law are believed to go undetected ( World Bank, 2002 , 2003 ; Mir and Rahaman, 2005 ; Solaiman, 2006 ; Uddin and Choudhury, 2008 ; World Bank, 2009 ; Rashid, 2011 ). Perhaps it is best described in the World Bank Country Study report (2002, p. 99): ‘… the gap between international standards and national standards is not as serious [in Bangladesh] as the gap between national standards and national practices. Laws and regulations exist, but are not enforced. At present there are few visible sanctions for wrongdoing. As laws and regulations have not been enforced they have fallen into disuse and often been forgotten’. The situation has been serious enough for the World Bank (WB) to impose conditions that require improvements in CG if Bangladesh is to continue to receive financial assistance ( World Bank, 2005 ). Footnote 6

DRIVERS OF COUNTRY-LEVEL CORPORATE GOVERNANCE REFORMS IN BANGLADESH

‘Country-level CG reforms’ encompass all activities aimed at improving the legal and institutional framework of a country to enhance investors’ confidence in its capital market operations, and to better protect minority shareholders from the likely expropriation of their interests by insiders and controlling shareholders. In this context, the legal framework of a country helps ensure that relevant legal mechanisms are in place; and the institutional framework helps ensure that existing rules and legal provisions are kept up to date to match relevant new developments elsewhere, that national practices are monitored to ensure they conform to the national standards, and, most importantly, that the national standards are uniformly enforced.

It is argued in the literature that CG reform initiatives at the country-level in general and the initiative to develop a code of CG in particular are influenced by a number of exogenous (external) and endogenous (domestic) factors that address deficiencies in a country’s CG system ( Aguilera and Cuervo-Cazurra, 2004 ; Hermes et al, 2006 ). The extent to which such initiatives are successful is strongly influenced by the country’s political, cultural and economic forces ( Li and Harrison, 2008 ; Steger and Amann, 2008 ; Haxhi and van Ees, 2010 ; Brown et al, 2011 ; Daniel et al, 2011 ).

External forces include globalization, opening up of financial markets, and the actions of foreign institutional investors and international donor agencies who seek to acquire legitimacy in capital markets ( Aguilera and Cuervo-Cazurra, 2004 ). For example, when countries increasingly open up their economy to external influences and foreign capital, or when countries (particularly emerging countries) depend heavily on donor support for funds, they are more likely to be confronted with pressures from these external agencies to signal the country’s commitment to improve its CG system, such as by implementing international best practice adopted elsewhere.

Domestic forces, on the other hand, influence the way in which the CG reforms are undertaken in a particular country. While it is commonly argued that domestic forces aim to increase efficiency in the system ( Aguilera and Cuervo-Cazurra, 2004 ), it may not be universally true. Within a country, influential parties can exert pressure in both directions, that is, for and against the reform. Domestic forces such as the growth of active institutional investors, privatization and rising shareholder activism tend to exert positive pressure towards reform. These domestic forces increase the perceived need for more effective monitoring mechanisms and appropriate incentive schemes to improve existing CG systems ( Aguilera and Cuervo-Cazurra, 2004 ). However, other key domestic players, such as controlling shareholder groups, rent-seeking politicians and bureaucrats whose interests are likely to be hampered by reform, may all oppose a reform, slowing down the reform process, and affecting the content, timing and sustainability of reform initiatives ( Grindle and Thomas, 1989 ). In a recent study, Haque et al (2011) find evidence supporting the notion that broad-based interest groups contribute significantly to the less than efficient state of CG in developing economies.

The success of CG reform in a given country and the state of the country-level CG framework at a given point in time depends on a host of legal, institutional, political, social, cultural and economic factors. Since these factors differ across countries, differences tend to exist among countries in terms of the type of reform undertaken, and more specifically the contents of any CG codes that are adopted ( Hermes et al, 2006 ). As argued above, differences in the balance of power among stakeholders within a country may also result in differences in governance codes across countries. Footnote 7

Using the above framework, the development of CG guidelines in Bangladesh can be explained by referring to both external and domestic forces. In the following two sub-sections, external and domestic forces influencing the development of CG guidelines are discussed.

External forces influencing the development of corporate governance guidelines in Bangladesh

While forces like globalization, the opening up of financial markets and the actions of foreign institutional investors are often cited as major factors influencing country-level CG reforms, in the context of Bangladesh the International Financial Agencies (IFAs) Footnote 8 such as the Asian Development Bank (ADB), the International Monetary Fund (IMF) and the WB has greatly influenced CG reform since the early 1990s ( Mir and Rahaman, 2005 ; Siddiqui, 2009 ; Rashid, 2011 ). Footnote 9

The ADB approved a loan of US$80 million on 20 November 1997 for the Capital Market Development Program (CMDP) in Bangladesh, the aim being to broaden the market and to develop a fairer, transparent and efficient domestic capital market that would attract larger amounts of investment to augment financing by the banking system ( ADB, 2005a ). In so doing, the key aim of the CMDP was to restore investor confidence, which had been significantly damaged when the Bangladesh stock market crashed in 1996, blamed on excessive speculation aggravated by widespread irregular activities ( ADB, 2005a ). Footnote 10

In the project performance audit report, the Operations Evaluation Mission (OEM) of the ADB considered the CMDP was partly successful in achieving its objectives. One reason why the CMDP was considered only partly successful is that it did not give balanced support to some key elements in establishing a regulatory system based on ‘fair’ disclosure. Lack of support for good CG practice was one of these key elements ( ADB, 2005a ). Based on interviews of key stakeholders in the Bangladesh capital market, Footnote 11 the OEM reported that irrespective of successes in some areas, the CMDP had failed to improve investor confidence in listed companies’ financial statements. Weak CG contributed to the lack of confidence, as pointed out by interviewees ( ADB, 2005a ).

It was, therefore, no surprise that the OEM considered the need to focus on strengthening CG as a key issue for ADB’s follow-up actions ( ADB, 2005a , p. 22):

The foundation for any regulatory regime relying on the principle of full and fair disclosure to investors rests on the quality of financial statements and the reliability of independent audit. Such requirements will only be effective if they are complemented by sound corporate governance practices and proper oversight of the accounting and audit profession. In Bangladesh, deficiencies remain in these areas.

Consistent with the above observation, a technical assistance (TA) grant was made for a project titled ‘Capacity building of the Securities & Exchange Commission & selected capital market institutions’. It focused on promoting CG in listed companies and market intermediaries and strengthening the quality of financial reporting, and was approved on 9 November 2000 ( ADB, 2005b ). As part of the project, a ‘National Workshop on Corporate Governance’ was held on 12 and 13 July 2003. In its TA completion report, ADB (2005b , p. 2) said:

The Corporate Governance Workshop was high-level, with the Finance Minister giving the opening remarks, and it was widely attended, with 80 participants from the government, capital market institutions, private sector companies, universities, and donor institutions. The corporate governance and shareholders’ rights manuals and the proposed amendments to the Companies Act were discussed at the National Workshop on Corporate Governance … the SEC Chairman proposed that in every general meeting, there should be at least one independent director representing minority shareholders.

In the TA completion report, it was pointed out that future ADB assistance and policy dialogue along with donor coordination should be directed at strengthening institutional mechanisms for implementing the CG reform provisions in the Companies Act ( ADB, 2005b ). As a consequence, the ADB reached an understanding with the Government of Bangladesh to jointly finance the ADB’s TA titled ‘Financial Markets Governance Program’. Footnote 12 One focus was on assisting capital market regulators to strengthen CG by adopting best practices with respect to: (i) the structure of the BOD and the role of independent directors; (ii) protection of minority shareholders; (iii) transparency; (iv) setting up a commission to revise the Companies Act 1994; and (v) formulating a code of CG ( ADB, 2003b ).

Under the above-mentioned TA, a day-long workshop titled ‘SEC Governance and Corporate Governance’ was conducted on 30 May 2005. Apart from four executive directors of SECB, 12 persons representing exchanges, banking, non-banking financial institutions and non-financial institutions took part in the workshop. Footnote 13 At the workshop, three relevant sources of CG materials were distributed to participants: the OECD Corporate Governance Principles 2004 (considered to be the benchmark of international best practice), the Malaysian Code of Corporate Governance of March 2000 (since the Malaysian stock market was not highly developed, and its market characteristics resemble the Bangladesh capital market) and the Hong Kong Stock Exchange Rules of Corporate Governance Disclosure in Annual Reports (since Hong Kong also has a common law tradition and is characterized by family-controlled corporate ownership) ( ADB, 2007 ). It was expected that stock exchanges in Bangladesh and the SECB would require listed companies to adopt similar CG provisions to those in Malaysia and Hong Kong ( ADB, 2007 ).

While the WB was not directly involved in the development of CG guidelines in Bangladesh due to its mutual understanding with the ADB ( World Bank, 2002 ; ADB, 2003a , 2005a ), the WB has, nonetheless, taken an active role in promoting good governance around the world, including in Bangladesh, by helping emerging countries to evaluate their current CG practices and upgrade them to international levels ( Aguilera and Cuervo-Cazurra, 2009 ). The country study report of WB (2009) is such an attempt. CG has been adopted as one of 12 core best-practice standards by the international financial community. As part of the WB and the IMF programme on Reports on the Observance of Standards and Codes, WB assessed the CG of companies listed on the stock exchanges in Bangladesh, and the study report is the outcome of this assessment. Using the OECD Principles of Corporate Governance as the benchmark, the study identified major weaknesses in the existing CG system and provided policy recommendations in this respect. One recommendation was that ‘a new CA [Companies Act] should be introduced as part of broader reform to make the legal framework for corporate governance more coherent and effective. This reform should strengthen shareholder rights and the accountability of directors’ (executive summary in World Bank, 2009 ).

The above discussion shows clearly how external forces such as the ADB and the WB can exert a major influence on the development of CG guidelines and practices in countries like Bangladesh.

Domestic forces influencing the development of corporate governance guidelines in Bangladesh

While the market for corporate control barely exists in Bangladesh, and institutional investors mostly play a passive role in exerting pressure for CG reform, a number of domestic factors have influenced the development and content of CG guidelines in Bangladesh. Local bodies such as the Bangladesh Enterprise Institute (BEI), a private-sector think-tank, the ICAB, and the Metropolitan Chamber of Commerce and Industry (MCCI), Dhaka, have influenced the development of CG guidelines. The experience of other countries also seems to have been an important factor.

