Letter of submission

Date: July 24, 2011

To
The Supervisor
Mr.Arjun Kumar Das
Assistant ro!essor
"a#ulty o! $usiness Stu%ies
remier &niversity 'hitta(on(, $an(la%esh
Su)je#t: Su)mission o! *nternship +eport.
Sir
*t is a (reat pleasure !or me to su)mit the term aper. * have su##ess!ully !inishe% my term paper on
,'orporate (overnan#e o! !inan#ial institutions -ith parti#ular re!eren#e to )an.in( se#tor o!
$an(la%esh/. Durin( the perio%, * -or.e% on ,%i!!erent #orporate a#tivities o! $an.s 0 per!orme% )y
#ommer#ial )an. $an(la%esh. 1n the )asis o! my stu%y * am su)mittin( this report on the a#tual !a#ts 2
!in%in(s o! my -or.. * li.e to than. !or your .in% supervision.
* enjoye% in preparin( the report )e#ause it provi%e me the #han#e to put my theoreti#al .no-le%(e in a
real li!e pro)lem.
Sin#erely yours
3 4
5ame :
Stu%ent *D :
Masters o! $usiness A%ministration
"a#ulty o! $usiness Stu%ies
remier &niversity 'hitta(on(, $an(la%esh
Major *n "inan#e
1
Preface
Theoretical knowledge is not sufcient for a student to get clear concept
about any subject or any feld or an institution. It can only give wound
concepts to overcome this lacking, So, practical knowledge is necessary.
The contet of modern business world, more important to perfect
coordination between theory and practical knowledge. !esearch
program can be treated as a primary knowledge. !esearch program can
be treated as a primary level for student to get knowledge in the
practical feld. It can fulfll degree re"uirement and enhance career
preparation that will laundering himself a better job. It spread our
knowledge by coordinating theory and practice. !esearch helps us to
understand and identify the di#erences between the theoretical and
practical knowledge for the frst time. $ndoubtedly, it is an appreciable
and valuable addition of the educational institution.
2
Acknowledgement
At the very outset, * -oul% li.e to e6press any %eep (ratitu%e to-ar%s Almi(hty Allah !or the su##ess!ul
#ompletion o! the resear#h paper.
*t -oul% not )e possi)le on any part to #omplete the resear#h paper su##ess!ully an% su)mit the same
-ithout any #o7operation an% inspiration o! some in%ivi%uals.
"irst o! all, * -oul% li.e to o!!er my heart !elt than.s to my supervisor !or his valua)le (ui%elines %urin(
the perio%. 8ithout his help this report #oul% not )een possi)le.
* am very mu#h (rate!ul to %i!!erent )ran#h Mana(er 2 Sr. Asstt. 9i#e resi%ent o! the $an.s -ho has
provi%e% me (ui%elines, ne#essary in!ormation an% %o#uments relate% to my stu%y. 8ithout his
inspiration:su((estion this report -oul% not )een possi)le to #omplete.
;
Executive Summary
A #ommer#ial $an. is a len%er o! %epositor<s money. *t is ta.in( %eposit !rom those -ho have surplus
money, an% len%in( the money to those -ho are in nee% o! temporary a##ommo%ation. $an.in( )usiness
!irst ma%e its a##eptan#e in the pro#ess o! ta.in( %eposits an% till no- it remains the rin#ipal "un#tion o!
a #ommer#ial $an.. The primary assets o! any !inan#ial *nstitution:#ommer#ial $an. 'onsists o! its loans
an% A%van#es an% other investments, #re%it !a#ilities et#., to their #lients.
're%it is the #on!i%en#e o! the len%er in the a)ility an% -illin(ness o! the )orro-er to re7pay the loan at a
!uture %ate. *t is (enerally )elieve% that #on!i%en#e is the )asis o! all #re%it transa#tions. The !un%amental
prin#iples upon -hi#h #re%it is (enerally )ase% are #hara#ter, #apa#ity, responsi)ility an% resour#es o! the
)orro-er. =en%in( is a !un#tion )ut that is most important to the )an.er, )e#ause o! the asso#iate ris. an%
pro!it potential. Totality o! len%in( %epen%s on sa!ety, li>ui%ity, pro%u#tivity, national an% so#ial interest,
mana(ement a)ility, )orro-er analysis an% )usiness analysis.
8hile allo-in( #re%it !a#ilities to the )orro-ers in the !orm o! loan, over%ra!t, #ash #re%it et#. 8e must
ensure proper %o#umentation to sa!e(uar% !uture interest o! the )an.. So -henever an a%van#e is ma%e in
any !orm -e must o)tain proper %o#ument !rom the )orro-er. ?oo% %o#umentation ta.es time, )ut saves
time an% )an.s.
So, in vie- o! these, s#he%ule% )an.s:)an.ers are to !ollo- some rules an% re(ulerations in len%in( their
money. 5o- in these tropi#s * shall try to (ive total len%in( pro#e%ure o! loans an% a%van#es, -i#h (ives
us (ui%e in our %ay )y %ay -or. 2 ensure !ull se#urity o! )an. an% )an.er, -hen len%in( the money.
4
Ta)le o! 'ontents
Page no.
Chapter !ntroduction
1.1 So#ial responsi)ility
%es#ription
1.2 Areas o! stu%y
1.; Metho%olo(y o! stu%y
1.4 =imitations o! the stu%y
Chapter " Statement of the problem
literature an% theoreti#al
revie-s
Chapter # Sample enterprise at a
glance
Chapter $ Practical aspects
4.1 @istori#al perspe#tive o!
the issue
4.2 A#onomi# )ene!its
4.; So#io #ultural )ene!its
4.4 Stru#tural !eatures
'hapter B 'on#lu%in( remar.s
+e#ommen%ations !or
!uture %evelopment
B
Corporate governance of fnancial institutions with
particular reference to banking sector of Bangladesh.
C
%hapter& '
D
*ntro%u#tion:
Corporate governance is the set o! pro#esses, #ustoms, poli#ies, la-s, an% institutions a!!e#tin( the -ay
a #orporation 3or #ompany4 is %ire#te%, a%ministere% or #ontrolle%. An important theme o! #orporate
(overnan#e is the nature an% e6tent o! a##ounta)ility o! parti#ular in%ivi%uals in the or(aniEation, an%
me#hanisms that try to re%u#e or eliminate the prin#ipal7a(ent pro)lem. 'orporate (overnan#e also
in#lu%es the relationships amon( the many sta.ehol%ers involve% an% the (oals !or -hi#h the #orporation
is (overne%. *n #ontemporary )usiness #orporations, the main e6ternal sta.ehol%er (roups
are sharehol%ers, %e)thol%ers, tra%e #re%itors,suppliers, #ustomers an% #ommunities a!!e#te% )y the
#orporationFs a#tivities. *nternal sta.ehol%ers are the )oar% o! %ire#tors, e6e#utives, an% other employees.
There has )een rene-e% interest in the #orporate (overnan#e pra#ti#es o! mo%ern #orporations sin#e 2001,
parti#ularly %ue to the hi(h7pro!ile #ollapses o! a num)er o! lar(e #orporations, most o! -hi#h involve%
a##ountin( !rau%. 'orporate s#an%als o! various !orms have maintaine% pu)li# an% politi#al interest in the
re(ulation o! #orporate (overnan#e. *n the &.S., these in#lu%e Anron 'orporation an% M'* *n#.
De!inition:
Many o! the 0%e!initions0 o! corporate governance are merely %es#riptions o! pra#ti#es
or preferred orientations. "or e6ample, many authors %es#ri)e #orporate (overnan#e in terms o! a system
o! stru#turin(, operatin( an% #ontrollin( a #ompany -ith a vie- to a#hievin( lon( term strate(i# (oals to
satis!y sharehol%ers, #re%itors, employees, #ustomers an% suppliers, an% #omplyin( -ith the le(al an%
re(ulatory re>uirements, apart !rom meetin( environmental an% lo#al #ommunity nee%s. @o-ever, there is
su)stantial interest in ho- e6ternal systems an% institutions, in#lu%in( mar.ets, in!luen#e #orporate
(overnan#e.
'orporate (overnan#e re!ers to the stru#tures an% pro#esses !or the %ire#tion an% #ontrol o! #ompanies. *t
#on#erns the relationships amon( the mana(ement, $oar% o! Dire#tors, #ontrollin( sharehol%ers, minority
sharehol%ers an% other sta.ehol%ers. *n (eneral, ?overnan#e is the e6er#ise o! authority, %ire#tion an%
#ontrol o! an or(aniEation in or%er to ensure its purpose is a#hieve%. *t re!ers to
-ho is in #har(e o! -hatG
-ho sets the %ire#tion an% the parameters -ithin -hi#h the %ire#tion is to )e pursue%G
-ho ma.es %e#isions a)out -hatG
-ho sets per!orman#e in%i#ators, monitors pro(ress an% evaluates resultsG an%,
-ho is a##ounta)le to -hom !or -hat.
'orporate (overnan#e is (enerally seen as the systems or pro#esses )y -hi#h entities are mana(e% an%
#ontrolle%. These are usually summariEe% in the rules an% re(ulations (overnin( the entity.
H
$ut #orporate (overnan#e is more than just rules an% re(ulations. *n his a%%ress to the 2;
r%
'on!eren#e on
$an. Stru#ture an% 'ompetition, hel% in 'hi#a(o, *llinois, the ?overnor o! the "e%eral +eserve, Alan
?reenspan o)serve%
,Irules #annot su)stitute !or #hara#ter. *n virtually all transa#tions, -hether -ith #ustomers or
#ollea(ues, -e rely on the -or% o! those -ith -hom -e %o )usiness. *! -e %o not %o so, (oo%s an%
servi#es #oul% not )e e6#han(e% e!!i#iently. Aven -hen -e !ollo-e% to the letter, rules (ui%e only a small
num)er o! %ay7to7%ay %e#isions re>uire% o! #orporate mana(ement.
'orporate (overnan#e mo%els aroun% the -orl%
There are many %i!!erent mo%els o! #orporate (overnan#e aroun% the -orl%. These %i!!er a##or%in( to the
variety o! #apitalism in -hi#h they are em)e%%e%. The An(lo7Ameri#an 0mo%el0 ten%s to emphasiEe the
interests o! sharehol%ers. The #oor%inate% or multi7sta.ehol%er mo%el asso#iate% -ith 'ontinental Aurope
an% Japan also re#o(niEes the interests o! -or.ers, mana(ers, suppliers, #ustomers, an% the #ommunity.
Codes and guidelines
'orporate (overnan#e prin#iples an% #o%es have )een %evelope% in %i!!erent #ountries an% issue% !rom
sto#. e6#han(es, #orporations, institutional investors, or asso#iations 3institutes4 o! %ire#tors an%
mana(ers -ith the support o! (overnments an% international or(aniEations. As a rule, #omplian#e -ith
these (overnan#e re#ommen%ations is not man%ate% )y la-, althou(h the #o%es lin.e% to sto#.
e6#han(e listin( re>uirements may have a #oer#ive e!!e#t. "or e6ample, #ompanies >uote% on the =on%on,
Toronto an% Australian Sto#. A6#han(es !ormally nee% not !ollo- the re#ommen%ations o! their
respe#tive #o%es. @o-ever, they must %is#lose -hether they !ollo- the re#ommen%ations in those
%o#uments an%, -here not, they shoul% provi%e e6planations #on#ernin( %iver(ent pra#ti#es. Su#h
%is#losure re>uirements e6ert a si(ni!i#ant pressure on liste% #ompanies !or #omplian#e.
