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Explain and brief about the present scenario of Corporate Governance in Bangladesh

Submitted To: Professor Dr.Tanbir Ahmed Chowdhury Course Instructor Corporate Governance School of Business Independent University, Bangladesh (IUB)


Md.Rakibul Ahosan ID: 1110814
Dhaka December 14 , 2012

Bangladesh . Bangladesh Subject : Submission of Assignment Dear Sir. Thanking you. Md. I am grateful to you for your guidance and kind cooperation at every step of my endeavor on this report. I am pleased to submit herewith the Assignment “Explain in brief about the present scenario of Corporate Governance in Bangladesh” which was assigned to me as a fulfillment of requirements of MBA Course: Corporate Governance Throughout the study I have tried with the best of my capacity to accommodate as much information and relevant issues as possible and tried to follow the instructions as you have suggested. I tried my best to make this report as much informative as possible. 2012 Professor Dr. I will remain deeply grateful if you kindly go through the report and evaluate our performance.LETTER OF TRANSMITTAL December 14. We sincerely believe that it will satisfy your requirements.Independent University.Tanbir Ahmed Chowdhury Course Instructor Corporate Governance School of Business Independent University.Rakibul Ahosan ID # 1110814 School of Business.

corporate governance often becomes the centre of discussion only after the exposure of a large scam. Corporate Governance deals with determining ways to take effective strategic decisions. Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return on their investment. The managers are the deciding authority. The owners must see that individual’s actual performance is according to the standard performance. Corporate Governance has a broad scope. It gives ultimate authority and complete responsibility to the Board of Directors. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights. . It includes both social and institutional aspects. Having a clean image on the corporate governance front could also make it easier for companies to source capital at more reasonable costs.Introduction: Fundamentally. It is the technique by which companies are directed and managed. Corporate Governance is the interaction between various participants (shareholders. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. What is Corporate Governance? Corporate Governance refers to the way a corporation is governed. It is also known to have a positive influence on the share price of the company. Unfortunately. efficiency as well as globalization is significant factors urging corporate governance. harmonizing. rather. the need for corporate governance arises. In modern corporations. there is a level of confidence that is associated with a company that is known to have good corporate governance. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. the functions/ tasks of owners and managers should be clearly defined. board of directors. In today’s marketoriented economy. economic and social goals. Corporate Governance ensures transparency which ensures strong and balanced economic development. and company’s management) in shaping corporation’s performance and the way it is proceeding towards. as well as ethical environment. Also. moral. as well as. Corporate Governance is essential to develop added value to the stakeholders. It means carrying the business as per the stakeholders’ desires. Corporate Governance encourages a trustworthy. It is all about balancing individual and societal goals. Corporate Governance clearly distinguishes between the owners and the managers. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. These dimensions of corporate governance should not be overlooked.

It ensures organization in managed in a manner that fits the best interests of all. as the dominant financier for the industrial and commercial activities. banks play a vital role in Bangladesh economy. There is neither any value judgment nor any consequences for corporate governance practices. Strong corporate governance maintains investors’ confidence. 2003). Good corporate governance also minimizes wastages. institutional and economic motivation for stakeholders to encourage and enforce corporate governance practices. Good corporate governance ensures corporate success and economic growth. 6. Corporate Governance in Financial Enterprises in Bangladesh As in many developing countries. 7. two out of six National Commercial Banks (NCBs) were denationalized and private commercial banks were allowed to operate in the country. the operational efficiency of the banking institutions has continued to be dismal. 9 belong to the public sector. hence failure in most of the constituents of corporate governance is witness in Bangladesh. The sector witnessed decreasing profitability. The current system in Bangladesh does not provide sufficient legal. One reason for this absence of Corporate Governance is that most companies are family oriented. In fact. 5. company can raise capital efficiently and effectively. In 2003. increasing nonperforming assets. It lowers the capital cost. It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization. corruption. 3. out of the 49 banks operating in Bangladesh. It helps in brand formation and development. the government until 1982. 30 are local private and 10 are foreign owned banks (Bangladesh Bank. During the reform period. risks and mismanagement. . when the ‘ownership reform’ measures started in the financial sector. Despite the expansion. Moreover. 2. rampant corruption patronized by political quarters. eroded credit discipline.Benefits of Corporate Governance 1. Since the independence in 1971. provision and capital shortfalls. had carried out the regulation and ownership of all the financial institutions. inferior asset quality. low recovery rate. Present scenario of Corporate Governance in Bangladesh: Corporate governance practices in Bangladesh are quite absent in most companies and organizations. 4. There is a positive impact on the share price. Bangladesh has lagged behind its neighbors and the global economy in corporate governance. as a result of which. motivation to disclose information and improve governance practices by companies is felt negatively.

