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 Springer 2009

Journal of Business Ethics (2010) 91:253274

DOI 10.1007/s10551-009-0082-4

Development of Corporate Governance

Regulations: The Case of an Emerging

ABSTRACT. This paper investigates the development

of corporate governance regulations in emerging economies, using the case of Bangladesh. In particular, the paper
considers three issues: What type of corporate governance
model may be suitable for an emerging economy such as
Bangladesh? What type of model has Bangladesh adopted
in reality? and What has prompted such adoption? By
analysing the corporate environment and corporate governance regulations, the paper finds that, like many other
developing nations, Bangladesh has also adopted the
Anglo-American shareholder model of corporate governance. Analysis of behaviours of principal actors in the
Bangladeshi corporate governance scenario, using new
institutionalism as a theoretical foundation, then reveals
that such adoption may be prompted by exposure to
legitimacy threats rather than efficiency reasons.
KEY WORDS: corporate governance, emerging economies, regulations, institutional theory

Ever since international financial agencies (IFAs)
such as the World Bank included corporate governance reforms as a development goal, significant
changes have taken place in the regulatory environment guiding corporate governance in emerging economies1 (World Bank, 2002a). Developing
economies, in great need of external funds, have
been forced to open up their economies as part
of the IFA-sponsored globalisation process. The
IFAs have encouraged adoption of internationally
accepted accounting and corporate governance
practices as a prerequisite for obtaining loans. In
many cases, these agencies have prescribed models of

Javed Siddiqui

corporate governance that have been tested and

developed in developed economy conditions as a
powerful tool to battle against poverty (World
Bank, 2007), and the socio-economic conditions of
the developing countries have been ignored (Uddin
and Choudhury, 2008).
Studies investigating adoption of donor-prescribed regulatory reforms reveal that wholesale
embracement of such models by governments in
emerging economies has been a result of past failures
of indigenous economic and industrial polices, and
dependence on overseas assistance. Subsequently,
the role of IFAs in promoting such models has been
questioned (Reed, 2002). This sets the context for
this study.
The primary objective of this paper is to investigate the development of corporate governance
(CG) regulations in emerging economies, using
Bangladesh as a case. Like many other developing
economies, the Bangladesh corporate sector is characterised by high ownership concentration, reluctance of the corporate sector to raise funds through
the capital markets, lack of shareholder activism,
availability of bank financing, and poor enforcement
and monitoring of regulations. Also, the Bangladesh
government is dependent on IFAs for financing
various development projects, and there are instances of donor influence in government policy
making (Sobhan, 2003).
In investigating the development of CG regulations, this paper seeks to address three questions:
What type of CG model is conducive to Bangladeshs current state of economic, legal and sociopolitical environment? What type of CG reform has
Bangladesh adopted? And, what has prompted such
adoption? In doing so, the paper uses efficiency and


Javed Siddiqui

institutional perspectives (Zattoni and Cuomo,

2008) to investigate adoption of a particular brand of
CG reforms. Using new institutionalism (new
institutional sociology, hereafter NIS) as the conceptual framework, this paper investigates the role of
different actors, namely, the professional bodies, the
private sector and the regulators, in the CG scenario
of Bangladesh. The influences of the IFAs on each of
these actors are investigated. By comparing the codes
developed by different regulatory bodies, the paper
attempts to identify isomorphic behaviour by different actors, and then use the NIS framework to
explain the potential reasons for such behaviour.
The findings suggest that, consistent with other
emerging economies, Bangladesh has also adopted the
Anglo-American shareholder model of CG, although
is not considered to be entirely suitable for emerging
economies, given the economic, legal and corporate
environment of these countries. An analysis of the
behaviour of the principal actors in the Bangladeshi
CG scenario indicates that the lack of self-regulation
by the professional bodies, and the absence of privatesector rule-making bodies have created the scope for
the IFAs operating in Bangladesh to intervene with
policy-making decisions through private-sector
think-tanks. Thus, the decision for wholesale adoption of IFA sponsored shareholder models have been
prompted by exposure to threats of legitimacy, rather
than efficiency perspectives.
The paper is organised as follows: the next section
presents a review of literature concerning CG regulations in emerging economies. Different CG
models are discussed. The following section examines the corporate environment for Bangladesh, and
seeks to identify the type of CG model that may be
suitable for such an environment. A subsequent
section then analyses different CG initiatives in
Bangladesh in an effort to determine the type of CG
model Bangladesh has adopted. This is followed by
section that attempts to explain and discuss the reason for such adoption. Using agency and institutional perspectives, the roles of different actors in the
Bangladeshi CG scenario are analysed.

CG models in developing economies

Donaldson and Preston (1995) identify two different
theories of corporation. The shareholder theory

emphasises that corporations are extensions of their

owners, who should be benefiting from it. Therefore, the corporation should be accountable only to
the shareholders. On the other hand, the stakeholder theory acknowledges corporation as a social
entity that has responsibility to a wider group of
stakeholders including shareholders, creditors, management, employees, the government and other
interested groups (Freeman and Reed, 1983). Subsequent models of CG have been based on these two
views of the corporation. Whereas the Anglo-Saxon
models of CG have been embedded on the shareholder theory, the European model has incorporated
the stakeholder version.
Letza et al. (2004) compare the two theories. The
shareholder model, or the principal agent model
(Jensen and Meckling, 1976), views that the purpose
of the corporation is to maximise shareholders
wealth. According to this model, the main problem
of governance arises because of the agency relationship. Like the agency theory, the shareholder
model of CG is also a rational actor model, where
human beings are expected to be maximising their
own interest. As the model is based on assumptions
of strong market efficiency, a voluntary code of CG
is deemed to be sufficient, as managers in a strong
market would have enough incentives to install CG
mechanisms in their firms. The stakeholder model,
on the other hand, rejects the agency relationship as
the principal problem of CG. Rather, absence of
stakeholders involvement is viewed as the main
obstacle for ensuring efficient controls. Contrary to
the shareholder model, this model emphasises a
trust-based long-term relationship between firm and
stakeholders, protection of the rights of different
stakeholders, employee participation and business
ethics (Letza et al., 2004).
Zattoni and Cuomo (2008) apply efficiency and
institutional perspectives to investigate the global
diffusion of CG practices. The paper argues that, in
countries with poor protection of investors rights
(later referred to as civil right countries), the
potential benefits of adopting CG practices are
greater than in countries with strong protection of
investors rights (common law countries). The paper
also mentions that, under pressure from external
forces, governments may be forced to change governance practices in order to legitimise the economic
system and attract foreign investments (p. 4). Using a

Development of Corporate Governance Regulations

sample of 44 countries, the paper concludes that
issuance of codes in countries with poor investor
protection is prompted more by legitimisation reasons rather than efficiency reasons. This is also
consistent with Enrione et al. (2006), who find such
countries to be late adaptors of CG regulations.
However, the paper did not comment on the types
of codes adopted by the sample countries.
The adoption of different type of codes of CG
was investigated by Rwegasira (2000) in an emerging economy context. The paper refers to stockholder and stakeholder models as market-based and
institutionally based systems of governance. The
market-based system of governance is considered to
be more appropriate where company shares are
generally owned by dispersed owners, and the
managers are relatively free from close scrutiny and
control. Such systems are characterised by one-tier
board leadership structure. The institutionally based
system, on the other hand, relies on closer contact
between shareholders, managers, workers and suppliers, and is hence synonymous with the stakeholder model of CG. Rwegasira (2000) mentions
that this system of CG is more applicable to countries where banks are the primary sources of finance
for the companies. Such models are characterised by
the presence of a two-tier board structure: bankers
and other non-executive directors are members of
the supervisory or oversight board, whereas the
managers are members of the management board.
Having identified the essential characteristics of the
two models, the paper then proceeds to comment on
the applicability of these models for Africa. Rwegasira (2000) states that market-based systems have
got limited applicability in Africa.
The market-based system presupposes a low degree of
concentration of ownership, limited bank holdingsas
well as free flowing reliable and timely information
about the business and financial affairs of the company.
A number of these characteristics are not readily
realisable in Africa, at least for the time being.
(Rwegasira, 2000, p. 265)