1ne o! the most in!luential (ui%elines has )een the 1JJJ 1A'D rin#iples o! 'orporate ?overnan#e. This
-as revise% in 2004. The 1A'D (ui%elines are o!ten re!eren#e% )y #ountries %evelopin( lo#al #o%es or
(ui%elines. $uil%in( on the -or. o! the 1A'D, other international or(aniEations, private se#tor
asso#iations an% more than 20 national #orporate (overnan#e #o%es, the &nite%
5ations *nter(overnmental 8or.in( ?roup o! A6perts on *nternational Stan%ar%s o! A##ountin( an%
+eportin( 3*SA+4 has pro%u#e% their ?ui%an#e
arties to #orporate (overnan#e
The most in!luential parties involve% in #orporate (overnan#e in#lu%e (overnment a(en#ies an%
authorities, sto#. e6#han(es, mana(ement 3in#lu%in( the )oar% o! %ire#tors an% its #hair, the 'hie!
A6e#utive 1!!i#er or the e>uivalent, other e6e#utives an% line mana(ement,sharehol%ers an% au%itors4.
1ther in!luential sta.ehol%ers may in#lu%e len%ers, suppliers, employees, #re%itors, #ustomers an% the
#ommunity at lar(e.
J
The a(en#y vie- o! the #orporation posits that the sharehol%er !or(oes %e#ision ri(hts 3#ontrol4 an%
entrusts the mana(er to a#t in the sharehol%ersF )est 3joint4 interests. artly as a result o! this separation
)et-een the t-o investors an% mana(ers, #orporate (overnan#e me#hanisms in#lu%e a system o! #ontrols
inten%e% to help ali(n mana(ersF in#entives -ith those o! sharehol%ers. A(en#y #on#erns 3ris.4 are
ne#essarily lo-er !or a #ontrollin( sharehol%er.
A )oar% o! %ire#tors is e6pe#te% to play a .ey role in #orporate (overnan#e. The )oar% has the
responsi)ility o! en%orsin( the or(aniEationFs strate(y, %evelopin( %ire#tional poli#y, appointin(,
supervisin( an% remuneratin( senior e6e#utives, an% ensurin( a##ounta)ility o! the or(aniEation to its
investors an% authorities.
All parties to #orporate (overnan#e have an interest, -hether %ire#t or in%ire#t, in the !inan#ial
per!orman#e o! the #orporation. Dire#tors, -or.ers an% mana(ement re#eive salaries, )ene!its an%
reputation, -hile investors e6pe#t to re#eive !inan#ial returns. "or len%ers, it is spe#i!ie% interest payments
, -hile returns to e>uity investors arise !rom %ivi%en% %istri)utions or #apital (ains on their sto#..
'ustomers are #on#erne% -ith the #ertainty o! the provision o! (oo%s an% servi#es o! an appropriate
>ualityG suppliers are #on#erne% -ith #ompensation !or their (oo%s or servi#es, an% possi)le #ontinue%
tra%in( relationships. These parties provi%e value to the #orporation in the !orm o! !inan#ial, physi#al,
human an% other !orms o! #apital. Many parties may also )e #on#erne% -ith #orporate so#ial
per!orman#e.
A .ey !a#tor in a partyFs %e#ision to parti#ipate in or en(a(e -ith a #orporation is their #on!i%en#e that the
#orporation -ill %eliver the partyFs e6pe#te% out#omes. 8hen #ate(ories o! parties 3sta.ehol%ers4 %o not
have su!!i#ient #on!i%en#e that a #orporation is )ein( #ontrolle% an% %ire#te% in a manner #onsistent -ith
their %esire% out#omes, they are less li.ely to en(a(e -ith the #orporation. 8hen this )e#omes an
en%emi# system !eature, the loss o! #on!i%en#e an% parti#ipation in mar.ets may a!!e#t many other
sta.ehol%ers, an% in#reases the li.elihoo% o! politi#al a#tion.
opularity espouse% prin#iples o! #orporate (overnan#e
%ights and e&uitable treatment of shareholders: 1r(aniEations shoul% respe#t the ri(hts o!
sharehol%ers an% help sharehol%ers to e6er#ise those ri(hts. They #an help sharehol%ers e6er#ise their
ri(hts )y e!!e#tively #ommuni#atin( in!ormation that is un%erstan%a)le an% a##essi)le an%
en#oura(in( sharehol%ers to parti#ipate in (eneral meetin(s.
!nterests of other stakeholders: 1r(aniEations shoul% re#o(niEe that they have le(al an% other
o)li(ations to all le(itimate sta.ehol%ers.
10
%ole and responsibilities of the board: The )oar% nee%s a ran(e o! s.ills an% un%erstan%in( to )e
a)le to %eal -ith various )usiness issues an% have the a)ility to revie- an% #hallen(e mana(ement
per!orman#e. *t nee%s to )e o! su!!i#ient siEe an% have an appropriate level o! #ommitment to !ul!ill its
responsi)ilities an% %uties. There are issues a)out the appropriate mi6 o! e6e#utive an% non7e6e#utive
%ire#tors.
!ntegrity and ethical behavior: Athi#al an% responsi)le %e#ision ma.in( is not only important !or
pu)li# relations, )ut it is also a ne#essary element in ris. mana(ement an% avoi%in( la-suits.
1r(aniEations shoul% %evelop a #o%e o! #on%u#t !or their %ire#tors an% e6e#utives that promotes
ethi#al an% responsi)le %e#ision ma.in(. *t is important to un%erstan%, thou(h, that relian#e )y a
#ompany on the inte(rity an% ethi#s o! in%ivi%uals is )oun% to eventual !ailure. $e#ause o! this, many
or(aniEations esta)lish 'omplian#e an% Athi#s ro(rams to minimiEe the ris. that the !irm steps
outsi%e o! ethi#al an% le(al )oun%aries.
'isclosure and transparency: 1r(aniEations shoul% #lari!y an% ma.e pu)li#ly .no-n the roles
an% responsi)ilities o! )oar% an% mana(ement to provi%e sharehol%ers -ith a level o! a##ounta)ility.
They shoul% also implement pro#e%ures to in%epen%ently veri!y an% sa!e(uar% the inte(rity o! the
#ompanyFs !inan#ial reportin(. Dis#losure o! material matters #on#ernin( the or(aniEation shoul% )e
timely an% )alan#e% to ensure that all investors have a##ess to #lear, !a#tual in!ormation.
(echanisms and controls
'orporate (overnan#e me#hanisms an% #ontrols are %esi(ne% to re%u#e the ine!!i#ien#ies that arise
!rom moral haEar% an% a%verse sele#tion. "or e6ample, to monitor mana(ersF )ehavior, an in%epen%ent
thir% party 3the e6ternal au%itor4 attests the a##ura#y o! in!ormation provi%e% )y mana(ement to investors.
An i%eal #ontrol system shoul% re(ulate )oth motivation an% a)ility.
)edit*!nternal corporate governance controls
*nternal #orporate (overnan#e #ontrols monitor a#tivities an% then ta.e #orre#tive a#tion to a##omplish
or(anisational (oals. A6amples in#lu%e:
(onitoring by the board of directors: The )oar% o! %ire#tors, -ith its le(al authority to hire, !ire
an% #ompensate top mana(ement, sa!e(uar%s investe% #apital. +e(ular )oar% meetin(s allo- potential
pro)lems to )e i%enti!ie%, %is#usse% an% avoi%e%. 8hilst non7e6e#utive %ire#tors are thou(ht to )e
more in%epen%ent, they may not al-ays result in more e!!e#tive #orporate (overnan#e an% may not
in#rease per!orman#e.
K1DL
Di!!erent )oar% stru#tures are optimal !or %i!!erent !irms. Moreover, the
a)ility o! the )oar% to monitor the !irmFs e6e#utives is a !un#tion o! its a##ess to in!ormation.
A6e#utive %ire#tors possess superior .no-le%(e o! the %e#ision7ma.in( pro#ess an% there!ore
11
evaluate top mana(ement on the )asis o! the >uality o! its %e#isions that lea% to !inan#ial per!orman#e
out#omes, ex ante. *t #oul% )e ar(ue%, there!ore, that e6e#utive %ire#tors loo. )eyon% the !inan#ial
#riteria.
!nternal control procedures and internal auditors: *nternal #ontrol pro#e%ures are poli#ies
implemente% )y an entityFs )oar% o! %ire#tors, au%it #ommittee, mana(ement, an% other personnel to
provi%e reasona)le assuran#e o! the entity a#hievin( its o)je#tives relate% to relia)le !inan#ial
reportin(, operatin( e!!i#ien#y, an% #omplian#e -ith la-s an% re(ulations. *nternal au%itors are
personnel -ithin an or(aniEation -ho test the %esi(n an% implementation o! the entityFs internal
#ontrol pro#e%ures an% the relia)ility o! its !inan#ial reportin(
+alance of power: The simplest )alan#e o! po-er is very #ommonG re>uire that the resi%ent )e a
%i!!erent person !rom the Treasurer. This appli#ation o! separation o! po-er is !urther %evelope% in
#ompanies -here separate %ivisions #he#. an% )alan#e ea#h otherFs a#tions. 1ne (roup may propose
#ompany7-i%e a%ministrative #han(es, another (roup revie- an% #an veto the #han(es, an% a thir%
(roup #he#. that the interests o! people 3#ustomers, sharehol%ers, employees4 outsi%e the three (roups
are )ein( met.
%emuneration: er!orman#e7)ase% remuneration is %esi(ne% to relate some proportion o! salary
to in%ivi%ual per!orman#e. *t may )e in the !orm o! #ash or non7#ash payments su#h
as shares an% share options, superannuation or other )ene!its. Su#h in#entive s#hemes, ho-ever, are
rea#tive in the sense that they provi%e no me#hanism !or preventin( mista.es or opportunisti#
)ehavior, an% #an eli#it myopi# )ehavior.
*n pu)li#ly7tra%e% &.S. #orporations, )oar%s o! %ire#tors are lar(ely chosen )y the resi%ent:'A1 an% the
resi%ent:'A1 o!ten ta.es the 'hair o! the $oar% position !or his:hersel! 3-hi#h ma.es it mu#h more
%i!!i#ult !or the institutional o-ners to 0!ire0 him:her4. The pra#ti#e o! the 'A1 also )ein( the 'hair o! the
$oar% is .no-n as 0%uality0. 8hile this pra#ti#e is #ommon in the &.S., it is relatively rare else-here. *t is
ille(al in the &.K.