Before the SECB’s CG guidelines were issued in 2006, a number of attempts had been made to develop CG voluntary codes. For example, a private consulting firm, BEI, started a project in 2002 to examine the current state of CG norms and practices in four South Asian countries: India, Pakistan, Sri Lanka and Bangladesh. It published a report titled ‘A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh’ in August 2003 ( BEI, 2003 ). The report identified a number of reasons for developing CG standards in Bangladesh ( BEI, 2003 , p. 16):

First: Bangladesh should strive to reach international standards with regard to corporate governance practices not only as a prerequisite to attracting international capital, but also to enhance the commercial reputation of the country generally. Second: good corporate governance practices can be an important tool in improving domestic economic efficiency, business management, and risk management, which will assist in the development of the private sector. Finally, the corporate sector should strive to improve corporate governance as a mechanism to demonstrate corporate responsibility and attain trust and support of the public.

Consistent with the above notion, in August 2003, the BEI formed a National Taskforce (comprising individuals from the private sector, the Government, non-governmental organizations (NGOs) and other relevant bodies, including the SECB Chairman) to draft the ‘Code of Corporate Governance for Bangladesh’ ( BEI, 2004 ). The Taskforce prepared and published ‘The Code of Corporate Governance for Bangladesh’ in March 2004. In November 2004, BEI initiated the ‘Corporate Governance Strengthening Project’ (CGSP), supported by the Royal Netherlands Embassy, with an aim to implement good governance practice in the public, private and NGO sectors of Bangladesh. Footnote 14

The ICAB prepared a ‘Draft Code of Corporate Governance-Bangladesh’ in November 2004 . Footnote 15 Earlier, in January 2003, ICAB had published the results of a study funded by the WB that examined CG in Bangladesh, which included recommendations for improvement ( ICAB, 2003 ).

As mentioned before, the current CG guidelines in Bangladesh came into effect through a notification on 20 February 2006. The notification replaced an order dated 9 January 2006. Footnote 16 There are two differences between the notification and earlier order: first, the number of independent directors was reduced from a fifth to a tenth of the board size and second, in the earlier order there was a requirement to disclose one additional statement by the board concerning the firm’s significant plans and decisions such as corporate restructuring, business expansion and discontinuance of operations along with future prospects, risks and uncertainties surrounding the company (guideline 1.4(j)). While it is difficult to explain why the SECB changed the CG regulation after just 42 days, the news on the MCCI, Dhaka website is worth mentioning: ‘The Committee [Commercial Legislations Sub-Committee of MCCI] reviewed the new guidelines finalised by the Securities and Exchange Commission (SEC) with regard to Independent Directors, Audit Committee, etc… As decided by the Committee, a delegation met the Securities and Exchange Commission’s Chairman and other high officials and submitted the proposals. The SEC later made amendments to the relevant Circular in accordance with the points submitted by the Chamber’ ( MCCI, 2006 ). Footnote 17

Experience in other countries also seems to have influenced the development of CG guidelines in Bangladesh. It is evident from the news appearing in the quarterly publication of the SECB ( BSEC, 2006 , p. 5): ‘after corporate debacle in Western countries like other regulators of capital markets, the Commission has issued “Corporate Governance Guidelines” on a comply or explain basis to elevate corporate governance scenario in Bangladesh’. Footnote 18

The above discussion suggests that apart from donor agencies’ initiatives, the development of the CG guidelines was influenced by a small number of domestic bodies. One relevant question, therefore, arises: is there any way to determine to what extent the CG guidelines are driven by external or domestic forces?

A similar question has been addressed by Hermes et al (2006) in the context of countries in the European Union (EU). By comparing the contents of codes with the priorities set by the European Commission, they show the majority of the codes in the EU did not comply fully with the priorities of the European Commission. They interpret this finding as indicating CG codes are driven by both external and domestic forces.

Following Hermes et al (2006) , I expect that if domestic forces are influential in the CG reform process, the resulting CG regulations need not converge fully with international best practice; rather it is likely there will be a divergence from international best practice because of differences in countries’ legal, institutional, political, social, cultural and business environments.

Since I am focusing on a single country, I have effectively only one set of formal CG guidelines to consider. Moreover, the CG guidelines are unlikely to reflect all CG reforms in a country, as other rules and regulations can include potentially important aspects of CG reform. Therefore, I take an alternate route. In a recently published CG assessment study report by the WB, a summary of observance of the OECD Corporate Governance Principles in Bangladesh is provided ( World Bank, 2009 , pp. 13-14). The level of observance is classified into one of five categories: fully implemented, broadly implemented, partly implemented, not implemented and not applicable. Footnote 19 Using this publicly available WB report (available at: http://www.worldbank.org/ifa/rosc_cg_bgd09.pdf ), I have further examined whether external or domestic forces are important in explaining CG reforms in Bangladesh. Table 5 is constructed using the information contained in the WB report.

Table 5 shows that out of the 63 applicable indicators covering six broad CG principles, 13 indicators are broadly implemented (20.64 per cent), 45 indicators are partly implemented (71.43 per cent), 5 indicators are not in place (7.93 per cent) and none of the indicators is fully implemented (0 per cent).

Using a weighting scheme, providing weights of 3, 2, 1 and 0 for full implementation, broad implementation, partial implementation and non-implementation, respectively, the total compliance score is shown in the last row of Table 5 . Using this approach, the total compliance score is 71 out of a possible maximum of 189. The large difference between the actual total compliance score and maximum possible score suggests that the current state of CG regulation in Bangladesh does not fully reflect international best practice. While I have not explicitly investigated the full range of determinants of the CG reforms, this result provides at least partial support for the notion that apart from external forces, domestic forces also affect CG reform. A comment by the ICAB President ( ICAB, 2004 ) that ‘over the years, ICAB has followed a regular approach to adoption of new Standards, after a process of stringent technical review and considering their applicability to our country’ supports this line of thinking.

INFLUENCE OF EXTERNAL CORPORATE GOVERNANCE REFORM ON FIRM-LEVEL PRACTICES

In the previous section, I discussed various forces affecting the development of CG guidelines in Bangladesh. CG guidelines are likely to be more effective when firms comply with the ‘spirit’ of the guidelines; that is, when they are more than an exercise in ‘ticking the boxes’. In this section, I examine how developments taking place outside the firm affect the firm’s governance choices. In the context of Bangladesh, four developments are considered here: (1) the CG guidelines issued by the SECB in 2006; (2) ICAB’s decision to give ‘ICAB National Awards for Best Published Accounts and Reports’ beginning in 2001 , (3) SAFA’s decision to give ‘SAFA Best Presented Accounts Awards’ beginning in 2002; and (4) ICMAB’s (the Institute of Cost and Management Accountants of Bangladesh) decision to introduce ‘ICMAB National Best Corporate Award’ beginning in 2007. The CG guidelines issued by the SECB in 2006 are not mandatory. The guidelines are to be applied on a ‘comply or explain’ basis, whereby listed companies should include a compliance statement in their annual reports, stating specifically which guidelines they have complied with and which they have not, giving reasons for any non-compliance.

I collected data on the level of compliance with the CG guidelines from published annual reports of listed companies in Bangladesh from 2005–2006 to 2008–2009. Table 6 presents summary results of the level of compliance with the CG guidelines.

In the first year following the issue of CG guidelines, of 227 sample companies from all listed companies on the DSE, about two-thirds (65 per cent) included compliance statements in their annual reports. About 35 per cent of the sample companies did not provide any information on their compliance with the guidelines. Inclusion of a compliance disclosure statement increased to 96 per cent of cases in 2008–2009 from 65 per cent in 2005–2006. In nine instances out of the total sample of 232 companies in 2008–2009 there was no compliance statement. In year 2005–2006, 13 companies (9 per cent of complying companies) achieved the maximum score of 39. In 2008–2009, 42 companies achieved the maximum score of 40 (19 per cent of complying companies). The overall compliance level has increased from 62 per cent in 2005–2006 to 85 per cent in 2008–2009, meaning that compliance with the CG guidelines continued to increase. This is evidenced by the fact that the proportion of firms reporting exceeded 80 per cent in relation to 28 out of 40 conditions in 2008–2009. However, less than 51 per cent compliance was found for one guideline condition: a report by the AC to the shareholders. Table 6 suggests that listed companies in Bangladesh have gradually adopted the CG guidelines, indicating that the issuance of CG guidelines has influenced CG practices in Bangladesh.

Question, however, remains whether such reform is really changing the way business is undertaken in Bangladesh. Alternatively, have the listed companies embraced the genuine spirit of the guidelines rather than only following the letter of the guidelines?

In Bangladesh, listed companies are required to disclose additional statements and report in support of their compliance statement. For example, the BOD need to disclose additional statements and information following CG guidelines conditions 1.4(a)–1.4(k). Besides, the AC report must also be published as a part of the annual report [Condition 3.4]. I collected data on whether the listed companies are disclosing additional information in support of their compliance with 11 guidelines conditions. Footnote 20 Absence of any such disclosure is interpreted as: the firm is complying with the guidelines condition in letter but not in spirit and the firm is simply ‘ticking the box’. Table 7 presents summary results:

As the table shows, in nine out of the 11 conditions, the tendency of ‘ticking the box’ has decreased from 2005–2006 to 2008–2009, while in another condition, the tendency remained almost at the same level. These conditions are related to the requirement to disclose additional statements in the directors’ report. In relation to CG guideline condition 3.4 (a firm is required to publish AC report to the shareholders in the annual report), the exercise of ‘ticking the box’ is the most frequent, with 40 per cent (19 per cent in 2005-2006) of the sample companies failing to publish an AC report. Except for two conditions, such exercise is followed by at least one-fourth of the sample firms in 2008-2009 as suggested in Table 7 .

While the above finding provides some insight that a number of companies are not following the guidelines conditions in letter, not in the true spirit, the findings should be interpreted cautiously. For example, the content analysis technique used to construct Table 7 suffers from the limitation that it merely indicates what firms say they are practising which may substantially differ from what they actually are practising ( Cochran and Wood, 1984 ). Nonetheless, Table 7 suggests that the box-ticking exercise exists and therefore, enforcement of CG guidelines should be in place.

It can be reasonably expected that firm’s governance practices are likely to improve due to the reputational effects of being awardees of ICAB, ICMAB and SAFA. When selecting the winners, these professional bodies use specific selection criteria, one being the information disclosed on CG practices in the company’s published annual report. For example, in the 2000 selection round, ICAB allocated 10 points (out of 200) for CG practices: statement of directors (4 points), AC information (4 points) and remuneration committee information (2 points) ( ICAB, 2010 ).

The weights on disclosure of CG practices were doubled in 2010 (10 points out of 100) ( ICAB, 2010 ). Similarly, ICMAB’s ‘Questionnaire for ICMAB Best Corporate Award 2007’ included five questions relating to CG practices: number of board meetings held during the year, number of Executive Committee (EC) members and the name of the Chairman of the EC, number of EC meetings held during the year, name of the Chairman of the AC and number of AC meetings held during the year. Beginning in 2005, SAFA introduced a new category titled ‘Corporate Governance Disclosure Award’. One of the main aims of these awards by professional bodies is to encourage listed companies to act and report in a more informative, transparent and accountable manner, which are often viewed as essential for good CG.

