Corporate governance in Bangladesh faces structural problems
Saturday, 23 January 2010
Md Salim Uddin
In Bangladesh, it was not statutorily required to report and disclose all the requisite information on corporate governance before the promulgation of SEC’s notification in February, 2006. But after promulgation of SEC notification it is now mandatory to report the status of corporate governance in line with set conditions imposed by SEC as to compliance and to explain the fact if it is otherwise by the listed companies in their annual report issued after the February, 2006. In this regard, it is interesting to examine the status of compliance of the corporate governance reporting requirements as prescribed by SEC by sample listed companies. For this reason first sample companies were categorised by industry type.
The highest compliance score is found in paper & printing sector at 97 per cent which consist of only one sample unit. It needs to be pointed out that this score misleads as to sector wise highest position occupied by this sector due to inclusion of only one unit. In sectoral analysis, the Table 02 revealed that NBFI’s has been seen in the highest position securing 96 per cent compliance score followed by Banking sector, food and allied sector, pharmaceuticals & chemicals, and textile sector obtained 90 per cent, 83 per cent, 78 per cent, 76 per cent compliance scores respectively and so on. On the other hand, IT sector is the lowest performer as regard compliance (66 per cent) with corporate governance reporting. The Table 02 shows that total complied conditions by all 95 sample companies is 2688 out of 3515 conditions (95x37) indicating the mean level of compliance with corporate governance reporting is 76 per cent. It implies that the sample companies on an average comply 76 per cent of the condition of corporate governance in their annual reports. It seems on the face to some extent satisfactory. But to have a clear idea a review of the compliance level of sample companies is important to understand the structure or pattern of compliance.
It is reported that the maximum, minimum and average score of 95 sample companies are 100 per cent, 51 per cent and 76 per cent respectively. The compliance indexes of 48 sample companies out of 95 sample companies are less them 80 per cent. The remaining 47 sample companies have a compliance indexes between 81 to 100 per cent. It implies that the level of compliance of about 50 per cent of the sample is unsatisfactory and needs more legislative enforcement by the regulator, SEC.
In 2006, the Securities and Exchange Commission imposed some very important conditions to be followed by listed securities with the purpose to develop a code of corporate governance in Bangladesh. This notification of corporate governance will be helpful for industrial sector and to increase confidence for attracting capital through stock market. The code is based on the principle “comply or explain’ which means that companies do not have to comply with the requirements of the code as long as they explain their reasons why they deviate. In this background, it was found that the 18 sample companies out of 95 or 19 per cent have complied with all the 37 conditions imposed by SEC and obtained 100 per cent compliance score.
It has been found that only 19 per cent sample companies comply with the SEC notification with proper explanation. It means greater number of samples fail to comply the set conditions and that the situation is unwarranted and painful as to the listed companies in Bangladesh. In this regard, the poor complied sample companies have been examined in the following section.
Most of the sample companies under poor compliance were reportedly not in a position to fulfill the conditions imposed by SEC in spite of their willingness due to time constraint and other reasons such as requiring amendment of articles of association for compliance with some conditions. During the measuring of compliance index, the following of sample companies have been identified as poor performer as regard compliance with corporate governance reporting in Bangladesh. It is observed that Tripti Industries Ltd, National Polymer Industries Ltd and Samata Leather Co. Ltd have secured lowest compliance score of 51 per cent and other 6 sample companies such as Olympic Industries Ltd., Tamijuddin Textile Mills Ltd, Beximco Knitting Ltd, Bengal Fine Ceramic Ltd, Standard Ceramic Industies Ltd and Shinepukur Holding Ltd have been awarded second lowest compliance score of 54 per cent.