The paper suggests that the institutionally based

system of CG may be a more preferred model for
Africa because of the low level of sophistication of
the stock markets and the investors, domination of
bank financing and high degrees of debtequity
ratios. Also, most of the businesses in Africa tend to


be small or medium in size, making the banks even

more important stakeholders. The presence of bank
representatives on the board of directors would be
beneficial especially to the minority shareholders
who may not have the time and resources to
understand the complexity of the business. However, the paper pointed out that the success of such
models would depend on restructuring of banks and
financial institutions to accommodate better quality
staff and management. Paredes (2005) investigates
whether the US-styled stockholder model contributes to economic development for the emerging
economies. Consistent with Rwegasira (2000), the
paper identifies the lack of advanced markets as a
major factor that makes the stockholder model
inappropriate for the emerging economies. Paredes
states that emerging economies lack important
second-order institutions such as experienced
investment bankers, lawyers, security analysts,
accountants and effective judicial systems that
enables markets to monitor (Paredes, 2005, p. 36).
Paredes also points out that the shareholder system is
based on long-term pay-offs rather than short-term
benefits. However, the socio-political and economic
instability prevailing in many developing economies
makes it harder to predict future prospects.
Reed (2002) investigates adoption of CG models
in emerging economies. The paper states that, typically, emerging economies tend to adopt the AngloSaxon (shareholder) model of CG [for example, India
(Mukherjee-Reed, 2002), South Africa (West, 2006)
and South Korea (Reed, 2002)], despite the fact that
such model is based on assumptions of efficient
markets and equity financing. The paper mentions
that many of these countries are formal British colonies, and share the common law system. This could
act as an incentive for adopting the Anglo-Saxon
model. Mukherjee-Reed (2002) investigates reasons
for Indias adoption of the Anglo-Saxon model of
CG. The paper compares the performance of the
Indian CG model with three basic claims made by
the Anglo-Saxon model: firstly, liberalisation will
result in increased corporate growth and profits;
secondly, sustained macro-economic growth will
facilitate overall level of opportunities, and benefits to
the society; and thirdly, the model will ensure
increased transparency in corporate dealings and
provide greater investor protection. The results
indicate that the effects of CG reforms in India have


Javed Siddiqui

been less than promising. Especially, the reforms have

resulted in weakening of labour power, as indicated
by declining wage rates. Also, the reforms have failed
to improve levels of transparency and control by
shareholders (Mukherjee-Reed, 2002, p. 263). As
reasons for Indias adoption of the Anglo-Saxon
model, the paper mentions
The impetus for this shift (towards adoption of the
Anglo-Saxon model) has been a combination of global
political economy pressures and problems arising our
of the previous business house model of governance.
(Mukherjee-Reed, 2002, p. 266)

Therefore, the paper identifies the efficiency and

institutional perspectives (Zattoni and Cuomo,
2008) for adopting a particular model of CG.
However, apparently, the efficiency perspective does
not seem to explain the less than promising performance of the CG model in India. As a source of
global political-economic pressure, the paper mentions that poor economic performance in 1991
forced the Indian government to turn to the International Monetary Fund (IMF) and World Bank,
which initiated CG reforms in line with the AngloSaxon model. Reed (2002) also acknowledges
dependence on external bodies (such as the World
Bank and the IMF) as one of the major reasons for
the dissemination of the shareholder model in
emerging economies.
As a condition of renegotiating loans, international
finance bodies imposed structural adjustment programmes on developing countries. These programmes
included a variety of features that induced a move to
an Anglo-Saxon model of governance. (Reed, 2002,
p. 230)

This is supported by Arnold (2005) who mentions

that IFAs such as the World Bank, the IMF and the
Asian Development Bank (ADB) could be regarded as
the new colonising influences arising from globalisation of economic governance. Influences of
development agencies in accounting standard setting
in emerging economies are also reported by a number
studies [for example, Ashraf and Ghani (2005) in
Pakistan, Akhtaruddin (2005) and Mir and Rahaman
(2005) in Bangladesh, Ozcan and Cokgezen (2003) in
Turkey, Ahunwan (2002) in Nigeria and Uddin and
Tsamenyi (2005) in Ghana]. Uddin and Choudhury

(2008), investigating CG practices in Bangladesh,

question the role of the IFAs in development of CG
regulations in emerging economies.
Least developed countries (LDCs), sponsored and
advised by donor agencies, continue to focus on direct
transfers of governance models from Anglo-American
countries. The obsession with Western governance
models has led to insufficient regard for how traditional social structures, characterised by families, may
affect Western solutions in Bangladesh. Thus, the
paper encourages further research on CG issues in
traditional settings, which should take local peculiarities and culture into consideration. (Uddin and
Choudhury, 2008, p. 1045)

Reed (2002) also points out that adoption of the

Anglo-Saxon model also has a legitimisation role. By
adopting this model, governments in developing
countries may try to send signals to the public that
the unpopular reforms (promoting globalisation and
free markets) are guided by efficient corporate
structures that will help generate condition for
economic growth and development. This is consistent with Enrione et al. (2006) who suggest that late
adopters of CG codes tend to mimic established
practices for the sake of gaining legitimacy.
The Bangladesh corporate sector
Bangladesh is a South Asian country surrounded by
India and Myanmar. According to the United
Nations human development index, it is classified as
a least developed country (LDC).2 The corporate
environment in Bangladesh is characterised by
concentrated ownership structure, bank financing,
poor legal framework and lack of monitoring.
Table I presents the basic macro-economic data for
Bangladesh and its neighbours in South Asia. The
table indicates that Bangladesh significantly lags
behind its South Asian neighbours, all developing
nations, in terms of national income per capita. In an
effort to understand the nature of CG model that
may be suitable for Bangladesh, this section now
analyses the environment within which the corporate sector operates. In line with literature concerning the suitability of different CG models [for
example, Paredes (2005), Rwegasira (2000)], a
number of attributes are analysed.

Development of Corporate Governance Regulations


Comparative economic, financial and capital market indicators as of December 31, 2006
Population (million)
GDP per capita (US $)
Number of stock exchanges
Market capitalisation (% GDP)
Number of companies registered
Number of companies listed
Number of chartered accountants
Presence of second-tier accountants
Number of commercial banks




Sri Lanka



Source: ADB quarterly economic update, December 2006, Economic Survey India, 2006, Securities and Exchange
Commission of Sri Lanka, South Asian Federation of Accountants website; Wikipedia list of banks http://; South Asian Federation of Exchanges website Number of companies listed data for
Bangladesh, India, Pakistan, and Sri Lanka are for Dhaka Stock Exchange, Mumbai Stock Exchange, Karachi Stock
Exchange and Colombo Stock Exchange, respectively.

Ownership structure
Like many other developing countries, most companies in Bangladesh are either family owned or
controlled by substantial shareholders (corporate
group or government). Company managements are
effectively just extensions of the dominant owners
(Farooque et al., 2007). They are closely held small
and medium-sized firms where corporate boards are
owner driven. Consequently, most of the companies
have executive directors, CEO and chairman from
the controlling family. Farooque et al. report that, on
average, the top five stockholders hold more than
50% of a firms outstanding stocks. Imam and Malik
(2007) analyse the ownership patterns of 219 companies from 12 different industries listed on the Dhaka
Stock Exchange, the major stock exchange in the
country. It is reported that, on average, 32.33% of
the shares are held by the top three shareholders,
the results being even higher for real estate, fuel
and power, engineering, textile and pharmaceutical

general meetings (AGMs) even though this is a

statutory requirement. When AGMs are held, these
are characterised by domination by a small group of
people, poor attendance and discussion of trivial
matters. This is supported by a CG survey conducted
by the Bangladesh Enterprise Institute (BEI, 2003).
The perception of AGMs amongst the non-banking
listed companies surveyed seems to be a combination of
a necessary evil and a statutory requirement. Generally,
shareholder demands concentrate either on higher
dividends or trivial concerns like better quality food
and gifts at the AGM and transportation allowances.
The main incentive for attendance is the meal served at
an attractive hotel and, surprisingly, trading activity
increases prior to AGMs to reflect that interest. There
are, in reality, a very limited number of people going to
AGMs who actually understand the financial statements
being presented and, consequently, have little to contribute in terms of relevant inputs. (BEI, 2003, p. 33)

Reaz and Arun (2006), investigating the state of

CG in the banking sector, also have similar conclusions regarding shareholder involvement in the
Bangladesh corporate sector.

