Corporate governance in Bangladesh: A close view

Dewan Muktadir-Al-Mukit Today wealth of the firms is no longer of the property of general shareholders but of management and firm itself. Due to the lack of long-term relationship of shareholders with firms, management and corporate insiders have become sole corporate decision-makers. This ultimately leads to misappropriation of owners' wealth. To ensure that management is working for the best interest of owners and for the firm rather than own interest, several mechanisms have been introduced among which corporate governance is one of them. Shareholders always want high returns on their investments, while management of public companies want good remuneration with minimal outside intervention. Corporate governance deals with this divergence of interest between them, spelling out how to resolve this problem through providing incentives to management to act in the best interests of the owners. Corporate governance is the set of processes and policies, way by which a firm is directed and controlled in the best interest of shareholders and alignment is made between different stakeholders' interests. Besides the Company Act-1994, the Securities and Exchange Commission (SEC) Ordinance-1969, Bank Com-panies Act-1991, Financial Institutions Act-1993, SEC Act-1993, Bankruptcy Act-1997, Insurance Act-2010, the guideline issued by SEC in 2006 govern corporate entities in Bangladesh. Later, Bangladesh Bank issued another corporate governance guideline for the banking companies only. Problems toward stabilising of the good corporate governance system: Some observations; After analysing the report of the SEC, it is found that during January to September 2010, a total of 22 companies failed to submit the audited financial statements, 23 companies failed to comply with securities-related laws regarding audited financial statements, six companies are alleged for non-compliance of securities law regarding audited financial statements, 19 companies failed to comply with securities-related others laws, 15 companies failed to submit the half-yearly financial statements, one company is charged for not reflecting accurate and transparent information in the audited financial statements. At the same time three Chartered Accountant Firms were identified for failure to comply with securities'-related laws regarding audited financial statements of the issuers. And the SEC has also taken punishment against total 47 stock broker stock dealers and authorised representatives (AR) for violation of different laws. [Source of analysing data -- SEC Quarterly Review: Jan-March, April-June and July-September 2010] From the recent reports on the stock market crash, we find massive irregularity, violation of corporate governance and breach of ethics by different parties. Exceeding capital market investment exposure limit by commercial banks, insider trading transactions on the basis of undisclosed price sensitive information, planned malpractice of some of the directors of the listed companies regarding companies' shares and capital issues, failure of regulator and unethical activities of some SEC members, excessive speculative transaction (prohibited) by brokerages houses, higher issue price coming through initial public offering (IPO) and book building by manipulating data in prospectus, a prior understanding among the issuer company and some of the institutional investors participating in the road shows for price discovery etc., are the major causes of recent capital market volatility which could be protected ensuring effective corporate governance system. There must have some loopholes in the system for which reasons companies can violate the laws which is the hinder to establish good corporate governance. In Bangladesh, one of the worst scenarios in case of corporate governance is the annual general meeting (AGM). The AGM is the primary platform where shareholders can raise their concerns and it is only the communication way where they can pressure the management towards attaining good governance. Company Act states that the duration between two AGM must not be more than 15 months. But here we see a number of cases where the duration is violated several times. A number of companies are sent to Z category just for not complying with AGM issue. Here another problem exists of lacking of shareholders activism in corporate matter. Such shareholders do not possess significant level of education, understanding of company matters and they also do not know what their rights in company are and how to exercise them. They are more concerned about appreciation of share price rather than company performance. Our investors are motivated by capital gain, through frequent buying and selling of shares, instead of enjoying yearly dividend. For this reason they have very short term relationship with companies. We see strong family relationship exists in company shareholding. In one of his article Dr A A Mahboob Uddin Chowdhury shows that in Bangladesh 72.5 per cent of the outstanding shares are owned by householdssponsors. According to him, the governance structure of public limited companies is also responsible for the weak condition in that these companies prefer to keep ownership holdings within the family connections [Portfolio, Jan-March,2006]. A number of lacking can be found regarding board of directors issue. There are still many companies in Bangladesh where the Chairman and Chief Executive Officer (CEO) is the same individual for which most of the decisions are passed for the favour of corporate insiders rather than general investors. Again, many companies do not follow the ideal size of the board. Most of the corporate directors do not know their legal responsibilities and therefore do not carry out their duties with sufficient diligence. There are currently no professional qualification requirements or prerequisite training for directors. Independent director cannot perform independently. There is hardly any company where we can find more than one independent director. Moreover, there is no detailed provision regarding the quality of independent director under the Companies Act. Recently we see a number of cases where loan is sanctioned by ChairmanCEO without approval of board. In our country, there are several examples of accounting data manipulation. In 2009, Bextex Limited, a concern of Beximco Group, declared dividend at 10 per cent of the revaluation reserve of its asset for the year 2008. This raised a controversy over whether a company could declare dividend of revaluation reserve, according to the Company Act, 1994. Because asset revaluation can be shown in the capital reserve of a company, but it can't be disbursed as dividends as long as it remains as unrealised gain. This is still a kind of unresolved issue. From another recent report, we see that Bangladesh Bank audit team found massive irregularities and corruption in providing Tk 2.5 billion (Tk 255 crore) loans by the state-owned Bangladesh Small Industries and Commerce Bank, also known as BASIC Bank. The report said that the bank did not follow Bangladesh Bank rules and proper banking norms for sanctioning, approval and disbursement of loans between 2004 and 2010. If we see the financial statements of many companies, then we can find a lack of disclosure notes and details of transaction. For example, entries can be found in many financial statements like "other income" or "other expense". But there are no details of such income or expense sources! One of the reasons of such manipulation is inconsistency between different act and rules. We have seen that Mobil Jamuna Lubricants and MI Cement had issued share at a very high premium in the market. They have been allowed to list with exchanges with the condition that if their share price falls below their offer price within 30 days of trading, they must buy back their shares, which is prohibited by the