Table 8 provides a name-wise list of the winners of ‘ICAB National Awards for Best Published Accounts & Reports’. As the table shows, 12 companies from the non-financial sector have won the award since its inception in 2001. One important point to note is that except for one company (Singer Bangladesh Ltd.), no company has won first prize in two consecutive years, suggesting that companies compete for the awards. Competition is likely to be stronger among larger companies, since they can devote greater resources to implementing costly governance structures to improve their governance practices, and to disclosing those practices.

CONCLUSIONS

Prior literature suggests that a number of domestic and external forces influence CG reform, which tends to evolve over a prolonged period of time, often in response to corporate failures or other systemic crises. As the political and socio-economic environments differ across countries, factors driving CG reform are also likely to differ from one country to another, setting a platform for a new line of research: which factors influence CG reform in a country in general, and the contents of the country’s CG standards in particular. I address these questions by examining the relevant CG reforms in an emerging country, Bangladesh. This article also examines how country-level developments affect firm-level governance practices.

As in some other countries, most companies in Bangladesh are either family controlled or controlled by one or a few substantial shareholders, paving the way for the interests of minority shareholders to be expropriated by corporate insiders. Weak investor protection has resulted in a less-developed capital market, and weak insider trading legislation and enforcement would have been associated with a higher cost of capital. Recognition of these outcomes has contributed to a number of CG reforms, such as the introduction of guidelines and laws to strengthen internal governance, protect and empower minority shareholders, enhance disclosure requirements, and monitor corporate behaviour and enforce the law.

A number of steps have been taken since the early 1990s, mostly with support from the IFAs, but according to key observers there is scope for further improvement. One area for attention is monitoring and public enforcement, since many contraventions are believed to remain undetected and unpunished, as pointed out by different studies and the WB reports. The importance of further CG reform has been highlighted by the WB requiring improvement in CG in order to secure the continuity of financial assistance from the IFAs.

In this article, I have examined the drivers of the CG guidelines issued in 2006 which are an important outcome of CG reform initiatives. Consistent with prior literature, I have focused on the roles of both domestic and external forces. Consistent with the relatively undeveloped state of the Bangladesh capital market, I find that factors such as globalization, opening up of financial markets and foreign institutional investors have not played as significant a role as the IFAs. Since CG is one of the development goals of the IFAs, their supportive actions and communications have contributed to a number of CG reforms, including the development of the 2006 CG guidelines in Bangladesh. Domestic players such as the BEI, the ICAB, the MCCI, and experience from other countries, have influenced the guidelines too.

I have also examined whether both external and domestic forces are drivers of CG reform. In so doing, I have followed an approach similar to Hermes et al (2006) and used information from the WB country study report of 2009. The results show that out of the 63 applicable indicators of good governance, covering six broad CG principles of OECD, 13 indicators are broadly implemented (20.64 per cent), 45 are partly implemented (71.43 per cent), five are not in place (7.93 per cent) and none is fully implemented (0 per cent). Using a self-constructed weighting scheme, the total compliance score is found to be 71 out of a possible maximum of 189. I interpret my analysis as providing some support for the notion that apart from external forces, domestic forces do affect the nature of CG reform in an emerging market.

Finally, I have examined how country-level development affects firm-level governance practices. Using information disclosed in companies’ annual reports in relation to compliance with the SECB CG guidelines, I find evidence of an increasing trend in the overall level of compliance, from 62 per cent in 2005–2006 to 85 per cent in 2008–2009. Thus there is evidence that companies in Bangladesh are gradually changing their CG practices, based on compliance with the national guidelines. However, closer examination suggests that many companies are complying only in letters not in its true spirit, suggesting that enforcement of CG guidelines should be in place to increase its effectiveness.

I have also examined the influence of other voluntary national and regional developments on firms’ CG practices. In this respect, I have considered the selection criteria of three professional institutions (ICAB, ICMAB and SAFA) in relation to their annual awards for the best published annual reports. The results show that except for one company, no company has won first prize in the ICAB’s national award in two consecutive years. I interpret this result as evidence that the introduction of the annual corporate awards has motivated companies to improve their governance practices.

This article is not intended to provide a comprehensive study of why CG reforms diverge from the principles identified by the OECD. Future research could explore whether and to what extent domestic forces do indeed determine CG reforms, and if so, which country-level forces have greatest influence. In this connection, there is a growing literature focusing on whether an Anglo-Saxon governance model, as promoted by the IFAs, adequately captures the political and socio-economic environments within which firms operate. Future research might also focus on that line of enquiry.

Imam and Malik (2007) report that the top 3, top 5 and top 10 shareholders in Bangladesh own on average 32.33 per cent, 36.96 per cent and 41.06 per cent of shares in listed public limited companies, respectively. They note that these top shareholders are mostly members of controlling families.

Through Notification No. SEC/CMRRCD/2006-158/Admin/02-08, dated 20 February 2006.

The proposed amendment to the Corporate Governance Guidelines in Bangladesh suggests that at least one-third of the board should be independent directors ( BSEC, 2012 ).

Apart from the Credit Rating Companies Rules, 1996, the SECB’s Asset Backed Security Issue Rules of 2004 require a credit rating report for asset pools to be securitized. In addition, Bangladesh Bank (the Central Bank of Bangladesh) requires annual mandatory credit ratings of all commercial banks and non-banking financial institutions in addition to mandatory credit ratings during an initial public offering (BRPD (Banking Regulation and Policy Department) Circular No. 18, dated 11 December 2005). Similarly, the Office of the Chief Controller of Insurance requires a mandatory rating on part of general insurance companies on an annual basis and for life insurance companies on a biennial basis (circular No: 21/21/98-376 dated 12 March 2007).

Pattern of shareholdings includes shareholdings by the parent/subsidiary/associated companies and other related parties, and name-wise details of shares held by directors, the CEO, company secretary, Chief Financial Officer, Head of Internal Audit and their immediate family members, the other top five salaried executives, and holders of at least 10 per cent ownership in the company.

The World Bank (2005) required the Bangladesh Government to present to Parliament by June 2005 a ‘Financial Reporting Act’, including provision for an independent oversight body named ‘Financial Reporting Council’ (FRC). The council is expected to monitor how auditors are conducting their professional duties ( Byron, 2005 ). More than 6 years have passed but the Act is still to come into effect. This is a clear example of the administrative bureaucracy that is likely to hamper effective monitoring and enforcement in Bangladesh. After the stock market crash of 2010-2011, the Government again expressed its intention to formulate the ‘Financial Reporting Act’ to make qualitative improvement in accounting and auditing disclosures by listed companies ( Chowdhury, 2011 ). There has been disagreement, however, as to whether the FRC is necessary ( Kabir, 2006 ).

Consistent with Rosser (1999) , Haque et al (2011) note that the dominant section of ‘politico-bureaucrats’ of the developing countries, with their access and authority to allocate resources, tends to oppose or slow down accounting reform measures out of the fear that increased transparency and accountability could limit their rent-seeking opportunities in state-owned enterprises and from private conglomerates with which they are connected.

In the mid-1990s, these IFAs began to look at good governance as a condition necessary for development of countries and suggested their member nations adopt CG best practices in both country-and firm-levels ( Collier and Zaman, 2005 ; Aguilera and Cuervo-Cazurra, 2009 ). In many cases, the codes issued by these IFAs, particularly the one by the OECD, serve as the basis for the creation of codes of governance in individual countries.

On 22 July 1988, ADB approved a technical assistance (TA) grant of $430 000 to study capital markets in selected developing member countries, including Bangladesh. The study report laid the foundation for future loans on programmes like the Capital Market Development Program (CMDP) in 1997.

The Dhaka Stock Exchange (DSE) all share price index rose to 3627.018 on 15 November 1996 starting from 859.88 on 31 May 1996, that is, a 322 per cent increase in 168 days. Afterwards, the index fell to 957.48 on 30 April 1997, a 279 per cent decrease in 166 days. The decline continued and the index reached 472.6497 on 22 December 1999. The Economist (1997) stated that at the time of the boom, an estimated 300 000 small investors rallied the market and subsequently ‘thousands of small and first-time investors have lost their shirts’ ( The Economist, 1997 , p. 70).

Persons interviewed were the representatives of the Ministry of Finance (MOF), Bangladesh Bank, SECB, two exchanges, Department of Insurance (DOI), Privatization Commission, Investment Corporation of Bangladesh (ICB), ICAB, and other financial institutions and market observers ( ADB, 2005a ).

The estimated cost of the programme was $690 000 and the understanding was that ADB would finance $550 000 (as a loan) and the remainder would be financed by the Bangladesh Government. The programme was approved by ADB on 12 December 2003.

The Chairman of SECB spoke in the workshop ( ADB, 2007 ), which indicates its importance.

Under the CGSP, BEI conducted an opinion survey to examine the awareness and practice of CG among the business community from December 2004 to January 2005 and published the study report titled ‘Baseline Study on Corporate Governance Practices in Bangladesh’ ( Rahman and Rahman, 2005 ).

By being a part of the South Asian Federation of Accountants (SAFA) Corporate Governance Group, ICAB also was involved in the development of the ‘Best Practices on Corporate Governance for South Asian Countries’ of December 2005.

Order No. SEC/CMRRCD/2006-158/Admin/02-06.

From personal communication, I came to know that the meeting took place on 8 February 2006.

The SECB Chairman’s comment to the press that recent worldwide developments on corporate governance practices and non-availability of any guideline in the country prompted the capital market watchdog to take initiatives for preparing a set of guidelines ( The Daily Star, 2006 ) supports this view.

The assessment criteria used in classifying the level of observance into one of the five categories are: ‘Principles are Fully Implemented if the OECD Principle is fully implemented in all material respects with respect to all of the applicable Essential Criteria. Where the Essential Criteria refer to standards (that is, practices that should be required, encouraged or, conversely, prohibited or discouraged), all material aspects of the standards are present. Where the Essential Criteria refer to corporate governance practices, the relevant practices are widespread. Where the Essential Criteria refer to enforcement mechanisms, there are adequate, effective enforcement mechanisms. Where the Essential Criteria refer to remedies, there are adequate, effective and accessible remedies. A Broadly Implemented assessment is likely appropriate where one or more of the applicable Essential Criteria are less than fully implemented in all material respects. A Partly Implemented assessment is appropriate when (1) one or more core elements of the standards described in a minority of the applicable Essential Criteria are missing, but the other applicable Essential Criteria are fully or broadly implemented in all material respects (including those aspects of the Essential Criteria relating to corporate governance practices, enforcement mechanisms and remedies); and (2) the core elements of the standards described in all of the applicable Essential Criteria are present, but incentives and/or disciplinary forces are not operating effectively to encourage at least a significant minority of market participants to adopt the recommended practices; or the core elements of the standards described in all of the applicable Essential Criteria are present, but implementation levels are low because some or all of the standards are new, it is too early to expect high levels of implementation and it appears that the reason for low implementation levels is the newness of the standards (rather than other factors, such as low incentives to adopt the standards). A Not Implemented assessment likely is appropriate where there are major shortcomings’ ( World Bank, 2009 , p. 19).