Shareholder involvement
The capital market
Uddin and Choudhury (2008), investigating the
state of CG practices in Bangladesh, report that
Bangladeshi companies are reluctant to hold annual

The capital market in Bangladesh is still in primitive

stage. The country has two stock exchanges: the


Javed Siddiqui

Dhaka Stock Exchange (DSE) and the Chittagong

Stock Exchange (CSE). Although the Dhaka Stock
Exchange was set up in the early 1950s, the capital
market in Bangladesh has not flourished in comparison with its South Asian counterparts. Table I
presents the market capitalisation statistics for the
major bourses in South Asia. It shows that market
capitalisation to GDP ratio for Bangladesh is only
7.5%, whereas it is much higher in other South
Asian countries. A survey conducted by the Bangladesh Enterprise Institute (BEI, 2003) reports that
the capital market does not seem to offer adequate
incentives for companies to go public.
Bank financing is readily available as result of excess
liquidity and extensive competition in the banking
sector due to the fact that new private bank licenses
had been issued mostly on a political basis; banks
therefore are reluctant to enforce additional requirements or strict conditions in lending. This phenomenon is substantiated by our survey which revealed that
equity requirement had been the prime motivator for
only 10% of the public companies interviewed the
remaining companies had cited reasons like tax
advantages and legal compulsion, for going public.
(BEI, 2003)

Bank loans are easily available as result of excessive

liquidity (discussed later in this section). Competition
in the banking sector also has resulted in lenient
conditions for credit. As a consequence, companies
still prefer debt financing to enlisting with stock exchanges. The ADB quarterly economic update on
Bangladesh (ADB, 2006) identifies poor CG, lack of
quality shares and inadequate and irregular participation of the institutional shareholders as major
reasons for the stagnant capital market. This is substantiated by the low number of companies listed in
Bangladesh stock exchanges (Table I).

The second-order institutions

Despite having a very large population, the number
of auditors in Bangladesh is surprisingly low, even
compared with its neighbours.3 A recent World
Bank report (2003) suggests that the auditing profession does not attract the best quality students, and
the job does not really differentiate between an
MBA and a professional auditor. Karim and Moizer

(1996) identified that audit fees in Bangladesh are

significantly low. The Company Act (1994) requires
that all public limited companies must have their
annual reports audited by professional chartered
accountants (members of the Institute of Chartered
Accountants of Bangladesh).
The Bangladesh Enterprise Institute (BEI, 2003),
in its report on the state of CG in Bangladesh,
identified the dismal state of the auditing profession
in Bangladesh.
The auditing function would seem to represent a
vicious circle; auditors are not perceived as independent, and do not provide quality audits, therefore,
companies and shareholders are not willing to pay high
fees for an audit. The low fee structure, in turn, does
not provide an incentive to provide quality personnel
and audits. (BEI, 2003, p. 62).

Also, Bangladesh lacks the presence of any second-tier accountancy bodies to cater to the needs of
the corporate world, although neighbouring countries have similar institutions.4 This means that a vast
majority of accountants working in the corporate
sector do not possess any accounting qualifications.
In addition to this, the other second-order institutions, such as the judiciary, suffer from lack of skills
and proper training, especially in dealing with corporate cases (BEI, 2003).
Legal structure
Bangladesh is a former British colony, and has
inherited the common legal system. The Companies
Act 1994 (revised after 81 years from Companies
Act 1913, when Bangladesh was part of British
India) defines the structure of the firms, including
the composition of the board of directors, appointment of the CEO, appointment and remuneration of
the auditors etc. The financial sector is also regulated
by the Banking Companies Act (1994) and the
Insurance Act (1973). However, the problem with
the legal environment has always been its poor
implementation (BEI, 2003). Uddin and Hopper
(2003), examining the success of privatisation of
state-owned companies in Bangladesh, also identified the lack of legal enforcement as a major problem. A World Bank study on the state of financial
accountability and governance in Bangladesh (World

Development of Corporate Governance Regulations

Bank, 2002b) identifies that the sharing of responsibility by a number of government agencies complicates enforceability of corporate regulations.
Responsibility for enforcement is shared among the
Registrar of Joint Stock Companies, the Securities and
Exchange Commission, the professional accountancy
bodies, and the judiciary. The involvement of several
bodies in corporate accountability complicates enforcement and reduces overall effectiveness. (World Bank,
2002b, p. 83).

Economic dependence on IFAs

After its independence in 1971 from Pakistan,
Bangladesh inherited a private-sector-dominated
economy. The new government was committed to
socialism. This, along with the ownership vacuum
created by West Pakistani owners of the industries,
who fled the country during the liberation war,
resulted in nationalisation of almost all major
industries. To fill this vacuum, bureaucrats, with no
prior management experience of training to run
commercial enterprises, were charged with running
these public-sector enterprises. The relative lack of
experience of these new managers led to poor performance of these public-sector entities. This, coupled with poor economic performance and change
in the government, allowed IFAs such as the World
Bank and the IMF to start intervening in economic
policy making in Bangladesh. Like other emerging
economies, donor agencies started sanctioning loans
against conditions of privatisation and open market
economy. A number of donor-aided financial sector
reforms projects were undertaken [for example, the
Financial Sector Adjustment Credit (FSAC) project
and the Financial Sector Reforms Programme
(FRSP), financed by the World Bank]. Among other
things, The FSAC, introduced in the early 1990s,
aimed at strengthening the capital market (CPD,
2003). This is consistent with Reed (2002) who
reports that structural adjustment programmes
imposed by international financial institutions working in emerging economies tend to promote globalisation, free market economy and development of
capital markets. The World Bank and the Asian
Development Bank were instrumental in the
development of accounting standards in Bangladesh


(Mir and Rahaman, 2005). The influence of the

World Bank and other IFAs in structural adjustments
reforms in Bangladesh has also been investigated by
Uddin and Hopper (2003) and Akhtaruddin (2005).
Uddin and Hopper (2003), investigating the effect of
the World-Bank-initiated privatisation policy, questions the World Banks focus on profitability to the
neglect of employment conditions, including trade
union and individual rights; social returns; and
financial transparency and accountability to external
constituents (Uddin and Hopper, 2003, p. 769). It
is interesting to note that all these factors mentioned
by Uddin and Hopper as not considered by policies
imposed by the World Bank are actually consistent
with the stakeholder model of CG.

Excess liquidity in the banking sector

The Bangladeshi banking sector is characterised by
presence of large number of commercial banks, excess liquidity in the banking sector and default culture. Due to recent deregulation in the banking
sector, there has been a significant growth in the
number of private commercial banks. The number
of banks in all now stands at 49 in Bangladesh. Out
of the 49 banks, four are Nationalised Commercial
Banks (NCBs), 28 local private commercial banks,
12 foreign banks and the other 5 are Development
Financial Institutions (DFIs). Table I indicates that,
compared with its neighbours, this number is high.
This has resulted in fierce competition in the
banking sector, resulting in greater ease in obtaining
loans from this sector (BEI, 2003).
However, the main problem in the Bangladeshi
banking sector is the presence of default culture
(Siddiqui and Podder, 2002). The total default loan
rate of all banks was 33.49% (of total loans) in 1997,
40.65% in 1998, 41.11% in 1999 and 34.92% in
2000. Recently, the non-performing loan came
down to 17% in 2004 (BSS, 2004). Younis (2005)
identifies information problems in the form of moral
hazard, adverse selection or monitoring cost of
commercial banks in selecting borrowers; the lack
of legal actions against defaulters (as a major portion
of the loans goes to influential businessmen, politicians and insiders) and the governments practice of
debt forgiveness as major reasons for nonpayment of
debt in Bangladesh. This is consistent with the BEI


Javed Siddiqui

(2003), which reports presence of political interference in lending decisions by banks. The Centre for
Policy Dialogue (2003) reports that the existence of
this default culture is not only having adverse impact
on profitability and liquidity, but also raising the cost
of lending substantially. This, in turn, means that
good borrowers are affected and in some cases, they
have been influenced not to repay bank loans.