External corporate governance controls
A6ternal #orporate (overnan#e #ontrols en#ompass the #ontrols e6ternal sta.ehol%ers e6er#ise over the
or(aniEation. A6amples in#lu%e:
#ompetition
%e)t #ovenants
%eman% !or an% assessment o! per!orman#e in!ormation 3espe#ially !inan#ial statements4
(overnment re(ulations
mana(erial la)our mar.et
me%ia pressure
12
ta.eovers
1.2 Areas of study
This paper hi(hli(hts the #orporate (overnan#e o! !inan#ial institutions -ith
parti#ular re!eren#e to )an.in( se#tor o! $an(la%esh. The importan#e o!
#orporate (overnan#e o! )an.s remains #ru#ial (iven their #ontri)ution in
e#onomi# (ro-th throu(h !inan#ial %evelopment. This paper has she% li(ht on
the stru#tures o! #orporate (overnan#e o! )an.s in $an(la%esh involvin( their
o-nership stru#ture, )oar% issues, e6e#utive aspe#ts, %is#losure, an% au%it
pra#ti#es alon( -ith their asso#iate% -ea.nesses. The paper has also sho-e%
ho- politi#al inter!eren#e an% !ailure )y the re(ulators has #ontri)ute% to the
(overnan#e pro)lems in the )an.s.
1.3 methodology of the study
The #hoi#e o! metho%olo(i#al approa#h %epen%s upon the nature o! the
investi(ation to )e #arrie% out, its purpose an% pro)lem statement. "or this
proje#t, the main approa#h -as mainly %etermine% )y the (ui%elines !or the tas..
The pro)lem statement an% purpose that -as #ompose% !or the proje#t in the
)e(innin( has (ui%e% the -or. !rom #olle#tion o! in!ormation to analysis o!
!in%in(s in relation to theory.
1;
1.4 limitations of the study
*n every pro(ram or a#tivities, one has to !a#e numerous #onstraints. Durin( my ; months internship
pro(ram, * have also !a#e% some pro)lems. These are:
1. $an. is a )usy or(aniEation -ith #omparison to others. There are rushes o! people !or a)out
-hole the %ay an% the o!!i#ers have to transa#t -ith them. So it is very mu#h tou(h !or them to
allo#ate time !or an internee.
2. The %uration o! our internship pro(ram is only ; months. The allo#ate% time is not su!!i#ient
!or us to (ather .no-le%(e an% to ma.e the stu%y a #omplete an% !ruit!ul one.
;. The stu%y also su!!ere% !rom ina%e>ua#y o! %ata.
4. Many pro#e%ural matters -ere -ritten !rom o-n o)servation, -hi#h may also vary !rom
person to person.
14


Chapter "
Statement of the problem
1B
Literature and theoretical review
?lo)aliEation o! !inan#ial mar.ets an% !ears o! !inan#ial insta)ility have )rou(ht the issue o! the #orporate
(overnan#e into !ore!ront o! the poli#y %is#ussions. *n an in#reasin(ly %ere(ulate% poli#y environment,
the )i( #orporate !ailures su#h as Anron, 9iven%i, $arrin(s have raise% the nee% !or implementin(
#ompetent #orporate (overnan#e pra#ti#es. The re#ent !inan#ial #rises in %i!!erent #ountries have veri!ie%
ho- the la#. o! (oo% (overnan#e pra#ti#es in the !inan#ial institutions #an lea% to a #risis in the system
leavin( lon(7term #onse>uen#es to the e#onomy. Amon( the !inan#ial institutions, the #orporate
(overnan#e o! )an.s has re#eive% very little attention only. *n %evelopin( #ountries, )an.s have a
%ominant position in the !inan#ial systems an% a %is#ussion on #orporate (overnan#e o! )an.s re>uire%
spe#ial attention. This paper a%%resses the #orporate (overnan#e o! )an.in( se#tor in the #onte6t o!
$an(la%esh.
'orporate (overnan#e 3'?4 is an important e!!ort to ensure a##ounta)ility an% responsi)ility an% is a set
o! prin#iples, -hi#h shoul% )e in#orporate% into every part o! the or(aniEation. This stu%y !o#use% on the
state o! 'orporate ?overnan#e 3'?4 in three se#tors o! the e#onomy: the private #ompany 3pu)li#7liste%
#ompany4, the !inan#ial enterprises, an% the State 1-ne% Anterprises 3S1As4. To un%erstan% the state o!
'?, three )roa% aspe#ts o! (overnan#e an% mana(ement issues -ere stu%ie%.
These are: a4 sharehol%ers< ri(hts, )4 pu)li# %is#losure o! in!ormation, #4 e!!e#tiveness o!
the $oar%. 8ithin ea#h o! these many su)7#ate(ories -ere stu%ie% -hi#h -ere %is#usse% in this paper. The
stu%y use% intervie-s -ith .ey sta.ehol%ers, e6perts an% e6e#utives o! these types o! #ompanies, a
>uestionnaire survey an% also (roup %is#ussions. *n terms o! the three se#tors, this stu%y !oun% that
pu)li#7liste% #ompanies are more open to their sharehol%ers -ith respe#t to sharehol%ers ri(hts an%
%is#losures o! in!ormation. 8ith re(ar%s to pu)li# %is#losure o! in!ormation an% transparen#y, #ompanies
use ,)o6 #he#.in(/ metho% rather than un%erstan%in( the spirit o! the %is#losure. 1n the issue o! the
a#tive parti#ipations o! the in%epen%ent %ire#tors S1As ha% a )etter ratin( than others. *n pu)li# limite%
#ompanies stu%y !oun% that in 40M o! the #ases in%epen%ent %ire#tors rarely %isapprove% the a(en%a
pla#e% in the )oar%. *n the )est pra#ti#e (ui%elines o! '? three major #ommittees are
re#ommen%e%, stu%y !oun% other than S1A, !inan#ial an% non7!inan#ial institutions are not #omplyin(
-ith the )est pra#ti#es.
1C
The nee% !or #orporate (overnan#e arises !rom the potential #on!li#ts o! interest amon(
sta.ehol%ers in the #orporate stru#ture. These #on!li#ts o! interest o!ten arise !rom t-o
main reasons. "irst, %i!!erent sta.ehol%ers have %i!!erent (oals an% pre!eren#es. Se#on%,
the sta.ehol%ers have imper!e#t in!ormation as to ea#h others a#tions, .no-le%(e, an%
pre!eren#es. 'orporate (overnan#e 3'?4 is an important e!!ort to ensure a##ounta)ility an%
responsi)ility an% is a set o! prin#iples, -hi#h shoul% )e in#orporate% into every part o!
the or(aniEation. Thou(h it is vie-e% as a re#ent issue, there is, in !a#t, nothin( ne-
a)out the #on#ept. $e#ause it has )een in e6isten#e as lon( as the #orporation itsel!7as
lon( as there has )een lar(e N s#ale tra%e, re!le#tin( the nee% !or responsi)ility in the
han%lin( money an% the #on%u#t o! #ommer#ial a#tivities. *n the -a.e o! a##ountin(,
lea%ership, an% (overnan#e s#an%als at su#h lar(e #ompanies as Anron, Ty#o, an%
8orl%'om, #orporate (overnan#e has su##ee%e% to attra#t a (reat %eal o! interest as it
!o#uses not only the lon( term relationship, -hi#h has to %eal -ith #he#.s an% )alan#es,
in#entives !or mana(ers an% #ommuni#ations )et-een mana(ement an% investors )ut also
the transa#tional relationship, -hi#h involves %ealin( -ith %is#losure an% authority.
5umerous -or.s, stu%ies, an% resear#hes have )een #on%u#te% to ena#t prin#iples, #o%es,
an% (ui%elines !or ensurin( (oo% #orporate (overnan#e systems an% #ulture -ithin the
or(aniEations.
C,%P,%A-E .,/E%0A0CE A0' +A01!0. !0S-!-2-!,0S
The nee% !or a #ompetent !inan#ial se#tor is important to stimulate an% support e#onomi# (ro-th throu(h
e!!i#ient resour#e allo#ation. The !inan#ial system also enhan#es (ro-th )y poolin( ris.s an% !a#ilitatin(
transa#tions 38orl% $an., 1JHJ4. The role o! !inan#ial se#tor in e#onomi# (ro-th is even (reater in
%evelopin( #ountries as their tolera)le mar(in o! errors in resour#e allo#ation is small1. Di!!erent #ross7
#ountry stu%ies support the i%ea that #ountries -ith e!!i#ient an% stron( !inan#ial mar.ets e6perien#e
hi(her rates o! e#onomi# (ro-th. Some
stu%ies have also !oun% the stron( evi%en#e o! relationship )et-een the siEe an% operation o! !inan#ial
mar.ets an%:or the %evelopment an% stru#ture o! )an.in( se#tor an% e#onomi# (ro-th. The num)er o!
)an. !ailures an% !inan#ial #rises %urin( the last t-o %e#a%es raises >uestions on the #ompeten#y o! the
(overnan#e pra#ti#es o! the )an.in( system. The un%esira)le )an.in( pra#ti#es su#h as poor ris.
%iversi!i#ation, ina%e>uate loan evaluation, !rau%ulent a#tivities -ere as mu#h responsi)le as other
ma#roe#onomi# !a#tors in #ausin( )an.in( #rises -hi#h shoo. the !inan#ial systems o! #ountries su#h as
Ar(entina, 'hile, Malaysia, hilippines, Spain, Thailan% et#.8in.ler 31JJH4 insists that the >uality o!
#orporate (overnan#e o! )an.in( institutions %etermines the su##ess o! the !inan#ial %evelopment.
A)sen#e o! proper monitorin( an% #ontrol me#hanism #ripples the potential (oo% e!!e#t o! !inan#ial
1D
%evelopment on the e#onomi# (ro-th. The !a#t that )an.in( #ompanies are allo-e% to #olle#t %eposit an%
utiliEe them !or pro!it ma.in( a#tivities, #oul% #reate opportunities o! moral haEar%s. The
possi)ility:motivation o! plun%erin( %epositor<s money, -ho happens to )e the primary prin#ipal in
)an.in( #ompanies, )y the a(ents is (reater in )an.in( #ompanies as the a(ents -ho !oun%e% the )an.
ha% to #ontri)ute very little throu(h e>uity in a##umulatin( the assets. 1ne reason -hy )an.in( stimulates
!inan#ial %evelopment is that people entrust the )an.s -ith their %eposits as the )an.s are e6pe#te% to
#are!ully sele#t investment opportunities an% then pru%ently monitor the loan )orro-ers -hi#h #oul% have
#ontrolle% the pro)lems
asso#iate% -ith in!ormation asymmetry. @o-ever, in reality the a(ents may not )e sele#tin( an%
monitorin( the loans, parti#ularly -hen the loans are #onne#te% to a(ents an% their )ene!i#iaries. The
implementation o! soun% (overnan#e me#hanisms #oul% re%u#e the ris. o! moral haEar%s an% enhan#es
the pro#ess o! !inan#ial %evelopment. ; $an.in( #ompanies pose uni>ue #orporate (overnan#e attention
as they %i!!er (reatly -ith other types o! !irms in terms o! )roa%er e6tent o! #laimants on the )an.s assets
an% !un%s. A (roup o! entrepreneurs an%:or e6e#utives #oul% set up a )an.in( )usiness )y puttin( very
little e>uity !rom their o-n po#.et as the nature o! )usiness itsel! (uarantees !lo- o! enormous amount o!
