Assignment on Corporate Finance of Corporate Governance Practice

Executive Summary

The purpose of this paper is to understand the present situation and the potential of corporate governance in Bangladesh. We did our literature review from three sources, those are journal, news paper and internet. This study focused on the state of Corporate Governance (CG) in three sectors of the economy: the private company (public- listed company), the financial enterprises, and the State Owned Enterprises (SOEs). Bangladesh is lagged behind compare to its neighbors and the global economy in corporate governance. Corporate governance practice is quite absent in most of the existing company in Bangladesh. They should practice more and more over the corporate governance. For development of our economy it is necessary to maintain the practice the governance from small business to large industries. Without good national governance it is difficult to ensure the interest of minor shareholders, supplier and consumers. It is necessary to have a good governance in national level.

Introduction:

The need for corporate governance arises from the potential conflicts of interest among

Stakeholders in the corporate structure. These conflicts of interest often arise from two

main reasons. First, different stakeholders have different goals and preferences. Second,

the stakeholders have imperfect information as to each others actions, knowledge, and

preferences. (Osman 2006)

Corporate governance (CG) is an important effort to ensure accountability and

responsibility and is a set of principles, which should be incorporated into every part of

the organization. Though it is viewed as a recent issue, there is, in fact, nothing new

about the concept. Because it has been in existence as long as the corporation itself-as

long as there has been large – scale trade, reflecting the need for responsibility in the

handling money and the conduct of commercial activities. In the wake of accounting,

leadership, and governance scandals at such large companies as Enron, Tyco, and

WorldCom, corporate governance has succeeded to attract a great deal of interest as it

focuses not only the long term relationship, which has to deal with checks and balances,

incentives for managers and communications between management and investors but also

the transactional relationship, which involves dealing with disclosure and authority.

Numerous works, studies, and researches have been conducted to enact principles, codes,

and guidelines for ensuring good corporate governance systems and culture within the

organizations.

Sir Adrian Cadbury in ‘Global Corporate Governance Forum’, provided defined Corporate

governance as: “Corporate Governance is concerned with holding the balance between

economic and social goals and between individual and communal goals. The corporate

governance 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)

Objectives of the Study:

The broad objective of the study is to understand the state of corporate governance in

public, private and financial organizations in Bangladesh. In particular, the study is

expected to know the followings:

a. The current practice of corporate governance in terms of accountability to its

stakeholders

b. How far the current practice of corporate governance passes the test of fairness.

c. Whether corporate governance system in Bangladesh is transparent for all

stakeholders.

Literature review

What is Corporate Governance?

Different authors view the meaning of corporate governance differently. For example,

one school of thought describe corporate governance as a “system” by which companies

are directed and controlled (Cadbury and Greenbury Report, CFACG 1992); another

school views corporate governance as “structures and processes for decision making,

accountability, control and behavior at the governing body” (Public accounts and

Estimates Committee, 2002); to others corporate governance is about “finding ways” to

ensure effective decision making (Pound 1995). But it must be kept in our mind that the

fundamental concern of corporate governance is to ensure the conditions whereby a

firm’s directors and mangers are held accountable, ensure better and effective protection

to all stakeholders. The World Bank argues that the framework of corporate governance

should be based on four “pillars” – of Responsibility, Accountability, Fairness and

Transparency (RAFT).

Three sources:

1. Internet

Corporate Governance in Bangladesh: Link between Ownership and Financial Performance

Omar Al Farooque, Tony van Zijl, Keitha Dunstan and AKM Waresul Karim
Tony van Zijl: Victoria University of Wellington
Keitha Dunstan: Victoria University of Wellington
AKM Waresul Karim: Victoria University of Wellington

Corporate Governance: an International Review, 2007, vol. 15, issue 6, pages 1453-1468

Abstract: This paper investigates empirically the effect of board ownership on firm performance in Bangladesh. By estimating single equation and simultaneous equation models on an unbalanced pooled sample of listed firms, it offers some new insight into the ownership-performance link in Bangladesh. Building on extant literature, it examines the ownership-performance relationship in an emerging market economy considering ownership as exogenous and as endogenous. The latter approach is favoured as recent empirical evidence shows that ownership and performance are endogenously determined and there is either a reverse-way or two-way causality relationship between the two. While OLS regression analysis indicates a linear and non-linear relationship between board ownership and performance, this disappears when 2-SLS estimation of a simultaneous equation model is carried out. Instead, a reverse causality relationship emerges. Other governance and control variables appear to have effects consistent with the literature. These results suggest a need to strengthen the internal control mechanisms within listed firms in Bangladesh. Copyright (c) 2007 The Authors; Journal compilation (c) 2007 Blackwell Publishing Ltd.