Other CG guidelines conditions are not required to be supported by additional disclosures, hence they are omitted.

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Acknowledgements

The author would like to thank Emeritus Professor Philip Brown of the Western Australia and an anonymous reviewer for their helpful comments on the earlier version of this article.

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Biswas, P. Corporate governance reforms in emerging countries: A case study of Bangladesh. Int J Discl Gov 12 , 1–28 (2015). https://doi.org/10.1057/jdg.2013.31

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DOI : https://doi.org/10.1057/jdg.2013.31

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Corporate Governance Guidelines in Bangladesh: Some Observations

This paper discusses the likely impact of the revised Corporate Governance guidelines issued by the Securities and Exchange Commission (SEC) in Bangladesh on 3 July 2012. In so doing, it critically examines the changes made in the current guidelines from the one issued on 20 February 2006. It is found that a number of key changes are made in the guidelines, particularly in the areas of independent director requirement, board's statements, CEO and CFO certification on financial statements, subsidiary company governance, and reporting and compliance of corporate governance. However, the guidelines could be further improved, for example, by including provisions to ensure true independence of the board and its committees, minimum educational and professional service requirement for non-independent directors, and annual assessment of the board members. The lack of flexibility in the revised guidelines is likely to pose challenges to the listed firms when implementing the guidelines fully. On part of market regulators, the key challenge will be to ensure enforcement of the regulation.

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Report on Corporate Governance Researches in Bangladesh

Executive Summary

We prepared the report on “Corporate Governance Researches in Bangladesh” fully based on secondary data and information. The study has been conducted mainly on the basis of literature survey and secondary information. For this specific purpose we collected data and information from various sources like published materials such as Various journals and research papers, conference papers presented in the international conference on CG in Bangladesh, seminar papers, World Bank reports, diagnostic study reports and newspaper articles have been surveyed in making this study. We furnished the full contents of the report in Four chapters. We concentrated on arranging and putting the data in such a way that the report progressively anchors to a desired destination of understanding. In the very first chapter we point out the information about the report. That is its origin, objective, data collection and presentation. It will facilitate the understanding what the report is for and how it is designed. As we prepared the report on “Corporate Governance Researches in Bangladesh”, we think a brief discussion about the Corporate Governance with a full effort to clear the term -definition of corporate governance, Views of corporate governance in mainstream research, the importance of corporate governance for transition economies will enhance the understanding of the report. With this view in the mind, through out the chapter two we highlight on the above matters. In chapter three, we focused mainly on the Corporate Governance Scenario of Bangladesh in the light of some Scholarly articles. There has been some work done in the area of corporate governance by the World Bank and ADB in Bangladesh, but overall there is a lack of material on corporate governance issues in Bangladesh. Some discussion regarding specific aspects of corporate governance has been undertaken by organizations like Centre for Policy Dialogue (CPD), Institute of Chartered Accountants (ICAB), and the Institute of Bank Management (BIBM). The brief summaries of the major articles and studies relating to CG are presented here The summaries explain the authors’ major points that relate to corporate governance. The chapter four is the concluding part of the report. It covers the Problems and findings of corporate governance in Bangladesh & conclusion drawn on the basis of data presented earlier.

Introduction

Corporate Governance is the system by which business corporations are directed and controlled. Its structure specifies the distribution of rights and responsibilities among company’s different actors such as board, management, share holders and other stake holders. Transparency and accountability are its major attributes. Beyond this there is a growing recognition that a good Corporate Governance system actively adds value to the long run. Viewed in this context, Corporate Governance is the enhancement of the long term shareholders value while at the same time protecting the interest of other stake holders.

The frame work for Corporate Governance deals mainly with executive and non executive directors, separation of CEO from chairmanship, rights of all shareholders including minority, accountability forwards stake holders, internal control to deal with risk, director’s remuneration to deal with shirking behavior and statement of going concern. It can be interpreted as a broad and somewhat vague term for a range of corporate controls and accountability mechanisms designed to meet the corporate objectives. This paper will focus on the above Corporate Governance issue with special reference to the corporate governance research in Bangladesh.

1.2. Rationale of the Study During the last three decades of the last century, there has been occurred a significant changes and improvements in the corporate world. Because of the expansion and diversion of most of the companies into public limited companies, an emergence of the separation of ownership and management was obvious. So professional expertise were needed to manage and operate the giant organizations so that shareholders wealth can be maximized. Ownership was diverged into sponsors, government, institutions, foreign investors and general public. As there so many stakeholders are related to the corporate body, it became a complicated matter to run the corporations. Agency problem began to exist. As a result, corporate governance emerged to help the corporations perform in the desired way. Firm’s performance is influenced by corporate governance and ownership structure. A significant number of research papers have been published on the topic ‘Corporate Governance’ in which most of the authors have considered some actors of corporate governance. Moreover, still now there have been very few formal and recognized studies on the concerned issue. So, it is a burning issue today to work on the topic. For this reason, there is much rationale to find out the existing scenario corporate governance in Bangladesh.

1.3 Objectives of the Study The objectives of the study are To provide an understanding of corporate governance, To provide an analysis of corporate governance environment in Bangladesh. To present the hindrance in having good corporate governance and To understand the corporate governance culture in the corporate sector in Bangladesh. To analysis the various corporate governance issues.

1.4 Methodology of the Study The study has been conducted mainly on the basis of literature survey and secondary information. Various journals and research papers, conference papers presented in the international conference on CG in Bangladesh, seminar papers, World Bank reports, diagnostic study reports and newspaper articles have been surveyed in making this study.

1.5 Limitations of the Study There were several constraints while performing this report. The following are the limitation of the study: The study is conducted under limited time allowed. Only few weeks were not sufficient time to visit all the related area of corporate governance. There is a significant difference between theoretical concept and practical field. Insufficiency of necessary information and data. Chapter -2 Literature Review

2.1 Definition of Corporate governance Corporate governance has received wide attention in recent years both in practical and in academic research. But there is a disagreement about the boundaries of the subject of corporate governance. Depending on their perspective, different authors define corporate governance in different ways.

Dr. Dhiman chowdhury, professor of Accounting & Information Systems, University of Dhaka, defined Corporate Governance in such way, “Corporate Governance is probably a control mechanism used for efficient utilization of corporate resources. It can be defined as an organizational control device, which is a hybrid of internal and external control mechanisms with view to achieving efficient utilization of Corporate Resources. In his on going research he is trying to prove that Corporate Governance is a network among various corporate players such as shareholders, managers, suppliers and consumers for increasing the value of the firm. He always tries to emphasize on the fact “Equitable Distribution of resources and reducing agency problem” in respect of Corporate Governance. Corporate governance is defined by the mainstream accounting and finance literature as “the range of control mechanisms that protect and enhance the interests of shareholders of business enterprises” (Fama & Jensen, 1983). There is a focus in this line of research on the structure and functioning of boards of directors audit committees of such boards (Rosen & Wyailt, 1990, Shleifer & Vishny, 1997). Cohen and Hanno (2000) using the Public Oversight Board’s (POB 1993) perspective, defined corporate governance as “those oversight activities undertaken by the board of directors and audit committee to ensure the integrity of the financial reporting process”. This view of governance focus on the control environment and control activities (Committee of Sponsoring Organizations of the Tread way Commission (COSO) 1992; POB. In its narrowest sense, corporate governance can be viewed as a set of arrangements internal to the corporation that define the relationship between the owners and managers of the corporation. An example is the definition by Monks and Minow (2001): corporate governance is the relationship among various participants in determining the direction and performance of corporations. The primary participants are (1) the shareholders, (2) the management, and (3) the board of directors.” The World Bank defined corporate governance from the two different perspectives. From the standpoint of a corporation, the emphasis is put on the relations between the owners, management board and other stakeholders (the employees, customers, suppliers, investors and communities). Major significance in corporate governance is given to the board of directors and its ability to attain long-term sustained value by balancing these interests. From a public policy perspective, corporate governance refers to providing for the survival, growth and development of the company and at the same time its accountability in the exercise of power and control over companies. The role of public policy is to discipline companies and, at the same time, to stimulate them to minimize differences between private and social interests. (World Bank, 1999). The OECD (1999) original definition is “Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.” The OECD also offers a broader definition: “…corporate governance refers to the private and public institutions, including laws, regulations and accepted business practices, which together govern the relationship, in a market economy, between corporate managers and entrepreneurs (‘corporate insiders’) on one hand, and those who invest resources in corporations, on the other.” (OECD, 2001) According to some experts “Corporate Governance means doing everything better, to improve relations between companies and their shareholders; to improve the quality of outside Directors; to encourage people to think long-term; to ensure that information needs of all stakeholders are met and to ensure that executive management is monitored properly in the interest of shareholders.” An article published in the June 21, 1999 issue of the Financial Times quoted J. dolfensohn, President, World Bank as saying that “Corporate Governance is about promoting corporate fairness, transparency and accountability” According to some economists, Corporate Governance is a field in economics that investigates how corporations can be made more efficient by the use of institutional structures such as contracts, organizational designs and legislation. This is often limited to the question of shareholder value i.e. how the corporate owners can motivate and/or secure that the corporate managers will deliver a competitive rate of return. In order to understand the problem of corporate governance it is most important to stress that it is dependent on the political system of any country and the country’s historical and cultural characteristics. To summarize, we can say that a precise definition of corporate governance does not exist, even in developed market economies. Moreover, scholars have not, to date, given sufficient attention to providing a policy-oriented definition suitable for the transition countries and their ongoing fundamental structural reform.

2.2 Views of corporate governance in mainstream research Cohen et al. (2000) point out that prior research in accounting, finance and management has presented a number of diverse views of corporate governance. The first view, which is broadly held in accounting and finance, relies on agency theory ( Beatty & Zajac, 1994; Bathala & Rao, 1995; Core et a!, 1999). This view of corporate governance assumes that managers act from self interest, even if this is detrimental to share holders. Within agency theory, the concept of corporate governance is focused primarily on designing contractual mechanisms to control self-interested managerial behavior. Central to the agency theory perspective that those performing the monitoring function (members of the board of directors) should be independent from those being monitored (management). Hence, the most desirable attributes for board members under the agency theory perspective are independence from management and expertise in monitoring and control (Cohen et al., 2000).