!un%s in the !orm o! %eposits. The (eneral approa#h to #orporate (overnan#e ar(ue in !avor o! the
sharehol%ers ri(hts only, as mana(ers:e6e#utives may not al-ays -or. in the )est interest o! the
sharehol%ers. $ut the sharehol%ers a#tually a##ount !or a very tiny portion o! the )an.<s assets an% !un%s.
+ather almost every )it o! )an.s< investments are !inan#e% )y the %epositors< !un%s. *n #ase o! losses or
!ailures it -ill )e %epositors< savin(s that the )an.s -oul% lose. Su#h ris.s %eman% priority in prote#tion
o! %epositors that ushers in a )roa%er vie- o! #orporate (overnan#e that su((ests the interest an% )ene!its
o! the suppliers o! !un%s !or a !irm shoul% )e uphel%. Ma#ey an% 1<@ara also ar(ue that a )roa%er vie- o!
#orporate (overnan#e shoul% )e a%opte% in the #ase o! )an.in( institutions, ar(uin( that )e#ause o! the
pe#uliar #ontra#tual !orm o! )an.in(, #orporate (overnan#e me#hanisms !or )an.s shoul% en#apsulate
%epositors as -ell as share hol%ers. Arun an% Turner supporte% the nee% !or the )roa%er approa#h to
#orporate (overnan#e !or )an.in( institutions an% also ar(ue !or (overnment intervention to restrain the
)ehavior o! )an. mana(ement. *n many #ountries, %eposit insuran#e is use% as a me#hanism to sa!e(uar%
the )an.in( system as -ell as the %epositors. The sel!7%ealin( a#tivities )y the )an. insi%ers are very
%an(erous to the per!orman#e an% survival o! the )an.s as s#ores o! previous )an. !ailures have )een
#ause% )y ris.y sel!7%ealin( )y the )an. insi%ers. The presen#e o! heavy li>ui% assets an% potential la#. o!
%epositors< interest to a#tively #ontrol an% monitor )an.s< ris.y %e#isions as a result o! the insuran#e
(uarantees simpli!ies an% a((ravates the shar.in( in the )an.in( !irms. $an.s in %evelopin( #ountries
are !a#e% -ith hi(h ris. o! shar.in( as a result o! heavy (overnment o-nership, la#. o! pru%ential
re(ulation, -ea. le(al prote#tion an% presen#e o! spe#ial interest (roups 33$'$S, 1JJJG Arun an% Turner,
200;4. The in%epen%ent re(ulatory a(en#ies are important in %evelopin( #ountries to a#t a(ainst the
!re>uent #ollusion amon( (overnment, )usinesses an% )an.ers to serve spe#ial interest (roups 3Shlei!er
an% 9ishny, 1JJDG Arun an% Turner, 20024. @o-ever, there is an ar(ument that a#tive role )y re(ulators
may #ause pro)lems as -ell, as re(ulators may not have a #onvin#in(:su!!i#ient motivation to monitor the
)an.s as they %o not have mu#h at sta.e in #ase o! )an. !ailures 3Ma#ey an% ?arrett, 1JHH4. +e#ently, the
!inan#ial mar.ets o! %evelopin( e#onomies have e6perien#e% rapi% #han(es %ue to the (ro-th o! -i%er
ran(e o! !inan#ial pro%u#ts. As a result o! this, )an.s have
)een involve% -ith hi(h ris. a#tivities su#h as tra%in( in !inan#ial mar.ets an% %i!!erent o!! )alan#e sheet
a#tivities more than ever )e!ore -hi#h ne#essitates an a%%e% emphasis on >uality o! #orporate (overnan#e
o! )an.s in %evelopin( e#onomies.
1H

Chapter #

Sample sector
CORPORATE GOVERACE A! "A#$G %ECTOR $ "AG&A!E%'
As in many %evelopin( #ountries, )an.s play a vital role in $an(la%esh e#onomy, as the %ominant
!inan#ier !or the in%ustrial an% #ommer#ial a#tivities. Sin#e the in%epen%en#e in 1JD1, the (overnment
until 1JH2, -hen the Oo-nership re!orm< measures starte% in the !inan#ial se#tor, ha% #arrie% out the
re(ulation an% o-nership o! all the !inan#ial institutions. Durin( the re!orm perio%, t-o out o! si6
1J
5ational 'ommer#ial $an.s 35'$s4 -ere %enationaliEe% an% private #ommer#ial )an.s -ere allo-e% to
operate in the #ountry. *n 200;, out o! the 4J )an.s
operatin( in $an(la%esh, J )elon( to the pu)li# se#tor;, ;0 are lo#al private an% 10 are !orei(n o-ne%
)an.s 3$an(la%esh $an., 200;4.
Despite the e6pansion, the operational e!!i#ien#y o! the )an.in( institutions has #ontinue% to )e %ismal.
The se#tor -itnesse% %e#reasin( pro!ita)ility, in#reasin( non7per!ormin( assets, provision an% #apital
short!alls, ero%e% #re%it %is#ipline, rampant #orruption patroniEe% )y politi#al >uarters, lo- re#overy rate,
in!erior asset >uality, mana(erial -ea.nesses, e6#essive inter!eren#e !rom (overnment an% o-ners, -ea.
re(ulatory an% supervisory role et#. *nternal #ontrol system alon( -ith a##ountin( an% au%it >ualities are
)elieve% to have )een su)stan%ar%. Many o! the pro)lems have )een attri)ute% to la#. o! soun% #orporate
(overnan#e amon( the )an.s. The reports )y the $an.in( +e!orm 'ommission 31JJJ4 an% $A* 3200;4
raises serious #on#erns on the )an.in( se#tor an% #riti#iEe the >uality o! (overnan#e that prevails in the
)an.in( se#tor in $an(la%esh, -hi#h provi%es an impetus to e6plore the (overnan#e issues in %etail in this
paper. As in many other #ountries, there -ere no availa)le stru#ture% %ata)ases on #orporate (overnan#e
in $an(la%esh that le% us to the o)vious #hoi#e o! (eneratin( %ata throu(h a stru#ture% survey o! )an.in(
institutions in the #ountry. The stru#ture% >uestionnaire survey aime% at !in%in( out the prevailin(
situation in the )an.in( se#tor -ith respe#t to the #ore elements o! #orporate (overnan#e su#h as
o-nership:sharehol%in( stru#ture, #ontrol o! !irms, )oar% issues, mana(ement #ontra#ts an%
#ompensation, au%it an% %is#losure. $e#ause o! #lose (eo(raphi#al pro6imity, the entire )an.in( 34J4
population -as tar(ete% in the survey. A total o! ;B )an.s have respon%e% in#lu%in( 4 5'$s, ; S'$s, 24
'$s an% 4 "'$s. *n a%%ition to this, semi7stru#ture% an% unstru#ture% intervie-s -ere use% to e6plore
the pra#ti#al %ynami#s o! #orporate (overnan#e -ithin the institutions -hi#h -as %i!!i#ult to e6plore in a
stru#ture% C >uestionnaire. A total o! 21 intervie-s have )een #on%u#te% -hi#h in#lu%e% the #entral )an.
(overnor, 14 top mana(ement o!!i#ials o! all types o! )an.s, mem)ers o! three %i!!erent )an.s< )oar%s ,
one e#onomist, one #hartere% a##ountant an% the re(istrar o! Joint Sto#. 'ompany. The %ata relatin( to
the per!orman#e o! the )an.s have )een o)taine% !rom o!!7site supervision unit o! the #entral )an.. *t -as
not possi)le to (et the entire se#tor<s %ata !rom any other sour#e as the pu)li# se#tor )an.s %o not pu)lish
annual reports re(ularly an% the !orei(n )an.s only pu)lish #onsoli%ate% annual reports )ase% on (lo)al
operations.
O(nershi)* %hareholding %tru+ture
The )an.s in $an(la%esh #an )e #onsi%ere% as e6tremely #losely hel% #orporations, sin#e the majority o!
the )an.s are not pu)li#ly liste% #ompanies. An avera(e o! only 20 per #ent shares o! )an.s is pu)li#ly
availa)le in $an(la%esh an% a lar(e majority o! the shares are o-ne% )y a small num)er o! OSponsor<
sharehol%ers4 leavin( a small portion o! the sharehol%in( to the O?eneral< sharehol%ersB. The num)er o!
e6e#utive sharehol%in( is very minimal amon( the )an.s in $an(la%esh. There is a le(al restri#tion on
)an. e6e#utives )e#omin( sponsor sharehol%ers o! the )an.s. The e6e#utives #an only )uy shares 3*1s4
-hen )an.s (o !or pu)li# o!!erin( or !rom the se#on%ary e>uity mar.et an% even !or that the evi%en#e o!
e6e#utive sharehol%in( have )een !oun% only
in 14 per #ent o! the )an.s. The private )an.s in $an(la%esh %o have shares hel% )y !amilies an%
institutions. @o-ever, the )an.in( la- prohi)its sharehol%in( o! more than 10 per #ent )y mem)ers o!
one !amilyC. The survey has noti#e% heavy presen#e o! )lo#. hol%ers in the )an.in( se#torD, an% the
over-helmin( majority o! these )lo#. hol%ers are !rom the sponsors< #ate(ory. The issue o! sponsors as a
20
sin(le interest (roup re>uires !urther analysis. This is %ue to the !a#t that the lea% sponsor, -ho normally
a!ter (ettin( politi#al assuran#e o! )ein( a-ar%e% )an.in(
li#ense, assem)les ten H or more sponsors !rom his:her !amily, relatives an% )usiness an% so#ial !rien%s.
The ten%en#y is to remain -ithin the relia)le .no-n people -ith the main o)je#tive to retain the #ontrol
o! the )an.. An% they %o retain the #ontrol o! the )an.s in almost all the #ases. Aven in #ases -here the
)an. is a liste% #ompany the sponsors hol% the #ontrol as the (eneral sharehol%ers are lar(e in num)er,
hi(hly %isperse%, %isor(aniEe% an% are not sophisti#ate% enou(h to un%erstan% many (overnan#e an%
per!orman#e relate% issues. Most o!
