CORPORATE GOVERNANCE FAILURES IN BANGLADESH: A

STUDY OF HALL-MARK AND BASIC BANK

Dr. Yousuf Kamal*
Fahmida Begum**

ABSTRACT

After facing a large number of corporate collapses around the world,the consider-
able attention had been given to study corporate governance in developed countries.
However, there is a dearth of studies on corporate governance practice and failures
in emerging economies such as economics in Bangladesh. This study attempts to
examine the corporate governance practicesand failures in Bangladesh in the light of
two recent corporate collapses. The Hallmark Group, a textile firm; along withSonali
Bank and BASIC Bank made the biggest plunder in the country’s history. Our analy-
sis found that organization’s haphazard financial systems associated with serious
deficiencies in its corporate governance were the primary reason of corporate
collapses in Bangladesh. We find that the weakness in internal control, lack of trans-
parency in financial reporting, poor audit quality, lack of board scrutiny of manage-
ment and poor management communication with the board are responsible for
corporate collapse. Our findings suggest that Hallmark and BASIC bank’s scandal
can be classified as a classic case of expectation miscasts, strategic mistakes, financial
unauthorized access by Board members and so on. We think, the scandal of
Hallmark and BASIC Bankprovided several important lessons on the role of corpo-
rate governance practices. Our findings would help the policy makers and corporate
regulators associated with some insights to prevent future corporate collapse.

Key Words: Corporate Governance, Bangladesh, Hall-Mark, Basic Bank, Financial

Scandal

1. INTRODUCTION

Corporate governance is the mechanism, process and relations by which corpora-

tions are controlled and directed. It includes the process through which corpora-
tion’s objectives are set and pursued in the context of the social, regulatory and
market environment. The mechanisms of Corporate Governance include monitor-
ing the actions, policies, practices and decisions of corporations, their agents and
affected shareholders.Corporate governance indicates the overall business and
other related issues managing and direction mechanism, structure and the process
(Khan, 2011). Corporate governance is applicable both for private and public orga-
nizations and it comprises laws, regulations and contemporary business practices
that shape the relationship between the managers and the stakeholders of the

* Professor, Department of Accounting & Information Systems, University of Dhaka.

Email: Yousuf.kamal@du.ac.bd
** Assistant Professor, Comilla University, Comilla.
Journal of Green Business School, Volume 1, Issue 1, January - December 2018

corporations (Oman, 2001). According to La Porta, et. al. (2002), corporate gover-
nance is the system which works as the shield for the shareholders that safeguard
them from the managers who is also known as insiderinvestors. There are many
definitions of corporate governance ranges from a broad societal definition to a
market specific one. For example, Sir AdrianCadbury proposes a broad understand-
ing of the concept, stating -

“Corporate governance is concerned with holding the balance between economic

and social goals and between individual and communal goals. The corporate gover-
nance framework is there to encourage the efficient use of resources and equally to
require accountability for the stewardship of those resources. The aim is to align as
nearly as possible the interests of individuals, corporations and society” (Cadbury,
2000).

An alternate and narrower understanding emerging from financial market

approaches to define corporate governance is found in the finance literature. This is
typified by the definition of corporate governance given by the Asian Development
Bank (ADB).

“Corporate governance is a set of rules that define the relationship between share-
holders, managers, creditors, the government and stakeholders; it is a set of mecha-
nism that help directly or indirectly to enforce these rules” (ADB, 2000, p.5).
Interest in the corporate governance practices of modern corporations, particularly
in relation to accountability, increased following the high-profile collapses of a
number of large corporations during the beginning of 21st century. However, most
of these collapses involved accounting fraud and therecent financial crisis made this
topic even momentum.

Research on corporate collapse has mainly focused on developing and

testing bankruptcy prediction models (e.g. Hensher et al. 2007). Moreover, bulk of
the corporate governance research deals with healthy firms to understand the role
of corporate governance in different contexts, such as, firm performance, executive
compensation, corporate structure and firm value.

While corporate governance receives wide media and political attention

following major collapse, academic research has rarely addressed corporate gover-
nance practices of collapsed firm. This paper aims to fill some of this void. If society
expects corporate regulators to design and practice governance structures that are
likely to reduce the chances of corporate collapse, then analysis of governance struc

02 | Page
 Corporate Governance Failures in Bangladesh: A Study of Hall-Mark and Basic Bank

ture and corporate governance practice of collapsed firms is must.Using evidence

from two un-related cases, this paper demonstrates that weakness in governance
practice in relation to internal control system, financial reporting quality, audit
quality, management scrutiny, and management communication with the board
can be catalysts to corporate collapse. This study contributes to the ongoing
researches on accounting and/or finance literatures and contributes to reducing the
dearth of literatures on corporate governance in emerging economies in general and
Bangladesh in particular.

The main objective of this paper is to provide a critical discussion of the

available literature on corporate scandal in the light of corporate governance frame-
work in Bangladesh. In addition, we attempt to assess the factors that affect the
recent corporate collapse in Bangladesh and to discuss how present corporate
governance systems can be developed to prevent such type of collapse.

