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

Submitted To:

Professor Dr.Tanbir Ahmed Chowdhury

Course InstructorCorporate Governance

School of BusinessIndependent University, Bangladesh (IUB)

By:

Md.Rakibul Ahosan ID: 1110814

DhakaDecember 14 , 2012

LETTER OF TRANSMITTAL

December 14, 2012

Professor Dr.Tanbir Ahmed Chowdhury Course InstructorCorporate GovernanceSchool of BusinessIndependent University, Bangladesh

Subject : Submission of Assignment

Dear Sir,

I am pleased to submit herewith the Assignment “Explain in brief about the present scenario of Corporate Governance in Bangladesh” which was assigned to me as a fulfillment of requirements of MBA Course: Corporate Governance

Throughout the study I have tried with the best of my capacity to accommodate as much information

and relevant issues as possible and tried to follow the instructions as you have suggested. I tried my best

to make this report as much informative as possible. We sincerely believe that it will satisfy your

requirements.

I am grateful to you for your guidance and kind cooperation at every step of my endeavor on this report.

I will remain deeply grateful if you kindly go through the report and evaluate our performance.

Thanking you.

Md.Rakibul AhosanID # 1110814School of Business,Independent University, Bangladesh

Introduction:

Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. The presence of an active group of independent directors on the board contributes a great deal towards ensuring confidence in the market. Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. It is also known to have a positive influence on the share price of the company. Having a clean image on the corporate governance front could also make it easier for companies to source capital at more reasonable costs. Unfortunately, corporate governance often becomes the centre of discussion only after the exposure of a large scam.

What is Corporate Governance?

Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation’s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return on their investment. Corporate Governance clearly distinguishes between the owners and the managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the need for corporate governance arises. Also, efficiency as well as globalization is significant factors urging corporate governance. Corporate Governance is essential to develop added value to the stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth. 2. Strong corporate governance maintains investors’ confidence, as a result of which,

company can raise capital efficiently and effectively. 3. It lowers the capital cost. 4. There is a positive impact on the share price. 5. It provides proper inducement to the owners as well as managers to achieve objectives

that are in interests of the shareholders and the organization. 6. Good corporate governance also minimizes wastages, corruption, risks and

mismanagement. 7. It helps in brand formation and development.

It ensures organization in managed in a manner that fits the best interests of all.

Present scenario of Corporate Governance in Bangladesh:

Corporate governance practices in Bangladesh are quite absent in most companies and organizations. In fact, Bangladesh has lagged behind its neighbors and the global economy in corporate governance. One reason for this absence ofCorporate Governance is that most companies are family oriented. Moreover, motivation to disclose information and improve governance practices by companies is felt negatively. There is neither any value judgment nor any consequences for corporate governance practices. The current system in Bangladesh does not provide sufficient legal, institutional and economic motivation for stakeholders to encourage and enforce corporate governance practices; hence failure in most of the constituents of corporategovernance is witness in Bangladesh.

Corporate Governance in Financial Enterprises in BangladeshAs in many developing countries, banks play a vital role in Bangladesh economy, as the dominant financier for the industrial and commercial activities. Since the independence in 1971, the government until 1982, when the ‘ownership reform’ measures started in the financial sector, had carried out the regulation and ownership of all the financial institutions. During the reform period, two out of six National Commercial Banks(NCBs) were denationalized and private commercial banks were allowed to operate in the country. In 2003, out of the 49 banks operating in Bangladesh, 9 belong to the public sector, 30 are local private and 10 are foreign owned banks (Bangladesh Bank, 2003).

Despite the expansion, the operational efficiency of the banking institutions has continued to be dismal. The sector witnessed decreasing profitability, increasing non-performing assets, provision and capital shortfalls, eroded credit discipline, rampant corruption patronized by political quarters, low recovery rate, inferior asset quality, managerial weaknesses, excessive interference from government and owners, weak regulatory and supervisory role etc.Internal control system along with accounting and audit qualities are believed to have been substandard. Many of the problems have been attributed to lack of sound corporate governance among the banks. The reports by the Banking Reform Commission raise serious concerns on the banking sector and criticize the quality of governance that prevails in the banking sector in Bangladesh, which provides an impetus to explore the governance issues in detail in this paper.

Corporate Governance in State-Owned Enterprises inBangladeshIn many developing countries, the state remains a significant owner of commercial enterprises that operate in comparative markets. State ownership includes businesses in several sectors, notably utilities and infrastructure, with energy, transport and telecommunication being usually the most important business. State Owned Enterprises have an undeniable capacity to deliver a positive contribution to the economy of a country, provided they are well managed and good management is built on strong foundations of good governance.State Owned Enterprises, like any company, have a body of shareholders that the directors and management are accountable to, the only difference is that in this instance the shareholder happens to be government via a ministry.. In order to grasp the specificity of SOE governance one should keep in mind the following two issues:Firstly, SOEs are often effectively protected from two major threats that are essentials in policing management behavior in public corporations i.e. the threat of takeover and bankruptcy.Secondly, accounting and disclosure may not reach private sector standards but rather be oriented towards public expenditure control, which may at the same time more burdensome and not fulfill the requirements of timeliness and materiality central to private sector disclosures practices.There are 44 non-financial public enterprises in Bangladesh of which

Six belong to industrial sector, under these six sector corporations there are a number of factories and industries.

