Co rporate Governance and its Implication in Bangladesh

Abstract:
Bangladesh is one of the third world countries having many opportunities in
corporate sector. Today, Business has to some dynamism with their products
otherwise consumer will not attract of their product. E-business, e-commerce,
and e marketing have been promoted as the rescuer of the business world and a
catalyst to twenty-first century performance in the global marketplace. Now we
have new word corporate Governance in the Bangladesh context. This paper
presents the meaning, scope, importance and the implementation of corporate
governance practices in Bangladesh. It also examines the internal mechanisms
like the board of directors, their independence, the challenges faced by
institutional investors, the role of internal and external communication
mechanisms, whistle blowers and th e legal protection needed for them to ensure
corporate governance practices. Successful corporate governance depends
largely of trade-off among the various conflicting interest groups like
Government, Society, Inventors, Creditors, and Employees of the org anization.
The basic governance issues related to the effectiveness and accountability of
board of directors.

This paper further examines the external mechanisms

through like corporate forums, media analysts, structural reforms and

governance

ratings

to incorporate

corporate

governance

codes

into

corporations. In addition, the researchers try to recommend regarding

governance that can help a lot for developing corporate sectors in Bangladesh.

Key Words: Corporate Governance, Implication, Bangladesh

Objectives of the study

1. To know what is all about corporate governance.
2. To recommend regarding implication of good governance in corporate sector in
Bangladesh

Scope & Methodology of the study

The proposed study will cover several public sectors organization like Railway, BTTB,
Medical Hospitals and educational institutions specially Universities which may need the
good governance for its own development. The proposed study would be empirical one.
Primary and secondary both kinds of data would be used in this study. The secondary
data would be collected from various books, reference Journal, seminar papers and
articles.

Rationale of the study

In the early part of the 21st century, the technologies emerging from the information
technology and biotechnology revolutions will present unprecedented governance
challenges to national and international political systems. These technologies are now
shifting and will continue to affect the organization of society and the ways in which
norms emerge and governance structures operate. How policymakers respond to the
challenges these technologies, including the extent to which developments are supported
by public research funds and whether they are regulated, will be of increasing concern
among citizens and for governing bodies. New governance mechanisms, particularly on
an international level, may be needed to address these emerging issues. In Bangladesh,
some sort of problems is going on regarding responsibility and accountability of each

sector. That is why the researcher find some interest to do research on this topics and try
hard to unearth the answers that why corporate governance did not apply everywhere
specially public sectors.

Introduction
Corporate governance has recently become a key debate and discussion item for the
restructuring of state owned enterprises and the development of a modern enterprise or
corporate system. Governance serves as an essential foundation for better quality
Performance. If organization structure or managerial accountabilities and rewards are
inconsistent with value creation, effectiveness will decrease. Governance identifies rights
and responsibilities, legitimizes actions and determines accountability. It is concerned
with the source, use and limitation of power. Corporate governance is concerned with the
process by which corporate entities are governed, that is, with the exercise of power over
the direction of the enterprise, the supervision of executive actions, the acceptance of a
duty to be accountable and the regulation of the corporation within the jurisdiction of the
states in which it operates.

What is All about Corporate Governance?

According to the Oxford English Dictionary states governance to be the act or manner
of governing, the office or function of governing, sway, control. In this definition it is
not to government and such but rather to management as handle, administer, run,
supervise, look after, watch over, direct, head, oversee, superintend, preside over, be in
charge of . . . This all seems to make sense to the lay user of such words. (Kenneth
Tombs, 2002). According to Tricker [1994], corporate governance is an umbrella term
that includes specific issues from interactions among senior management, shareholders,