State of corporate social responsibility, and labour

Belal and Owen (2007) investigates the extent of
corporate social reporting in Bangladesh. They
report that the key social issues of concern in the
corporate sector are child labour, equal opportunity
and workplace health and safety matters.5 Working
conditions and poor wage rates are issues of particular concern. In many instances workers are required
to work 12 h a day, sometimes throughout the
night, with 1 days holiday per month and compulsory overtime (Milne, 2001). A further problem
lies in the issue of unpaid wages which often remain
outstanding for months, especially in the exportoriented garments manufacturing sector (Frost,
2005).6 This results in frequent violence and anarchy
in the industrial sector.
From the above discussion, it is apparent that the
corporate sector in Bangladesh is characterised by
high ownership concentration, lack of shareholder
involvement, the reluctance of firms to raise capital
through the stock markets, high degree of bank
borrowing and eventual nonpayment of such
loans, and lack of quality manpower for operating
the second-order institutions. The socio-economic
environment is affected by unsatisfactory legal
enforcement and poor working conditions. In
addition, the Bangladesh corporate and economic
environment also suffers from lack of timely information (Imam et al., 2001), and political instability
(CPD, 2003).7 This is consistent with Farooque
et al. (2007), who report that some of the institutional features of Bangladesh include a less developed
capital market, an at least weak-form efficient stock
market, absence of an active market for corporate
control, generally concentrated ownership, high
reliance on bank financing and a passive managerial
labour market. It may be noted that these conditions

are not unique to Bangladesh. Rather, such conditions prevail in many emerging economies; for
example, Ahunwan (2002) reports presence of
concentrated ownership, inefficient capital market,
unsophisticated legal system and lack of shareholder
activism in Nigeria; Rwegasira (2000) identifies low
degree of capital market sophistication, high ownership concentration and lack of economic and
political stability in Africa. Paredes (2005) mentioned that the prerequisites for efficient functioning
of the shareholders model include an efficient capital
market, competent manpower working in the
second-order institutions, sound legal structure
and long-term political stability. Also, shareholder
involvement and timeliness of financial reporting
were considered important prerequisites for success
of the shareholder model (Letza et al., 2004; Rwegasira, 2000). It seems that all of these factors are
absent in Bangladesh, justifying the non-adoption of
the shareholder model of CG. Also, the poor
working conditions and unsatisfactory levels of loan
recovery make a case for representatives of workers
and banks to be present on the board of directors.
Therefore, it seems that the corporate environment
in Bangladesh is more conducive for the adoption of
a stakeholder-based model. This addresses the first
research question. The next section will analyse
what type of CG model Bangladesh has adopted, and
a subsequent section will attempt to analyse the
reasons for such adoption.

Corporate governance initiatives

in Bangladesh
CG reforms in Bangladesh are still in very initial stages.
So far, Bangladesh has failed to develop any recognised
code of CG. The only code of CG developed so far has
been through the Bangladesh Enterprise Institute
(BEI, 2004), a donor-funded private-sector think-tank
without any statutory power. The Bangladesh Bank
(BB), the central bank of Bangladesh, issued a number
of circulars relating to formulation of audit committees
(Bangladesh Bank, 2002), CG (Bangladesh Bank,
2003a) and appointment of the board of directors
(Bangladesh Bank, 2003b). These orders, though not
formally put together as a code, are applicable only for
banking companies. Recently, the Securities and
Exchange Commission (SEC) has issued an order

Development of Corporate Governance Regulations

relating to CG (SEC, 2006), applicable only to companies listed on the stock exchanges. These are the two
major regulations relating to CG in Bangladesh.
This section primarily compares the major CG
initiatives undertaken in Bangladesh so far. The
provisions of the BB circular (2002, 2003a, b), the
BEI code (2004) and the SEC order on CG (SEC,
2006) are compared. For the purpose of comparison,
a number of key features have been identified,
namely, the board of directors, the external auditors,
the audit committee and the basis of compliance.
Table II presents a brief comparison.

The board of directors

According to Bangladesh Bank (BB) circulars
(2003b) regarding banking companies, the board of
directors of bank companies should be constituted of
a maximum of 13 directors. According to the BEI
code (2004), the size of the board should be between
7 and 15. The SEC order (2006) suggests that the
number of board members should be not less than 5
and not more than 20.
BEI guideline says that companies should articulate and implement a nomination program to enable
a majority of board members to be non-executive
and independent directors. According to SEC, at
least one-tenth of the total number of the companys
board of directors, subject to a minimum of one,
should be independent directors.
The guidelines of BEI suggest that the position of
the chairman and the CEO should be fulfilled by
different individuals since their functions are necessarily separate. A strong, independent chairman provides the appropriate counterbalance and check to the
power of the managing director/CEO. The SEC
order states that the positions of the chairman and
CEO should preferably be filled by different individuals. Although BB guidelines do not mention
anything directly regarding this separation, it indicates
that the chairman should effect all necessary actions in
accordance with the set rules through the CEO.


and remuneration committee. SEC order (2006)

requires formulation of audit committees. According
to this order, the company should have an audit
committee as a sub-committee of the board of
directors. The audit committee should assist the
board of directors in ensuring that the financial
statements reflect a true and fair view of the state of
affairs of the company and in ensuring a good
monitoring system within the business. BB circular
(2002) advises banks to formulate audit committees
as a part of best practices.
Regarding the composition of audit committees,
BB circular mentions that there should be three
directors nominated by the board for a period of
3 years. BEI guidelines prescribe that there should be
at least three members and a chairman appointed by
the board. The chairman of the board should not be a
member of the committee. SEC states that in an AC
there should be three members selected by the board
of directors, one of whom would be the chairman.
BEI guidelines propose that majority of the members
along with the chairman should be independent
directors. BB did not cover this issue. SEC said that
AC should include at least one independent director.
BB states that the members of the AC should have
adequate understanding of the role and responsibilities of the committee, as well as the banks
business, operation and risks. BEI states the chairman
should be non-executive directors with professional
qualification and recent relevant financial experience. SEC pronounces that the chairman would
have to possess a professional qualification, and must
have knowledge, understanding or experience in
accounting or finance.
Regarding number of meetings, BB (2002)
requires audit committees to hold at least three to
four meetings in a financial year. This is consistent
with BEI (2004), which proposes that meetings must
be held quarterly, to monitor internal and external
audits. Also, the SEC (2006) prescribes that the audit
committees should meet at least three times in a year.

External auditors
Audit committees
BEI (2004) suggests forming a number of committees such as audit committee, nomination committee

BEI guideline suggests that external auditors should be

independent, well-qualified and free of conflicts of
interest. Except tax work, the audit firms should not
go for any non-audit services and if they perform any

Basis of compliance

External auditors

Skill, experience,

Separation of
chairman and CEO
Audit committees

The board of directors


CG order considered
part of best practice

At least three to four

meetings in a financial year

Required for members

Three members

Chairman to consult
CEO regarding rule-setting

Not mentioned

BB circulars (2002, 2003a, b)

Advises that the SEC should adopt their

CG code on a compliance or explain basis

NAS prohibited except tax work.