Company Act-1994, Sec-58. It states that no public company can buy back its own share. But the SEC has given such buy back permission as SEC Ordinnace-1969[Sec-2CC] permits the commission to impose any condition if it thinks it fit whether before or after commencement, in spite of the provisions of company law. So, here we see divergence of opinion between laws. In our country, for the preparation of financial statements different accounting standards are followed rather a unified one. An audit firm is not out of question. Sometimes it is found that audit firms have internal links with management. For this, they sometimes overlook the manipulation of accounting data. The recent case of Grameenphone (GP) for non paying Tk 30.34 billion fees according to Bangladesh Telecom Regulatory Commission (BTRC) demand on the ground of flawed audit and not following national and international standards by the audit firm, is a clear reflection of corporate governance problem. When talking then about corporate governance almost every time, we confine our views only to some selected issues like the structure or composition of the board and meeting, financial statement, auditing and reporting system, Shareholders expectation and internal management affair. So, our corporate governance system issue remains only within the ambit of shareholders and management-related issues. But we do not consider other parties here like government, local community, customers etc. But these are also parties to corporate governance as stakeholders. Government expects that company will pay tax regularly and properly. But tax evasion is a common scenario in our country. Many companies deliberately misrepresent or conceal the true state of their financial position to the tax authorities to reduce their tax liability through dishonest tax reporting. Another important side of corporate governance is responsibility toward society in which a firm is operating its business. Corporate social responsibility (CSR) is a management concept whereby companies integrate social and environmental concerns in their business operations. In Bangladesh, CSR practice is very poor. In most of the cases, few financial institutions and mobile companies are found to perform CSR activities. Again, sometimes it is found that CSR is just an eyewash by companies. While companies earn millions of takas as profits yearly, then contribute only few thousand takas to social activities. This is sometimes less than one per cent of total income earned by those firms. To get some media coverage and make goodwill, some firms are making such little contribution parading as CSR. Moreover, there is no specific guideline toward CSR activities and ways about its contribution. Finally, there is no proper awareness and initiative from government and respective parties to establish and monitor corporate governance system in our country. Companies don't feel urge to ensure corporate governance system too. Ensuring best practice of corporate governance: Some proposals: Ensuring good corporate governance is a key factor to achieve the improved performance of an organisation. It not only safeguards interests of all the stakeholders but also shapes the rules and procedures for making decisions on corporate affairs. Abraham Lincoln said: "When I do good, I feel good. When I do bad, I feel bad. And that's my religion." This should be the first dictum ensuring good corporate governance. Because the companies and management should realise the urgency of ensuring corporate governance first. In order to secure strong and sustainable corporate governance, it is important that corporations do good and healthy business practices. The companies should have an ideally sized board of directors. The members of the board of directors should be aware about their role and help formulate strategy, considering the expectations of all the stakeholders. More independent directors should be included in the board so that they can carry significant weight in the board's decision-making process. More specific guidelines should be formulated regarding the board of directors and the CEO. There should be details about the qualifications, roles and duties of directors. Employee Stock Ownership Plans (ESOPs) can be introduced for management and employee so that they can be enthusiastic to perform their respective job for the benefit of the owners. This ultimately will reduce the agency-conflict. The guideline, issued by the SEC, is only applicable for listed public limited companies. There should be corporate governance guideline for all the firms whether it is listed or not. Separate Corporate Governance monitoring committee can be formulated. Moreover, the SEC and the Bangladesh Bank should be more active about surveillance of maintaining corporate governance guidelines by companies. Besides, like external audit, an independent firm can be appointed to periodic monitor and to report matters about corporate governance of the companies. Corporate Social Responsibility (CSR) should be made mandatory for every firm-based on its income. There can be a certain range of investment amount, earmarked for CSR activities. For instance, If a firm's yearly profit range is between Tk 1.0 million to Tk 3.0 million, then it must distribute 2.0 per cent of total profit for CSR activities which can be incorporated in the financial statement in the following year. Shareholders should be provided proper knowledge about their rights, responsibilities and roles in the firms so that they can more actively participate in decision-making regarding improving and strengthening corporate governance of the companies. The general practice of the corporate structure which is dominated by family members and large blocks of shares hold by sponsors and directors, needs to be reduced to ensure accountability and transparency. The SEC and other regulatory institutions should be made free from political and government influence so that they can perform their duties independently without unnecessary intervention. Independent Audit Committee can be made compulsory for all companies. Auditors need to follow a common accounting standard while preparing financial statements. Quality of financial reporting needs to be improved through effective enforcement of the accounting and auditing standards. Transparency of audit firms must be ensured. There are many reputed firms which depend on bank financing rather floating shares to raise money for investment and expansion of business. Or, it can be said that they are not interested to be listed in stock exchange. As listed companies are more obliged to ensure corporate governance, such firms may have intention to avoid listing with exchange. So, the pressure must be exerted on all prospective firms so that they float shares. This will ultimately help to boost the economy through ensuring corporate governance. Separate corporate governance law can be introduced. Moreover, it should be ensured that different exiting laws regarding financial institutions are properly enforced. All the laws need to be updated. Besides, consistency needs to be ensured between different laws so that divergence of opinions can be reduced. Effective corporate governance ensures that long-term strategic objectives and goals are established through proper management structure which strives to achieve those objectives while maintaining accountability and considering expectations of all stakeholders. Besides, development of the stock market depends on the good practices of corporate governance. This is positively correlated with economic growth of the country. We believe that all organisations must be structured in such a way so that they incorporates corporate governance practices in their operations while considering the interests of all stakeholders. The writer is with the Department of Finance, University of Dhaka. He can be reached at e-mail: shovon_8512@yahoo.com