Corporate Governance in State-Owned Enterprises in Bangladesh In many developing countries. State Owned Enterprises in Bangladesh are besieged with same problems common to State Owned Enterprises throughout the world. State Owned Enterprises have an undeniable capacity to deliver a positive contribution to the economy of a country. which provides an impetus to explore the governance issues in detail in this paper. The reports by the Banking Reform Commission raise serious concerns on the banking sector and criticize the quality of governance that prevails in the banking sector in Bangladesh. and  Trade three. corporate governance and monitoring mechanism recently focused on matters like the composition of the Board of Directors. voting rights of shareholders and detailed disclosure of company information that are material for . Secondly. Many of the problems have been attributed to lack of sound corporate governance among the banks. the duties and responsibilities of the executive directors. like any company. weak regulatory and supervisory role etc. In order to grasp the specificity of SOE governance one should keep in mind the following two issues: Firstly. Agriculture two. provided they are well managed and good management is built on strong foundations of good governance. with energy. excessive interference from government and owners. State ownership includes businesses in several sectors.  In Power. and Service thirteen. . have a body of shareholders that the directors and management are accountable to.managerial weaknesses. regular monitoring by shareholders. notably utilities and infrastructure. under these six sector corporations there are a number of factories and industries. Internal control system along with accounting and audit qualities are believed to have been substandard.Best Practices and Guidelines Public Limited Company – Non Financial Institutions In practice. transport and telecommunication being usually the most important business. Construction four. accounting and disclosure may not reach private sector standards but rather be oriented towards public expenditure control. State Owned Enterprises.e. SOEs are often effectively protected from two major threats that are essentials in policing management behavior in public corporations i. gas and water there are five  Transportation and communication have eleven. There are 44 non-financial public enterprises in Bangladesh of which  Six belong to industrial sector. which may at the same time more burdensome and not fulfill the requirements of timeliness and materiality central to private sector disclosures practices. the threat of takeover and bankruptcy. the only difference is that in this instance the shareholder happens to be government via a ministry. the state remains a significant owner of commercial enterprises that operate in comparative markets. Corporate Governance .

