Corporate Governance: Some Observations of Bangladesh

Corporate Governance
Corporate governance is a set of internal and external arrangements that define and
enforce the discipline in relations between managers and shareholders. In the internal side,
the company’s policies, strategies, reporting system, board of directors, appointment of
independent non sponsored directors in the board, establishing audit committee,
establishing executive committee are vital contrivances to ensure good governance. At the
external level, corporate governance comprises market, legal and institutional arrangements
that reduce costs of the principal-agent problem. The corporate governance mechanisms
are market, institution and legal settings that protect outside investors from opportunistic
behavior of managers or controlling shareholders. In the absence of such protection,
asymmetries of information and difficulties of monitoring faced by outside investors enable
managers to misallocate corporate resources, often at the expense of the long-term
performance. Therefore, efficient corporate governance provides better corporate
performance, while poor corporate governance leads to bad corporate performance.

After all corporate governance therefore calls for three factors:

Transparency in decision-making;
Accountability which follows from transparency because responsibilities could be
fixed easily for actions taken or not taken, and;
The accountability is for the safeguarding the interests of the stakeholders and the
investors in the organization

Corporate Governance in Bangladesh

Bangladesh - a typical developing country in South Asia in terms of a large population, low
per capita income, persistent trade deficit and an economy dominated by agriculture - has
increasingly moved towards a market-based economy since the mid 1970s as a result of
receiving assistance under structural adjustment programs of World Bank, IMF and other
donor nations. Despite this foreign assistance poor governance remains a big challenge for
us. It is observed that both internal and external factors such as politics, public pressure and
donor country’s conditions on reform are slowly generating paradigm shift towards good
governance and sustainable development. However, the paradigm shift towards good
governance needs to pick up more speed to establish as a Bangladesh globally competitive
nation. It has been almost 40 years our country got its independence, but yet it did not
achieve any significant result in governance. The core challenge lies in developing a

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governance model that fits the current economic and political condition of the country. The
other major bottlenecks are its slow monolithic non transparent, bureaucratic structure,
rampant corruption in public offices not only puts Bangladesh in TIB (Transparency
International Bangladesh) top corrupt list of nations but also raise the cost of living in this
country. The legal frame work of the country dwells on the rules set by the British colonial
rulers- A master and servant mindset of governance, which is proving to be ineffective and
highly inefficient considering today’s global information age economic environment. Though
legal reforms are slowly taking place in public administration but due to lack of enforcement
as well as political commitment, government offices have no other alternative but to follow
inefficient outdated laws.

CG has been receiving increasing attention from regulatory bodies and practitioners
worldwide. Corporate sectors are still in its initial stage; nevertheless awareness of the
importance of CG is growing. Bangladesh's small size and lack of natural resources have
necessitated an open trade policy. Bangladesh also has a liberal policy towards foreign
direct investment (FDI). To govern the corporate environment in Bangladesh, following legal
measures are in practice:

Securities and Exchange Ordinance 1969

Bangladesh Bank Order 1972
Bank Companies Act 1991
Financial Institutions Act 1993
Securities and Exchange Commission Act 1993
Companies Act 1994
Bankruptcy Act 1997.

“Good governance for sound development” is a campaign echoed in Bangladesh as across

the world. It is believed that good governance is such types of government process where
important decisions are taken by concerned organizations through a participatory method
justifying the views of the civil society, have accountability and transparency as well as
application of rule of law in every government action. This paper discusses various aspects,
elements, expectations, and impact of good governance.

Corporate Governance Practice for Sector-specific Firms

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 1) State-owned Enterprises (SOEs):

In spite of privatization over the last three decades, state-owned enterprises (SOEs) are still
a mainstay in Bangladesh economy. Like Bangladesh, China, India, Russia and South Africa
are just a few countries where wholly or partly government-owned SOEs remain productive
and influential. Good CG is crucial for SOEs in Bangladesh, because they face even more
governance challenges than private companies do. Unlike a widely-held private company, an
SOE usually cannot have its board or management changed via a takeover or proxy contest,
and they usually cannot go bankrupt. In addition, they may have “free” equity and a very
low cost of subsidized loans. Thus, the incentives for board members and managers to
maximize the value of the company and keep costs in check are reduced. Accountability and
performance may also be hindered by political interference, poorly defined non-commercial
objectives, and an absence of transparency. Strong internal controls, good disclosure,
independent boards of directors, and other CG tools can help state -owned enterprises
perform well and act in the best interests of citizens and other shareholders. To help make
state –owned enterprises more competitive, efficient and transparent, OECD has introduced
following guidelines.