D them )uy the shares !orm the se#on%ary mar.et -ith the o)je#tive o! ma.in( (ain in share tra%in(. *n
the a)sen#e o! e6e#utive sharehol%in( an% or(aniEe% small (eneral sharehol%ers, the sponsor sharehol%ers
have an open !iel% to rule. *n the '$s the sponsors #ontrol virtually everythin(, !rom appointment :!irin(
o! 'A1 to loan approval to pur#hase %e#ision to salary %etermination. An% these sponsor an% lar(e
sharehol%ers have heavily misuse% their over-helmin( o-nership an% #ontrol in )oth pu)li# an% private
se#tor )an.s. ?overnment has use% its )an.s to support its politi#al o)je#tives as -ell as the politi#ians in
the
(overnment have use% them to !ill in their an% their #lose ones< po#.ets at the e6pense o! )an.s< !un%s
-hi#h a#tually #ome !rom the %epositors. Majority o! the loans o! these )an.s have )een approve% an%
%is)urse% on the instru#tions:re>uest o! the (overnment o!!i#ials an% politi#ians -ithout any proper an%
e!!e#tive #re%it an% ris. analysis. An% these pu)li# se#tor )an.s are to%ay all )ur%ene% -ith heavy non7
per!ormin( loans an% losses. 1ne )an.er lin.e% J0 per #ent o! the %e!ault loans to politi#ally %ire#te%
len%in(. The s#enario is no %i!!erent in the '$s. The '$s sponsors have heavily plun%ere% the )an.s<
money sho-in( little respe#t to the systemati# #re%it analyses an% %epositors< -ell )ein(. The '$
o-ners are more intereste% in loan money than ma.in( pro!it as the )ene!it o! plun%erin( -as (reater than
the pro!it o!
ma.in( pro!it. *n 1JJH a total o! $DT 1; )illion -as )orro-e% !rom the '$s )y 1B2 o! their
sharehol%ers. To ma.e the situation -orse, it<s -i%ely )elieve% that the '$ o-ners have )orro-e% even
more on thir% party or !i#titious #ompanies<:in%ivi%uals< names to avoi% any attention )y pu)li# or
re(ulators. An% no -on%er a num)er o! these loans have alrea%y turne% non7per!ormin( or )a% loans
ma.in( the )an.s lose the %epositors< money they investe%. $esi%es the loans, the '$s sponsor
sharehol%ers have )een involve% -ith misusin(:plun%erin( o! )an.s< !un%s in many other -ays just to a%%
)ene!its to their o-n po#.ets. *ts -orth-hile to mention that (eneral sharehol%ers %o not have any o!
these privile(es at all. The only involvement, i! there is any, they have -ith the )an.s is (oin( to the
A?Ms an% re#eivin( %ivi%en%s. The !orei(n )an.s, althou(h o-ne% #ompletely )y their parent
#ompanies, are reporte%ly to )e !ree o! any sort o! o-ner inter!eren#e.
"oards
$oar%s have )een #ite% as major #orporate (overnan#e me#hanism an% are entruste% -ith the
responsi)ility o! strate(i#ally lea%in( a !irm -ith e!!e#tive %e#ision ma.in( an% proper H monitorin( on
)ehal! o! the prin#ipals o! the !irms. *n $an(la%esh, the avera(e num)er o! %ire#tors in the )an. )oar%s
stan%s at 10, an% the )oar%s are over-helmin(ly %ominate% )y the non e6e#utive mem)ers. There is very
thin presen#e o! e6e#utive mem)ership in the )an. )oar%s most o! -hom are the 'A1s -ho )y the virtue
o! the )an.in( re(ulation must )e in#lu%e% in the )an. )oar%s. Amon( the non7e6e#utive )oar% mem)ers,
the s#ale is heavily
tilte% to-ar%s sharehol%er %ire#tors almost all o! -ho are sponsor sharehol%ers. 1nly the pu)li# se#tor
)an.s have non7e6e#utive in%epen%ent %ire#tors -here as there are only t-o in%epen%ent %ire#tors in the
)oar%s o! the private )an.s.
21
The normal tenure o! the )oar% mem)ers turns out to )e ; years !or the majority o! the )an.s. This #an )e
attri)ute% to the re#ent re(ulation issue% )y the #entral )an. -hi#h limits the tenure o! )oar% mem)ership
!or the private )an.s into t-o terms o! ; years ea#h. The survey also reveals that none o! the )an.s in
$an(la%esh have more than one level o! )oar%s su#h as mana(ement )oar% or supervisory )oar%s. $oth
the o-ner mem)ers an% the in%epen%ent mem)ers o! the )oar%s are remunerate% throu(h )oar% meetin(
!ees only. There is no
remuneration !or )oar% -or. o! the e6e#utive mem)ers as they are all e67o!!i#io mem)ers o! the )oar%s. *t
seems the )oar% mem)ers o! the private )an.s remain in the )oar% !or lon( time as a)out 40 per #ent o!
the )oar% mem)ers are in their respe#tive )oar%s !or more than B years. The issue o! lar(e sharehol%ers
%is#usse% in se#tion ;.1 )e#omes more prominent %ue to the total %omination )y those sharehol%ers in the
)oar%s o! the )an.s in $an(la%esh. *n the '$s nine out o! the 10 mem)ers o! the )oar%s are sharehol%er
%ire#tors. The other rest (oes mainly
to the 'A1s as the la- re>uires them to )e in the )oar%. The entire private )an.in( has only t-o
in%epen%ent %ire#tors. So it<s not %i!!i#ult !or one to un%erstan% -ho #ontrols the )oar%s in '$s in
$an(la%esh )an.in(. An% a##or%in( to the )an.in( la- as -ell #orporate )y7la-s, it<s )asi#ally the )oar%
-hi#h ta.es majority o! the %e#ision re(ar%in( )an.s operations in#lu%in(
loans, investments, appointments, au%its et#. The #orporate )y7la-s o! most o! the )an.s restri#t entry o!
one to the )an.<s )oar%s i! he:she is not a sponsor sharehol%er. An% the sponsors le!t no stones unturne% in
ta.in( !ull a%vanta(e o! their total rei(n in the )an. )oar%s that %e#i%e almost everythin( a)out those
)an.s. *n the pu)li# se#tor )an.s the )oar%s are #omprise% o! politi#ally appointe% in%epen%ent %ire#tors
-ho are put in those positions )y the J rulin( politi#ians -ith spe#ial instru#tion an% o)je#tives to serve
the purposes o! spe#ial >uarters
involvin( politi#ians an% )usiness houses. An% -ith (overnment<s total an% un#hallen(ea)le authority to
remove any %ire#tor any time #ouple% -ith the %ire#tors< politi#al loyalty, )oar%s in these pu)li# se#tor
)an.s #ontinue to serve the politi#ians as O+u))er Stamps<. The "'$s )oar%s are ho-ever #ompletely
#omprise% o! the e6e#utives -ho are a##ounta)le to senior re(ional
an% (lo)al mana(ers. An% these )oar% mem)ers happen to -or. -ith !ull autonomy an% usually -or.
very pro!essionally.
,anagement- Contra+ts and $n+enti.es
The o-ners o! the )an.s heavily #ontrol the mana(ement a#tivities in $an(la%esh. The sharehol%ers,
either %ire#tly in #ase o! pu)li# se#tor )an.s, or throu(h )oar%s as in #ases o! the private )an.s, have total
#ontrol on the !ate o! the e6e#utives. *n H2 per #ent o! the )an.s, the 'A1s are %ire#tly a##ounta)le to the
)oar%s an% !or the others it<s mostly the o-ners %ire#tly e6#ept !or !e- !orei(n )an.s -here
a##ounta)ility is to the seniors in the (lo)al #hain. The #ontra#t that %i#tates the mana(ements<
#ontri)ution to the )an.s< )ene!its seem to )e !ine !or the lo#al private an% !orei(n )an.s as almost all o!
their 'A1s< #ontra#ts are lin.e% to
per!orman#e. $ut the pu)li# se#tor )an.s %o not #are to %esi(n the #ontra#t o! their 'A1s in a -ay that
)rin(s per!orman#e into !o#us. The mana(ement #ompensation also seem to -or. )etter in the !orei(n an%
lo#al private )an.s -hile the pu)li# se#tor )an.s remain !ar )ehin% in terms o! salary or per!orman#e
)ase% payment or #ompensations. The salary level o! the top mana(ement e6e#utives is almost 20 times
more in the !orei(n )an.s an% 10 times more in the
lo#al private )an.s #ompare% to the pu)li# se#tor )an.s. The majority o! the %e#isions are thrust upon thee
e6e#utives )y the o-ners o! the '$s an%
5'$s. An% non7#omplian#e means sure %eparture !rom the jo) N only the timeline may vary. The
(overnment )an.s are in the -orst #on%ition. The e6e#utives there are not only O%an#in( %olls< o! the
22
politi#ians )ut also they severely la#. >uali!i#ation an% motivation. The politi#ians sittin( at the Ministry
o! "inan#e %i#tate all appointment, trans!ers an% promotions. That ma%e many )an.ers to (o easy on
per!orman#e, as they .no- politi#al alle(ian#e -ill ensure retainin(
the jo) as -ell as promotions. =a#. o! a##ounta)ility amon( the e6e#utives is very a#ute in thee )an.s as
a result o! politi#al inter!eren#e. Moreover the #ompensation pa#.a(es are e6tremely 10 lo-, almost 10
times lo-er than the private )an.s an% 20 times than the !orei(n )an.s. =a#. o! a##ounta)ility an% lo-
#ompensation pa#.a(es have pushe% these )an.ers to heavy #orruption. Small an% me%ium s#ale loan
appli#ants #an easily (et their appli#ations approve% just )y payin( a per #enta(e to the )an. e6e#utives.
The rei(n o! tra%e unions runs supreme in those )an.s. The tra%e union lea%ers, )ein( )a#.e% )y
politi#ians, !or#e mana(ement to approve many loan appli#ations, (ive them un%ue )ene!its an% even play
an important role in appointin( ne- 'A1s. The private )an.s are in a little )etter position. 1ther than the
#ases involvin( )oar% mem)ers or sponsors, the e6e#utives are stri#tly hel% a##ounta)le to the )oar% an%
the o-ners
!or their a#tivities. The e6e#utives are also more >uali!ie% than those o! pu)li# se#tor<s in terms o! )oth
pro!ession an% e%u#ation. Also (iven the mar.et #on%itions in $an(la%esh, the e6e#utives o! the private
)an.s are very -ell pai% in !a#t they are the hi(hest pai% e6e#utives amon( any $an(la%eshi #ompanies.
The partial a##ounta)ility alon( -ith su!!i#ient motivational pa#.a(es ma.e the
e6e#utives -or. har% !or the )etterment o! the )an.s an% its %epositors an% sharehol%ers. Thou(h the
"'$s e6e#utives %o not have any %ire#t supervision o! the o-ners, they -or. un%er a very -ell %esi(ne%
an% stri#t a##ounta)ility system. Also they are very hi(hly >uali!ie% pro!essionals (ettin( e6tremely
attra#tive )ene!its. The "'$s e6e#utives are in !a#t hi(hest pai% o! any type o! #ompany e6e#utives in
$an(la%esh. A%%itional !inan#ial in#entives an% a%van#ement in #areer has )een lin.e% to their an% the
)an.s< per!orman#e. All o! these a#tually ma.e them -or. very har% !or the pro!ita)ility o! the )an.s that
ultimately ta.es (oo% #are o! the %epositors< !un%s they are entruste% -ith.