To achieve the above stated objectives, we have used qualitative approach

to conduct this study. In particular, we have used the case study method. We tried
to analyze two cases here to understand their insights about corporate governance
practices. We have chosen Hallmark Group scandal and Basic Bank scandal as these
two cases are highly discussed in Bangladesh. We think these two cases can be ideal
examples of corporate governance failure. To support our analysis, we have collect-
ed secondary data from various scholarly articles, academic journals, online publi-
cations and newspape reports. To make a critical analysis on this study requires a
good number of literature reviews and case study method provides that flexibility.
The implication of this research is to insinuate that corruption does not do any good
to those committed it for a longer period of time. Instead, corruption disrupts the
stability and productivity of any economy.

The paper has the following structure. The next section provides the back-
ground of this study by highlighting the current state of corporate governance prac-
tices of Bangladesh. Section three provides the literature review, section four
provides the cases in detail and section five provides our findings. The last section
provides some policy recommendations that can be used by the corporate regula-
tors as well.

2. BACKGROUND OF THE STUDY

Bangladesh is a rising economy in South Asia. After fighting a long war, it

achieved its independence in 1971. By suspending Companies Act 1913, the Govern-
ment of Bangladesh nationalized all large and medium sized industries to ensure
the so called “economic justice” or “distributive justice”. Socialism was constitution

03 | Page
Journal of Green Business School, Volume 1, Issue 1, January - December 2018

ally accepted as one of the four fundamental principles of the state. Through nation-
alization, the government gained control over 92% of the total industrial asset of the
country (Uddin and Hopper, 2003). The government preserved the right to national-
ize any private enterprise whenever felt necessary (Ahamed 1978; Banglapedia
2006). This in turn establishes its economy one of the slowest growing economies
and Bangladesh became one of the poorest countries in the world. The World Bank
(1995, p89) stated that the biggest public failure in Bangladesh was due to the
State-OwnedEnterprise sectors in Bangladesh. However, export-oriented industries
and agricultural production were encouraged as a new development strategy
(Ahamed, 1978). The new regime took steps to rehabilitate the private sector and
facilitates industrialization, such as a revision of investment policy and a reduction
charges on industrial loans by the Development Financing Institution (DFI), dena-
tionalization of the public economy by the government brought in the new era of
industrialization.

Though many of corporate bodies include the privatization in 1976, major

portions of the banking and jute sectors, paper and textile mills, telecommunica-
tions, railways and airlines industries could not be denationalized due to various
difficulties and so they continued to remain under government control. These enter-
prises presented a very painful experience to the nation. For example, because of a
failure of corporate governance in terms of mismanagement and corruption, the
Adamjee Jute Mills Corporations Ltd. the largest jute mill in the world collapsed in
2002 costing the jobs of 17,000 workers. In the last 30 years Adamjee Jute Mill had an
accumulated loss of Tk. 11,080 million, approximately equivalent to 22.6 million
Australian dollars (Star, 2002).This encouragesadopting the market economy and
the ‘rehabilitation’ of the private sector which experienced a huge growth. For
example, the industrial GDP increased from 7.19% in 1974 to 27.8% in 1980 (Alaud-
din, 2004). The emergence of the growth of private sector causes a shift of the focus
of corporate governance from the public sector to the private sector. It was also
encouraged by so some other environmental factors, such as, the stock market
collapse in 1996, along with inefficiencies and underperformance causing collapses
of some privatized jute and textile mills (Bhaskar and Khan, 1995; Uddin and
Hopper, 2003). All these failures highlighted greatly the importance of good corpo-
rate governance in the private sector in Bangladesh.

The dominant shareholder group in Bangladesh is the major player in both

private and public sector. A few shareholders account for a significant portion of
total share value and most companies are managed and owned primarily by found-
ing family members, holding company or institutional investors; leading to very
high degree of concentration of ownership control. This concentrated owner holds a
position in the company and board, leading to poor monitoring of corporate gover

04 | Page
 Corporate Governance Failures in Bangladesh: A Study of Hall-Mark and Basic Bank

nance practice. If we take a closer look at the Non-performing loans (NPLs) figure,
we can find that the total NPLs up to the June 2018 stood at TK. 89,340 crore which
is enough to fund almost three Padma Bridges. This provides an example of ineffi-
ciency and lack of good governance. Independent non-executive directors are not
playing their roles at desired level. This serious anomaly in the public as well as in
the private sector sets the background for this study to look into the details of the
mechanisms behind the corporate governance practices and failures of Bangladesh.