Audit and NAS fees should be disclosed

Meetings must be held quarterly

At least three members and
a chairman
Required for chairman

Majority should be independent
and non-executive
Separation proposed

BEI code (2004)

SEC order (2006)

Has adopted CG order (2006) by listed

companies on a comply or explain basis

Prohibits a number NAS by incumbent auditors

Should meet at least three times in a year

Required for chairman

Three members including a chairman

Separation proposed


A comparison of corporate governance initiatives in Bangladesh


Javed Siddiqui

Development of Corporate Governance Regulations

non-audit service, both audit and non-audit fees
should be disclosed to the shareholders. Consistent
with BEI (2004), SEC (2006) also prohibits a number
of non-audit services (NAS) by incumbent auditors.8

Basis of compliance
All three CG regulations are also similar in terms of
the bases of compliance. Although the BB circular
on CG makes it mandatory for the banking companies to follow the rules relating to composition of
the board of directors, regarding the formulation of
audit committee, the BB is much more lenient,
mentioning this as a part of best practice, and
advising banks to formulate such committees
(Bangladesh Bank, 2002). The BEI code (2004)
advises that the SEC should adopt their CG code on
a compliance or explain basis. Subsequently, the
SEC has made adoption of their CG order (2006) by
listed companies on a comply or explain basis.
From the above discussion, it is apparent that,
despite the inappropriateness of the shareholder
model, as reported in the earlier section, Bangladesh,
like many other developing countries, has adopted
this model. The BB, BEI and SEC CG initiatives all
suggest a single-tier board structure where directors
are elected by the shareholders, the presence of
independent directors on the board and the separation of the chairman and the CEO. Consistent with
the Organisation for Economic Cooperation and
Development (OECD) guidelines for CG (1999 and
2004), all the CG regulations recommend an
extended role of the audit committees. Also, Bangladesh Bank (2002, 2003a, b), BEI (2004) and SEC
(2006) are similar in terms of audit committee
composition, qualification of committee members,
presence of independent directors and frequency of
the meetings. The BEI (2004) and the SEC (2006)
also have similar views regarding auditor providing
non-audit services, as both actors seem to suggest a
blanket prohibition on a number of services.

Theorising development of CG regulations

The early developments in CG regulations have
been rooted on the basic assumptions of the agency
theory (Jensen and Meckling, 1976). Thus, the


agency-based notions of market efficiency, opportunism and self-interest-driven motivations for

disclosure are also essential attributes of the AngloAmerican model of CG (Roberts, 2004). However,
shareholder model has been developed, and tested in
developing economy settings, where the basic
assumptions of the agency theory hold. Paredes
(2005) criteria for success of the shareholder model,
such as efficient contracting systems, sound economic policies, efficient market and second-order
institutions, are all features of the agency theory. As
mentioned by Paredes, and as evident from the
discussion presented in the earlier section, such a
model does not work in developing economy settings. Ozcan and Cokgezen (2003) consider agency
perspectives in explaining capital market reforms in
Turkey. The authors argue that economies in
emerging markets are subject to abuse by managers,
politicians and institutions. Therefore, the assumptions of the agency theory do not hold. Consistent
with Paredes, the paper finds that the Anglo-Saxon
open market models are not appropriate for
emerging economies.
The apparent shortcomings of the agency theory
in explaining CG in developing countries have
forced different authors to use other theoretical
foundations, and the new institutional sociology
(NIS) framework has been a popular choice (for
example, Enrione et al., 2006; Yoshikawa et al.,
2007 etc.). NIS explains why different organisations
structure themselves in a similar manner. Suchman
(1995) states that the principal difference between
the early management theories, where enterprise was
viewed as a rational system, and the NIS, lies in the
introduction of the concept of organisational legitimacy. The paper considers legitimacy as a generalised perception or assumption that the actions of an
entity are desirable, proper, or appropriate within
some socially constructed system of norms, values,
beliefs, and definitions (Suchman, 1995, p. 574).
Organisations may seek legitimacy for a number of
reasons. Parsons (1960) mentions that legitimacy
leads to persistence, as stakeholders are likely to
provide resources to organisations that appear
desirable, proper and appropriate. Jepperson (1991)
argues that legitimacy extends creditability to the
organisation, as it involves explaining what the
organisation is doing and why. This is supported by
Meyer and Rowan (1991), who mention that


Javed Siddiqui

organisations that lack legitimacy are generally

deemed as unnecessary and irrational. DiMaggio
(1988) mentions that attainment of organisational
legitimacy is imperative if an organisation wants
active support from its stakeholders.
DiMaggio and Powell (1983), in their seminal
paper on institutional isomorphism, identified three
mechanisms through which institutions become
similar: coercive isomorphism, mimetic isomorphism and normative isomorphism. According to
them, coercive isomorphism generates from political
influence and problems of legitimacy; mimetic isomorphism is a result of a standard response to
uncertain environments; and normative isomorphism is associated with professionalism. DiMaggio
and Powell (1983, 1991) state that coercive isomorphism may arise due to formal or informal
pressures. Sometimes, organisations are subject to a
common legal environment such as tax regulations,
company law requirements, antipollution provisions
etc. Organisations are forced to change their structures in response to these regulations, and this may
lead to an isomorphic organisational structure
throughout the industrial field. The paper also
acknowledges that direct imposition of regulations
may also come from outside government, such as
professional bodies, or other interested parties. Also,
sometimes, organisations tend to imitate each other.
DiMaggio and Powell (1983) point out that such
mimetic behaviour is likely to happen when the
organisation operates in an uncertain environment,
when the organisational goals are not clearly defined
or when organisational technology is poorly
Yoshikawa et al. (2007) adopt the institutional
approach to investigate CG developments in Japan.
Based on multiple case studies, the paper concluded
that the Japanese system of CG neither fully converges nor fully diverges from the Anglo-American
model (discussed later in this paper). The paper then
offered a NIS-based explanation for such developments. It was found that, in defence of legitimacy,
the Japanese government had to eventually revise the
commercial code. Enrione et al. (2006) investigated
the institutionalisation of CG codes using the NIS
approach. The paper argues that institutionalising
processes generally lead to convergence. The paper
used Greenwood et al.s (2002) six stages of institutional change to investigate the development of

codes of CG. The paper identifies that, since the

development of the OECD principles of CG
(OECD, 1999), countries around the world have
used this as a benchmark. Consistent with Seal
(2006), the authors argue that such isomorphism
generates due to problems of legitimacy, as the
legitimacy of the governance system is defined as
conformity to widespread global practises (Enrione et al., 2006, p. 967). The paper states that early
adopters of CG regulations have tended to use
economic rationale for such initiative. On the other
hand, late adopters generally tend to mimic the accepted global practices for the sake of legitimacy.
This is consistent with DiMaggio and Powells
(1983) notion of mimetic isomorphism.

Actors in corporate governance

The Bangladeshi CG scenario is dominated by the
presence of a few professional accountancy groups
who are supposed to self-regulate their members, a
number of civil society bodies which are expected to
be sources of normative pressure, and the regulatory
bodies. For the purpose of this paper, this section
will attempt to analyse the behaviour of three different major actors in the Bangladeshi CG scenario:
one professional accountancy body, one civil society
research organisation and one regulatory authority,
using the NIS as a theoretical foundation.

Self-regulation: the Institute of Chartered Accountants

of Bangladesh (ICAB)
The auditing profession in Bangladesh is characterised by very low levels of audit fees, poor perceptions regarding audit quality and lack of demand for
audited financial accounts. At present, the Institute
of Chartered Accountants of Bangladesh (ICAB) is
the only professional association for chartered
accountants. The ICAB is responsible for developing
the codes of ethics for its members, as well as selfregulating them. The ICAB has its code of professional ethics, and preserves the right to take
disciplinary actions, including cancellation of membership against members violating said code. The
ICAB code includes concepts of independence,
integrity and professional conduct. However, despite

Development of Corporate Governance Regulations

having such power, the ICAB has very rarely disciplined its members for violation of its bylaws and
code of ethics.9 In recent years, the SEC fined a
number of audit firms on charges of concealing
material information.10 However, the ICAB failed
to take any disciplinary action against the audit firms.
The lack of actions against members have raised
questions regarding the effectiveness of ICAB as a
professional body, and users have expressed their
concern regarding the quality of financial reports
audited by the members of this association (BEI,
2003). This perception has created problems of
legitimacy for the association.
The apparent failure of ICAB to be perceived as a
legitimate body for professional accountants in
Bangladesh has created the scope for intervention
into its activities by other independent actors. Like
many other developing countries, Bangladesh is also
heavily dependent on overseas assistance. Such
assistance mainly comes in the form of soft loans
from IFAs such as the World Bank, the ADB, the
Department for International Development (DFID)
etc., making these organisations hugely influential in
government policy-making process in Bangladesh.
These IFAs have an interest in promoting free
market economy around the world, and development of capital markets is one of the preconditions
for such an economy. As the accountancy profession
has a strong role to play in ensuring development of
capital markets, the IFAs have an active interest in
the activities of this profession. The World Bank, in
a number of reports (2002b, 2003), has acknowledged the poor state of accounting and auditing
profession in Bangladesh, and has identified the need
for assistance in the sector. In 1999, the World Bank
advanced a US $200,000 loan to the Bangladesh
Government for the development of accounting and
auditing standards in Bangladesh. The majority of
this fund was channelled to the ICAB through the
SEC. Mir and Rahaman (2005) investigated the
international accounting standards adoption process
in Bangladesh. The paper commented that most of
the accounting standards developed by the ICAB,
and labelled as Bangladesh Accounting Standards
were actually carbon copies of the International
Accounting Standards (Mir and Rahaman, 2005,
p. 826). Drawing on institutional theory, the paper
noted that such isomorphism was prominent in
developing economies, as adoption of international


accounting standards would result in cost savings.