A second view of corporate governance, drown from the management literature, is the resource dependence perspective. Within this view, management is viewed as relying on the board of directors for access to scarce information and other resources as well as help in determining the strategic direction of the company (Williamson, 1999). Under the resources dependence perspective, the primary role of the board of directors Shifts from being a monitor, as in the agency perspective to acting collaboratively with managers to set policies and strategies. The board of directors concentrates on identifying new products, markets and technologies, and helping management execute the strategic plans (Boyd, 1990). Hence, the most valuable attributes of a board member under the resource dependence perspective are industry expertise, knowledge, and the ability to provide access to external resources (Cohen et a!., 2000).

A third view of corporate governance focuses on managerial domination. In contrast to the agency and resource dependence perspectives, the hegemonic perspective views corporate governance as an unavoidable annoyance. Corporate governance mechanisms are viewed as being ineffective at monitoring and largely symbolic in terms of oversight of management. In effect, senior management selects friends and colleagues to be members of the board rather than choosing independent minded directors (Batton and Baker, 1987). The board members are passive participants in the governance process and are dependent on the company’s management for information about the firm and its industry (Wolfson, 1984). Pursuant to the hegemonic perspective the board’s functions are limited to ratifying management’s actions, satisfying regulatory requirements, and increasing senior management’s compensation (Core et. al., 1999).

It should be noted that each of these views of corporate governance involves only two groups, that is, the management of the company and the board of directors. Shareholders are not included in these views, even though it is presumably for the benefit of shareholders that corporate governance takes place. Other stakeholders and society as a whole are absent from these theories. Moreover, auditors are not mentioned as playing a significant role in corporate governance.

Corporate governance came to the center of the international development agenda following the East Asian financial crisis. Increased privatization and financial market liberalization also contributed to increased scrutiny of corporate behavior, management and policies. Governance of the banking sector has received particular attention due to the sector’s enormous influence on developing economies, especially where stock markets are underdeveloped. Recent, high profile corporate failures have brought renewed focus on the importance of good corporate governance, and have broadened interest in the topic to a broader audience. The resulting international debate has shown that underlying principles of fairness, transparency, accountability and responsibility reflect minimum standards necessary to provide legitimacy to the corporate sector, reduce financial crisis vulnerability, and broaden and deepen access to capital.

2.3 The importance of corporate governance for transition economies like Bangladesh Strong governance has long been considered crucial for enhancing the long term value of stakeholders in the business environment. In the new technology driven information age, strong corporate governance is more than good business practice. Recent demand from investors and others for greater accountability from corporate boards and audit committees will likely further enhance the quality of managerial stewardship and eventually lead to more efficient capital markets.

In transition economies like Bangladesh development of positive corporate governance through the adjustment of corporate control mechanisms is really a complicated task due to the underdeveloped institutional infrastructure, complex corporate ownership between the state and financial sectors, weak legal and judicial systems and scarce human resources capabilities.

The recent experience of countries in transition shows that the assumption that a strong system of corporate governance will appear automatically as a result of ownership transformation is unrealistic. Even in developed market economies, differences in the ownership structure and level of concentration or dispersion of owners influence the selection and adjustment of corporate control mechanisms. For the countries in transition, the problem of good corporate governance development becomes more complicated due to the underdeveloped institutional infrastructure. For this reason there is a need for a careful approach to governance restructuring so that a private sector can be formed, powerful enough to realize successful economic transformations towards a market economy.

The importance of sound corporate governance for transition economies can be explained through its four main influences: (1) creation of the key institution, the private corporation, which drives the successful economic transformation to a market based economy, (2) effective allocation of capital and development of financial markets, (3) attracting foreign investment and (4) making a contribution to the process of national development (Babic, 2000).

1) The development of corporate governance demands the establishment of certain market economy institutions necessary for economic growth. Without good corporate governance, corporations cannot fulfill their main missions of profit-making and contributing to the social welfare with maximum effectiveness. Companies cannot operate successfully without adequate rules of governance and the institutions that support them, or without the acceptance of a culture of corporate governance among managers, owners and other stakeholders. Well-developed corporate governance requires that all relevant actors recognize and understand their roles. Managers understand their roles of agents when they are compared to owners, but they run companies as if they were their property, satisfying own interest to the detriment of owners and the company as a whole. Corporate governance requires coherent and strict legal regulations which implies an urgent mission for the makers of economic policies of countries in transition. Furthermore, it is important to provide for systems to recruit, train and reward professional managers who can be held to / high standards of competency, ethics, and responsibility.

2) Corporate governance is directly related to financing and investments. Making managers disciplined by means of corporate governance mechanisms results in an efficient allocation of resources. For countries in transition it is doubly important: the scarcity of domestic savings demands that capital be directed towards the most profitable companies, which is possible only if principles of corporate governance are given publicity, transparency and monitoring. We can conclude that good corporate governance is an important factor for the functioning of a financial market, which leads to efficient allocation of financial resources and is the key to economic growth. The efficient financial market itself should promote better practice of corporate governance, reinforcing market discipline for corporate managers.

3) To attract long-term capital, any country must follow clear standards of corporate governance at the international level. Corporations use basic principles for good corporate governance is a relevant factor for investment decisions as well. It is especially important when we talk about direct investments, which are of the greatest benefit to countries in transition because they mean not only capital, but the transfer of skills, technology and know how as well.

4) Corporate governance is of great importance for national development because for overcoming barriers to achieving sustained productivity growth, such as the actions of vested interest groups. In the financial sector, attention must also be given to measures to strengthen the banking sector and a country’s financial institutions as a whole. In the “real” sector, close attention must be given to competition policy and sector specific regulatory reform (OECD, 2001)

Chapter -3 Findings of the Study

Corporate Governance Scenario of Bangladesh in the light of some Scholarly articles There has been some work done in the area of corporate governance by the World Bank and ADB in Bangladesh, but overall there is a lack of material on corporate governance issues in Bangladesh. Some discussion regarding specific aspects of corporate governance has been undertaken by organizations like Centre for Policy Dialogue (CPD), Institute of Chartered Accountants (ICAB), and the Institute of Bank Management (BIBM). The brief summaries of the major articles and studies relating to CG are presented here The summaries explain the authors’ major points that relate to corporate governance.

3.1 Research taken from Academicians

1.“Knowledge Management”. Arifur Rahman Khan, Dewan Mahboob Hossain This study highlights the issue of “Knowledge Management” within the organizations through describing the several aspects of this concept. It also highlighted the issue of knowledge management as a burning question in today’s corporate world and how to evaluate the implementation of knowledge management. When raw and unorganized data are organized and given a proper shape for using in a particular purpose, it becomes an information to become a knowledge, all these data and information should be mind with instruction and experience of the human resource of the organization. Knowledge management is a combination of many disciplines from human resources and personal development to corporate re-ingenuring and information technology. According to Stephens, “Knowledge Management is getting the right knowledge to the right people at the right time to serve the right objectives.” The article also identifies the tools for knowledge management and highlights the technical aspects of knowledge management. Knowledge management is a complex process that must be supported by a strong foundation of enablers of knowledge management the process usually involves the following stages in the use of knowledge: 1. Creation of knowledge goals. 2. Knowledge identification. 3. Collection of knowledge. 4. Organization of knowledge. 5. Sharing of knowledge. 6. Adoption of knowledge. 7. Knowledge use. Stephens identified four tools for knowledge management- a. Recruitment b. Re-organization c. Training d. Leadership. As the process of knowledge management involves sharing and gathering of knowledge, the use of technology is an integral part of this concept. Information technology is considered as a valuable enabler of knowledge management. Common technologies used now a days in modern organizations are- a) Internet b) Intranet c) Date warehousing/ Mining) d) Document Management system e) Decision support systems f) Group ware g) Extract h) Artificial Intelligence. This article also identifies the characteristics required in an organizational climate in order to implement knowledge management and the barriers in implementing the knowledge. The appropriate accomplishment of knowledge management is an organization is an extensive task. The executives in the organization should identify and invest in the elements of organizational knowledge that drive innovation and more new products and severer swiftly through the commercialization. The following by factors are the key factors for the success of a company: 1) Mapping knowledge management directly to the business strategy and supporting it clearly with technology strategy. 2) Developing process for continuously linking major decisions with the knowledge management system. 3) Getting senior management’s commitment 4) Building an intelligence system by first focusing on a few intelligence topics and achieving short term target. 5) Establishing legal and ethical guidelines for intelligence activity. People’s mindset in an organization can be a big barrier for proper knowledge management. Through the use of information technology plays a vital role in knowledge management, it is the people who have to implement it. As not all people have the some level of expertise in the field of technology, over emphasis on technology may prove to be an obstacle for knowledge management. Executives may full that there may be an information overload for the employees if they are exposed to too much information. Sharing knowledge may be difficult to implement in everyday organizational practice. There may be no space for reflection, bearing or knowledge transfer. As knowledge management is a mammoth process and it has a huge impact on several aspects of an organizations affairs, it is very difficulty to measure the effect of implementation of knowledge management. Knowledge management involves connecting people with people as well as people with information. It is a management philosophy that combines in purposeful information management with a culture of organizational learning in order to improve the business performance. It should be the task of the organizational leaders to create and the environment in the organization for managing the knowledge. Without an efficient use of human knowledge, an organization cannot get a competitive advantage in the market. So, it can be easily said that the corporate world would give a better importance if this issue in near future.

2. Development of Accounting and Auditing Standards in Bangladesh, lAS 18: Revenue Recognition. Prof. Santi Narayan Ghosh, Institute of Chartered Accountants of Bangladesh The report explains various theoretical views on the definition of revenue, the measurement of revenue, the recognition of revenue and the timing of revenues. Revenue must be recognized in the period in which the major economic activity leading to revenue creation takes place. Furthermore, the exchange value of revenue must be measurable, the value of revenue be verified by a market transaction, and revenue should be recognized concurrently with the related expenses. In addition, the business’ value- adding activity should be substantially complete when revenue is recognized. There are various methods of matching the timing of revenue with value-adding activity. Depending on the type of product and the terms of sale, the identification of substantial completion can vary; revenue can be recognized at the time of production, completion, sale, cash collection, or some combination of those points in time. The theoretical summary of revenue recognition provides the background for the specific application of lAS l8. The author further details the accounting treatment of revenue under LAS 18, providing specific examples of how various transactions would be treated under lAS 18. Identification of transactions under lAS 18 and revenue measurement is explained. The article details lAS treatment of some specific revenue activities, including real estate sales, sale of services, franchise fees, interest, royalties, and dividends. Finally, the article mentions the disclosure requirements for lAS 18: an enterprise complying with lAS 18 must disclose the accounting policies used for revenue recognition and the method used to determine the stage of completion. Furthermore, an enterprise must provide the categories of revenue arising from the various activities of the enterprise. The author states that Bangladesh companies do not provide such disclosures.