3. LITERATURE REVIEW

Following the large number of corporate collapses around the world,

considerable research on corporate governance is conducted within the developed
countries context, such as the United States, the United Kingdom, Australia, Germa-
ny and Japan. However, corporate governance in emerging economy has not been
studied as intensively as in the developed markets (Gibson, 2003; McConnel and
Denis, 2005). Similarly, several reactionary structural changes have been instigated
to prevent such events happening again in the developed markets context, such as
the introduction of the Sarbanes-Oxley Act, 2002 in the United States; however, the
reaction in the emerging market is almost absent. Corporate failures such as Enron
and WorldCom, which collapsed because of the absence of corporate governance
and unethical practices they indulged in, have brought corporate governance into
the limelight (Sangmi& Jan 2014).Chidoko and Mashavira (2014) studied the role of
corporate governance in the banking sector in Zimbabwe but focused on the period
2009-2012 using a mixed research method and found out that a culture of good
corporate governance is essential for the well-functioning of business. Consequent-
ly, some researchers have examined the worldwide diffusion of corporate gover-
nancecodes (Haxhi and van Ees, 2010) while others have examined the degree of
compliance by firms with national corporate governance standards (Gupta and
Parua, 2006) and some have concentrated on drivers of corporate governance
reforms in the context of a mature capital market (Hermes et al, 2006). However,
most of these researchers argue that corporate governance encourages new invest-
ments, enhances economic development and delivers employment opportunities.

Prior studies found that standard corporate governance practices in Bangla-

desh are absent to some extent in almost all the companies and organizations. In
fact, Bangladesh has lagged behind its neighbors and the global economy in corpo-
rate governance practices (Gillibrand, 2004).One reason for this absence of corporate
repetation is that most companies are family owned. Moreover, motivation to
disclose information and improve governance practices by companies is felt nega-
tively. There is neither any value judgment nor any severe legal consequences
(except some recently) for corporate governance failures. The current system in

05 | Page
Journal of Green Business School, Volume 1, Issue 1, January - December 2018

Bangladesh does not provide sufficient legal, institutional and economic motivation
for stakeholders to encourage and enforce good corporate governance practices;
hence failure in most of the constituents of corporate governance is witness in
Bangladesh. Poor bankruptcy laws, no push from the international investor
community, limited or no disclosure regarding related party transactions, weak
regulatory system, general meeting scenario, lack of shareholder active participa-
tion is some of the individual constituents of the overall corporate governance prac-
tices of Bangladesh(Ahmed and Yusuf, 2005).Haqueet. al.(2006) also documented
that the boards of the Bangladeshi firms are mostly family dominated and executive
management is family aligned. This is typical of circumstances found in the coun-
tries affected by the Asian Crisis. ADB (2000, p 2) further documented these scenari-
os as weaknesses in corporate governance, highly concentrated ownership,
under-developed capital markets, and the weak legal and regulatory framework for
investor protection.

In Australian perspective, Monem (2013) investigated the collapse of

One-Tel, the fourth largest telecommunications company in Australia, which
collapse in May 2001. The One-Tel collapse is a classic case of failed expectations,
strategic mistakes, wrong pricing policy and unbridled growth. Clarke et al. (2003,
p.263) linked the collapse of One-Tel to ‘still-born’ corporate trajectory. Hambrick
and D’Aveni (1992) argue that corporate collapses are usually preceded by corpo-
rate deteriorations due to strategic errors of senior management.One-Tel’s demise
leaves several important lessons on corporate governance as well. First, strong
internal controls, financial reporting quality, audit quality, effective management
scrutiny, full disclosure of company affairs to the board, and a strong link between
executive pay and firm performance are vital for effective corporate governance of
a firm. Second, a board is less likely to detect firm problems when there is a domi-
nant CEO in the firm. Third, non-executive board members should make their own
enquiries into firm strategies and performance. Hence, non-executive members
should be given access to middle and lower management to ensure transparency of
information. Third, large investors in any firm must take an active interest in man-
aging the firm. Fourth, as already documented in the literature, auditor’s involve-
ment in the non-audit service may compromise audit quality. Fifth, the board chair
should always preside over the board meetings to control the board's agenda and to
effectively monitor management behavior.However, Monem (2013) concludes that
all else being equal, firms with weaker corporate governance than others are more
likely to collapse, and the demand for good governance heightens in the wake of
poor firm performance. Thus, good corporate governance has the role of a ‘safety
net’ against corporate collapse.

After reviewing the above relevant literature, we find that in the perspec

06 | Page
 Corporate Governance Failures in Bangladesh: A Study of Hall-Mark and Basic Bank

tive of Bangladesh, to the best of our knowledge, no previous research was carried
out to understand the relationship between corporate collapse and corporate gover-
nance. As a result, there was a vacuum in research regarding this issue and a poten-
tial research gap was identified by the authors. Inspired to fill the gap in the litera-
ture, we have critically analyzed the two major corporate scandals of Bangladesh in
recent time and linked them with the extant literatures on this subject matter.
Through this study, the researchers provide some new insights into the association
between corporate collapse and corporate governance. The next section provides
the detailed about the two cases.