board of directors, and other corporate stakeho lders. In its narrowest sense, the term may
describe the formal system of accountability of senior management to the shareholders.
At its most expansive, the term is stretched to include the entire network of formal and
informal relations involving the corporate sector and their consequences for society in
general. The issues and challenges confronting business corporations have rarely been as
turbulent and unpredictable as they are today. Although the Nineteenth century concept of
corporate entity as distinct person still holds good and exercises influence over business
affairs every where. The concern about Corporate Governance which includes changing
pattern of distribution of share ownership, large scale corporate collapses in recent past,
auditing and accounting standards, lack of accountability, disclosures and transparency,
adequacy of board structures and processes, quality of directorial competencies, apparent
lack of corporate social responsibility, destabilizing impact of growth of the mergers and
acquisitions, increasing incidents of corporate fraud and the weakness of corporate self
regulation have become more pressing than at any time since the evolution of the joint
limited liability concept. Shleifer and Vishny state that Corporate governance deals with
the ways in which suppliers of finance to corporations assure themselves of getting a
return on their investment. (1997, p.737), while Blair (1995, p.3) argues that corporate
governance implicates the whole set of legal, cultural, and institutional arrangements
that determine what publicly traded corporations can do, who controls them, how that
control is exercised, and how the risks and returns from the activities they undertake are
allocated. There are many definitions to the term Corporate Governance. For instance,
Milton Friedman (A famous economist, recipient of the 1976 Nobel Memorial Prize for
Economic Science) has defined Corporate Governance as Conducting business in
accordance with owners or shareholders desires. The Auditor General of Australia, Pat
Barrett in November 2000 stated, Corporate governance is largely about organizational

and management performance. Simply put, corporate governance is about how an

organization is managed, its corporate and other structures, its culture, its policies and the
ways in which it deals with its various stakeholders. Corporate Governance is that
which deals with the ways in which suppliers of finance to corporations assure
themselves of getting a return on their investment (Shleifer & Vishny, 1997). This
definition is very relevant because in the emerging markets, before making an investment,
the investors generally like to ensure that not only the capital markets or enterprises with
which they are investing competently, but they also have good corporate governance. In
other words, when investments take place, the investors want to be sure that not only is
their capital handled effectively and adds to the creation of wealth, but the business,
decisions are also taken in a manner that is not illegal or, that which does not involve a
moral hazard. In a nutshell, we can conclude that corporate governance is a topic recently
conceived, yet ill defined and consequently blurred at the edges. Having a common global
definition and a common global approach for corporate governance is very difficult as the
legal framework varies from country to country. However, it is high time to define
corporate governance as a subject, as an objective, or as a regime to be followed for the
welfare of the shareholders, employees, customers, bankers and indeed for the reputation
and surveillance of ones nation and its economy.

Scope of Corporate Governance

The basic objectives of corporate governance is to ensure that the directors of a company
are subject to their duties, obligations and responsibilities, to act in the best interest of the
company, to give direction and to remain accountable to the shareholders and other
beneficiaries for their actions. Though these definitions aims to identify all business
organizations to which corporate governance should apply, in practice its coverage has

been very limited. At least the enforcement has been restricted only to specific types of
corporations in Bangladesh. While those left out who realize the long term benefits
accrued by adopting corporate governance practices take them up voluntarily, there are a
few, who move Scot free and pose a threat to fair competition.

Corporate Governance in Global Scenario

With the enactment of joint Stock Companies Act in 1844, the English Company Law
became one of the most permissive in the world and the concept in subsequent years
became the basis of Corporate Governance and framework for company law in many
jurisdictions. Company law in the United States evolved along similar lines. Development
in Continental Europe followed a different path. The regulations of corporate entities in
Germany adopted far more prescriptive and tightly controlled modes. In Japan,
shareholders virtually played no role except to provide capital. Sri Lanka and Malaysia
also realized the importance of corporate governance in the wake of changed international
trade scenario. A study of US corporations found that 90 percent firms fail to survive
beyond 210 years of their inception. In 1982, peter and Waterman found that two-thirds
of the total organizations were no longer excellent. Eight of them were in deep trouble.
An other report in Forbes found that only 22 of the 100 largest US companies of 1917
figured in the list of 1987. There were about half a million business bankruptcies in the
world in 1988. Between 35 and 85 per cent of new products fail to ever make a profit.
Over the past 20 years, more than 350 major firms have failed in the computer industry.
In 1989, there was a loss of more than $7 billion among the top 200 worked banks. In the
aut0omobile industry, over 1,500 firms failed in the past.(shukla 1994 aqnd Makridakis
1991). A survey sponsored by the Financial Executive Institute(USA) found that an
average of 72 per cent of the board members of nearly 800 representing publicly held