3. Corporate Governance: Bangladesh Perspective Mamtaz Uddin Ahmed, Professor, Department Of AIS. Mohammad Abu Yusuf. Former Lecturer Of AIS This paper provides a conceptual framework of corporate governance (CG) along with an analysis of CG scenario in Bangladesh. Various factors including poor legal enforcement, discretionary powers of the corporate top management, overriding regulatory provisions, lack of standard practice in financial reporting and auditing, and absence of strong pressure groups have caused the weak CG in Bangladesh. The paper suggests some policy recommendations to improve and assure good corporate governance in Bangladesh. In this paper, fundamental of corporate governance (CG) and various elements of corporate governance in Bangladesh have been discussed. The discussion includes the legal framework, ownership structure, shareholding and protection of minority shareholders. Board of Division and the role of capital markets and the Securities and exchange Commission (SEC) incorporation governance, accounting and auditing standards. The paper argues that weak enforcement of the regulatory framework, lack of well-functioning board, lack of clarity in the company law, lack of guidelines on International Accounting Standards on Auditing (BSAs), poor quality of audit reports, lack of board committees and weak pressure groups are the underlying reasons for weak corporate governance in Bangladesh. The discussion has been followed by some recommendation to ensure good corporate governance in Bangladesh. Corporate governance is seen as a means of improving efficiency in the economy. I emirates from a set of relationships, imposed through separation of ownership from managers. In this regard, Sir Adrian Cadbury perfectly said, “corporate governance is considered withholding balance between economic and social goals and between individual and community goals. The governance framework is required to encourage the efficient use of resources and equality to ensure accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society”. (Cadbury, 2003). Corporate governance has become a top priority for the regulatory bodies with the objective of providing better and effective protection to all stakeholders and also to make the market confident as research reveals a positive correlation between corporate governance and share prices (Ahmad, 2004). Corporate governance practices in Bangladesh are quite absent in most companies and organizations. In fact, Bangladesh has lagged behind its neighbors and the global economy in corporate governance (Gillibrand, 2004). One reason for this absence of Corporate Governance is that most companies are family oriented. Moreover, motivation to disclose information and improve governance practices by companies is felt negatively. There is neither any value judgment nor any consequences for corporate governance practices. The current system in Bangladesh does not provide sufficient legal, institutional and economic motivation for stakeholders to encourage and enforce corporate governance practices. There has been failure in most of the constituents of corporate governance. Finally government cannot legislate the personal integrity of key players (Walker, 2003). And no amount of legislation can substitute trust, faith and confidence necessary for good corporate governance practice (Chaudhury, 2004). But as the lead regulatory body overseeing corporate accounting and reporting, the SEC has a critical role to ensure that public company boards are properly structured and organized and have the resources to accomplish the objectives of adding value to shareholders, minimize risk of key shareholders and hold management responsible for corporate results 9Walker, 2003). Ruthless monitoring of compliance and severe punishment of transgressors can ensure good corporate governance (Chaudhury, 2004). But Bangladesh has to wait a lot to ensure enforcement of any corrective measures properly. If the policymakers implement the recommendations suggested above, undoubtedly a good CG environment will prevail in Bangladesh.

4. Implementation of international Accounting Standard (lAS) in Banks and Financial institutions A Step Towards Sound Governance System Dr. Sujit Saha, Professor, and Md. Saidur Ralunan, Assistant Professor, BIBM This report discusses the financial disclosure practices of banks and financial institutions before adoption of IAS-30 mid the disclosure requirements now that JAS-30 has been adopted. Prior to the adoption of IAS-30, the Bank Companies Act, 1991 governed financial disclosures of banks and financial institutions. Compared to international standards, the requirements were lax; for example, provisions for loan losses (specifically for bad/doubtful debt and generally for unclassified loans) ‘were not required. If a loan loss provision was made, it was not counted against profit and loss. hi addition. the reporting of capital adequacy was insufficient. The report includes further detail about reporting requirements before the adoption of IAS-30. After encouragement from the World Bank, IMF, and other international donor agencies, the Bangladesh Bank directed banks and financial institutions to comply with the requirements of IAS-30.IAS-30 introduced a number of improvements in disclosure, which are detailed in the report, but will only be briefly summarized here. There are three major, new disclosure requirements in the Profit and Loss Account. First, categories of income and expenses must be disclosed separately. For instance, interest income, investment income, and dividend income must be shown. Second, a specific loss provision for individually classified bad and doubtful debts and a general provision for potential, but not specifically classified, loans must be identified in the Profit and Loss Account, the notes should provide details on the movement in provision for losses throughout the year. Third, it requires that unrealized losses on securities investments be shown in an investment loss provision account. However, unrealized gains may not be shown in the financial statements. With regard to Balance Sheet reporting, assets (loans, advances, and investments) must be shown by category. Categories should include: type of asset, maturity, geographic location (domestic or international), borrower, and classification (substandard, doubtful, etc.). IAS-30 also requires disclosure of secured and unsecured liabilities and the type of security provided. Under the new requirements, banks must prepare a cash flow statement, which was previously not required. Banks and financial institutions will also have to prepare a statement showing changes in Equity Finally, in addition to the financial statements required, detailed notes to the financial statements will be necessary. Compliance with IAS-30 is a key step in improving the reputation of banks and financial institutions, both domestically and internationally. The new requirements will begin to reveal the true state of affairs to stakeholders and hopefully motivate management to make improvements. The author believes that “the positive results would come out only when the quality disclosure would take place instead of simple compliance with the lAS-prescribed formats”. To achieve this level of compliance, the author recommends that the Bangladesh Bank issue instructive circulars and develop a training module for bank personnel.

3.2 Research Published in The Bangladesh Accountant.

1. Annual Financial Statements of Banking Companies – Are Those Serving the Purpose? The Bangladesh Accountant, April-June 2000, Vol.29; No. 2. Khan Tariqul Islam, FCA In this article from The Bangladesh Accountant, the author explains the various elements of a bank’s financial statements, the importance of accurate financial statements, and the difficulties in implementing international accounting standards in the banking sector. Annual financial statements for banks include a balance sheet, profit and loss account, cash flow statement, and notes to the financial statements. The article explains the major elements of each financial statement, Of particular interest are the discussions regarding loan loss provisions and shareholders’ equity. A review of the guidelines for loan classification and provision, as established by Bangladesh Bank’s Circulars, is provided and the importance of accurate loan reporting is emphasized. The author states, “without true and fair reflection of loans the entire balance sheet of a bank can be misleading for its users and any banking company can be bankrupt overnight if its loans are not truly and fairly reflected in the balance sheet.” With respect to Shareholders’ Equity, the article points out that the present form of bank balance sheets make it difficult to identify and understand the amount of shareholders’ equity. The article underscores the importance of making bank financial statements properly reflect the true and fair financial position of the institution. The quality of information regarding banks is the cornerstone of the economy. If internal or external actors in the economy lack confidence in the banks, the whole financial system may collapse or transactions with international banks or companies may be limited. In fact, the author believes that the lack of international-level accounting and auditing standards is a major factor in the low level of foreign investment in the country. The major obstacle to improving the quality of bank financial statements, as identified by the article, is legal inconsistency between the Bank Company Act and the BAS. The implementation of BAS-30, which is equivalent to IAS-30 and governs the treatment of loans, would bring banks closer to international standards. However, BAS-30 is, in many cases, iii conflict with the Bank Company Act, 1991. Other instances of legal inconsistencies are also mentioned in the article.

2. Corporate Governance: The role of Accountants Wendy Werner The Bangladesh Accountant/ January-March 2003 This report focuses on the structures and institutions in place to support good corporate governance practices. A valid preliminary question is, therefore, why one should focus on corporate governance in Bangladesh. Although the motivations for improvement in corporate governance usually come from investors and the capital markets, these stakeholders are weak in Bangladesh and are unlikely to wield the influence necessary to change corporate practices. However, there are still compelling reasons for the corporate to encourage better corporate governance practices. First Bangladesh should strive to reach international standards with regard to corporate practices not only as a prerequisite to attracting international capital, but also to enhance the commercial reputation of the country generally. Second, good corporate governance practices can be an important tool in improving domestic economic efficiency, business management, and risk management, which will assist in the development of the private sector. Finally the corporate sector should strive to improve corporate governance as a way to prove corporate responsibility and attain the trust and support of the public. As the global markets have re-evaluated corporate governance practices in developed countries, the developing countries has gained momentum. This report originated from the fact that no systematic effort has been undertaken to develop and improve the quality of corporate governance in Bangladesh. This report seeks to focus on key areas that have been identified internationally as important to good corporate governance practices. The report doesn’t attempt to study every aspects of the economy on financial sector that may have some bearing on corporate governance, but instead focuses on the most important areas in which there is likelihood of seeing changes come about in the near future. In keeping with the OECD principles of corporate governance, five topics were the focuses of the diagnostic study: 1) The rights of shareholders. 2) The equitable treatment of shareholders. 3) The role of stakeholders in corporate governance. 4) Disclosure and transparency. 5) Responsibility of the Board. This report is a diagnostic tool from which a consensus can emerge regarding the way forward for corporate governance in Bangladesh. At this stage, only very board recommendation are provided, identifying institutions on sections that should be studied further. Specific recommendations will be framed in subsequent stages of this report. Further work should convert rate on the following areas to develop specific recommendations to reform: • Registrar of joint stock companies. • Securities and Exchange commission and the capital market scenario. • Institute of Chartered Accounts of Bangladesh to the auditing profession. • Adoption of International Accounting Standards. • Examining the requirements for and qualifications of directors, including independent directions. • Shareholders education and awareness of corporate governance. • Strengthening bombing practices and encouraging the including of corporate governance issues in credit analysis.

3. Corporate Governance: An issue for Financial Institutions in Bangladesh Corporate Governance is the major part in Bangladesh. Now a days corporate governance has been emerged as an important issue for financial institutions in Bangladesh. In most of the financial institution of Bangladesh, there is no employment contract, no agency relationship. So day by day agency cost in increasing. To reduce the corporate problem, corporate governance is now a major issue in financial institution. Performance of financial public or private are directly related to economic development and social progress. Any disruption in this area due to weak governance can cause misery and suffering to the people in general and poor in particular. As such corporate governance has become a critical issue closely related with the proper functioning of financial institution. Corporate governance means a decision making process which maximizes value for the shareholders in a fully transparent manner. For a group of people working in particular institution, CG is a culture and for an individual it is an mindset. The concept of corporate governance mainly focuses on transparency, accountability and fairness together with responsibility in making decisions for the institution. In order to develop the society as well as the country sustainable development of growth is necessary. Banks are playing a vital role in the financial sector. Corporate Governance build confidence and trust among the depositors, investors. In order to get best results in financial institutions particularly in bank corporate governance should include accurate information in time on management activities good business practices, proper accounting and central system and rigorous monitoring system. In corporate governance, the Board will balance the interest of the shareholders with other stakeholders such as customers, investors, suppliers and employees. There are three clearly defined areas in financial institution such as shareholders, Board of Directors and Management. Globalization of trade and commerce is also putting subtle pressure on local banks and other financial organizations to adopt corporate governance which in turn help tap international market and expand their business. IAS (International Auditing Standard) would help achieve quality in auditing to reflect greater accountability of corporate management and transparency of published financial information. In Bangladesh context, the application of IAS would not only benefit the investors but restore financial discipline through more objective disclosures. Finally, countries that fail to induce and implement corporate governance in financial institutions particularly in Banks will remain prove and susceptible to potential crisis and place their economy at significant disadvantage.