4. CASE STUDY OF HALLMARK AND BASIC BANK

4.1 Hallmark Scandal

The largest banking scandal to date in the history of Bangladesh is the
infamous Hallmark Scandal that was carried out by the collusion between officials
of Hallmark and Sonali Bank, in particular, between the Managing Director of
Hallmark Group, and the Manager of Sonali Bank’s Ruposhi Bangla branch. The
Hallmark group that began launching garments in 2007 becomes the owners of 80
factories in 2012, at least 40 of which are on paper though. Most of these factories
were built with the short-term loans. Hall-Mark bought 36 decimals of land from
Janata Housing at Hemayetpur in 2006 and set up its first factory, Hall-Mark Fash-
ion, there in 2007, the year it started banking with Sonali Bank’s Ruposhi Bangla
Hotel Branch. In 2008, the group set up Bobby Fashion, Wall-Mart Fashion,
Hall-Mart style, Boby Denim and Hall-Mark Design wear with Sonali Bank loan.
There was no factory built during 2009-2010. But in 2011, it suddenly got huge
money and set up 27 factories in a year (Dhaka Mirror, 2012).

Hall-Mark itself is aware that it has done wrong by diverting short-term

loans (Inland Bill Purchase-IBP) into project loans, which are long term in nature,
but lender Sonali Bank seemed not to notice it. The project in Hemayetpur, some 30
km north west of the capital, is built on a 100-acre land, a large portion of which was
bought with Sonali Bank loan. According to Hall-Mark, its net liabilities to Sonali
Bank stood at Tk. 2,268 crore, of the sums, Tk. 1,567 crore is funded loan, meaning
the amount has been taken in cash. The remaining amount is non-funded loan,
mostly in the form of guarantee against Letter of Credit (L/C)(Siddique,2017).

Bangladesh Bank has found out that the Hallmark Group along with five
other companies applied for further loan and eventually got the approval for their
loans with forged documents with the Sonali Bank(Manik, 2012). A Bangladesh
bank investigation in May’ 2012 found that the group’s total liabilities to be Tk.
2,686.14 crore and all of the Hall-Mark loans were against IBP, which is a short-term

07 | Page
Journal of Green Business School, Volume 1, Issue 1, January - December 2018

credit facility utilized as working capital. But the hitherto little-known company
used these loans for buying land and building factories (Dhaka Mirror, 2012).
Bangladesh Bank (BB) reports showed that the Ruposhi Bangla Hotel Branch of the
state-owned Sonali Bank distributed Tk. 36.48 billion in the form of loans from 2010
to 2012 and the largest portion of this loan that is Tk. 26.86 billion went to a single
company known as the Hallmark Group(Sabet and Ishtiaque, 2013). The question
arises as how did they carry out this huge loan scam and where those funds were
allocated by the group. Investigations by two famous daily newspapers of Bangla-
desh, The Daily Star and Prothom-Alo, have shown that the whole process of the
loan scamming was done mostly through the opening of Letter of Credit (LC) in
favor of Hallmark by giving guarantee of payments to many fictitious suppliers
based on the documents most of which were fake.

Figure 1: Diagram representing Letter of Credit (LC) fraud at Hallmark (Sabet and
Ishtiaque, 2013)

Above figure shows how the whole process of Hallmark Scam was carried
out in a graphical representation. Hallmark wasalleged to establish fictitious
companies, such as Anwara Spinning Mills, Max Spinning Mills, Star Spinning
Mills, which were shown as recipients of the LCs. These companies submitted
falsified paperwork reporting deliveries of fabric to Hallmark, which were then
paid for by the LCs from Sonali Bank’s Ruposhi Bangla branch. Because the
fictitious companies and Hallmark had their accounts at the Ruposhi Bangla branch,
on paper it looked like the branch’s assets and liabilities were balanced out (Rahman
and Khan, 2013; Jewel, 2013). The question further arises that why this huge
malpractice was not discovered earlier so that it could be prevented in the first
place. Research and newspaper investigation have figured out three important
vulnerabilities. Firstly, the internal control mechanism of Sonali Bank, specially the
internal audit department did not carry out their role honestly as found by a parlia-
mentary committee that the Ruposhi Bangla branch was certified as a “low-risk”
branch by the inspection and audit team of the bank despite violations of financial
rules between 2007 and 2011 (Ahmed and Devnath, 2012; Daily Sun, 2012). Second-
ly, the board of directors couldn’t justify the rationale behind sanctioning this huge
amount of loan in favor of Hallmark although the Ruposhi Bangla branch exceeded
its loan quota by almost 500% (Daily Sun, 2012). Finally, Bangladesh’s regulatory
authorities were also partially liable to this scandal as some investigators comment

08 | Page
 Corporate Governance Failures in Bangladesh: A Study of Hall-Mark and Basic Bank

ed that Bangladesh Bank should have been more proactive in responding to the
irregularities detected in the central bank’s own audits of Sonali Bank (Ahmed,
2013). However, newspaper reports revealed that Hallmark Chairman was convict-
ed and jailed for 3 years and was also fined Tk.20 lakh in the corruption case filed by
the Anti-Corruption Commission (Dhaka Tribune, 2018).