2. Journal:

Dhaka, July 18 (BDNEWS) – The speakers at a seminar Monday underscored the need for implementation of the corporate governance (CG) in the enterprises for ensuring of fostering sustainable growth in economy by all its components.

The entrepreneurs, experts and academicians stated this at the seminar on “Corporate Governance and Control”, organised jointly by the Dhaka Chamber of Commerce and Industries (DCCI) and Centre for Development Research Bangladesh (CDRB) at the DCCI auditorium.

Chairman of the Securities and Exchange Commission (SEC), Dr Mirza Azizul Islam, Deputy Governor of Bangladesh Bank Muhammad A (Rumi) Ali, Registrar of Joint Stock Companies M Abdul Quayyum and others spoke, with DCCI President Sayeeful Islam in the chair.

Dr Kabir U Hossain, Professor of New Orleans University in the USA presented the keynote paper.

Mirza Azizul Islam said that the corporate governance in the companies could ensure transparency as there are different issues like comprehensive information on financial statement, compliances and social issues of the enterprises were to be ensured under such system.

According to Sayeeful Islam, an economy with sound systems of Corporate Governance (CG) is rewarded with more investment and higher quality investors. “If we establish large scale industries from our small and medium enterprises (SMEs), we should ensure corporate governance in our companies,” he added.

The system would enable capital market, private investors from home and abroad, international donors and financial institutions to identify and fund successful enterprises.

He added that the CG in all types of economies focuses on: building a structure and rules to govern the board of directors of a company, creating independent audit committees made up of the board members of the enterprise, ensuring disclosure of all relevant information to shareholders and creditors, including business risk analysis, and controlling management.

About investment, the DCCI president said, the government is only crying for foreign direct investment, but did not seek investment from the expatriate Bangladeshis who are ready to invest in their homeland.

About the default loan culture in the country, the speakers said that a few borrowers are involved with the misappropriation and asked why authorities could not take action against them to recover the loan.

Muhammad A (Rumi) Ali said the system of CG is a journey but not a destination.

In this regard, Rumi said that the Bangladesh Bank cannot take action directly against the defaulters, it could guide the commercial banks to refrain in disbursing any loan to the defaulters and to recover the loan.

About growing problem with the registration of companies, Quayyum said most companies out of 63,208 are not transparent and accountable as they are not holding AGMs (Annual General Meetings) and not disclosing their annual financial statements.

BDNEWS/2033 hrs

3 News paper:

Dhaka, July 31 (BDNEWS) – Finance and Planning Minister M Saifur Rahman Sunday said corporate governance would not improve without good governance at the national level.

“The government and its agencies have to be good enough to ensure that maintain ethics and fairness in their operations,” Saifur said at the concluding session of the two-day conference on “Corporate Governance in Bangladesh.”

He said good governance at national level could only protect the rights and interest of the minority shareholders, consumers, suppliers and all other stakeholders.

Criticising the directors and auditors of companies, he said laws need to be enacted to check fraudulent practices and ensure transparency and accountability of the corporate houses.

He said a regulatory body over the Institute of Chartered Accountants of Bangladesh (ICAB) would be set up to ensure disclosure of correct information and financial status of companies.

The Centre for Corporate Governance and Finance Studies of Dhaka University (DU) organised the conference at the Dhaka Sheraton Hotel in association with the Dhaka Stock Exchange (DSE).

Vice Chancellor of Dhaka University SMA Faiz, Kim McQuay, Resident Representative of the Asia Foundation, Bangladesh and DSE CEO Salah Uddin Ahmed Khan addressed the conference.