Thirteen conditions out of 37 have been fully complied by all 95 sample companies under the study. The 13 full complied conditions are comparatively easy for compliance and most of these items are also required to comply by other regulations applicable to listed companies. Among the full complied conditions, fair presentation of financial statements, maintenance of books of account, application of accounting policy, continuation of going concern are traditional in nature. It is to be noted that the application of IAS, explanation of significant deviation in operating result, frequency of board meeting including attendance, shareholding patterns and the declaration as to non engagement of statutory / external auditors in some restricted services are the new development in the disclosure practices in Bangladesh. It is asserted that code of corporate governance can bring the company to the best practices of corporate management. Against this backdrop the list of fully complied conditions are set in the following table.
The conditions significantly compiled by number of listed sample companies ranging from 70 to 94 i.e. more than 70 per cent and less than 99 per cent sample companies which may be termed as highly compiled conditions. In this regard, the 09 (nine) conditions out of 37 conditions have been identified as highly complied conditions. Among the 9 conditions appointment of chief financial offices, internal auditor and company secretary, board’s size, and reasons for the no declaration of dividend have been complied by almost 80 sample companies out of 95 and rest six conditions complied by 81 to 94 sample companies.
Six most important and non-traditional information out of 37 concerning the reporting of corporate governance have been identified as moderately complied by number of the sample companies which fall between 48 to 67 out of 95 samples indicating 50 per cent to 69 per cent of total sample. It is found that reporting important events to board of directors, noncompliance of some rules and regulations and disclosure of audit committee’s findings are the major areas which fall under moderate compliance.
Annual reports of the sample companies have provided reasons or explanations regarding the noncompliance with corporate governance. After examining of the explanations, it is found that some of the reasons for the appointment of independent director and chairman and chief executive are reasonable and these companies are intending to comply then in future. However, some conditions like time constraint to amend articles, increasing number of director etc., not valid as the intention of the compliance in future are very uncertain. These reasons are not logical and tantamount to violation of codes of corporate governance as set by SEC in Bangladesh.
Corporate governance has been an active subject of academic and professional interest in many of the advanced countries, particularly the USA, UK, Germany and Japan. The international competitiveness and successful functioning of companies in these countries have, of late, alerted company owners and managers in the developing economies like Bangladesh to the fact that effective corporate governance is crucial for competitiveness and success in the long run.
The structure to ensure corporate governance includes the board of directors, top management, shareholders, creditors, and others. Role of each of these stakeholders is crucial in guaranteeing responsible corporate performance. In Bangladesh, several mechanisms of governance have formally been in place for quite a long time, but the issue of proper governance has assumed pertinence only recently.
The corporate governance in Bangladesh is still at evolutionary stage and faces some structural problems. In this context, it is worthwhile to mention that the main weaknesses for the proper functioning of the corporate governance in Bangladesh are:
(i) High degree of concentrated ownership of listed companies resulting in oppression of minority shareholders;
(ii) Separation of ownership and management control not clearly defined;
(iii) Insider control of company by chairman and or managing director or key managers;
(iv) Inability of directors to discharge their duties required by company law and securities law;
(v) Insider trading, non arms length transactions;
(vi) Lack of transparency and information disclosures;
(vii) Interference by regulatory/over seeing bodies in company management issues;
(viii) Inadequate legal framework for protection of minority shareholder;
(ix) Inadequate code of corporate governance promulgated by SEC in 2006.
In the above context, it is urgently needed to take proper steps by the regulatory and other relevant authorities focusing more on (i) the protection of shareholders’ rights; (ii) rights and responsibilities of board of directors and shareholders; (iii) quality of disclosure; (iv) monitoring; (v) effectiveness of the core management functions; (vi) use of international accounting and auditing standards mandatory; (vii) amendment of corporate and securities laws and regulations for incorporating noncomplied areas of corporate governance; (viii) financial sector participation as investors, issuers and intermediaries; and (ix) finally sustainable business environment with creative incentive structures.
From the foregoing discussion, it is suggested that the existing code of corporate governance needs to make adopting and disclosure compulsory to comply instead of retaining the provision of explanation for noncompliance so that the company take all prescribed codes seriously for implementation. (Concluded).