Audit and !is+losure /indings
roper an% e!!e#tive au%it #ouple% -ith !ull an% ri(ht %is#losure helps to maintain a##ounta)ility an%
)rin( transparen#y o! !irms. "or )an.in( #ompanies, -hi#h #olle#t people<s money an% ma.e pro!it )y
investin( those !un%s re>uire more strin(ent au%it an% %is#losure pra#ti#es than non7!inan#ial !irms. @ere
is ho- the au%it an% %is#losure is li.e in the )an.in( se#tor o! $an(la%esh. A)out JB per #ent o! the )an.s
in $an(la%esh have their internal au%it %epartment re(ularly
ta.in( a##ount o! important %e#ision ma.in(s:operations -ithin the )an.. *n CJ per #ent o! the 11 #ases
the internal au%it se#tion reports to the )oar% o! %ire#tors -hile the other ;1 per #ent reports to senior
mana(ement. More than hal! o! the )an.s< internal au%it !oun% evi%en#e o! !rau% in their au%its.
*nterestin(ly 2J per #ent o! the )an.s %i% not opine to ans-er this >uestion. Another interestin( part is that
all the )an.s in $an(la%esh %o have e6ternal au%itors an% it<s usually the a##ountin( !irms -ho -or. as
e6ternal au%itors. $ut its -orth-hile to mention that the )an.in( la- re>uires all the )an.s to appoint
e6ternal au%itors an% stipulates that the e6ternal au%itor must )e an a##ountin( !irm. 1n#e a(ain than.s to
a very re#ent )an.in( re(ulation )e#ause o! -hi#h all the )an.s no- %o have a )oar% au%it #ommittee.
@o-ever, only B per #ent o! the )an.s sai% they %is#lose the internal au%it reports to the sharehol%ers in
the A?M -hile only J per #ent o! the )an.s %is#lose their )oar% au%it #ommittee<s report pu)li#ly. 8hen
it #ame to %is#losin( per!orman#e to the %epositors only the !orei(n )an.s #ame -ith a positive ans-er
-hile no pu)li# an% lo#al private )an.s appear to )e %oin( so.
The survey noti#e% that e6#ept !or the !orei(n )an.s no lo#al )an. has any #orporate )y7la- or pra#ti#e o!
%is#losin( #onne#te%:insi%er len%in( in any sorts o! the reports nor %o they reveal metho%s to %etermine
the salaries an% )ene!its o! the e6e#utives. An% survey in!ormation reveals that only the !orei(n )an.s
2;
alon( -ith one lo#al private )an. are re>uire% )y their #orporate )y7la-s to reveal in!ormation on thir%
party transa#tionsJ. An% more surprisin(ly it has )een !oun% in the survey that e6#ept !or one pu)li#
se#tor an% one lo#al private se#tor )an.s no other )an.s have )oar% #ommittees on nomination an%
remuneration a!!airs ma.in( the those a#tivities non7transparent. *n an i%eal s#enario any -ron(%oin( )y
sharehol%ers or e6e#utives are suppose% to )e e6pose% i! there remains an e!!e#tive au%it an% %is#losure
system. "rom outsi%e, the au%it pi#ture in $an(la%esh )an.in( se#tor loo.s very )ri(ht. All the )an.s
have internal au%it %epartment, e6ternal au%itors, )oar% au%it #ommittees an% spe#ial au%it )y the #entral
)an.. $ut then ho- #ome the irre(ularities are ta.in( pla#eP *t<s mainly )e#ause o! pro)lems in
implementin( au%it !in%in(s #ouple% -ith lo- >uality an% inte(rity o! au%itors. *n the 5'$s an% '$s
the internal au%its ten% to avoi% irre(ularities asso#iate% -ith o-ners:)oar% mem)ers. @o-ever the
internal
au%its o!ten %is#over !rau%ulent a#tivities )y e6e#utives. $ut in 5'$s, the #ulprits mana(e to stall a#tions
throu(h politi#al or union in!luen#e. *n '$s, i! the %is#overy is not lin.e% to any 12 sharehol%er:)oar%
mem)er, then a#tion imme%iately !ollo-s. A##ountin( !irms usually #on%u#t the e6ternal au%its in
$an(la%esh. $an.s happen to )e very lu#rative #lient an% in most o! the #ases the au%it !irms are also
lin.e% -ith personal )usinesses o! the )an. o-ners. As a result the au%itors ten% to (ive into the %eman%s
o! the )an. o-ners an% prepare au%it reports, as the )an.s -ant them to. =a6 a##ountin( stan%ar% an%
-ea. re(ulatory -at#h on the a##ountants ma.e thin(s easier. Till year 2000, the )an.s in $an(la%esh
-ere not re>uire% to use the *AS7;0 that is a -i%ely a##epte% a##ountin( stan%ar% !or !inan#ial
institutions. As a result many o! the %is#losures ma%e )y the )an.s -ere an% are not still #orre#t. There are
alle(ations o! O-in%o- %ressin(< )y the )an.s to hi%e un%erlyin( pro)lems, -ea.nesses an% irre(ularities.
There are many e6amples o! )an.s revealin( %i!!erent !i(ures un%er same hea% in %i!!erent %is#losures. *n
pra#ti#e there are almost no %is#losures in the pu)li# se#tor )an.s. The only reports they su)mit (o to
Mo" an% the #entral )an.. '$s %o )rin( out annual reports )ut there are -i%esprea% alle(ations o!
%o#torin( !i(ures an% !a#ts in those reports. Surprisin(ly in the 5'$s an% '$s there are very little
%is#losures ma%e even to internal e6e#utives an% employees
a)out tar(ets, a#hievements, #orporate plans et#. &ntil the #entral )an. issue% a %ire#tive, e6#ept !or t-o
7no other )an.s ha% a )oar% au%it #ommittee. To %ate none e6#ept those t-o have !orme% )oar%
#ommittees on remuneration an% nomination. *n !a#t none o! their #orporate )y7la-s in#lu%e any #lause
!or esta)lishin( those )oar% #ommittees an% surprisin(ly the "'$s also appear to have this pro)lem.
@o-ever, the "'$s !ollo- their (lo)al poli#ies on au%it an% %is#losure. Au%it system an% pra#ti#e is very
strin(ent an% e!!e#tive. They ma.e !ull %is#losures usin( international a##ountin( stan%ar%s on loan
positions, e6e#utive remuneration, thir% party transa#tions et#. They al-ays #ommuni#ate their #orporate
(oals, a#hievements an% !uture plans -ith the e6e#utives. The "'$s even ma.e %ire#t %is#losure o! their
!inan#ial per!orman#e to the %epositors.
Role of Central "an0- Other Regulators and Cor)orate Go.ernan+e
The primary re(ulator !or the )an.s in $an(la%esh is the #entral )an., .no-n as $an(la%esh $an..
Amon( other re(ulators are +JS', SA', *'A$ an% the le(al authorities. The $$ remains un%er !ull
#ontrol an% in!luen#e o! the (overnment. *t a#utely la#.s >uality in its sta!!s in terms o! pru%ent
monitorin( an% supervision. =o- #ompensation pa#.a(es have also #ontri)ute% 1; mu#h in #ur)in( $$<s
rei(n on the )an.s. *ts is very easy to )uy out an au%itor o! the $$ -ho in return su)mits !avora)le
reports on the )an.s. oliti#al interventions, la#. o! >uality an%
#orruption has #reate% (reat o)sta#les !or the #entral )an. to play the e6pe#te% role. The +JS' remains
just as a Oli#ense issuin( authority< permittin( !irms to #ome into e6isten#e. 8ith la#. o! %etermination,
>uantity an% >uality o! sta!!s an% mo%ern te#hnolo(y the +JS' ma.es very little #ontri)ution as a
24
re(ulator o! !irms. *ts -orth-hile to mention that there is neither #omputer nor any #omputer literate sta!!
in +JS' -hi#h han%le more than 1,00,000 #ompany !iles. The SA' is tryin( har% to )rin( %is#ipline in the
liste% #ompanies )ut in the )an.in( se#tor -here the majority is not pu)li#ly liste%, SA'<s s#ope to a#t is
limite%. Moreover SA' also su!!ers !rom shorta(es o! >uali!ie% sta!!s. There is only on !ull time #orporate
a##ountant -or.in( at the a(en#y. *'A$ is the supreme authority !or a!!iliations an% re(ulations o!
a##ountants in $an(la%esh. The *'A$ !aile% to %esi(n e!!e#tive re(ulations !or its mem)ers as -ell !ell
short o! properly monitorin( an% a#tin( upon the a#tivities o! the a##ountants in $an(la%esh. *t has also
!aile% to (enerate su!!i#ient num)er o! >uali!ie% a##ountants an% implement international a##ountin(
stan%ar%s. "inally everythin( in $an(la%esh )an.in( (ets stu#. on#e it rea#hes #ourts. The le(al )a#.up to
)an.s is very -ea. an% o!ten ta.es #ourts a(es to (ive a ver%i#t. De!aulters o!ten (o to the #ourt an% -in
an injun#tion )arrin( )an.s to sell the #ollaterals or #allin( them O%e!aulter< until the #ase is solve%. An% a
%e#a%e is a very #ommon time!rame !or #ourts to #ome up -ith ver%i#ts. A(ain la#. o! su!!i#ient le(al
personnel in $an(la%esh is a##ounta)le !or this pro)lem. Alto(ether the re(ulatory authorities, parti#ularly
the #entral )an.s have !aile% the %epositors an% small sharehol%ers in ren%erin( its %uty properly in terms
o! pru%ential re(ulation an% supervision.
2B
'hapter: 4
Analysis an% !in%in(s
4.1 @istori#al perspe#tive o! the issue
*n 2002, $an(la%esh Anterprise *nstitute em)ar.e% on a proje#t to e6amine the #urrent state o!
#orporate (overnan#e norms an% pra#ti#es in $an(la%esh, *n%ia, Sri =an.a, an% a.istan. "rom
the outset, -e .ne- that $an(la%esh la((e% )ehin% its South Asian nei(h)ours -ith re(ar% to
#orporate (overnan#e stan%ar%s an% pra#ti#e an% hope% that a #omparative analysis -oul%
provi%e re(ional e6amples o! initiatives that #oul% )e applie% in $an(la%esh to improve the
situation. This pu)li#ation is the pro%u#t o! the !irst sta(e o! the proje#t, -hi#h #omprise% o! !our
reports on the state o! #orporate (overnan#e in $an(la%esh, *n%ia, Sri =an.a, an% a.istan. 8e
-ere !ortunate to )e a)le to -or. -ith e6perts in #orporate (overnan#e in ea#h o! the #ountries
involve%.
2C
The pro#ess o! stren(thenin( #orporate (overnan#e in South Asia is on(oin(. As the reports in
this volume point out, there are many aspe#ts o! the #orporate (overnan#e re(ime in South Asian
#ountries that #ontinues to la#. stren(th. As Ajith 5ivar% 'a)raal points out in his report on Sri
=an.a, there are >uestions re(ar%in( a#tual #orporate (overnan#e per!orman#e #ompare% to state%
#orporate (overnan#e pra#ti#es. ro#e%ures !or )an.rupt#y an% insolven#y in *n%ia are i%enti!ie%
as a sti#.in( point )y 1m.ar ?os-ami. "inally, "aisal $ari an% Ali 'heema >uestion -hether
the re>uirements enshrine% in the a.istani 'o%e o! 'orporate ?overnan#e -ill )e too onerous
!or small #ompanies.