Ensure a level-playing field for state -owned enterprises competing with the private sector by

· Clearly separating the state’s ownership role from its regulatory role

· Allowing more flexibility in capital structures while making sure that state –owned
enterprises face competitive access to finance

Become more informed and active shareholders by

· Simplifying the chain of accountability through centralizing or more effectively coordinating

shareholding responsibilities within the state administration

· Reducing political interference in day-to-day management

· Introducing a transparent nomination process for boards, based on competence and skills

Empower boards by

· Clarifying their mandates and respecting their independence

· Separating the role of Chairman and CEO and giving boards the power to appoint CEOs
Systematically monitoring the board’s performance

Improve transparency by

· Strengthening internal controls

· Carrying out independent, external audits based on international standards

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· Disclosing any financial assistance from the state

· Producing aggregate performance reports

2) Corporate Governance in the Private Sector Enterprises (PSEs):

The basic principles of good CG for the PSs are identified as involving:

· Appropriate disclosure

· The development of codes of conduct for company directors, and the

· Development of internal structures which provide for independent review of processes and
decision making within a company.

Ensuring the basis for an effective corporate governance framework: The CG framework
should promote transparent and efficient markets, be consistent with the rule of law and
clearly articulate the division of responsibilities among different supervisory, regulatory and
enforcement authorities. The rights of shareholders and key ownership functions: The CG
framework should protect and facilitate the exercise of shareholders’ rights.

The equitable treatment of shareholders: The CG framework should ensure the equitable
treatment of all shareholders, including minority and foreign shareholders. All shareholders
should have the opportunity to obtain effective redress for violation of their rights.

The role of stakeholders in corporate governance: The CG framework should ensure

behavior and the rights of stakeholders established by law or through mutual agreements
and encourage active co-operation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises.

Disclosure and transparency: The CG framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the financial
situation, performance, ownership, and governance of the company.

The responsibilities of the board: The CG framework should ensure the strategic guidance of
the company, the effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders.

3) Corporate Governance in the Financial Institutions (FIs):

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The need for a competent financial sector is important to stimulate and support economic
growth through efficient resource allocation. Good CG practices are essential to the
effectiveness, competitiveness and safety and soundness of financial institutions.

Streamlining the Guidelines with the Code of Corporate Governance: A Code of CG has been
published by BEI can be streamlined to reduce duplication and resources to comply with CG
requirements for the FIs.

Protection of depositors: Given the special nature of banking institutions, a broad view of CG
where regulation of banking activities is required to protect depositors. In developed
economies, protection of depositors in a deregulated environment is typically provided by a
system of prudential regulation, but in developing economies such protection is undermined
by the lack of well-trained supervisors, inadequate disclosure requirements, and the cost of
raising bank capital and the presence of distributional cartels.

Improvements in prudential regulation: Liberalization policies need to be gradual, and

should be dependent upon improvements in prudential regulation. Bangladesh needs to
expend resources enhancing the quality of their financial reporting systems, as well as the
quantity and quality of bank supervisors. Given that bank capital plays such an important
role in prudential regulatory systems, it is necessary to improve investor protection laws,
increase financial disclosure and impose fiduciary duties upon bank directors so that banks
can raise the equity capital required for regulatory purposes. A further reason as to why this
policy needs implemented is the growing recognition that the CG of banks has an important
role to play in assisting supervisory institutions to perform their tasks, allowing supervisors
to have a working relationship with bank management, rather than adversarial one.

Political determinants of Corporate Governance: CG of financial institutions, particularly

banking sector, in Bangladesh is severely affected by political considerations. Given the
trend towards privatization of government-owned banks in Bangladesh, there is a need for
the managers of such banks to be granted autonomy and be gradually introduced to the CG
practices of the private sector prior to divestment.

Role of the shareholders: Where there has only been partial divestment and governments
have not relinquished any control to other shareholders, it may prove very difficult to divest
further ownership stakes unless CG is strengthened.

4) Governance in the NGOs:

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The orientations of NGOs are defined, updated and widely communicated: Like other
nonprofit organizations, NGOs cannot escape from the need and requirement to explain and
make known their major orientations and the strategic framework of their action regularly.
This ‘communicational activity’ is found in all the principles. It implies the defining and
appropriateness of what is going to be communicated. Good governance verifies that this is
true at each level of the NGO’s aims and projects.

Relationship with the stakeholders: Good governance devotes itself to federating the
internal stakeholders and to managing the interfaces with the external stakeholders. This is
how it builds its legitimacy, its image and its representativeness. Good governance also
strengthens the support that its stakeholders give it.

· The internal stakeholders are: the members, trustees, volunteer help, expatriate staff,
employees, local non-profit organization partners and national staff (in the country of
intervention).

· The external stakeholders are: the beneficiaries, financial backers, private donors
(including sponsors), public sector of the country of the NGO, public sector of the country of
intervention, public opinion in the country of the NGO, public opinion in the country of
intervention, suppliers, partners in the field, other non-profit organizations and NGOs, and
non-profit organization collectives, etc.