4.2 BASIC Bank Scandal

The BASIC Bank Limited(Bangladesh Small Industries and Commerce
Bank Limited) was one of the finest state-owned banks of Bangladesh up until
recently when some serious allegations were made against the top managers of the
bank regarding loan scamming from the period of 2009 to 2013 by the economic
intelligence unit of Bangladesh Bank. BASIC Bank establishes as a banking compa-
ny under the companies Act 1913 and launched its operation in 1989. It was incorpo-
rated under the Act on the 2ndof August, 1988 and started its operation from the
21stof January, 1989.The Bank was established as the policy makers of the country
and felt the urgency for a bank in the private sector for financing Small Scale Indus-
tries. At the outset, the Bank started as a joint venture enterprise of the BCCI Foun-
dation with 70 percent shares and the Government of Bangladesh (GOB) with the
remaining 30 percent shares. However, the Government of Bangladesh took over
100 percent ownership of BASIC on 4thJune 1992.Thus, it becomes a state-owned
bank though it is not nationalized and it operates like a private bank as before. Basic
Bank is unique in its objectives and it is in fact a blend of development and commer-
cial banks. The Memorandum and Articles of Association of the Bank stipulate that
50 percent of loan-able funds shall be invested in small and cottage industries sector
(BASIC Bank website, 2018).

Bangladesh Bank reports revealed that nearly Tk. 4,500 crore was taken
illegally in the name of loans from the bank with the direct connection from the
chairman of the bank at that time along with the help of other board of directors.
What was really surprising in this situation is that of the Tk 4,500 crore swindled out
of the bank, more than 95 percent was sanctioned by the board. In each case, the
loan amount was more than Tk 1.5 crore, a sum the management cannot approve
without the board's approval (Khan and Uddin, 2018).Bangladesh Bank (BB) how-
ever, unearthed several anomalies in the loan sanctioning process by the Board of
Directors of the bank. The report of Bangladesh Financial Intelligence Unit (BFIU),
the anti-money laundering unit of the central bank, in 2014 showed that around Tk.
20 crore was transferred to bank accounts of two firms, owned by a close family
member of the Chairman, from several companies that got loans from BASIC Bank
through scams. Another important thing to notice on this point is that in 2010,
BASIC Bank approved a loan of Tk 5.60 crore to BS Trading before the firm even
opened its account with the bank. The loan amount was raised to Tk 33 crore in

09 | Page
Journal of Green Business School, Volume 1, Issue 1, January - December 2018

2012. The branch concerned, however, didn't show any reason for increasing the
amount. It didn't even verify the ownership of the property that was mortgaged
against the loan. Besides, no credit risk grading was done before approving the loan
though it was mandatory. No documents of the mortgaged land were collected
(Alo, 2017). This means there existed some serious irregularities in the governance
mechanisms of the bank at that period.

The BB team filed a 47-page long report, which includes a list of borrowers,
giving almost a minute-detail account of how the loans were approved and then
withdrawn in clear violations of the rules. A serious governance failure was identi-
fied in this report of BB as it said that BASIC Bank's board and its credit committee
at the headquarters ignored the negative observations from the bank's branches on
a number of loan proposals, and approved those without following due diligence.In
May 2014, the central bank fired BASIC Bank managing director for presiding over
a period of serious irregularities at the state-run bank. Bangladesh Bank found him
to be culpable in seven counts, including lack of sound management, failure to
protect depositors' interest, and loan irregularities.In the aftermath of this incident
Anti-Corruption Commission (ACC) filed 56 cases in 2015 accusing a total of 110
people and organizations for gross loan irregularities worth over Tk 4,500 crore.Of
the accused, 27 were bank officials and the rest were borrowers and surveyors,
according to the ACC(The Daily Star, 2016).Despite those paper evidences and prac-
tical allegations against the then chairman of the bank, he was not made an accused
in any of the cases filed by ACC which raised questions regarding his political back-
ings in this scam.

5. FINDINGS

In this section we have discussed our findings pertaining to the failure of corporate
governance of Hall mark and Basic Bank. In a nutshell, we can say that state backed
corruption, lack of good governance, lack of transparency in the loan sanctioning
process, independence of the board being hampered due to the selfishness of the
family owned or politically backed directors were the main driving forces behind
the Hallmark and BASIC Bank collapses. We have summarized our findings into
three categories such as economic factors, political factors and institutional factors
that are responsible for the failure of these companies. Economic factors arisefrom
negative economic conditions in the macro-economy perspective. Such adverse
economic conditions include; high and rising inflation rate; high and increasing
foreign exchange rate; subsisting huge foreign debts; huge and expanding fiscal
deficits; inadequacy of foreign exchange; monetary policy changes; inconsistent or
unstable economic policies; unguided economic reform program deregulation, low
capacity utilization in the industries; low per capita income; high domestic debts;

10 | Page
 Corporate Governance Failures in Bangladesh: A Study of Hall-Mark and Basic Bank

dwindling national income and corruptions. For example, the combination of high
inflation and exchange rates reduce the capacity of bank customers to save. Thus,
deposit mobilization becomes a subject of intense competition with consequences
for higher operational and financial costs. On the other hand, low capacity utiliza-
tion and low income per capitareduce the ability of borrowers to repay their finan-
cial obligations. Thus, bad debts developed with serious consequences for increased
provisions, which lead to reduced profits or increased losses. We think all these
economic factors accelerated the collapse of the Hallmarks and Basic Bank to a great
extent.