The conference recommended initiating awareness building programmes among the directors, executives, and shareholders, bringing changes in the regulatory framework, formulation of code of conduct for companies, formation of independent audit committee and strengthening of regulatory bodies to ensure good corporate practices in Bangladesh.

BDNEWS/2054 hrs.

Analysis of literature review:

From the above journal, news paper and internet report it is clear that we are well behind with the practice of corporate governance compare to our neighbor country as well as other countries. In our country a very few company maintain corporate governance practice which is not that much effective for our economy development. Many people talk about corporate governance in different time but all of them simply indicating and agree with one thing that we should practice more and more over the corporate governance and for this we have to build a larger industry from small and medium enterprises. They also mention that there should be a structure in every small as well as big industry for corporate governance practice.

Findings and Conclusion:

From the above sources and by analyzing the literature review it is clear that every company should have a standard format for practicing the corporate governance. For better economy and well establishment in business sector it is mandatory to do corporate governance practice from small business to larger industrial sectors. Economist and analysts are gave importance over the companies ownership and its performance. A good national level governance can only protect the rights and interest of the minority shareholders, consumers, suppliers and all other stakeholders. Laws need to be ensure transparency and accountability of the corporate houses.

This study focused on the state of Corporate Governance (CG) in three sectors of the

economy: the private company (public- listed company), the financial enterprises, and the

State Owned Enterprises (SOEs). To understand the state of CG, three broad aspects of

governance and management issues were studied. These are: a) shareholders’ rights, b)

public disclosure of information, c) effectiveness of the Board. Within each of these

many sub-categories were studied which were discussed above.

The study used interviews with key stakeholders, experts and executive, of these types of

companies, a questionnaire survey and also group discussions to arrive at the following

conclusions.

Shareholders Rights and Disclosures of Information

In terms of three sectors, this study found that financial and private institutes are more

open to their shareholders compared to SOEs. This means that except for SOEs,

shareholders of the companies do receive information to protect their interests in the

company. In the SOEs, the dominant player, the state, is more powerful and do not

adequately share information with minority shareholders. As a dominant shareholder, the

state is capable of abusing the rights of minority shareholders. State Owned Enterprises

need to improve the practice of disclosure of information to all shareholders, so that other

shareholders feel that they are treated equitably. The state’s track record in terms of

respecting rights of all the stakeholders has a significant impact on the value of shares in

the market and it is important for the company’s future growth. As more and more SOEs

are considering floating shares in the market (as a means of privatization) respecting the

rights of minority shareholders’ and disclosure of information to them will play an

important role for the SOEs’ success.

Public Disclosures and Transparencies

Most of the codes and principles that have been introduced throughout the world are

based on some common pillars, whether it is RAFT (responsibility, accountability,

fairness, and transparency) or FAT (fairness, accountability, and transparency),

transparency issue is a major factor common to all. Laws have been enacted to protect

this issue. Even in Bangladesh, SEC, Bangladesh banks, and other regulatory bodies

made it mandatory for the organizations to report crucial information such as information

with regards to

1. Directors’ selling and buying shares in their company

2. Background of directors

3. Remuneration of directors

4. Fees paid to external auditors, advisors

5. Policies on risk management to stakeholders.

The principle objective of this disclosure of information is to ensure transparency.

Organizations in all the three sectors need to improve their procedures of disclosures. At

present most of the above issues are reported in Annual Reports (AR) and/or in the

Reports to the Regulatory (RR) agencies. However rather than using a box checking

methods (i.e. carrying out minimum requirements that ensures that the organization is

complying with the regulations) organizations should focus more on the spirit of the

disclosure. Some issues like directors selling or buying are not disclosed at all. This is

crucial for the potential future investors of the enterprise. Directors remuneration are also

rarely disclosed, this needs further improvement.

In the case of disclosure and transparency to the public State Owned Enterprises are

doing better than the private and financial institutions. The latter should develop and

promote the culture of disclosure to public in more effective manners.

Effectiveness of the Board of Directors

Four separate issues were studied to understand the effectiveness of the board. An

effective board is a sign of healthy corporate culture. These are discussed below.