The writer is Associate Professor, Department of Accounting & Information Systems, University of Chittagong. He can be reached at e-mail: salimtahia@yahyoo.com
In Bangladesh, it was not statutorily required to report and disclose all the requisite information on corporate governance before the promulgation of SEC’s notification in February, 2006. But after promulgation of SEC notification it is now mandatory to report the status of corporate governance in line with set conditions imposed by SEC as to compliance and to explain the fact if it is otherwise by the listed companies in their annual report issued after the February, 2006. In this regard, it is interesting to examine the status of compliance of the corporate governance reporting requirements as prescribed by SEC by sample listed companies. For this reason first sample companies were categorised by industry type.
The highest compliance score is found in paper & printing sector at 97 per cent which consist of only one sample unit. It needs to be pointed out that this score misleads as to sector wise highest position occupied by this sector due to inclusion of only one unit. In sectoral analysis, the Table 02 revealed that NBFI’s has been seen in the highest position securing 96 per cent compliance score followed by Banking sector, food and allied sector, pharmaceuticals & chemicals, and textile sector obtained 90 per cent, 83 per cent, 78 per cent, 76 per cent compliance scores respectively and so on. On the other hand, IT sector is the lowest performer as regard compliance (66 per cent) with corporate governance reporting. The Table 02 shows that total complied conditions by all 95 sample companies is 2688 out of 3515 conditions (95x37) indicating the mean level of compliance with corporate governance reporting is 76 per cent. It implies that the sample companies on an average comply 76 per cent of the condition of corporate governance in their annual reports. It seems on the face to some extent satisfactory. But to have a clear idea a review of the compliance level of sample companies is important to understand the structure or pattern of compliance.
It is reported that the maximum, minimum and average score of 95 sample companies are 100 per cent, 51 per cent and 76 per cent respectively. The compliance indexes of 48 sample companies out of 95 sample companies are less them 80 per cent. The remaining 47 sample companies have a compliance indexes between 81 to 100 per cent. It implies that the level of compliance of about 50 per cent of the sample is unsatisfactory and needs more legislative enforcement by the regulator, SEC.
In 2006, the Securities and Exchange Commission imposed some very important conditions to be followed by listed securities with the purpose to develop a code of corporate governance in Bangladesh. This notification of corporate governance will be helpful for industrial sector and to increase confidence for attracting capital through stock market. The code is based on the principle “comply or explain’ which means that companies do not have to comply with the requirements of the code as long as they explain their reasons why they deviate. In this background, it was found that the 18 sample companies out of 95 or 19 per cent have complied with all the 37 conditions imposed by SEC and obtained 100 per cent compliance score.
It has been found that only 19 per cent sample companies comply with the SEC notification with proper explanation. It means greater number of samples fail to comply the set conditions and that the situation is unwarranted and painful as to the listed companies in Bangladesh. In this regard, the poor complied sample companies have been examined in the following section.
Most of the sample companies under poor compliance were reportedly not in a position to fulfill the conditions imposed by SEC in spite of their willingness due to time constraint and other reasons such as requiring amendment of articles of association for compliance with some conditions. During the measuring of compliance index, the following of sample companies have been identified as poor performer as regard compliance with corporate governance reporting in Bangladesh. It is observed that Tripti Industries Ltd, National Polymer Industries Ltd and Samata Leather Co. Ltd have secured lowest compliance score of 51 per cent and other 6 sample companies such as Olympic Industries Ltd., Tamijuddin Textile Mills Ltd, Beximco Knitting Ltd, Bengal Fine Ceramic Ltd, Standard Ceramic Industies Ltd and Shinepukur Holding Ltd have been awarded second lowest compliance score of 54 per cent.
Thirteen conditions out of 37 have been fully complied by all 95 sample companies under the study. The 13 full complied conditions are comparatively easy for compliance and most of these items are also required to comply by other regulations applicable to listed companies. Among the full complied conditions, fair presentation of financial statements, maintenance of books of account, application of accounting policy, continuation of going concern are traditional in nature. It is to be noted that the application of IAS, explanation of significant deviation in operating result, frequency of board meeting including attendance, shareholding patterns and the declaration as to non engagement of statutory / external auditors in some restricted services are the new development in the disclosure practices in Bangladesh. It is asserted that code of corporate governance can bring the company to the best practices of corporate management. Against this backdrop the list of fully complied conditions are set in the following table.