Also, adoption of International Accounting Standards (IAS) provides these countries, heavily dependent on external assistance, with legitimacy with
their donor agencies. This is consistent with
DiMaggio and Powell (1983), who pointed out that
conformity or isomorphism is a function of external
dependence. Pfeffer and Salancik (1978) also
acknowledge that acquiescence is the most probable
response to institutional pressure when organisational dependence on the source of such pressure is
The above discussion indicates the lack of selfregulation in the accountancy profession in Bangladesh. Such lack of self-regulation leads to lack of
legitimacy, as the market tends to believe that the
auditors do not act in a socially acceptable manner.
According to Meyer and Rowan (1991), such
organisations would be deemed as unnecessary. To
regain such legitimacy, the ICAB then has to be seen
as acting in a manner that is acceptable to its stakeholder groups. However, it might be noted that,
although the institute is externally dependent on
donors for funds for implementation of its projects,
the Company Law (1994) has given the members of
this profession the right to operate in a monopoly.
Therefore, although the ICAB has a severe legitimacy problem, for it to survive in an economy
characterised by a weak capital market and poor
demand for audited financial statements, it does not
really have to respond to legitimacy threats, as the
market would not have gone for voluntary or
higher-quality audit services anyway. So far, the
ICAB has not taken any initiative on CG, other than
holding a number of seminars for its members. This
is unusual compared with developed economies, as
accountancy and auditing bodies are considered to
be a major stakeholder group in the CG models.

Private actors: the civil society

According to Whittington (1993), regulation tends
to switch from self-regulation to private regulation.
The absence of self-regulation in Bangladeshi corporate sector would then create a scope for the
development of private regulations. However, there
have not been any attempts by the professional
accountancy and business bodies in Bangladesh to


Javed Siddiqui

initiate any private regulatory initiatives in CG.

Nevertheless, there are a number of civil society
think-tanks that have from time to time provided
guidance on CG in Bangladesh, the Bangladesh
Enterprise Institute (BEI) being the most prominent.
The BEI conducted the first major study on CG in
Bangladesh in 2002. The project, funded by the
DFID and the Commonwealth Secretariat, compared the existing CG practices in South Asian
countries. The Bangladesh chapter of the report
reviewed the corporate and legal environments, the
state of the accounting and auditing profession,
the role of the regulatory bodies and the role of the
pressure groups (BEI, 2003). The report identified
that, due to a number of reasons, including lack of
proper knowledge, lack of proper monitoring and
lack of quality audit services, disclosures made in the
annual reports of Bangladeshi companies were, in
many cases, inaccurate and incomplete. The report
also identified the common concern of the stakeholder groups regarding the truth and fairness of
audited financial statements (BEI, 2003, p. 24). The
report commented that government-funded regulators, such as the SEC, the Bangladesh Bank and the
Registrar of Joint Stock Companies (RJSC),
remained largely ineffective due to lack of capacity
and qualified personnel. The ICABs role in regulating the accounting and auditing profession was
referred to as seriously called into question (BEI,
2003, p. 27). The report also identified that there
was a dearth of pressure groups in Bangladesh. The
financial media lacks qualified and experienced
journalists, and there is no association or group that
joins the shareholders together.
Having identified the lack of governance in the
corporate sector in Bangladesh, and lack of legitimacy of the professional and regulatory bodies,
the BEI set about developing a code of CG in
Bangladesh (BEI, 2004). It is important to note that
the BEI is strictly a private-sector entity with no
statutory or regulatory power. Also, unlike the
Cadbury Code (1992) or the Combined Code
(FRC, 2003) in the UK, the BEI code has not been
adopted by any stock markets.11 Nevertheless, the
BEI code is the first comprehensive set of CG
guidelines in Bangladesh. Surprisingly, even though
the BEI is an independent private-sector body, the
BEIs taskforce on CG included members from the
Bangladesh Government and other important regu-

latory agencies, including the Chairman of the SEC.

Like BEI (2003), the CG codes were also developed
by BEI under a project funded by the DFID and the
Commonwealth Secretariat. Consistent with CG
codes in other parts of the world [for example, the
OECD guidelines (1999) and the Combined Code
(2003) in the UK], the BEI CG code (2004)
incorporated notions of independent directors on
the board, separation of the chairman and the CEO
and the formulation of audit committees. It is
mentioned that the BEI code was developed in
consultation with the OECD code of CG (1999).
The BEI code is discussed in detail in a later section
of this paper.
Once the CG code was developed, BEI then
undertook another project to strengthen CG practices in Bangladesh. The objective of this project was
to inject CG practices as a microeconomic policy
instrument to complement other microeconomic
policy instruments and macro-economic reform
policies, particularly financial sector reform.12
Under this project, the BEI has been regularly
organising CG training and awareness programmes
in different private, public and professional institutions. The project is funded by The Netherlands
embassy in Bangladesh, and the Commonwealth
The above discussion indicates that, in the absence
of private-sector regulatory bodies in Bangladesh,
think-tanks such as BEI have made significant contributions in the development of CG guidelines. In a
recent speech, the BEI chief claimed that the BEI has
acted as a catalyst in the development of CG in
Bangladesh (ICGN, 2006). It may be noted that all
the BEI CG initiatives, including the CG code, have
been funded by different donor agencies. The BEI has
no source of revenue of its own, and is financially
dependent on these projects. This is different from
private-sector regulatory initiatives in other countries.13 The resource dependence of the BEI on different aid agencies may be seen as providing scope for
different donor agencies to influence the BEIs policy
making and research. As BEI has demonstrated that it
has significant influence on government-level policy
making, the donors might use such organisations as
catalysts to pass on policies to the Government.14
Also, the donor-funded BEI CG awareness programmes would also make such policies more
acceptable to the private and public sectors.