3.3 Research taken from ICAB

1. Moving to International Standards Anwaruddin Chowdhury, President ICAB This report reviews Bangladesh’s progress towards harmonization of fmancial reporting and auditing with international standards, as well as provides recommendations for future steps. The author sees accounting harmonization as a necessary step for Bangladesh to remain competitive in the face of globalization and to attract capital into the economy. The author explains some of the challenges involved in implementing and monitoring lAS and ISA in Bangladesh. Some of the primary limitations to compliance are: a lack of monitoring by regulatory agencies, the low level of compensation for auditors, and differences between financial and tax reporting where the ICAB adopted lAS requirements are at odds with the legal requirements in the Companies Act or the tax law. Furthermore, there is a lack of consistency between the standards required and enforced by the relevant regulatory agencies (SEC. Bangladesh Bank, etc.) and the standards adopted by profession organizations like ICAB. lAS and ISA adopted by the ICAB may be made legally enforceable through the relevant laws (Companies Act 1994, Securities Exchange Rules 1987, Bank Company Act 1991, etc.) and/or professionally enforceable through the application of Chartered Accountants Bye-laws 1973. In spite of the challenges, some positive steps have been taken. ICAB voted in 2001 to amend its Bye- laws so that compliance with adopted lAS and ISA is “professionally enforceable” for its members. In addition, effective April 1, 2000 Bangladesh Bank required that the financial statements of banking companies comply with IAS-30, which spells Out rules on non-performing loans, Both steps provide avenues to enforce compliance with lAS and ISA once they have been adopted for Bangladesh. The author makes a number of recommendations for further harmonization of accounting policies. Those of interest include: The Companies Act should be amended to require public companies comply with lAS and ISA as adopted by ICAB. In 1997, the SEC amended the Securities and Exchange Rules 1987 so that all listed companies must comply with the lAS that have been adopted by ICAB. However, a further amendment in 2000 changed the rules to bypass the ICAB adoption of lAS. The SEC and ICAB should have a forum for regular interaction to work towards proper implementation and monitoring of the adoption of lAS by companies. The SEC needs additional staff qualified to monitor companies at a level consistent with international standards. The report includes a survey of the financial reports of 36 listed companies and four foreign companies for compliance with lAS. The results show that, although there has been progress in ensuring harmonization of financial accounts in Bangladesh, there is still a significant degree of non-compliance with GAAP. Inventory cost basis, depreciation, accounting for leases, and earnings per share calculations were all areas in which the survey found financial statements did not comply with lAS and GAAP. At the time of the report, 31 lAS had been adopted 1w IASC for practice. The ICAB had adopted 21 lAS in their original versions and six more were approved by the Technical and Research Committee of ICAB, but not yet adopted by ICAB. (IASC often revises the standards after they have been issued, hence the appellation “original versions.”) ICAB is reviewing the revised versions of the adopted standards. With regards to auditing standards, the IAPC has issued more than 40 ISA, of which ICAB has adopted 22 in their original versions.

2. CPE Seminar on Microfinance – Governance and Reporting Parveen Mahmud, FCA, ICAB, November 6, 2001

The article explains the regulatory structure governing microfinance institutions (MFIs) and microfinance NGOs in Bangladesh. The Paili Karma-Sahayak (PKSF) is an agency set up by the Government of Bangladesh (GOB) to oversee MFIs and to provide subsidized loans to such organizations. The PKSF has policy and standards guidelines, which should be followed by MFIs. The guidelines relating to governance and financial accountability include: Standards for microfinance accounting Policy for loan classification and debt management reserve: Similar to banks arid financial institutions, MFI must classify their loans and account for loan loss provisions. Financial ratio analysis: Analysis of financial ratios covering portfolio quality, operating efficiency, and rates of return allow managers to identify strengths and weaknesses. Guidelines for Management Audit Guidelines for Internal Audit: The PKSF internal audit cell carries out management and financial audits of MFIis each year. Terms of Reference for an external auditor auditing PKSF Terms of Reference for an external auditor of PKSF auditing MFIs: When an external audit of PKSF takes place, the external auditor also audits the MFIs under PKSF’s purview. Terms of Reference for an external auditor auditing MFIs appointed by the MFI If an MFI deviates from the guidelines set by PKSF, the audit report should explain the nature of each deviation and management’s reasons for not complying. PKSF’s guidelines are not official accounting standards and therefore only serve as a source of assistance to an analyst looking at the accounts of an MFI. Furthermore, the article outlines the PKSF’s principles of good governance that discuss the composition and function of the MFIs boards of directors.

3. Corporate Governance for Transparency and Accountability The Bangladesh Accountant, April-June 2000, Vol.29; No.2 Jamal Uddin Ahmad, FCA and MA. Barec, FCA The authors summarize the principles and standards of corporate governance as agreed and put forth by OECD. Cadburv Committee (UK). and other international committees. The problems of implementing international corporate governance norms in Bangladesh arc then explored. Finally, the authors make some recommendations for reform of corporate governance in Bangladesh. The article identifies eight characteristics of the private sector in Bangladesh as the primary obstacles to good corporate governance in Bangladesh. They are: (1) boards and management tend to avoid disclosure; (2) closely-held family ownership leads to limited transparency and accountability; (3) bank finance is the primary source of financing; (4) a lack of independent directors and skilled audit committee members; (5) a weak regulatory framework and inefficient bureaucracy; (6) low audit fees for external auditors and a dearth of qualified internal auditors; (7) the absence of sufficient institutional investors; and (8) a lack of active minority shareholder groups. The article recommends three substantive actions be taken to improve corporate governance in Bangladesh. First, a “high powered committee” including members from government, regulatory agencies, companies, and ICAB should write a code for CG in Bangladesh. Second, amendments to existing laws should be adopted to enforce CG norms. Third, academic and professional institutions should include CG principles in their syllabi. In addition, the authors encourage institutional investors to exercise their influence and discourage nominee directors from the GOB and financial institutions. 3.4 Research taken from international Institutions

1. Bangladesh: Financial Accountability for Good Governance World Bank, 2002 This report primarily discusses the current state of public sector financial accountability and makes recommendations for reform and improvement. ft deals in depth with the problems of the Comptroller and Auditor General’s Office (CAG), internal audit, public accounts, parliamentary oversight, and public enterprises. It also contains a section on private sector accountants and auditors, which is of primary concern to corporate governance. The report finds a number of failings with the structure of the accounting profession in Bangladesh. First, the supply of accountants is low due to lack of adequate training facilities and lack of sufficient financial support for trainees. ICAB has concentrated on increasing the quality of training and strengthening requirements but the self-regulation of members of both professional institutes (ICAB and ICMAB) has been ineffective. There are three major recommendations for improvement of private sector accounting: Professional institutes (ICAB and ICMAB) should to prepare strategic plans to expand the output of professional accountants and auditors without sacrificing quality. The establishment of a sub-professional accounting qualification ICMAB should introduce a code of ethics, and both professional institutes should enforce their codes strictly. In general the report concludes that the most significant failing in financial accountability in Bangladesh is between national standards and national practices. “Laws and regulations exits, but are not enforced. At present there are few visible sanctions for wrongdoing.” Recommendations focus on creating a cohesive voice for reform by mobilizing support from beneficiaries of reform, including citizen groups. civil society, the business community, the donor community, and reform-minded government officials. However, as a starting point, the report recommends greater transparency of the public sector through public dissemination of data reports and information. This recommendation could just as easily apply to the corporate sector, where public disclosure is one of the cornerstones of good corporate governance.

2. Capacity Building of the Securities and Exchange Commission and Selected Capital Market Institutions (Asian Development Bank) November 2000 This document is a project document for a new technical assistance project being funded under the auspices of the Capital Market Development Program Loan of ADB. A related technical assistance project, which started in 1997 and was ongoing at the time of the report, focused on surveillance procedures for the SEC and other reform measures. In 1999, the GOB requested further assistance from the ADB to strengthen the Securities and Exchange Commission (SEC), this document details the objectives, scope. and budget of the technical assistance program (TA). The TA will focus on the SEC. the stock exchanges (CSE and DSE), and capital market participants. It will improve the SEC’s capacity to effectively regulate the markets and to audit listed companies. The TA will help CSE and DSE become more efficient in their function as a central securities depository. Finally, the TA will provide training for capital market participants. The focus will be on corporate governance, financial reporting, and compliance with international accounting and auditing standards. Some of the outputs detailed in the scope of the TA include: Proposed amendments to existing laws to improve corporate disclosure, corporate governance. and the protection of shareholders A corporate governance manual A shareholder tights manual A syllabus for CG training Guidelines for governance audits Corporate governance training sessions for listed companies Accounting and auditing training for personnel of listed companies SEC staff training on procedures for financial statement reporting and lAS/ISA compliance 3. Bangladesh Strategic Issues and Potential Response Initiatives in the Finance Sector: Banking Reform arid Development (BRD) Yawer Sayeed, AlMS of Bangladesh Limited for the Asian Development Bank, July 22, 2002 In this working draft report prepared for the Asian Development Bank, Mr. Sayeed describes the current banking environment and establishes a road map for future initiatives in banking reform and development. Major failures in the banking sector identified by the report are: (i) the level of non-performing assets; (ii) operating practices in state-owned commercial banks; (iii) ineffective oversight by the Bangladesh Bank; and (iv’) the legal and judicial framework for default loan recovery. Overall, the report questions the health of most banks in Bangladesh. The author states, “while there are sound banks, the banking sector as a whole is technically insolvent.” The primary symptom of the problem is a very high percentage of classified loans as a percentage of total outstanding loans. In 2001, classified loans comprised 31.3% of total outstanding bank deposits and 8.7% of GDP. A number of operational failings are at the root of this situation. Practices of particular concern are policy lending to loss-making state-owned enterprises, political patronage and directed lending, insider lending in private local banks, unproductive assets, and a pervasive culture of default by borrowers. The Bangladesh Bank, whose mandate is the oversight of the banks, does not fulfill its duties in this respect. “The Bangladesh Bank (BB) has questionable financial standing; its prudential regulations are lax arid enforcement quite ineffective.” Primary obstacles to improvement of the BB are the organizational structure, excessive union activity, and politicized appointments to the BB board and top senior management positions. Some upcoming policy measures may improve the situation. Amendments to the legislation governing the BB will increase its autonomy from the Ministry of Finance. Second, the government plans to remove treasury functions from the BB, leaving it with more resources to fulfill its regulatory and oversight functions. The BB is also concentrating on monitoring non-performing loans, advising bank management on loan recovery, and controlling insider lending. The final major problem identified is the lack of a legal and judicial framework for default loan recovery. Use of Money Loan Court or Bankruptcy Court by banks pursuing loan defaulters does not yield satisfactory results, particularly with respect to executing judgments against defaulters. Recent directives by the BB regarding rescheduling installment loans also have the effect of condoning delays in loan repayment. In short, the author suggests that reform of the banking sector must start with improved loan recovery practices and stronger regulatory oversight. Simultaneously, banks can be relieved of their non- performing loans by pooling them into a separate organization overseen by a private asset management company. In addition, fast-track privatization of the SOEs and SCBs is recommended. The final Recommendations for a future program to improve the financial sector include detailed goals, performance targets, monitoring mechanisms, and assumptions and risks. iii addition, the author makes suggestions for government policy initiatives and areas in which technical assistance will be required.