Information is sincere, reliable and available: Each person receives all the information
appropriate for his or her position, in an appropriate form. The quality of the information is
checked, and its circulation is adapted to the use that must be made of it.

The NGO’s financial management is impartial. The notion of the NGO’s impartial
management must be subject to internal discussion, because it can be interpreted in
different ways. NGO, by themselves or by people who intervene for them, have no direct or
indirect advantage from the financial results of the operations’. The balance between
administrative and organizational costs and the resources allocated to the operational
projects is to be examined regularly, out of concern for efficiency. Good governance, for
example, has a cost, but it contributes to improving the interventions to the beneficiary’s
advantage. The building up of reserves, investments, loans, guarantees and deposits is
governed by the required rules of exactness and carefulness.

The representative bodies: The representative bodies of the internal stakeholders can be
consulted before a significant expenditure is made (purchase of buildings, for example). The
members of a Board of Trustees of an NGO must be volunteers.

Challenges to Good Governance in Bangladesh

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Despite the continuing efforts of Bangladesh to enhance the quality of governance in the
country, it is still suffering, among other things, from numerous and diverse governance-
related insufficiencies and complexities, both structural and non-structural. At present, one
of the key challenges of good governance in Bangladesh is: To ensure a continually
meaningful participation of rural people, including those at the grassroots level and the poor
in local, national, regional and global economics, politics, peace, security and right-based
development.

 Corruption

Corruption is one of the biggest obstacles in the way of good governance in Bangladesh.
According to Transparency International Report (TIR, GCR: 2003), “Corruption acts to
diminish the ability of law enforcement to accomplish its mission. The prevalence of
corruption in Bangladesh has not only diminished the ability of the law enforcement but
also adversely affected the judiciary, public administration and is impeding the fair
functioning of the society.”

 Inefficiency of Bureaucracy

Bureaucracy is inevitable in any society or state, an inseparable part of an organized society.

But the bureaucracy of Bangladesh is not efficient in management and administration. The
capacity of policy implementation of our bureaucracy is very poor. Bureaucrats are not
accountable and transparent to the people. Besides, the whole system runs on an outdated
legal structure.

 Nepotism and Politicization in Public Administration

Nepotism is another curse of our politics and administration. The rulers give privilege and
unfair advantage to their family members, kiths and kens on public resources. So the mass
people are deprived from these opportunities. In addition, politicization in government
institutions including the police not only increases inefficiency and corruption but also
increases human rights violation, especially on the opposition political parties by filing false
cases.

 Improper and non-observance of the rule of law

In true and real sense it is said that laws are there but there are applied only in favor of
privilege people or class. As a result justices suffer and denied to the common people
although that is an important aspect of good governance.

 Improper use of resources

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The fund flow in Bangladesh is not smooth to the local government. Beside, this fund is not
utilized properly and very often diverted to other purposes. So, the ordinary people can not
get efforts, if any, of ensuring good governance.

 Poor planning strategy

It results in deep effect in peoples every day life. Improper planning and use of resources
result in threatening scarceness in electricity, water and gas but effective measures are yet
to be taken.

Besides these, instability in Citation Hill Tracts and discrimination against the minorities and
environmental degradation surround this country

Concluding Remarks

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It should be kept in mind that the main objective of good governance is not to deter the
growth prospect of the corporations, rather to assist them to grow in a rational and
transparent way. In finale, some of the major issues that should be taken care of to ensure
good governance are recommended:

a) Developing infrastructural facilities of the total systems. Government, development

partners, NGOs, private sectors should work together to build the infrastructural facilities
that will ensure maximum availability of information, reducing the asymmetries of
information, ensuring the availability of information at minimal cost.

b) Building the awareness among the corporations, public, beneficiaries and other related
stakeholders about consequences of the good governance. A platform should be crated
where different interest group can post their concerns, issues and updates.

c) International standard for financial reporting system should be incorporated gradually

into all corporations, where option for adjustment/tuning up will be kept open for
indigenous need.

d) Coordinating different laws, acts, regulations that handle the same category of issues. It
has been observed that most of the malpractice cases escaped due to lack of uniformity of
laws, rules and acts. A high powered coronation committee can be formed in this regard,
who will align the dissimilarities of existing laws regarding the issues.

e) Forming a central watchdog to dig into the complaint, non-compliance,

misrepresentation, malpractices, window dressing and other negative matters. It should be
headed by the experts form different streams of expertise and knowledge.

f) Privatization of SOEs has to be implemented gradually and with cautions, as the motive of
SOE and the motive of private one differs. To safeguard the benefits of mass people and to
be a profitable at the same time, the standard operating procedure (SOP) of the privatized
SOE will have to be designed with collaboration of regulatory authorities and watchdogs.

g) The good wishes from the government part are indispensable in this regard.