Development of Corporate Governance Regulations

Government regulators: the Securities and Exchange
The primary government regulator in the Bangladesh CG scenario is the Securities and Exchange
Commission of Bangladesh (SEC). Established in
1993, the SECs objective is to protect the investors, promote and develop capital markets in Bangladesh, and regulate the securities market (Hossain
et al., 2005). The SEC is funded by the government,
and its chairman and three members in the board are
also recruited by the government.
In 1996, the Bangladeshi capital market went
through a major turmoil. Between July and
November, the all share price index in Dhaka Stock
Exchange (DSE) went up by 265%. The relatively
inexperienced Bangladeshi investors rushed to the
market. However, such rise was short lived, as the
index went down from 3648 in November 1 to 486
points in April (SEC, 1997). Investigations later
revealed a scam involving a group of investors.
Association of members of SEC and DSE were also
reported (The Daily Star, 1999). The stock market
crash resulted in huge lack of confidence, and for
years investors stayed away from investing in the
capital market (BEI, 2003). This is consistent with
Ozcan and Cokgezen (2003), who report that capital market failures in emerging economies often
have long-term destabilising effects with widespread painful outcomes. Solaiman (2006) recently
reviewed the development of capital markets in
Bangladesh. On the 1996 stock market crash, the
paper commented:
The disaster came as a blow to investors and regulators
alike. The government became more concerned about
the market, which prompted the authorities to bring
about further reforms in securities regulation. (Solaiman, 2006, p. 203)

Immediately after the stock market turmoil, the

government undertook a number of reform programmes to restore investors confidence. The SEC
went through a number of major changes: it was
entrusted as the final rule-making authority for
capital markets; its organogram was revised to
incorporate two new members; considerable staff
was recruited; and a new investors education programme was introduced. However, despite such


measures, the SEC still suffers from lack of highly

skilled professionals, as noted by the BEI report
The Corporate Accounts does not have the capacity to
review the half-yearly accounts of the listed companies. The SEC, like other regulators dealing with
corporate accounts, has to depend to a large extent on
the performance of the auditors of these companies, of
which much has been said elsewhere in the report.
Likewise, the Commission does not have a full time
corporate lawyer on board. The surveillance and
investigations units are also not adequately staffed or
trained. Therefore, the quality of the monitoring
activities of the SEC remains open to question. (BEI,
2003, p. 57)

In 1999, the Asian Development Bank (ADB)

initiated a US $1.07 million project to strengthen
the capacity of SEC so that it can perform its regulatory functions. The ADB, in its technical assistance report to the Government of Bangladesh
(ADB, 2000), mentioned that the stock market had
not recovered from the 1996 crash, and that good
CG by the companies listed in the stock exchanges
was essential. The purpose of the ADB technical
assistance was to develop a CG structure needed to
build confidence and trust of the public and shareholders (ADB, 2000). Under the project, the ADB
aimed to develop a CG manual that would be distributed at the workshops and training sessions
conducted by the SEC. Also, members of the SEC,
DSE, CSE, and ICAB would be provided training
regarding CG. However, although the project
completed in 2002, the CG manual was not developed. Nevertheless, under the project, members of
the SEC staff were provided training regarding CG,
which helped the SEC to finally come up with a CG
order in 2006 (SEC, 2006). Compared with the BEI
code, the SEC order is much more specific in terms
of contents, and does not offer detailed explanation
of the rules.
The above section discussed the role of different
actors in the Bangladesh CG scenario. The discussion indicates that international financing bodies
exercise significant levels of influence on all the
actors involved in the CG scenario in Bangladesh.
The next section will present a comparison between
different CG initiatives in Bangladesh.


Javed Siddiqui
of comments were made on the appropriateness of
certain provisions of the order.

This section attempts to explain the behaviour of the
principal actors in the Bangladeshi CG scenario.
Diagram 1 presents a model for such analysis.
As development of CG has been attributed to the
principal agency model (Roberts, 2004), the agency
theory is considered to be the primary basis of
analysis. Paredes (2005) mentioned that the success
of the Anglo-Saxon model actually depends on
agency-theory-based assumptions, such as the efficiency of the capital market, sophistication of the
investors, availability of qualified personnel to supplement the capital markets, incentives for equity
financing and political stability leading to long-term
expectations. The low level of sophistication of the
Bangladeshi capital market and its investors, high
ownership concentration and high rates of bank
financing would therefore indicate that the shareholder model would not be very effective in Bangladesh. Therefore, the agency theory perspective
does not really explain such adoption. In a recent
round-table discussion on the SEC (2006), a number

The Bangladeshi Corporate world is managing the

independent director well. For example, the central
bank had stringent provision for the rotation of bank
directors. The owners are running the show with their
nominees even better. Also there could be the issue of
scratching each others back. Thus, independent
directors cannot serve its purpose. Independent
directors should not be the Chairman of the Board.
(President, International Chamber of Commerce in
Bangladesh, DSE, 2006)

However, as indicated by the role of different CG

actors, as in other emerging economies, the Bangladesh CG scenario is also characterised by lack of
participation of different stakeholder groups. The
fact that the capital markets are inefficient automatically implies that the managers would not have
necessary incentives to comply with CG codes on a
voluntary basis. However, despite this, the BB
and SEC orders are applicable on comply or
explain basis. MacNeil and Li (2006) report that the

Diagram 1. Adoption of CG codes: alternative theoretical explanations.

Development of Corporate Governance Regulations

application of CG codes on comply or explain basis
is ineffective even in developed economies. Also, the
lack of participation of different stakeholder groups
in the preparation of CG codes has resulted in the
lack of corporate social reporting in Bangladesh
(Belal and Owen, 2007), and even the ICAB has
failed to protect its own interest (as evidenced by a
suggested ban on NAS). Another discussant in the
DSE round-table discussion (2006) summed up the
inappropriateness of the CG codes in Bangladesh.
The CG practices we are discussing were developed in
OECD countries. These might not be applicable in
our country because of the difference in culture and
value system. (former vice president, ICAB, DSE,

Therefore, it is apparent that the agency theory is

not sufficient in explaining the adoption of the AngloAmerican model of CG in Bangladesh. Diagram 1
then explores whether NIS can be used as a theoretical
basis for such behaviour. From the institutional perspective, it may be worth noting that, although the
professional and regulatory bodies suffer from problems of legitimacy, their exposure to threats of legitimacy may have been different. The accountancy body,
the ICAB, has severe problems of legitimacy, arising
from public perceptions of lack of independence. This
may have resulted in lower audit fees as clients are not
willing to pay more for poor quality audit work.
Nevertheless, the Company Law (1994) still ensures
that public limited companies must have their financial
statements audited by members of the ICAB. This
grants the ICAB a right to operate in a monopoly.
As the ICAB enjoys a superior lobbying power compared with the other accountancy body, the Institute
of Cost and Management Accountants of Bangladesh
(ICMAB) (see Mir and Rahaman, 2005), ensures that,
although it is reluctant to self-regulate its members, its
self-regulatory power will not be challenged by any
other professional bodies. This, coupled with the poor
demand for audited financial information, probably acts
as an incentive for the ICAB not to regulate its members. Therefore, although the organisation has severe
problems of legitimacy, its legitimacy threat is low, as
the professional body has been granted a monopoly and
does not necessarily have to be seen to be acting in a
socially acceptable manner to earn revenues.


The regulatory body, the SEC in this case, is

financially dependent on the government. Also, the
top posts are filled by the government. Therefore,
the government exercises a significant influence on
this body. The 1996 stock market collapse created
sever problems of legitimacy for the SEC, and it has
not recovered from such problems of legitimacy so
far. However, although the legitimacy problems for
the ICAB and the SEC may be similar, their exposure to legitimacy threats is different. Whereas the
ICAB does not have to depend on public perception
and confidence for its earning, the SEC, financed by
the Government of Bangladesh, has to face a different scenario. The Government of Bangladesh
heavily relies on overseas assistance, and donors tie
up such assistance with different development goals.
One such development goal is the promotion of
capital markets as a means for ensuring a free market
economy. Therefore, the Government of Bangladesh, the SECs financiers, would be keen to restore
their legitimacy with the IFAs by proving that they
are behaving in an acceptable manner. This is consistent with Seal (2006), who mentions that CG
reforms are considered to be collectively sanctioned
norms that organisations are expected to comply
with. Thus, the adoption of the apparently successful
shareholder model may provide the SEC, and the
Government of Bangladesh, with its much-needed
legitimacy which will ensure continued support of
the financing agencies. As the SEC, a new organisation with a reputation for failure (for the 1996
stock market crash), is operating in an uncertain
environment, the NIS would predict that such
organisations would tend to mimic others. The fact
that the SEC order is remarkably similar to the BEI
code may indicate that, under threats of legitimacy,
the SEC may have chosen to follow the safe path of
adopting the shareholder model of CG, as preferred
by the donors. This is consistent with Mir and
Rahaman (2005), who suggest that Bangladesh
preferred to adopt the International Accounting
Standards rather than developing its own standards
because the international standards seem more
preferable to its stakeholder groups. Also, the NIS
framework suggests that late adopters of CG codes
will tend to mimic established practices for the sake
of legitimacy (Enrione et al., 2006).