4. Bangladesh: Strategic Issues and Potential Response Initiatives in the Finance Sector: Integrated Financial Development (lED) Yawer Sayeed, AIMS of Bangladesh Limited for the Asian Development Bank, July 22, 2002 Prepared for the Asian Development Bank, this report identifies ways in which the capital market can be expanded to provide more options to enterprises and to decrease the economy’s vulnerability to economic shocks. The report includes a discussion of the current capital market environment, explaining the function of and problems with the Investment Corporation of Bangladesh (ICB), Bangladesh Shilpa Rin Sangstha, Jiban Bima Corporation, and Sadharan Biman Corporation. Since the current capital market is essentially equity oriented, the report primarily catalogues the impediments to the development of capital market instruments. The capital market outside the equity market in Bangladesh is very limited primarily because state-owned institutions are dominant. In addition, legal and practical obstacles make it difficult for private participants to compete with state-sponsored offerings. Current policies favor state-owned financial institutions. For instance, the state-owned financial institutions operate in the capital market under different rules than private players; for instance, the ICB mutual funds do not publish their net asset value or Submit performance reports, which is re which non-bank financial institutions have been active is in leased assets, but they could expand into asset securitization if the current Stamp Duty is reduced. The largest impediment to the development of a fixed income securities market is the high yield structure on government savings schemes; in comparison to the savings schemes, any private sector fixed income offering would not be competitive. The government recently reduced the rate paid on the savings schemes, which will likely encourage future corporate debt securities issuances. The Capital Market Development Program, funded by the ADB, worked to strengthen market regulation and supervision to development capital market infrastructure. The author maintains that the program is perceived by market participants as being regulatory-focused and has not had a direct effect on the market. Therefore, a future capital development program should focus on capacity-building in the private sector and removing impediments to new capital market products. Specific goals and recommendations for a future capital market development program are discussed.

4.1 Corporate governance in Bangladesh : An assessment Corporate governance practices in Bangladesh are quite missing in most companies and organizations. Moreover, incentive to reveal information and improve governance practices by companies is felt negatively. Weak legal framework is one problem in Bangladesh but compliance in the socio cultural interface is another. Motivation instead of obligation is what is required for corporate sector in Bangladesh to accept and adopt a corporate governance framework. The major weaknesses of corporate governance in ensuring good corporate governance are portrayed below:

Weak Pressure Group: Shareholders, investor associations, institutional investors and the financial press can play significant role in ensuring better corporate governance. Each of these potential pressure groups is weak in Bangladesh. Most shareholders have very little awareness about their rights and responsibilities. In most cases they are inactive in every cases. Public shareholders are not organized under a common platform to demand better corporate governance. Say in USA Call PERS (California Public Employees’ Retirement System). The Call PERS acted for various governance’s policies. In Bangladesh, the institutional shareholders have no common forum. In USA and UK, institutional shareholders are widely spreader among insurance companies, pension funds, banks and financial institutions and companies whereas in Bangladesh ICB is the main institutional shareholder. Some cases it is dysfunctional. Though ICB, as an institutional shareholder has the power to nominated one director from their own manpower but currently they cannot afford it for lack of manpower. So, the roles of ICB on those companies are very limited.

Absence of sufficient institutional investors: In Bangladesh ICB is the main institutional investor which hold on average 1 5% of Shares of the DSE listed companies where as in USA and UK, institutional shareholders hold about 65% of corporate resources. The shareholders in these countries are organized and they have common forum (like ISC, CII) from where they issue various guidelines about corporate governance.

Discrepancy between IAS Requirement and Actual Practice: The IAS has been adopted in its original form and subsequent amendments have not been incorporated in the BAS. This creates significant difference between IAS and BAS in material aspects.

Limited or No disclosure about related Party Transactions: Parties are considered to be related if one party has the ability to control the other party or exercise significant influences over the other party in marketing financial and operating decisions (IAS-24). In Bangladesh related party transactions is not disclosed properly in the financial statements.

Very limited transparency and accountability practice by the unlisted public Limited companies: Management structures of corporations in case of listed leading companies are mostly family based, exposed to limited transparency and accountability. But the unlisted public limited companies traded securities at OTC which is not under the area of control by SEC or other laws. Here corporate governance practice is rare to be found.

Capital Market role: The capital market of Bangladesh is still a weak link in the movement towards strengthening corporate governance. The overall performance measures offerings and unsteady valuations more on the declining side. The stock market scandals in 1 996 has seriously decrease investor confidence in the stock market. But only recently the effect of the shock started receding. Moreover, there are no bonds, fixed income or debt instruments in the groups for enforcing corporate governance principles

Bank finance rather than fresh securities issue: In some cases Bank finance is still regarded a better financing alternative by most of the companies since domestic bank do not care very much about good accounting. or other disclosure, whereas foreign banks are less interested in long term industrial financing. If no equity will issue then no shareholders and mgt. arrange finance from bank to maintain their domains on existing structure. So, some people retired from directorship and re-elected again and again. Functionalities of different Board Committees: Board committees (audit, remuneration and nomination and risk management committee) are very important for corporate governance. • Audit committee is now being treated as a principal player in ensuring good corporate governance and rebuilds public confidence in financial reporting. The role of audit committee among others are: monitoring integrity of financial statements, reviewing internal financial controls, recommending appointment of external auditor and reviewing auditors independence and objectivity and audit effectiveness. • Among the responsibilities of remuneration committee are establishment and review of the managing Director’s remuneration package and senior management salary packages. Remuneration committee assists the Board to attract, retain and motivate high caliber executives and directors through proposing remuneration that increase their performance. • Good corporate governance ensures the business is being soundly and effectively managed, with risks being properly assessed and controlled by the risk management committee. It encompasses planning and strategic development of the company day to day operations, knowledge of market and the business. Despite significant importance of the board committees, few boards (except for banks) have audit committee and almost none have remuneration or risk committee

Scenario of AGM & EGM: AGM are irregular which is a serious hampers good corporate governance practice. The scrutiny of minutes of annual general meetings showed that no shareholder raised the question about non—disclosure of directors remuneration in the company annual reports and accounts although the disclosure is a statutory requirement under the companies Act 1994 and the securities Exchange ordinance 1987. Most companies in Bangladesh are closely held. Small groups of shareholders own or control the majority of shares, and by using that majority, control the decision making processes of the companies. Here, minority interest sometimes ignored.

Board of Directors: In case of leading non-banking listed companies in our country, the board is heavily dominated by sponsor shareholders who generally belong to a single family. The boards are actively involved in management. The Chairman and the CEO should be separate and the responsibility should be clearly identified. But most often the same person holds the same post. Normally the most senior member of the family hold the two posts according to seniority in the family relationship and juniors are director. Most independent directors represent current or former, government officials or bureaucrats or sometimes university teachers who are skilled in the field of accounts and finance. They are appointed directors to assist company in getting licenses or as payback for previous favors when he was govt. officer. Very often they do not act as an advocate for minority shareholders.

Lack of knowledgeable Shareholders: The number of shareholders with sufficient knowledge and skills to understand company operations is very low. Moreover, general shareholders do not pay attention about the issues like performance, business strategy, future business plans, disclosures and processes that could give them a greater voice in the policy decisions of a company. In fact, there is very little awareness about shareholders rights and responsibilities.

Audit Independence is questionable: In our country auditors are not fully independent and sometimes they are less qualified to attest to the validity of the F/S of corporate entity.

Corporate governance practice within the organization and within the industry: Sometimes, people are recruiting ignoring the legal procedure, even the wage and remuneration structure are not always justified according to their competence, skills and responsibility or job attachment. Most family oriented business appoints relatives who have no skill. Sometimes, promotion is given avoiding profession codes and conducts. So, unskilled manpower operates the corporation which may sometimes lead low performance of the entire company. For example: Current turbulent situation by the labor in Garments Sector is the outcome of weak corporate governance practice within the firm. Their salary, promotion etc are not justified. 4.2 Conclusions At present the need for strengthening the corporate governance in Bangladesh arises with a global demand for a sound and transparent corporate world system. Corporate governance was viewed as the total system or control mechanisms, external or internal, that provided an effective means of good corporate behavioral process. This process ensures accountability of those who matter most in the process and maximizes the value for the shareholders in a fully transparent manner. Failure in institutions, legal enforcement and market behavior resulted in weak corporate governance in Bangladesh. A large number of companies listed in the stock exchange in Bangladesh pay inadequate attention to follow the ‘rules of businesses’ and full disclosure of information and demonstrate lack of corporate norms and responsibility. But this is hopeful that there is no serious scandal in respect of corporate governance in Bangladesh. It is seen that in many areas, system did not provide adequate incentives and motivations in terms of legal, institutional or economic, for the shareholders to encourage and enforce good corporate governance. As a result, they added, there were hardly any rewards for the companies that instituted good corporate governance practices and no penalties for failing to do so. Dhaka Stock Exchange is going to incorporate corporate governance principles in the list of the stock exchange to ensure a competitive atmosphere in the capital market. However, the Securities and Exchange Commission notified certain further conditions for the public listed companies with any stock exchange in Bangladesh, on mandatory basis, in order to improve corporate governance in the interest of investors and the capital market.

To conclude, government cannot legislate the personal integrity of key players and no amount of legislation can substitute trust, faith and confidence necessary for good corporate governance practice. But as the lead regulatory body overseeing corporate accounting and reporting, the SEC has a critical role to ensure that public company boards are properly structured and organized and have the resources to accomplish the objectives of adding value to shareholders, minimize risk of key shareholders and hold management responsible for corporate results. Ruthless monitoring of compliance and severe punishment of transgressors can ensure good corporate governance. But Bangladesh has to wait a lot to ensure enforcement of any corrective measures properly.

Internal Female Migration Towards Dhaka

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Governance in Bangladesh