The role of nonexecutive directors (independent directors) in corporate and public sector governance has received wide recognition around the world. Independent nonexecutive director is the brain of the board; he is called an idea man and therefore is very important for good governance. Any adverse selection can be very damaging for the organisation.
In Bangladesh, independent directors in corporate boards are employed without any advertisement in the public media. Same is the case with the appointment of independent members in the governing bodies of public sector organisations. This is a serious lapse in governance both in corporate and public sector.
ADVERTISEMENT IS A BASIC REQUIREMENT: Advertisement in newspapers is a basic requirement for any appointment and in most of the places it is a legal requirement. This is the first condition for a competitive market. Advertisements specify clearly the requirements for applicants, like academic qualifications, experiences, duties and responsibilities, duration, and remuneration or fee if any. There is a provision for short listing. The selection board then chooses the best candidate or candidates. There is also a system of a search committee. Some private universities in Bangladesh have already started practising this system. Qualified persons have the opportunities to prove their worth. This is called a merit-based society which is an essential precondition for good governance.
In UK, all appointments are done through advertisements in newspapers and international magazines. This is true both for private and public sectors - and both for executive and nonexecutive (independent) positions. Advertisements for corporate sector independent directors are available in the Financial Times and advertisements for public sector independent directors are available in The Economist. Even for small and medium enterprises, there are daily advertisements for nonexecutives. They work 3 (three) to 4 (four) days a month, their remuneration is around BPS12000 to 15000 plus travel allowance. They are mostly qualified accounts. These are usually technology and knowledge-based organisations. These nonexecutives are hired like consultants and advisers. However, nonexecutives in these organisations and independent nonexecutives in large organisations are not the same thing. In the former case nonexecutives are skill- and expertise-based and they are retired persons who serve small businesses where there is no agency relation and agency problem (owners and managers are the same persons). They particularly focus on specific business issues and they may not be members of the board. But in large companies where there is agency problem (owners and managers are different persons), the need for nonexecutives is wider. They are the majority of the corporate board. They do not serve specific purpose rather they are hired in the board for advising the management for good governance of the whole company.
BANGLADESH SITUATION: In Bangladesh, nominations for independent directorships in the corporate sector mainly come from inside the firms and those nominated are within their networks. In other words, the independent directors are known or connected either to the board members, chief executive officer (CEO) or major shareholders. They are either family members or relatives or friends of the CEO or the chairman or big shareholders. In the public sector banks, state-owned enterprises (SOEs) and utilities, the nomination comes from the government political party. There is no practice of search committee or public advertisement for selecting nonexecutives both in the private and public sectors. This raises the questions of independence and transparency of the selection process. Hence, it would be very difficult for independent directors to perform a monitoring role. This network restricts merit-based recruitment. This is one of the reasons for bad name in governance.
Strategic and nationally important organisations like the Investment Corporation of Bangladesh (ICB), Bangladesh Securities and Exchange Commission (BSEC), and all government banks have appointed their Chairman (a nonexecutive director) without any advertisement in the daily newspapers. This is one of the reasons why these organisations have performed miserably. The same is the practice for appointing nonexecutive directors in all government banks. There is neither a search committee nor any public advertisement. The bank loan default, particularly in the public sector, has turned into a national crisis.
Independence of nonexecutive directors is an important requirement according to both national and international corporate governance codes. Bangladesh Securities and Exchange Commission corporate governance code, Cadbury Committee (UK) corporate governance code and all corporate governance codes around the world require that the potential candidates must not be related to management and must not have any business relation with the company where they are appointed as nonexecutive directors. Nonexecutive directors in our large companies are either secretaries of various ministries, executives in government organisations or professionals, particularly chartered accountants. Although many of the nonexecutives in our companies have expertise, they are not independent in the sense that they have positional power. Companies want 'real life and real business experience'. But this is one thing, independence is another.
A practical (professional) nonexecutive will look particularly for the shareholders' interest like profit and wealth maximisation. But companies have other stakeholders like employees, government and society at large. An independent nonexecutive, in addition to owners' interest, will have to look for right amount of taxes given to the government, a good balance of executive and workers' remuneration, and environment-friendly company practices. This vast task and social responsibility is hard to expect from a professional only. High intellect, independence from management and owners, and some exposure to global knowledge and culture is also necessary for this task.
The corporate sector also does not follow a competitive public advertisement policy or a search committee for hiring nonexecutive directors (advisers). Companies (for example, Aftab Automobiles) have chartered accountants as independent directors but the problem is that they are partners of chartered accounting firms who do audit and consultancy work for various companies. Thus there are possibilities of conflict of interest between the company and the auditor directors. A particular company has one director, who is a retired MD of Pubali Bank and another one who is a retired civil servant. Another company has two business personalities and one retired secretary of the ministry of information and rural development as directors. One noticeable trend is that the chairman who is the largest shareholder of a company takes nonexecutives from his own profession; for example, the chairman is a chartered accountant and his nonexecutive is also a chartered accountant. In another case, the owner is an engineer and his company has two engineer nonexecutives, one of whom was a government servant. A reputed company also has the same affiliation: both the chairman (businessman and owner) and the nonexecutive were affiliated with the Aga Khan National Council. This is the general trend in the corporate world which needs to be changed for establishing good governance.
Adam Smith in his Theory of Moral Sentiments (1759) argued for nonexecutive advisers to be impartial spectators. Thomas Nagel (1986) suggested in his The View from Nowhere: The objectivity of observations must be a position-dependent characteristic - not a "view from within", but one "from a delineated somethere".
Dr Dhiman Chowdhury is Professor of Accounting at the University of Dhaka
dhiman_chowdhury@yahoo.com