CEOs are expected to carry out the vision of the board, take decisions and report to the

boards the status of the organization on a regular basis. Board is expected to evaluate the

performance of CEO in order to ensure good practice of corporate governance. In this

particular case financial institutions and State Owned Enterprises are doing better than

the private enterprises. Private organizations rarely evaluate their CEOs, this could be

because in many cases CEOs are directly linked and/or have more shares than the other

members of the board. This practice will not create a healthy and effective board culture.

Independent directors are appointed in board by law to protect the interest of the

numerous small shareholders of the organization. Although most financial institutions

have independent directors (following the legal compliance) they rarely or never

intervene in the decision making process of the board; where as independent directors in

private organization play nominal role. In case of SOE independent directors have

significant influence in the decision making process of the board. It is therefore

concluded that the spirit of appointing independent directors taken seriously and

individual with expertise and reputation should be appointed as independent directors.

Board of the directors appoints statutory committees to ensure accountability,

transparencies, and fairness. OECD Principles, Basel corporate governance guidance and

others have stressed the importance of specialized committees of the board. Audit

Committee, Compensation Committee, Nomination Committee, and Risk management

committee (for the financial institution) are but few such specialized committees which

are functioning effectively in the organizations where sound corporate governance

practice is found. Except Audit Committee other committees like Compensation

Committee, and Nomination Committee rarely exists or effectively operates in

Bangladesh’s private and financial institutions. State Owned Enterprises are only

organizations where we find existence of all the three committees. Although audit

committees were present in all three sectors, their effectiveness is questionable,

especially in private and in financial institutions.

Given the above discussion and findings, it is fare to conclude that corporate culture in

Bangladesh is still in a state of infancy. While we have created legal requirements for

good corporate governance, rushing to institutionalize the culture of governance through

legal and regulatory requirements or through external pressures will do more harm than

good to the culture. Under such circumstances, the spirit of the good governance will be

lost and rather perfunctory structure will take place. The objective of practicing good

governance is to help the corporation as well as the society and the nation. It promotes a

mechanism to use the capital market to enhance the growth of the corporations and for

this it is important that corporate sector are educated to understand the benefits from good

corporate governance. It is under such a scenario, the state of governance in our corporations will mature.

Questionnaire Survey on Corporate Governance Practices at Public and Private Enterprise/Financial Institution in Bangladesh

General Information on the Company/Institution and Respondent

1. Respondent’s Name:

2. Sex: [ 1=Male, 2=Female]

3. Age:

4. Position: [1=Director, 2=Manager, 3=Executive, 4=Other]

5. Company Name:

Please fill in the box from the following answers:

6. How do you describe the ownership and control structure of the company?

1=The largest shareholder has a substantial voting right and effectively controls the

company. (You can express share percentage if you want) or (say over 30%-40%

including that of companies he/she control.

2=Two or more large shareholders collectively control the company

3=Ownership is fairly disseminated with no controlling shareholder, and shareholder does

not directly control the management

4=Others (Please Explain: ……………………

7. Is the company stand-alone company or a subsidiary of a business group or holding

company?

1= Stand-alone company

2= Subsidiary of a family based business group.

3=Subsidiary of a business group not control by families.

4=Others (Please Explain: ……………………

8. Is the company wholly or partially owned and control by the government?

1= Yes, substantially owned and controlled by the government.

2= Partially owned, but not much controlled by the government.

3=Others [Please explain: ………………………

9. Is the firm wholly or partially owned and controlled by foreigners (foreign companies)?

1= Little owned by foreign investors

2=Yes, substantially owned and controlled by foreigners (foreign companies).

3= Substantially owned, but not controlled, by foreign investors.

4=Others [Please explain:……………………………

10. What relation does the CEO have with the founder or the largest shareholder?

1= Founder himself/herself

2= Founder’s family member.

3= Professional manager.

4= Others: [Please explain:……………………

11. What is the ownership/control structure of the biggest creditor bank of your company?

1= Mainly government-owned .

2= Belong to the same business group as the firm

3=Belong to a business group not related with the firm

4= Mainly owned and controlled by a foreign financial institution(s).

12. Does your company have a labor union(s)?

1= Yes

2= No

II. Shareholder Rights and Disclosure of Information:

13. How easy is it for your shareholders to participate in voting at the shareholders’

meeting?[May be more than One Answers]

1= Is voting by mail allowed?

2= Can anybody serve as a proxy?