The conditions significantly compiled by number of listed sample companies ranging from 70 to 94 i.e. more than 70 per cent and less than 99 per cent sample companies which may be termed as highly compiled conditions. In this regard, the 09 (nine) conditions out of 37 conditions have been identified as highly complied conditions. Among the 9 conditions appointment of chief financial offices, internal auditor and company secretary, board’s size, and reasons for the no declaration of dividend have been complied by almost 80 sample companies out of 95 and rest six conditions complied by 81 to 94 sample companies.
Six most important and non-traditional information out of 37 concerning the reporting of corporate governance have been identified as moderately complied by number of the sample companies which fall between 48 to 67 out of 95 samples indicating 50 per cent to 69 per cent of total sample. It is found that reporting important events to board of directors, noncompliance of some rules and regulations and disclosure of audit committee’s findings are the major areas which fall under moderate compliance.
Annual reports of the sample companies have provided reasons or explanations regarding the noncompliance with corporate governance. After examining of the explanations, it is found that some of the reasons for the appointment of independent director and chairman and chief executive are reasonable and these companies are intending to comply then in future. However, some conditions like time constraint to amend articles, increasing number of director etc., not valid as the intention of the compliance in future are very uncertain. These reasons are not logical and tantamount to violation of codes of corporate governance as set by SEC in Bangladesh.
Corporate governance has been an active subject of academic and professional interest in many of the advanced countries, particularly the USA, UK, Germany and Japan. The international competitiveness and successful functioning of companies in these countries have, of late, alerted company owners and managers in the developing economies like Bangladesh to the fact that effective corporate governance is crucial for competitiveness and success in the long run.
The structure to ensure corporate governance includes the board of directors, top management, shareholders, creditors, and others. Role of each of these stakeholders is crucial in guaranteeing responsible corporate performance. In Bangladesh, several mechanisms of governance have formally been in place for quite a long time, but the issue of proper governance has assumed pertinence only recently.
The corporate governance in Bangladesh is still at evolutionary stage and faces some structural problems. In this context, it is worthwhile to mention that the main weaknesses for the proper functioning of the corporate governance in Bangladesh are:
(i) High degree of concentrated ownership of listed companies resulting in oppression of minority shareholders;
(ii) Separation of ownership and management control not clearly defined;
(iii) Insider control of company by chairman and or managing director or key managers;
(iv) Inability of directors to discharge their duties required by company law and securities law;
(v) Insider trading, non arms length transactions;
(vi) Lack of transparency and information disclosures;
(vii) Interference by regulatory/over seeing bodies in company management issues;
(viii) Inadequate legal framework for protection of minority shareholder;
(ix) Inadequate code of corporate governance promulgated by SEC in 2006.
In the above context, it is urgently needed to take proper steps by the regulatory and other relevant authorities focusing more on (i) the protection of shareholders’ rights; (ii) rights and responsibilities of board of directors and shareholders; (iii) quality of disclosure; (iv) monitoring; (v) effectiveness of the core management functions; (vi) use of international accounting and auditing standards mandatory; (vii) amendment of corporate and securities laws and regulations for incorporating noncomplied areas of corporate governance; (viii) financial sector participation as investors, issuers and intermediaries; and (ix) finally sustainable business environment with creative incentive structures.
From the foregoing discussion, it is suggested that the existing code of corporate governance needs to make adopting and disclosure compulsory to comply instead of retaining the provision of explanation for noncompliance so that the company take all prescribed codes seriously for implementation. (Concluded).
The writer is Associate Professor, Department of Accounting & Information Systems, University of Chittagong. He can be reached at e-mail: salimtahia@yahyoo.com