As is practised all over the world, in most cases the securities and exchange commissions issue corporate governance guidelines for listed companies. Why? The reason is to ensure effective control on governance systems of listed companies for protecting public interest by strengthening by securities laws. The guidelines provide an additional ground to make any board, senior management or auditor more accountable with a view to ensuring transparent operation and reporting thereof to protect stakeholders' interest. In addition to the securities and exchange commissions, other regulators like central bank, regulator of insurance companies, etc. may issue separate codes of corporate governance to develop the governance systems of banks, insurance companies or member companies. These types of companies are publicly accountable and so are required to be more accountable to maintain, sustain and develop corporate governance systems for transparent operation and financial reporting accordingly.
The question is: who will ensure corporate governance systems for unlisted companies? Do not the unlisted companies i.e. unlisted public and private companies require corporate governance at all? In this case, the applicable provisions of the Companies Act for such types of companies will be the corporate governance framework. As the Companies Act does not especially focus on corporate governance and there is no active regulator to oversee their functioning, the unlisted companies become reluctant to be fully complaint with provisions in the Companies Act. When these unlisted companies go to the capital market, they cannot come out of the culture they created over the years by not complying with a good corporate governance system. A bad culture cannot be removed overnight even by enforcing any law or guidelines. If they could be legally bound to comply with the corporate governance systems by any specific provisions in the Companies Act, then they could be easily compliant with the Securities and Exchange Commission (SEC) guidelines, when listed.
The Institute of Directors and the European Confederation of Directors' Association jointly published a paper on "Corporate Governance Guidance and Principles for Unlisted Companies in the UK" in November 2010. Now it is time to think about it and introduce standard corporate governance systems for unlisted companies and thus ensure optimum use of resources before reaching the target, having access to capital and achieving sustainable development aiding industrialisation.
In accordance with the Cadbury (the Cadbury Report, UK 1992) and OECD (1999 and 2004) reports, the following points should be covered to make the Companies Act corporate governance-friendly: (i) Rights and equitable treatment of shareholders, (ii) Interests of other stakeholders, (iii) Role and responsibilities of any board, (iv) Integrity and ethical behaviour, and (v) Disclosure and transparency. Provisions covering the five above categories are there in the act. Yet, the act should have a separate focus on corporate governance and its principles for all types of companies by incorporating a chapter on it.
The reasons for why the Companies Act should especially focus on a corporate governance framework under a separate chapter are: (i) to have a national code of corporate governance, i.e., a general framework for all companies (the act should mention the aforesaid code and the code may be framed to provide a basic framework of rules), (ii) to have own corporate governance principles for each company in line with the national code and applicable provisions of the Companies Act, (iii) to put pressure on all companies for complying meticulously with provisions of the Companies Act alongside having own Corporate Governance Principles (CGP), (iv) to refer to other laws and regulators' power for framing special guidelines to ensure better compliance needed by the regulators, (v) to have a Corporate Governance Plan and its implementation like business plan, (vi) to make accountable boards of directors and different committees, senior management and external auditors, (vii) to ensure internal control systems including risk management, and finally (viii) to conduct the operation effectively and efficiently for transparent operation and reporting. So no way it has any alternative to focusing especially on the provisions on corporate governance, including internal control and risk management systems. By incorporating provisions in the Companies Act the implementation of corporate governance may be enforced effectively.
The recently-drafted Bangladesh Companies Act has no specific focus on corporate governance. The Indian Companies Act, already approved by Lok Sabha, pays no special attention to corporate governance as well. The Bangladeshi one is now under review by different quarters. Both the acts of Bangladesh and India are much more developed than the earlier ones and they can ensure better corporate governance, but separate sections or a chapter on the national codes of corporate governance, any company's own principles, implementation plan, internal control systems with risk management, monitoring and compliance etc. are missing, though it is needed to make the act a mandatory guide to corporate governance.
The Financial Reporting Council of the UK has issued corporate governance guidelines whereas in the USA the Sarbanes and Oxley Act 2002, similar to the financial reporting act, has stipulated these guidelines. Now it is intensively discussed globally that financial scandals and untrue financial reporting take place due to the lack of a standard corporate governance framework and the lack of strict compliance. So, not a separate law or guideline but a corporate governance system in its totality should be included in the Companies Act stating its elements, national code, principles, implementation plan and compliance. It may be made mandatory in the act to submit the corporate governance framework with principles to the Registrar of Joint Stock Companies and Firms (RJSC) at the time of registration of a company. The Companies Act should be a guide to corporate governance. Other regulators like Bangladesh Securities and Exchange Commission (BSEC) or the central bank or other regulators may provide an additional or complementary ground for better regulation of the member corporations aiding governance.
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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