companies were outside directors. In U.S.A, U.K. and Germany guidelines and code for
good Corporate Governance have been formulated for the companies. The international
accounting standard committee has been working towards harmonization of accounting
statements so that performance reports of the companies are useful to users across the
world. Survey reports presented at the Academy of Management Meetings (USA) states
that 60 percent of the infant food items surveyed had no therapeutic effect at all, and
hence, were withdrawn from American markets. These infant food brands were, however,
exported to the developing countries. Multi-National drug giants have now captured the
worked markets and become the richest corporates, yet they do not hesitate to exploit
people and play with their lives. Recently (1998) a crack down by the Income-tax
department on some big MNCs revealed a very large-scale evasion of tax by flouting the
rules regarding TDS provisions. The report says, it has emerged during the inspections
that these companies had been depriving the national exchequer of crores of rupees by
adopting certain unethical methods. Records show very meager salary payments to
employees in Bangladesh but huge payments wer e actually made in dollars into the
employees foreign bank accounts thereby evading the tax to be deducted at source. This
indicates that managerial manipulations in the spheres of accounting and finance lead to
the creation of unaccounted wealth and black money. Tax evasions and law escaping
have become the corporate styles of functioning. Publicity and marketing functions of the
business are galore with unethical practices.

Corporate Governance and Reality

Table 1 Average Premium Investors are willing to pay for Good Governance (Selected
Countries)
Country

Premium %

Venezuela

28

Indonesia

27

Malaysia

25

Thailand

26

United States

18

Germany

20

Italy

22

Japan

20

Source: Coombes P. and M. Watson (2000), Three surveys on corporate governanc e,

McKinsey Quarterly, 4.

The above survey provides some evidence of the importance of corporate governance. It
is also tempting to say that corporate governance does not matter. Because crooks will
find ways to perpetrate, their corporate frauds and less than scrupulous managers will find
ways to manipulate accounting numbers, no matter what academics or regulators say or
do about the quality of corporate governance. This response is of course an
oversimplification of the debate, but with at least a grain of truth. We also have come to
accept that in countries where powerful business grouping dominate, such as the Japanese
keiretsu or the Korean chaebols, corporate governance standards remain weak or
ineffective in protecting minority shareholders. However, the scale of the cover up at
Enron strikes to the heart of the home of capitalism.

Corporate Governance in Bangladesh

In Bangladesh, corporate sector is at cross roads as far as legal structure and internal
management, control and administration of corporations is concerned .a it is faced with
numerous issues demonstrating the ineffective implementation of laws and code of
business ethics. If at all certain instances of malpractices tax, evasion, Tax avoidance,
earn black money and management infighting are any evidence, the corporate sector and
the Government need to have an urgent look at the whole scenario prevailing in the
country to ensure good corporate governance. Qualitative improvement in corporate
governance in Bangladesh is based on a code of good corporate practices and meaningful
disclosure of information to shareholders hold the key to corporate success. This is
necessary in the context of changing profile of corporate ownership with increasing flow
of foreign investment, preferential allotment of shares to the promoters of companies and
the new role being given to mutual funds. This means better governance and management
of corporate bodies, prompt compliance of legal and financial obligations and adherence
to ecological and environmental standards. The benefits of such governance must accrue
to the investors, customers lenders of finance and thee society. Most of the public
companies in Bangladesh particularly suffering from good governance due to ill practices
of its executives and users. The scenario is deteriorating day by day because of the
emergence of governance.

Key Elements of Corporate Governance

The main actors in the stage show of corporate governance are Directors, shareholders,
employees, Government, institutional investors and banks and the community. The basic
framework is provided by the legal regulatory, financial and business requirements in the
emerging context. In a globally competitive world, the interdependence between the
corporate sector and its stakeholders has become a necessity and every corporate entity

has to pursue a broad stakeholder approach, attempting to balance the often-conflicting

interest. Issues like environment standards, labor standards, infrastructure, R&D, effects
of technology, quality and value sys tems, must receive increasing attention of corporates.
Only then, the shareholder value can be sustained. Therefore, the corporate sector has to
function as a trustee of the stakeholders while managing its business.

Implementation of Corporate Governance

Before covering the implementation of the various governance concepts, Bangladesh
should make out the prevailing models. These models for corporate governance can be
broadly classified in three ways: (1) Outsider Model followed in the Anglo American
countries which separates ownership and management; (2) Insider Model followed in the
European countries where shareholders exercise control in management; (3) Founding
Family Model prevalent in the East Asian countries which has family oriented ownership.
In Bangladesh, however the corporate governance system is a hybrid of the outsider
dominated market-based systems of the UK and the US, and the insider-dominated bankbased systems of Germany and Japan. Various mechanisms are framed to ensure good
corporate go vernance practices. As said above, legislation does not cover governance for
all the corporate. However, very few organizations take voluntary measures, within their
system to ensure good practices. Such practices are framed within the organization in the
form of rules, regulations and policies, codes of conduct, which holds everyone, right
from the Board to the individual low -level worker, accountable for their actions. But still
this is not enough to bring in the needed changes because there lays a major conflict of
goals. The organization might vie for growth, which is projected as the ideal and
achievable, however pressures to achieve within and across the industry pushes them to
stretch these goals. Thus, implementation is hindered due to the conflict in goals. There