in good faith. The guideline that good corporate governance frameworks project and facilitate is the exercise of shareholders’ rights. The equitable treatment of all shareholders. a Head of Internal audit and a Company Secretary. their high degree of sensitivity to potential difficulties arising from ineffective corporate governance and the need to safeguard depositors’ funds. and to be sufficiently informed on. Shareholders should have right to participate in. and in the best interest of the organization and shareholders. corporate governance for banking organizations is of great importance to the international financial system and merits targeted supervisory guidance. Few other guidelines and best practices on corporate governance which receive considerable emphasize are:  The position of the Chairman of the Board and CEO should be filled by different individuals. Public Limited Company – Financial Institutions: Given the important financial intermediation role of banks in an economy. Another important responsibility of corporate governance is time and accurate disclosure of all matters regarding the corporation. in the Annual Report. The board of Directors is the central entity in a functioning corporate governance system. Board members should act on fully informed basis. including individual employees and their representative bodies. compliance with accounting standard and proper internal control. with due diligence and care. including minority and foreign shareholders should be ensured by corporate governance also.decision making by interested parties.  A company should appoint Chief Financial Officer (CFO). should give representation of the true and fairness of accounts. A group of entrepreneurs and/or executives could set up a banking business by putting very little equity from their own pocket as the nature of business itself guarantees. The main issues and priorities for reforms in CG of banks in Asia that were identified are: .  A company should have an audit committee as a subcommittee of the board. decisions concerning fundamental corporate changes. This guidance drew from principles of corporate governance that were published earlier that year by the Organization for Economic Co-operation and Development with the purpose of assisting governments in their efforts to evaluate and improve their frameworks for corporate governance and to provide guidance for financial market regulators and participants in financial markets. Banking companies pose unique corporate governance attention as they differ greatly with other types of firms in terms of broader extent of claimants on the banks assets and funds.  Directors. should be able to freely communicate their concerns about illegal and unethical practices to the board and their rights should not be compromised for doing this. Stakeholders. Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosures.

Bank’s monitoring of the CG structure of its corporate borrowers – Extent to which banks should assess/monitor CG of their corporate borrowers or seek to improve it. Separation between Chairman and CEO. Creating clear accountability lines and internal control systems. The roles/functions of the board – guiding. Bank holding companies and groups of companies holding banks – a bank’s parent company should not impede the full exercise of the CG of the bank within the banking group. The committees of the board – audit committee. remuneration. Publicly disclose such transaction. The composition of the board – banks are more encouraged to have independent directors than other firms. the Risk Management Committee. with the necessary degree of professionalism  Equitable Treatment of Shareholders: The state and SOE should recognize the rights of all shareholders and ensure equitable treatment and equal access to corporate information. Creation of specialized committee to monitor and approve related part transaction. performance evaluation. Bank’s autonomy in relation to the state – state as owner should respect the legal corporate structures of State Owned Commercial Banks (SOCB). Disclosure – effort on convergence into international standards on accounting. personal abilities. Preventing abusive related party transactions – inspection of the existing firewall. etc. training programs on integrity and professionalism.         The responsibility of individual board members – fiduciary duties of bank’ board members.  The State Acting as an Owner: The state should act as an informed and active owner and establish a clear and consistent ownership policy. State-Owned Enterprises (SOE) Organizations for Economic Co-operation and Development guidelines for State Owned Enterprises are:  Ensuring an Effective Legal and Regulatory Framework for State Owned Enterprises: The legal and regulatory framework for State Owned Enterprises should ensure a level-playing in markets where State Owned Enterprises and private sector companies compete in order to avoid market distortions. etc. need of skills. .  Relations with Stakeholders: The state owner ship policy should fully recognize the SOE responsibilities towards stakeholders and request that they report on their relation with stakeholders. approving and overseeing strategies/policies rather than being immersed in day-to-day operations. ensuring that the governance of SOE is carried out in a transparent and accountable manner. The Governance Committee with combined responsibilities of Nomination. should be encouraged. training. succession planning. Sufficient flows of information and managerial support.

as well as the promotion of a boardroom culture that encourages constructive criticism and alternative views. as indicated by the respondents. competencies and objectivity to carry out their function of strategic guidance and monitoring of management. and auditing. To enhance the effectiveness of boards. Conclusion: A policy implication of the survey results is that the on-going corporate governance reform efforts should be continued to encourage firms to pay more attention to substance than to form. and professional societies. independent directors. Critically important for these tasks are the roles of regulatory agencies. the provision of adequate support for outside directors seems to be the most important factor. accounting. More broadly.  Transparency and Disclosure: SOE should observe high standards of transparency. The Responsibilities of the Board of State-Owned Enterprises: The boards of SOE should have the necessary authority. priorities should be given to making internal corporate governance mechanisms work better and enhancing the standards for information disclosure. . They should act with integrity and be held accountable for actions.