3= Presence Requires

4=Others [Explain…………………….

Express the extent to which you agree or disagree on the given statement by choosing (circle)

one of the following:

14. Do you agree with the following statements for your company?

14.a. Shareholders are provided with adequate information on the agenda items of the

shareholders’ meeting … [(5),( 4), (3), (2),( 1)].

14.b. Adequate time is given for asking questions and placing issues at the shareholders’

meeting: [(5),( 4), (3), (2),( 1)]

14.c .It is not difficult to know how much equity ownership the major shareholders control

(including the equity shares of companies they control)?

 [(5),( 4), (3), (2),( 1)]

15. Role of shareholders in practice in nominating candidates and electing outside directors of Your company:

Please Mark (Ö) the appropriate answer by filling the box from (Q15a-Q15c)

15a. Are director candidates disclosed before the shareholders’ meeting?

1=Yes

2= No

15b. Can minority shareholders (holding more than a certain level of shares) nominate candidates at the shareholders’ meeting or prior to the meeting (to have the company disseminate relevant

information)?

1=Yes

2= No

15c. Would it be possible for the director candidates proposed by the management of your company to fail to be elected at the shareholders’ meeting?

1=Sometimes

2= Rarely

3= Unthinkable

iii. Information about the latest annual shareholders’ meeting:

16. How long did the meeting last?

1= Less than 30 minutes

2= (30-60 minutes)

3=(2-3 hours)

4= Over 3 hours

17. How many shareholders attended the meeting? persons

iv. Disclosure and Transparency

13. Does your company disclose the following information? If yes, then by what means?

Web: company’s web page AR: annual report

RR: report to regulatory agencies No: no disclosure

Please Fill in the box from the appropriate answers: Questions (13a-13g)(May be More than One

Answers):

13a. Directors’ selling or buying shares in their company:

1=Web

2= RR

3=AR

4=No

13b. Resume/background of directors:

1= Web

2= RR

3=AR

4= No

13c. Remuneration of directors:

1= Web

2= RR

3=AR

4= No

13d. Fees paid to external auditors, advisors, and other related parties:

1= Web

2= RR

3=AR

4= No

13e. Policies on risk management:

1= Web

2= RR

3=AR

4= No

13f. Significant changes in ownership:

1= Web

2= RR

3=AR

4= No

13g. Governance structures and policies (explicit corporate governance rules and vision)

1=Web

2= RR

3=AR

4= No

14. How timely and informative are the disclosures?

14a. Does your company disclose semi-annual reports?

1= Yes

2=No

14b. Does your company disclose quarterly financial statements?

1=Yes

2=No

14c. Does your company have a web-site? Is it also in English?

1= Yes

2=No

14d. Available and very informative both in local language and English:

1= Yes

2=No

3= No web-site yet

V. Effectiveness of the Board of Directors

15. Board Size and Structure

1. How many directors does your (supervisory) board have in total? [ ]

2. How many outside directors does your board have? ———- [ ]

3. How many independent directors does your board have? ————- [ ]

16. Are there any foreign nationals on your board?

1= Yes

2=No

17. Does the CEO of your firm also serve as board Chairman?

1= Yes

2=No

18. How is the CEO evaluated and compensated? Please Mark the answer by filling the following box:

18a. Does your board or compensation committee formally evaluate the CEO’s performance?

1=Yes, as a routine

2= Sometimes

3= Rarely

4=Never

18b. How about the review of CEO compensation?

1=Yes, as a routine

2= Sometimes

3= Rarely

4= Never

18c. Is the CEO given a stock option?

1= Substantially

2= Some

3= None

19. How prevalent are the following practices? Please Mark the appropriate answer by filling the

following box:

19a. Independent directors altering or adding the board meeting agenda set by the CEO:

1=Often

2=Sometimes

3=Rarely

4=Never

19b. Independent directors participating actively in board discussions

1=Often

2= Sometimes

3=Rarely

4=Never

19c. Agenda items disapproved at the board meetings by independent directors

1=Often

2=Sometimes

3=Rarely

4=Never

19d. Independent directors’ positions on board meeting agendas recorded in minutes

1=Often

2= Sometimes

3= Rarely

4=Never