Political factors are politically induced, which turn out to have adverse
consequences on the effective management of financial sectors. For instance, the
political interference on the management of financial sector is such that most of the
government owned finance sectors were politically influenced to grant loans and
overdrafts, soon after which became hardcore and remained unpaid. Furthermore,
appointments of board and management members of such sectors were mainly
politically influenced, many times resulting to using unqualified and / or inexperi-
enced person to manage the economy. There were various newspaper reports about
the link between these two companies and the various political parties. Thus, we
think political factors are also liable to the collapse of these two companies.

In addition to economic and political factors, some researchers argue that

institutional factors are equally liable for the corporate collapse in many countries.
In the perspective of Bangladesh, it will not be undermined if we argue that there is
still weakness in the institutional settings, such of weakness in the Bangladesh Secu-
rities and Exchange Commission (BSEC) and Stock exchanges. Institutional factors
also include boardroom squabbles arising from ownership structure, insider abuse,
frauds and forgers, weak / ineffective internal control systems, poor asset quality,
inadequate capital, poor management and other internal factors.

We also find that strong internal controlsystems, financial reporting quali-

ty, audit quality, effective management scrutiny, full disclosure of company affairs
to the board are the important factors to ensure good corporate governance practice
in Bangladesh.We think in both of above cases these factors were either missing or
used in the lesser scale. We argue that a board is helpless to detect firm problems
when there is a dominant CEO in the firm and this reason also responsible for the
collapse of these two companies. We also argue that firm strategies and perfor-
mance should be perfectly evaluated by non-executive board members with their
own enquiries. Hence, non-executive members should be given access to middle
and lower management to ensure transparency of information. This issue was also
missing in both of the cases in our study. Previous research finds that auditors are

11 | Page
Journal of Green Business School, Volume 1, Issue 1, January - December 2018

liable to justify the financial reporting quality and auditor’s involvement in the
non-audit service may compromise audit quality. Though we did not check the
audit report and the detailed of audited financial information in our present study
but we can infer that in both of the cases auditors might not provide ‘due care’ or
‘professional diligence’ while auditing these two companies.Thus, we can conclude
that our findings are consistent with the previous research such as the findings of
Monem (2013).

6. POLICY RECOMMENDATIONS

From the discussion of the above two cases of corporate collapse, we can
argue that lack of efficient or good corporate governance is a big problem in Bangla-
desh. Hall-Mark and Basic Bank’s demise leaves several important lessons on
corporate governance practices and failures as well. We think firms with weaker
corporate governance are more likely to collapse, and the demand for good gover-
nance heightens in the wake of poor firm performance. Thus, good corporate gover-
nance has the role of a ‘safety net’ against corporate collapse.The Hallmark Group
and Basic Bank corruption case in Bangladesh is being just two examples of preva-
lent fraudulent cases that happen due to supervisory lapses from the law enforce-
ment and policy regulators inside and outside of the organization. The good news
is that some of those corporate perpetrators have been finally caught up and
brought under the law of justice. People in general expect that these wrong-doers
would get exemplary punishment so that nobody in future would be encouraged to
commit such corruption. On the basis of our findings we can provide some policy
recommendations that could be useful for the corporate governance practitioners,
government policy makers and corporate regulators. We suggest the following
initiatives:
a. The organization’s corporate governance system must be strictly design and
followed.
b. The responsibility of Board Members, Chairman and another authorized person
should be clearly defined.
c. The quality of Financial reporting should be improved according to establish
rules and regulations.
d. The persons involved in the record keeping system should have adequate
knowledge on accounting, auditing and other related area.
e. To establish a fair reporting system there may be a provision to review the audit
work by other auditor or audit firm.
f. The quality of both internal and external audit needs to be improved and the
highest regulatory bodies need to be proactive in this regard.
g. Political involvement should be removed to establish a fair corporate culture.

