Media reports on corporate financial scandals are frequent. Some of the recent financial scandals in the banking sector including the financing of Hallmark and Bismillah Groups were talk of the country until recently. Desperate loan disbursements by different banks including the BASIC Bank and former Oriental bank are other examples of banking scandals. Similar scandals may lead the banking sector to a point of serious threat unless corporate governance is strengthened.
Apart from the banking sector, many corporate entities raised funds from the capital market and then presented themselves as losing concerns after manipulating the funds and paying off the bank loans and other liabilities. This is another type of financial malpractice by listed companies. Sometimes, a corporate establishment--listed or unlisted--finds it hard to survive without some kind of deliberate manipulation, which may be termed corporate failure. Such companies, not very often reported in the media, fail to achieve sustainable business and collapse ultimately. If the case for each scandal or corporate failure is studied, the principal issue that comes to the fore is lack of good corporate governance. The media highlight the facts behind the scandals including the sequential criminal activities associated with these scandals but do not pinpoint the root cause and thus play an active role to strengthen the corporate governance process.
If a scandal or corporate failure is reviewed, a definite lack of good corporate governance arising from either a defective framework of corporate governance or non-compliance of the policies of the framework is found. Five elements of corporate governance, such as, (i) good Board practices, (ii) effective control process, (iii) transparent disclosures, (iv) well-defined rights of the shareholders and (v) the Board's commitment to ensure effective corporate governance practice, often escape the attention of the media. Four pillars on which the five elements stand are: (i) accountability (ii) fairness (iii) transparency and (iv) responsibilities. As per principles of corporate governance practice, the Board will be accountable to all stakeholders to ensure fair and transparent operation and presentation.
The biggest challenge before corporate governance is adoption of corporate governance principles in the organisation by the board. This aspect is looked upon by most boards as less important for operation and a burden for cost of compliance involved. The board may want instant profit instead of sustainable business model with a firewall of sustainable corporate governance practice. Corporate governance provides a seasoned business structure and model that can absorb the financial risks in the event of shocks, stress and a period of profound structural changes. So, the directors need to be aware of the necessity of corporate governance for a sustainable business model.
The media can highlight the message why and how the corporate governance practice can be beneficial for business as well as the stakeholders. People follow the media and may have enough knowledge about the importance of corporate governance. Thus media can play a powerful role in strengthening the corporate governance practice in a company in addition to state governance.
In our banking sector, the recent scandals took place because of two weak components of corporate governance, namely, lack of well-structured Board and good practice and lack of effective internal control system. The Banking Companies Act, 1991 and corporate governance guidelines of the Bangladesh Securities and Exchange Commission (BSEC) and the Bangladesh Bank provide the framework for board structure including appointment of independent director, deposit holder director, disclosures requirement, the role of Audit Committee, Chief Executive Officer and Chief Financial Officer (CFO) etc.
The appointment of directors including independent or deposit-holder directors has been merely a legal compliance by the banks rather than any benefit from the services of these directors. In most cases, the independent director and deposit-holder directors cannot work independently to protect the public interest. In addition, there is no committee to evaluate the capability of a director and nominate someone as a board member to the annual general meeting for approval by the members. The role of audit committee to resolve issues contained in a report may be questionable in respect of adequacy and appropriateness. In compliance with guidelines, they can work proactively to find out the risk areas and provide solution and an effective internal control process.
The audit committee, as part of the board, can assess the internal control and risk management systems of the bank to find out the loopholes and repair those with a view to ensuring effective internal control systems to prevent any manipulation or fraudulent transactions. The framework under the guidelines exists on paper only and does not work effectively in most cases. The table of compliance report under the BSEC guidelines has been a tick box, and the report on compliance issued by outside professionals has been a formality of signature on the template rather than reviewing the corporate governance process.
The media can project these issues to highlight proper banking practices through reports and programmes. TV programmes can be aired under a project sponsored by the media or development partners, regulators, business houses and the government.
Unlisted companies do not care about complying with laws and regulations. They do not care for institutionalising their companies with a sound policy framework to compete in the market in any adverse or stress situation. An organisation lacking good corporate governance practices fails to survive. As the guidelines issued by the BSEC are applicable for listed companies, the unlisted companies do not come under the purview of these guidelines and as such, they cannot also adopt the guidelines overnight when they get listed.
Therefore, there should be a separate set of guidelines of corporate governance for them so that they can acclimatise themselves with an updated version of those for corporate governance meant for the listed companies.
The listed companies are seen raising capital from the capital market and collapsing operationally due to lack of proper corporate governance. Some of them deliberately embezzle the money of the investors showing operational loss as stated earlier. But they are not taken to task or awarded any punishment for violation of law of the land as well as banking laws. The state governance fails to hold them responsible. Corporate governance can never be enforced effectively keeping lax state governance. Some people take advantage of laxity in state governance by political or unethical means. In spite of laxity in state governance, the good corporate governance structure and practice help preserve the interests and trust of the common people to a reasonable extent.
The media can focus on the reasons for corporate failure and financial scandals for both listed and unlisted companies to make the board, regulators and general investors aware of the importance of corporate governance for sustainable business and industrialisation.
The writer is an Associate Member of ICAB and Head of Finance of Venture Investment Partners Bangladesh Ltd. (VIPB). roy_dipok@yahoo.com
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