Javed Siddiqui

The behaviours of the actors in the Bangladesh

CG scenario is consistent with the expectations of
the NIS theory. It may be argued that the similarity
of the BB, BEI, and SEC CG initiatives reflect
coercive isomorphism, where organisations are forced
to change their behaviour due to formal or informal
pressure applied by independent actors (DiMaggio
and Powell, 1983). However, this could also be
indicative of mimetic behaviour, where the SEC
might be following the established practices for the
sake of defending its legitimacy. This is consistent with
Enrione et al. (2006), who mention that late adopters
tend to imitate established practices. Also, DiMaggio
and Powell (1983) mention that the three instruments
of isomorphism are not distinct, and may tend to

This paper investigates the development of CG
codes in Bangladesh. More specifically, three questions are investigated: What type of CG regulations
would fit into the corporate and socio-economic
environment of Bangladesh? What type of CG
model has Bangladesh adopted in fact? and What
prompted the adoption of a particular model of CG?
It is found that the Bangladesh corporate and economic environment is characterised by high ownership concentration, primitive capital markets, high
government dependence on IFAs, easy availability of
bank credit and subsequent default culture, and poor
labour conditions. The presence of all these factors
suggest that the Anglo-American shareholder model
of CG, based on agency-based notions of market
efficiency, will not be entirely suitable for Bangladesh. Rather, the presence of representatives of
banks and workers, as suggested by the stakeholder
model, could contribute to better loan recovery and
improvement of working conditions. The adoption
of the stakeholder model may be even more
appropriate against the backdrop of the ongoing
financial crisis, which has seen major slowdown in
global economy. Although emerging economies
such as Bangladesh have been largely unaffected by
the first phase of the financial crisis, it is expected
that these economies will be severely affected by the
second phase of such crisis, as exports and remittances suffer (ADB, 2009). This may further

deteriorate unemployment rates and result in even

lower payments for labourers. Also, the financial
sector is expected to be severely hurt by the crisis,
and the bad debts situation may worsen further for
the banks. All these factors provide justifications for
the adoption of a stakeholder model, where the
interests of employees and banks would be protected
through the presence of their representatives on the
board. However, the paper finds that, despite having
a socio economic structure that does not support the
shareholder model, Bangladesh has adopted the
shareholder model of CG.
In the course of investigating the reason for such
wholesale adoption, it is found that the process of
development of CG regulations in Bangladesh is
characterised by the absence of self-regulation by the
professional bodies, a dominant presence of donordriven private-sector regulations and the adoption of
private-sector regulations by government-funded
regulators. The apparent ineffectiveness of the ICAB
to self-regulate its members, and its lack of initiative
to develop any CG regulations, has led to the
development of such regulations by private-sector
think-tanks. These private-sector think-tanks do not
have any regulatory or statutory authority. However, their projects are funded by donor agencies,
and as a result, they enjoy significant influence on
the regulators. Analysis presented in this paper also
indicates that, consistent with development of CG
initiative in other emerging economies, Bangladesh
has also adopted the shareholder model of CG,
despite the fact that this model is based on assumptions that only hold in developed economies. By
analysing the role of different actors in the CG
scenario in Bangladesh, this paper finds that these
actors are exposed to different levels of legitimacy
threat, and behave accordingly. The monopoly
granted to the ICAB by the Company Law (1994)
and the weak market for audit services act as an
incentive for the professional body to remain inactive in the CG scenario. On the other hand, the
regulator, funded by the government, also suffers
from similar levels of legitimacy problem due to its
previous inaction in the 1996 stock market crash.
The SEC, being a government-funded regulatory
body, has to promote government agenda to legitimise its actions to the donor agencies and ensure
continued flow of support towards the Bangladesh
government. The adoption of shareholder-based

Development of Corporate Governance Regulations

models of CG suggests that they have done so. The
findings seem to suggest that, in emerging economies such as Bangladesh, organisations have little
motivation to act in a socially acceptable manner,
unless such action has direct relationship with
organisational resources. This provides even stronger
justifications for why the stakeholder theory may be
more appropriate for such countries. Future research
in this area may investigate applicability of the
alternative models at the firm level, applying different methodological perspectives.


The classification of emerging and developing

economies is debatable. However, for the purpose of
this paper, the term emerging and developing economies are used interchangeably to refer to countries listed
as emerging and developing countries by the International Monetary Funds World Economic Outlook
report (IMF, 2008).
A country is classified as an LDC if it meets three
criteria based on: low income (3-year average gross national income per capita of less than US $750, which
must exceed US $900 to leave the list), human resource
weakness (based on indicators of nutrition, health, education and adult literacy) and economic vulnerability
(based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export
concentration, and handicap of economic smallness, and
the percentage of population displaced by natural disasters) (United Nations, 2006).
Table I indicates that the number of qualified chartered accountants in Bangladesh is only 727, which is
significantly lower than neighbouring India, Pakistan
and Sri Lanka.
Among neighbouring countries, Pakistan and Sri
Lanka have associations for second-tier accountants
(Pakistan Institute of Public Finance Accountants and
Association of Accounting Technicians, Sri Lanka).
Although India does not have a second-tier accounting
qualification, the Institute of Chartered Accountants of
India has a very large number of qualified members
(130,000). Also, India has an association for certified
analysts (1,650 members).
The neglect of health and safety at workplace is
evident from the fact that hundreds of employees have
been killed at work due to several fire incidents in
recent times. Indeed, between 1990 and 2005 there


were 115 reported factory fires, resulting in 300 deaths

and over 2,500 injuries. In one particular fire incident
in Dhaka on 11 April, 2005, 73 people were killed and
100 workers were trapped in the debris. In another
more recent incident in the KTS garments factory in
Chittagong, 56 people died and 100 were injured due
to a fire caused by boiler explosion (Belal and Owen,
The nonpayment of overdue wages has resulted in
numerous violent protests by workers in Bangladesh. A
very recent example was on August 11, 2008, when
300 workers of Polonia Garments Limited in Dhaka
gathered in expectation of payment of owed wages, as
promised by management. Finding the factory gates
locked, furious workers began ransacking the factory.
Events escalated when over 1,000 workers from neighbouring factoriesarmed with bamboo sticks and
stonesjoined Polonia workers and attacked other factories on the Dhaka-Tangail highway. Highway traffic
was blocked for 2 h (
Bangladesh has a history of political instability.
Since its independence in 1971, the country has been
frequently ruled by military dictators. Very recently, a
democratic government has been re-established after
2 years of military-backed rule through elections on
December 29, 2008.
Categories of NAS prohibited by the SEC (2006)
are: appraisal or valuation services or fairness opinions;
financial information systems design and implementation; bookkeeping or other services related to the
accounting records of financial statements; brokerdealer services; actuarial services; internal audit services; and
any other service that audit committee determines to be
In September 2002, the ICAB, for the first time in
38 years of existence, suspended membership of an audit firm for 3 years. Other disciplinary actions have
been few and far between.
An audit firm, NN Islam and Company, issued a
clean audit report for Rose Heaven Ball Pen Plc. in
June 2004. The SEC, through a newspaper advertisement published in May 2005, came to know that the
company had owed Taka 19 million to a bank, and the
bank had advertised to sell the companys property held
against such mortgage. However, this was not disclosed
in the financial statements, and the auditors still issued
an unqualified audit report. The SEC asked the audit
firm to appear at a hearing, but the firm failed to do so,
despite having being allowed several extensions. Finally,
the SEC fined the audit firm (The Daily Star, April 23,
2007). However, the ICAB is yet to take any disciplinary actions against the audit firm.


Javed Siddiqui


The Cadbury Code (1992) was adopted by the

London Stock Exchange (LSE), and companies listed
with the LSE are required to adhere to the code on a
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and funded by six professional accounting bodies,
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The BEIs level of influence can be ascertained
from comments of the SEC chairman, who, in a discussion organised by the BEI, admitted that the SEC CG
order (2006) had been inspired by the BEI code
(BEI, 2006). Also, the BEI managed to incorporate key
members of the SEC in its taskforce on CG, whereas it
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Manchester Business School,

University of Manchester,
Manchester, U.K.