12 | Page
 Corporate Governance Failures in Bangladesh: A Study of Hall-Mark and Basic Bank

References

Ahamed, E. (1978), Development Strategy in Bangladesh: Probable Political Conse-

quences, Asian Survey, 18 (11): 1168-1180.
Ahmed, M. U., & Yusuf, M. A. (2005). Corporate governance: Bangladesh perspec-
tive. The cost and management, 33(6), 18-26.
Ahmed, K. and D. Nichollas (1994), The Impact of Non-Financial Company Charac-
teristics on Mandatory Compliance in Developing Countries: The Case of
Bangladesh, The International Journal of Accounting, 29(1): 60-77.
Ahmed, I. and Devnath, A. (2012). The enemy within,The Daily Star: Sept. 4.
Ahmed, N. (2013). Hallmark-Sonali Bank Loan Scam, Financial Express: January 14.
Aguilera, R.V. and Cuervo-Cazurra, A. (2009) Codes of good governance. Corporate
Governance: An International Review 17(3): 376–387.
Alauddin, M. (2004). Recent Development in the Bangladesh Economy, Economic
Growth, Economic Performance and Welfare in South East Asia, Palgrave-Mac-
millan: 11-27.
Aguilera, R.V. and Cuervo-Cazurra, A. (2004) Codes of good governance world-
wide: What is the trigger? Organization Studies 25(3): 415–443.
Alam, N. (2012). 'The impact of regulatory and supervisory structures on bank risk
and efficiency: evidence from Dual banking System.' Asian Journal of Finance &
Accounting. Vol. 4, No, pp. 1- 29. 1. doi:10.5296/ajfa. v4i1.150, [Online] Avail-
able at: http://www.macrothink.org/journal/index.php/ajfa/article/down-
load/1507/1437 [Retrieved 29 October 2012]
Ahad, A. (2012). 'How to Rob a Government Controlled Bank– A Hall Mark Group
Story.' Bangla News. [Online] Available at: http://www.banglan-
ews.com/2012/10/13/how-to-rob-a-a-govern-
ment-controlled-bank-a-hallmark-group-story/. [Retrieved 31October 2012]
Alo, J., N. (2017). BASIC Bank Loan Scam: Transfer of Tk 20cr raises questions, The
Daily Star: December 06
Arcot, S. and Bruno, V.G. (2006) In letter but not in spirit: An analysis of corporate
governance in the UK. SSRN eLibrary.
Asian Development Bank, ADB (2000), Corporate Governance and Finance in East
Asia, A Study of Indonesia, Republic of Korea, Malaysia, Philippines and Thai-
land, A Consolidated Report, Volume 1, The Asian Development Bank, Manila.
21
BASIC Bank Limited. (2018). www.basicbanklimited.com
Bangladesh Bank (2003-04), The Annual Report, Bangladesh Bank, Bangladesh, the
online version available at http://www.bangladesh-bank.org/ (Accessed on
10th November, 2005).
Bhaskar, V., & Khan, M. (1995). Privatization and employment: A study of the jute
industry in Bangladesh. The American Economic Review, 85(1), 267-273.

13 | Page
Journal of Green Business School, Volume 1, Issue 1, January - December 2018

Banglapedia (2006), The National Encyclopedia of Bangladesh, Asiatic Society of

Bangladesh, The online version available at http://www.banglapedia.org/
(Accessed on various dates from 3rd January 2006-22nd June 2006).
Cadbury, A. (2000), Global Corporate Governance Forum, World Bank, at
http://www.corpgov.net/library/definitions.html (Accessed on 20th February
2007).
Chidoko, C., &Mashavira, N. (2014). An analysis of corporate governance in the
banking sector of Zimbabwe. Humanities and Social Sciences Letters, 2, 174-180.
Retrieved from www.pakinsight.com

Clarke, F., Dean, G., Oliver, K. G., & Oliver, K. (2003). Corporate collapse: Account-
ing, regulatory and ethical failure.Cambridge University Press.
Daily Sun. (2012). SB board blamed for Hallmark Scam,Daily Sun: Dec. 17.
Dhaka Mirror. (2012). Hall-Mark seeks fresh Sonali loan,October 7
Dhaka Mirror. (2012). Hallmark Group ignores Sonali Bank Notice, September 18
Dhaka Mirror. (2012). No reply from Hallmark on Money Refund, September 19
Farashuddin & Mohammed (2012, September 9). Hall-Mark fraud: Lessons for the
banking system, The Daily Star.
Fama, E., & Jensen, M. C. (1983). Separation of ownership and control. Journal of
law and Economics, 26, 301–325. Retrieved from http://www.jstor.org.
Gillibrand, M. (2004). New frontiers for corporate governance in 2004 and beyond.
Corporate Governance Journal, 4(1), 4-21.
Gibson, M. S. (2003). Is corporate governance ineffective in emerging markets?
Journal of financial and quantitative analysis, 38(1), 231-250.
Goncharov, I., Werner, J.R. and Zimmermann, J. (2006) Does compliance with the
German corporate governance code have an impact on stock valuation? An
empirical analysis. Corporate Governance: An International Review 14(5):
432–445.
Gupta, A. and Parua, A. (2006) An enquiry into compliance of corporate governance
codes by the private sector Indian companies. SSRN eLibrary.
Haxhi, I. and van Ees, H. (2010) Explaining diversity in the worldwide diffusion of
codes ofgood governance. Journal of International Business Studies 41(4):
710–726.
Haque, M. S. (2002), Corporate Governance, Roles of CEOs and Accountants: Shift-
ing Focus on Fundamentals? Portfolio, Quarter 4, Chittagong Stock Exchange,
Bangladesh, the online version available at http://csebd.com/cse/Publications
(Accessed on 12th March 2005). 22
Haque, F.; C. Kirkpatrick and T. Arun (2006), Political Economy of Corporate
Governance in Bangladesh, Paper Number 127
Hambrick, D. C., & D'Aveni, R. A. (1992). Top team deterioration as part of the
downward spiral of large corporate bankruptcies. Management Science, 38(10),