In Power, gas and water there are five Transportation and communication have eleven, and Trade three, Agriculture two, Construction four, and Service thirteen.

State Owned Enterprises in Bangladesh are besieged with same problems common to State Owned Enterprises throughout the world.

Corporate Governance - Best Practices and GuidelinesPublic Limited Company – Non Financial InstitutionsIn practice, corporate governance and monitoring mechanism recently focused on matters like the composition of the Board of Directors, the duties and responsibilities of the executive directors, regular monitoring by shareholders, voting rights of shareholders and detailed disclosure of company information that are material for decision making by interested parties. The guideline that good corporate governance frameworks project and facilitate is the exercise of shareholders’ rights. Shareholders should have right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes. The equitable treatment of all shareholders, including minority and foreign shareholders should be ensured by corporate governance also. Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal and unethical practices to the board and their rights should not be compromised for doing this. Another important responsibility of corporate governance is time and accurate disclosure of all matters regarding the corporation. Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosures. Board members should act on fully informed basis, in good faith, with due diligence and care, and in the best interest of the organization and shareholders.The board of Directors is the central entity in a functioning corporate governance system,Few other guidelines and best practices on corporate governance which receive considerable emphasize are:

The position of the Chairman of the Board and CEO should be filled by different individuals.

A company should appoint Chief Financial Officer (CFO), a Head of Internal audit and a Company Secretary.

A company should have an audit committee as a subcommittee of the board.

Directors, in the Annual Report, should give representation of the true and fairness of accounts, compliance with accounting standard and proper internal control.

Public Limited Company – Financial Institutions:Given the important financial intermediation role of banks in an economy, their high degree of sensitivity to potential difficulties arising from ineffective corporate governance and the need to safeguard depositors’ funds, corporate governance for banking organizations is of great importance to the international financial system and merits targeted supervisory guidance.

This guidance drew from principles of corporate governance that were published earlier that year by the Organization for Economic Co-operation and Development with the purpose of assisting governments in their efforts to evaluate and improve their frameworks for corporate governance and to provide guidance for financial market regulators and participants in financial markets.Banking companies pose unique corporate governance attention as they differ greatly with other types of firms in terms of broader extent of claimants on the banks assets and funds. A group of entrepreneurs and/or executives could set up a banking business by putting very little equity from their own pocket as the nature of business itself guarantees.The main issues and priorities for reforms in CG of banks in Asia that were identified are:

The responsibility of individual board members – fiduciary duties of bank’ board members, need of skills, personal abilities, training programs on integrity and professionalism.

The roles/functions of the board – guiding, approving and overseeing strategies/policies rather than being immersed in day-to-day operations. Creating clear accountability lines and internal control systems. Sufficient flows of information and managerial support.

The composition of the board – banks are more encouraged to have independent directors than other firms. Separation between Chairman and CEO.

The committees of the board – audit committee, the Risk Management Committee, The Governance Committee with combined responsibilities of Nomination, remuneration, succession planning, training, performance evaluation, etc.

Preventing abusive related party transactions – inspection of the existing firewall. Creation of specialized committee to monitor and approve related part transaction. Publicly disclose such transaction.

Bank holding companies and groups of companies holding banks – a bank’s parent company should not impede the full exercise of the CG of the bank within the banking group.

Disclosure – effort on convergence into international standards on accounting, etc. should be encouraged.

Bank’s autonomy in relation to the state – state as owner should respect the legal corporate structures of State Owned Commercial Banks (SOCB).

Bank’s monitoring of the CG structure of its corporate borrowers – Extent to which banks should assess/monitor CG of their corporate borrowers or seek to improve it.

State-Owned Enterprises (SOE)Organizations for Economic Co-operation and Development guidelines for StateOwned Enterprises are:

Ensuring an Effective Legal and Regulatory Framework for State Owned Enterprises: The legal and regulatory framework for State Owned Enterprises should ensure a level-playing in markets where State Owned Enterprises and private sector companies compete in order to avoid market distortions.

The State Acting as an Owner: The state should act as an informed and active owner and establish a clear and consistent ownership policy, ensuring that the governance of SOE is carried out in a transparent and accountable manner, with the necessary degree of professionalism

Equitable Treatment of Shareholders: The state and SOE should recognize the rights of all shareholders and ensure equitable treatment and equal access to corporate information.

Relations with Stakeholders: The state owner ship policy should fully recognize the SOE responsibilities towards stakeholders and request that they report on their relation with stakeholders.

Transparency and Disclosure: SOE should observe high standards of transparency.

The Responsibilities of the Board of State-Owned Enterprises: The boards of SOE should have the necessary authority, competencies and objectivity to carry out their function of strategic guidance and monitoring of management. They should act with integrity and be held accountable for actions.

Conclusion:

A policy implication of the survey results is that the on-going corporate governance reform efforts should be continued to encourage firms to pay more attention to substance than to form. To enhance the effectiveness of boards, the provision of adequate support for outside directors seems to be the most important factor, as well as the promotion of a boardroom culture that encourages constructive criticism and alternative views. More broadly, as indicated by the respondents, priorities should be given to making internal corporate governance mechanisms work better and enhancing the standards for information disclosure, accounting, and auditing. Critically important for these tasks are the roles of regulatory agencies, independent directors, and professional societies.