should be ways through which such pressures are eliminated. Effective internal
communication might help in bringing a consensus in the goals, which are ideal and
acceptable and achievable by one and all. Unions also can play a vital role in this. Other
topics to be covered in the internal mechanisms are:
Recommendations
In Bangladesh, corporate governance implication is the greatest challenge for the
authority. However, some practices also going on regarding corporate governance. Here
the some recommendations for Bangladeshi corporates in the shed light of UK, USA and
Indian literature regarding corporate governance practices in particular these three
countries is as follows:-

1. The mission, vision and the procedures of all function of the company should be
transparent to its shareholders.
2. The Board must meet at least three or four times a year.
3. In case of the appointment of a new director or reappointment of a director, the
shareholders must be provided with a brief resume of the director, his/her
expertise and the names of companies in which (s) he holds directorship and the
membership of committees of the Board.
4. The Board of a company should have an optimum combination or mixture of
executive and non-executive directors.
5. The number of non-executive directors on the board should be at least 40-60% of
its total power.
6. The management must make disclosures to the Board, relating to all matter,
financial and commercial transactions, where they have personal interest.

7. There should be a separate section on Corporate Governance in the Annual

Reports of the companies. In addition to the Directors Report, Management
Discussion and Analysis should form part of the annual report.
8. A certificate from the auditors on compliance of conditions of corporate
governance should be annexed with the Directors Report forming part of Annual
Report and must be sent to all the shareholders of the company.
9. A board committee should be formed to look into the redressed of shareholders
complaints like transfer of shares, non-receipt of balance sheet, dividend etc.
10. To expedite the process of share transfers, the board should delegate the power of
share transfer to an officer or a committee or to the Registrar and Share Transfer
Agents. And the delegate or hand over authority should attend to share transfer
formalities atleast once in a fortnight.
11. The Board should set up a qualified and an independent Audit Committee. A
majority of these directors should be independent, and at least one director should
have sound financial and accounting knowledge. The Chairman of the Audit
Committee should be an independent director.
12. The Chairman of the Audit Committee should be present at Annual General
Meetings to answer shareholder-queries.
13. The Audit Committee should have powers to inves tigate any activity within its
terms of reference, to seek information from any employee, to obtain outside
legal or professional advice, and to secure attendance of outsiders, if necessary.
The Audit Committee should discharge various roles such as reviewing any
change in accounting policies and practices; compliance with accounting
standards; compliance with Stock Exchange and legal requirements concerning

financial statements; the adequacy of internal control systems; the companys

financial and risk management policies etc.
14. The Board of Directors should decide the remuneration of the non-executive
directors. Full disclosure should be made to the shareholders, regarding the
remuneration package of all the directors.
15. A director should not be a member in more than five to seven committees or, act
as the chairman of more than three to five committees across all companies to
which he is a director.
16. The financial institutions should be under normal circumstances, have no direct
role in the decision making of the board of the company. They should not have
nominees on the board, merely by virtue of their financial exposure in the
company. There is however a ground for the term lending financial institutions to
have nominees on the boards of the borrower companies, to protect their interests
as creditors.
17. Privatization can be the key decision for the sake of transparency and liability
towards shareholders.
18. Government should encourage to the corporates to open up their information to
its shareholder by imposing rules, law or ordinance in the time of registration.
These recommendations can change the scenario of good corporate governance
situation in Bangladesh.

Conclusion
Bangladesh is suffering from good governance in public sector specially. But it is not an
extremely hard task for Bangladeshi government and other private agencies to implement
good corporate governance in their own operations. Corporate survival largely depends

on discipline placed on managers. Discipline can come from the marketplace or it can
come from inside the firm through corporate governance structures. A great deal of
research denotes that privatization can be helpful for economic development but
effectiveness of privatization is greater when corporate governance works well. Effective
laws are the important requirement for corporate governance because law implementation
and launch is the roadway for better governance. However, if public and private
companies will follow the recommendations then transparency and liability will come
forwards to the authority and shareholders. Therefore effective laws, privatization and
intension of the government bodies can be the three key things to implement authentic
good corporate governance in Bangladesh.

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