14 | Page
 Corporate Governance Failures in Bangladesh: A Study of Hall-Mark and Basic Bank

1445-1466.
Hermes, N., Postma, T.J.B.M. and Zivkov, O. (2006) Corporate governance codes in
the European Union: Are they driven by external or domestic forces? Interna-
tional Journal of Managerial Finance 2(4): 280–300.
Hensher, D. A., Jones, S., & Greene, W. H. (2007). An error component logit analysis
of corporate bankruptcy and insolvency risk in Australia. Economic Record,
83(260), 86-103.
Jensen, M. C., &Meckling, W. H. (1976). Theory of the firm: managerial behavior,
agency costs, and ownership structure. Journal of Financial Economics, 3(4),
305–360. Retrieved from http://www.sfu.ca
Jewel, M., N., S. (2013). Sonali Bank vs Hall Mark Group: An Analysis. Financial
Express: Jan. 6.
Khan, M., R., and Uddin, A., Z. (2018). BASIC 'plunderers' go happy, The Daily Star:
June 04.
Khan, H. (2011). A literature review of corporate governance. In International
Conference on E-business, Management and Economics (Vol. 25, pp. 1-5).
LaPorta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W Vishny.
(2002). Investor Protection and Corporate Valuation. Journal of Finance, 57 (3):
1147-1170.
McConnel, J. J., & Denis, D. J. (2005). Corporate restructuring. Edward Elgar
Publishing.

Manik, J. A. (2012) Adviser's shadow in Hallmark scam. The Daily Star. Online.
Available at: http://www.thedailystar.net/newDesign/news-de-
tails.php?nid=247643 [Retrieved 29 October 2012].
Monem, R. (2013). The OneTel Collapse: Lessons for Corporate Governance, Austra-
lian Accounting Review, No. 59, 21(4).
Oman, C. (2001), "Corporate Governance and National Development", OECD
Development Centre Working Papers, No. 180, OECD Publishing, Paris,
https://doi.org/10.1787/113535588267.
Rahman and Khan (2013). A Question of Public Trust, Financial Express
Sabet, S., and Ishtiaque, A., S. (2013). Understanding the Hallmark-Sonali Bank
Loan Scandal, The Center for Enterprise Society (CES), ULAB
Saeid, H., &Sakine, H. (2015). Agency theory and corporate governance. Interna-
tional Business Management, 9, 805-815. doi:10.3923/ibm.2015.805.815
Sangmi, M. D., & Jan, S. (2014). Corporate governance policies in Indian commercial
banks: An empirical analysis. IOSR Journal of Business and Management, 16(1),
13–23. Retrieved from http: iosrjournals.org
Siddique, M., S. (2017). Sonali Bank scandal and Bangladesh Bank. Daily Asian Age
Online. Available at: https://dailyasianage.com/news/54255/sona-
li-bank-scandal-and-bangladesh-bank [ Retrieved 12 December, 2018]

15 | Page
Journal of Green Business School, Volume 1, Issue 1, January - December 2018

Stijn V. P., Caers, R., Cind D. B., & Marc J. (2012). The Governance of nonprofit orga-
nizations: Integrating agency theory with stakeholder and stewardship theo-
ries. Nonprofit and Voluntary Sector Quarterly, 41(3), 431-451. doi:
10.1177/0899764011409757
The Dhaka Tribune. (2018). Hallmark Chairman Jasmine jailed for 3 years, The
Dhaka Tribune: July 11
The Daily Star. (2016). Loan scam: BASIC Bank GM held, The Daily Star: April 05
Uddin, S., & Hopper, T. (2003). Accounting for privatization in Bangladesh: testing
World Bank claims. Critical perspectives on accounting, 14(7), 739-774.
Werder, A.v., Talaulicar, T. and Kolat, G.L. (2005) Compliance with the German
corporate governance code: An empirical analysis of the compliance statements
by German listed companies. Corporate Governance: An International Review
13(2): 178–187.
Yousuf, S., & Islam, M. D. (2015). The concept of corporate governance and its
evolution in Asia. Research Journal of Finance and Accounting 6 (5), 19-25.
Retrieved from www.iiste.org
Zattoni, A. and Cuomo, F. (2008) Why adopt codes of good governance? A compari-
son of institutional and efficiency perspectives. Corporate Governance: An
International Review 16(1): 1–15.

16 | Page