@o-ever, $an(la%esh has mu#h to learn !rom its South Asian nei(h)ours an% learn it must. "or
$an(la%esh to improve its e#onomi# per!orman#e, it must attra#t more investment #apital )oth
!rom %omesti# an% !orei(n investors. $etter #orporate (overnan#e is a prere>uisite !or investors
to entrust their !un%s to #orporations. "or $an(la%esh, the !irst step in stren(thenin( the role o!
sta.ehol%ers in #orporate (overnan#e is raisin( a-areness re(ar%in( these issues an% in#rease
#onsensus a)out the nee% !or )etter #orporate (overnan#e. *n a%%ition, there shoul% )e more
re#o(nition that #orporate (overnan#e is inte(ral an% ne#essary to the %evelopment o! the private
se#tor in $an(la%esh. To a#hieve these (oals o! )etter a-areness an% re#o(nition o! (oo%
#orporate (overnan#e pra#ti#es, startin( in Au(ust 200;, $an(la%esh Anterprise *nstitute is
#onvenin( a Tas.!or#e on 'orporate ?overnan#e that -ill %evelop an% en%orse a 'o%e o!
'orporate ?overnan#e !or $an(la%esh. This Tas.!or#e -ill )e(in the !irst step in )rin(in(
$an(la%esh up to a level e>uivalent -ith international an% re(ional stan%ar%s o! #orporate
(overnan#e.
*n $an(la%esh, ho-ever, there have )een no serious #orporate s#an%als -hi#h have )een enou(h
to sen% sho#. -aves to un%ermine #on!i%en#e in the !inan#ial system, nor has the #ountry !oun%
that it has rea#he% the limits o! #onventional #orporate !inan#in( mainly throu(h )an. len%in(.
The #ountry report i%enti!ies that ,the relatively lo- level o! international investment in
$an(la%esh %oes not provi%e a su!!i#ient motivation !or improvin( #orporate (overnan#e, nor are
there many tra%itional %omesti# motivations !or improvement in #orporate (overnan#e pra#ti#es
in $an(la%esh/. 5evertheless, the report #on#lu%es that this %oes not mean that $an(la%esh
shoul% (ive lo- priority to #orporate (overnan#e, as there are reasons other than #apital mar.et
re!orms to !o#us on #orporate (overnan#e. The $an(la%esh #ountry report notes the si(ni!i#an#e
o! #orporate (overnan#e !or a #ompetitive private se#tor in a (lo)al mar.et as -ell as !or
e!!i#iently utiliEin( %omesti# investment to a#hieve (reater e#onomi# %evelopment. ?oo%
#orporate (overnan#e pra#ti#es -ill help %evelop an% stimulate )etter )usiness mana(ement,
strate(i# mana(ement, an% ris. mana(ement, -hi#h, in the lon(7term, -ill ma.e $an(la%eshi
)usinesses more #ompetitive. *n a%%ition, the lessons !rom the e6perien#e o! the nei(h)ourin(
#ountries in South Asia are su#h that $an(la%esh #an %eploy (oo% #orporate (overnan#e to
prevent the pro)lems -hi#h have a!!li#te% other #ountries rather than to solve them a!ter the
event.
The #ountry reports (o )eyon% %es#ri)in( the si(ni!i#an#e o! #orporate (overnan#e in theoreti#al
an% poli#y terms N they also provi%e in%i#ations o! the e!!e#tiveness o! #orporate (overnan#e.
erhaps the most important >uestion !or #orporate (overnan#e is -hether -ell7(overne%
#ompanies per!orm )etter 3in terms o! (ro-th, pro!ita)ility an% share pri#e4 an% )ehave )etter 3in
terms o! #orporate so#ial an% environmental responsi)ility an% o! #orporate #itiEenship, espe#ially
in ta#.lin( the supply si%e o! #orruption4 than %o )a%ly7(overne% #ompanies. ?oo% #orporate
2D
(overnan#e is virtuous, )ut %oes it %eliver resultsP *t #oul% )e sai% that this >uestion impli#itly
runs li.e a theme throu(h the $an(la%esh #ountry report, an% e6pli#itly emer(es in #on#lusions
su#h as ,nor are there many tra%itional %omesti# motivations !or improvement in #orporate
(overnan#e pra#ti#es in $an(la%esh/. There is a possi)le #hallen(e that, unless there are
satis!a#tory ans-ers to this >uestion o! the e!!i#a#y o! #orporate (overnan#e, $an(la%esh N an%
other #ountries N -ill, >uite reasona)ly, not )e #onvin#e% o! the nee% to assi(n hi(h priority to
#orporate (overnan#e pro(rammes.
4.2 A#onomi# )ene!its
'orporate (overnan#e ensures that an or(aniEationFs assets an% authority !o#us on the #orporationFs
%e!ine% purpose an% are not %iverte% else-here. Sir A%rian 'a%)ury, #hair o! the #ommittee that pro%u#e%
the !oun%ational 1JJ2 0'o%e o! $est ra#ti#es,0 %e!ine% #orporate (overnan#e as 0a series o! stru#tures
an% pro#esses !or the %ire#tion an% #ontrol o! a #ompany.0 @e pointe% out that (overnan#e spe#i!ies ri(hts
an% responsi)ilities o! all #orporate parti#ipants, in#lu%in( )oar% mem)ers, mana(ement an% sharehol%ers.
A##or%in( to the 1r(aniEation !or A#onomi# 'ooperation an% Development 31A'D4, it also )alan#es
e#onomi#, so#ial, in%ivi%ual an% #ommunity (oals, en#oura(es ste-ar%ship an% ali(ns 0the interests o!
in%ivi%uals, #orporations an% so#iety.0
A%vanta(es
Davi% M. @. hillips an% Alison Thomas o! ri#e -ater house 'oopers i%enti!ie% three main )ene!its o!
#orporate (overnan#e: 0)etter %e#ision7ma.in(G lo-er sto#.7pri#e volatility an% #ost o! #apitalG an% )etter
sta.ehol%er en(a(ement.0 The Mana(ement Stu%y ?ui%e on 'orporate ?overnan#e i%enti!ie% !ive more:
2H
ensure #orporate su##ess an% e#onomi# (ro-thG maintain investor #on!i%en#eG in%u#e o-ners an%
mana(ers to a#hieve o)je#tives in the )est interest o! the or(aniEation an% its sharehol%ersG minimiEe
-aste, #orruption, ris.s an% mismana(ementG an% help in )ran% !ormation an% %evelopment.
ru%ent Mana(ement
The )asis o! #orporate (overnan#e #on#erns %eterminin( e!!e#tive %e#ision7ma.in( strate(ies. 8hile
ultimate authority rests -ith the )oar% o! %ire#tors, #orporate (overnan#e ensures that mana(ers, o-ners
an% the )oar% are all a%herin( to #orporate (oals rather than sel!7promotin( pra#ti#es. This #reates a
#limate o! transparen#y that re%u#es opportunities !or #orruption an% mismana(ement. 'are!ul a##ountin(
an% oversi(ht i%enti!ies areas o! -aste an% improves ris. assessment.
Sto#. ri#e Sta)ility an% 'apital 'osts
The *nternational "inan#e 'orporation 3*"'4 reports that 0-ell7(overne% #ompanies re#eive hi(her mar.et
valuations,0 ma.in( them more attra#tive to investors. A #orporate (overnan#e pro(ram (ives potential
partners an% #apital investors more #on!i%en#e in a )usiness see.in( ne- !un%s. 'orporations a%optin(
transparent (overnan#e poli#ies %evelop improve% systems !or #ontrollin( internal pro#e%ures, lea%in( to
(reater !inan#ial a##ounta)ility an% hi(her pro!it mar(ins an% allo-in( investors to )etter pre%i#t !uture
per!orman#e. $etter pre%i#tions lea% to hi(her intrinsi# sto#. values, -hi#h then remain sta)le %espite
mar.et !lu#tuations, allo-in( investors to %etermine mar(ins o! sa!ety.
Sta.ehol%er An(a(ement
'ompanies that are proa#tive in sharin( #re%i)le #orporate in!ormation #an improve their relationships
-ith all sta.ehol%ers. Amployee retention in#reases, an% #ustomer #on!i%en#e that the #ompany -ill
%eliver on promises improves its reputation in the press an% #hat rooms. 'ase stu%ies sho- that a
#ompanyFs a)ility to ne(otiate sensitive #ontra#ts is stren(thene% an% that suppliers are more -illin( to
#ommit their o-n #apital -hen there is an open, truste% relationship throu(h #orporate (overnan#e
reportin(.
$ran% A-areness
*mprove% sta.ehol%er relationships an% sta)le sto#. pri#es improve the #orporationFs )ran% !ormation an%
%evelopment internally an% in the mar.etpla#e. Soli% (overnan#e pra#ti#es lea% to #onsumer prote#tions
that %evelop )ran% loyalty. As #onsumer #on!i%en#e rises, #orporate su##ess tren%s up-ar%.
An e!!e#tive #orporate (overnan#e !rame-or. #an minimiEe the a(en#y #osts an% hol%7up
pro)lems asso#iate% -ith the separation o! o-nership an% #ontrol.
There are )roa%ly three types o! me#hanisms that #an )e use% to ali(n the interests an% o)je#tives o!
mana(ers -ith those o! sharehol%ers an% over#ome pro)lems o! mana(ement entren#hment an%
monitorin(:
QR1ne metho% attempts to in%u#e mana(ers to #arry out e!!i#ient mana(ement )y %ire#tly
ali(nin( mana(ers interests -ith those o! sharehol%ers e.(. e6e#utive #ompensation plans,
sto#. options, %ire#t monitorin( )y )oar%s, et#.
2J
QRAnother metho% involves the stren(thenin( o! sharehol%er<s ri(hts so sharehol%ers have )oth
a (reater in#entive an% a)ility to monitor mana(ement. This approa#h enhan#es the ri(hts o!
investors throu(h le(al prote#tion !rom e6propriation )y mana(ers e.(. prote#tion an%
en!or#ement o! sharehol%er ri(hts, prohi)itions a(ainst insi%er7%ealin(, et#.
QRAnother metho% is to use in%ire#t means o! #orporate #ontrol su#h as that provi%e% )y #apital
mar.ets, mana(erial la)our mar.ets, an% mar.ets !or #orporate #ontrol e.(. ta.e7overs.
Moreover, the a)sen#e o! an e!!e#tive mar.et !or #orporate #ontrol may also impe%e the
%evelopment o! an international pro%u#tion )ase, an% may prevent !irms !rom enterin( throu(h %omesti#
a#>uisitions. *n ?ermany, !or e6ample, the limite% importan#e o! liste% joint7sto#. #ompanies, the role o!
#ross7sharehol%in(s )et-een partner !irms, an% the important role o! employee representation on
#ompany
)oar%s, all ma.e it very %i!!i#ult !or outsi%ers to )uy ?erman !irms. At a time o! (lo)aliEation this may )e
in#reasin(ly #ostly to !irms.
4.3 Socio-cultural benefits of corporate governance
+enefits of .ood Corporate .overnance
A (oo% system o! #orporate (overnan#e #ontri)utes to sustaina)le e#onomi# %evelopment )y enhan#in(
the per!orman#e o! #ompanies an% in#reasin( their a##ess to outsi%e #apital. ?oo% #orporate (overnan#e
has )oth a sta)iliEin( impa#t as -ell as a (ro-th impa#t on the ma#ro e#onomy.
*n terms o! (ro-th, the ar(ument is strai(ht !or-ar%. ?oo% (overnan#e en#oura(es #on!i%en#e in the
!inan#ial system lea%in( to in#rease% mo)iliEation an% investment. All thin(s )ein( e>ual the in#rease%
invest -ill lea% to in#rease% (ro-th in the e#onomy. *t is important to note that )e#ause (oo% (overnan#e
ensures that resour#es are allo#ate% to those that use it )est, pro%u#tivity -oul% )e enhan#e% an%
#onse>uently (ro-th is enhan#e%.
?oo% #orporate (overnan#e -oul% also lea% to a sta)le ma#roe#onomi# situation. This re>uires an all
em)ra#in( interpretation o! (oo% #orporate (overnan#e. *ma(ine a situation in -hi#h (overnment is the
lar(est sharehol%er in most o! the )an.s. ?overnment then sele#ts )oth senior mana(ement an% mem)ers
o! the )oar% o! %ire#tors. *! the sele#tion is not )ase% on >uali!i#ation an% #ompeten#e, )ut rather politi#al
#ronyism an% nepotism, then there is a stron( possi)ility !or the emer(en#e o! poor #orporate (overnan#e.
*n su#h situations, ?overnment is more li.ely to !inan#e its %e!i#its throu(h )an. )orro-in( -ith all its
;0
atten%ant pro)lems o! hi(h in!lation an% ,#ro-%in( out/ o! the private se#tor. *n other -or%s, a poor
#orporate (overnan#e stru#ture is more li.ely to lea% to an unsta)le ma#roe#onomi# system than a (oo%
one.
4.4 Structural features
'orporate stru#tures %i!!er !rom one #ountry to another. *n most -estern e#onomies #orporate po-er is
le!t in the han%s o! the )oar% o! %ire#tors an% senior mana(ement -ho are appointe% )y the sharehol%ers
to a#t in a -ay so as to ma6imiEe sharehol%ers< value. This stru#ture re!erre% to as the An(lo7Ameri#an
system #ontrasts -ith the ,sta.ehol%er/ system, as is pra#ti#e% in pla#es li.e ?ermany an% Japan. *n the
sta.ehol%er or relational system, sharehol%in( is more #on#entrate%, -ith lar(e )lo#s hel% )y )an.s, other
#orporations, an% !amilies. These )lo#s ten% not to )e a#tively tra%e%. They have (reater relian#e on %e)t
!inan#in( an% a (overnan#e role !or )an.s. $an.s hol% e>uity either in %ire#t or %epositary !orm, an% may
)e represente% on the )oar% o! %ire#tors. Shares also are hel% )y .ey #ustomers, suppliers, an% allie%
#orporations, o!ten on a re#ipro#al )asis. 'on#entrate%, %e%i#ate% hol%in(s ma.e it %i!!i#ult to esta)lish a
mar.et !or #orporate #ontrol. "inally, employees play a role in #orporate (overnan#e in the sta.ehol%er
system.
Thus, un%er the sta.e hol%er system #re%itors #ontrol the #ompany -hile in the An(lo7Ameri#an system
the $oar% o! Dire#tors an% the top mana(ement a#ts a(ents !or the sharehol%ers in ma6imiEin( their
value.
The ma#ro impa#t o! #orporate (overnan#e %i!!ers un%er the %i!!erent s#enarios. *ma(ine a situation o!
e6#essive #apital e6pen%iture lea%in( to e6#ess a((re(ate supply in the e#onomy. Simple Keynesian
reme%y -oul% su((est in#reasin( a((re(ate %eman% throu(h ta6 #uts, pu)li# -or.s proje#ts, an% the li.e.
8hile un%er )oth systems the Keynesian %eman%s #an )e satis!ie%, the lo- ris. pro!ile o! #re%itor
#ontrolle% !irms -ill lea% them to more in#rease% mar.et7share o)je#tives than pra(mati# )ut ris.y
ventures li.ely to (et the e#onomy out o! the %ol%rums.
C,0CL2S!,0S
$an.in( se#tor remains o! enormous importan#e !or $an(la%esh -ho is strivin( har% to stren(then its
%evelopin( yet !ra(ile e#onomy. To move !rom the a(ri#ulture )ase% e#onomy to an in%ustry7)ase% one,
$an(la%esh nee%s its )an.in( se#tor, -hi#h is the sin(le lar(est element o! the !inan#ial se#tor, to operate
at its )est -ith utmost e!!i#ien#y. Anythin( short o! that an% even a sli(ht insta)ility in this area -oul%
-re#. lon( term havo# on $an(la%esh<s %evelopment. An% soun% #orporate (overnan#e remains to )e a
;1
.ey re>uirement !or e!!i#ient an% sta)le )an.in( system. 8e have %is#usse% in this paper ho- uni>ueness
o! )an.in( #ompanies an% )an.in( )usiness re>uire spe#ial #orporate (overnan#e attention on a priority
)asis parti#ularly 14 !or the %evelopin( #ountries -here pru%ential re(ulation an% supervision is
ina%e>uate to provi%e a sa!ety net !or the %epositors an% sta.ehol%ers o! the )an.s. *n the #ase o!
$an(la%esh as -ell, -e have noti#e% that the o-ners o! )an.s hol%in( lar(e shares have )een misusin(
the )an.s< !un%s utiliEin( their #ontrol over the institutions. They have use% their %omination in the )oar%
positions as -ell as la#. o! e!!e#tive, strin(ent an% !ull au%it an% %is#losure to plun%er pu)li#<s money
sho-in( little respe#t !or the %epositors an% the institutions. An% the re(ulatory sta.ehol%ers have totally
!aile% to %esi(n, implement pru%ent re(ulations as -ell as e!!e#tive motivations an% supervisions. The
result is a near7#ollapse #on%ition o! the )an.in( se#tor -ith lo- pro!ita)ility an% hi(h7ris. in%i#ators !or
the lo#al )an.s -hile the !orei(n )an.s, in spite o! operatin( in the same environment, ten% to sho- )etter
results an% sta)ility -ith (oo% (overnan#e pra#ti#es. *n or%er to restore %is#ipline an% )rin( soun%
#orporate (overnan#e the !irst priority is to .eep the system out o! politi#al in!luen#e. The politi#al
#onsi%erations:in!luen#e rei(ns supreme in $an(la%esh )an.in( !rom runnin( the pu)li# se#tor )an. to
issuin( private )an. li#enses an% !rom inter!erin( -ith the #entral )an. to prote#tin( )an. %e!aulters.
$an.s an% re(ulators nee% total autonomy an% must )e allo-e% to %eal -ith )an.in( issues in terms o!
e#onomi# an% #ommer#ial via)ility. The #entral )an. must )e (iven the !ree%om o! a#tin( on )ehal! o! the
%epositors. @o-ever the #entral )an. nee%s to restru#ture it sel! -ith )etter monitorin( te#hni>ues, use o!
te#hnolo(y an% improve the >uality an% a##ounta)ility o! its o-n human resour#es. The pre!erential
treatment o! OSponsor< sharehol%ers is #reatin( a lar(e #hun. o! the pro)lems in the lo#al private )an.s.
A>ual treatment an% ri(hts o! all sharehol%ers -oul% )rin( a)out mu#h positive %is#iplinary #han(e in the
)an.s. The )an.s in $an(la%esh are still #losely hel%
#ompanies. +eleasin( more shares to pu)li# an% parti#ularly to institutional investors shoul% )e
en#oura(e% as it -ill )rin( a)out mar.et7%riven an% #loser monitorin( o! )an. a#tivities. ru%ential
re(ulation shoul% )e %esi(ne% ta.in( into a##ount the au%it an% %is#losure pro)lems that ma.e mu#h o!
the )a.in( %e#isions non7transparent. The #entral )an. shoul% -or. #losely -ith the other re(ulators su#h
as *'A$ to ma.e improvements in the au%it an% %is#losure
pra#ti#es o! the )an.s -ithout -hi#h (oo% (overnan#e -ill )e %i!!i#ult to a#hieve. @a% these 1B issues
)een #onsi%ere% more than 20 years a(o -hen (overnment starte% to li)eraliEe the )an.in( se#tor, the
se#tor #oul% have avoi%e% many o! the un%erlyin( pro)lems an% losses it is )ur%ene% -ith to%ay. *n other
-or%s the issue o! #orporate (overnan#e o! !inan#ial institutions must (et %ue importan#e alon( -ith the
%e#ision o! !inan#ial li)eraliEation or else li)eraliEation -oul% only a%% to the -oes o! thousan%s o!
%epositors alon( -ith ine!!i#ient )an.in( system.
1C
;2
%eferences
Arun, T.?. an% J. Turner 320024 Ou)li# Se#tor $an.s in *n%ia:
Arun, T.?. an% J. Turner 3200;4 O'orporate ?overnan#e o! $an.s in Developin( A#onomies: 'on#epts
an% *ssues<,
'orporate ?overnan#e: An *nternational +evie-, 9ol. 12, 5o. ;, pp.;D17 ;DD. $an(la%esh $an. 3200;4
Annual +eport. $an(la%esh Anterprise *nstitute 3$A*4 3200;4 O
A 'omparative Analysis o! 'orporate ?overnan#e in South Asia: 'hartin( a +oa%map !or $an(la%esh<
$A*, Dha.a, $an(la%esh. $an.in( +e!orm 'ommission 31JJJ4 The +eport o! the $an.in( +e!orm
'ommission, !orme% )y the ?overnment o! $an(la%esh.
"inan#ial Development<, 8or.in( aper, &niversity o! 'hi#a(o. +a>ui), A. 31JJJ4 O"inan#ial Se#tor
+e!orm in $an(la%esh: An Avaluation<, $an. ori.roma, 9ol. SS*9, 5o. ; an% 4. Sayee%, T. 320024
O$an(la%esh: Strate(i# *ssues an% otential +esponse *nitiatives in the "inan#e Se#tor: $an.in( +e!orm
an% Development<, aper resente% at Seminar 1r(aniEe% )y Asian Development $an. an% A*MS o!
$an(la%esh, Dha.a, July 22.
8orl% $an. 31JHJ4 8orl% Development +eport. 8orl% $an. 31JJH4 O$an(la%esh: Strate(y !or
Asta)lishin( a Soun% an% 'ompetitive $an.in( Se#tor<, 9ol. 1 2 2, "inan#e an% rivate Se#tor &nit,
South Asia +e(ion, 8orl% $an.. 1J
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