Problems and prospects for corporate governance in Bangladesh

Bangladesh is one of the worlds least developed economies. A low level of corporate governance is an impediment to the economic development of the country. However there is an enormous possibility of improvement which is an important reason to implement corporate governance in business practice as this will encourage investors' confidence by improving awareness and consistency of business rules and regulations. Widespread improvements in corporate governance have the potential to promote a fairer and more trustworthy environment. Corporate governance devices which defend investors from the opportunistic behavior of managers or overprotective shareholders include market mechanisms, institutional norms and standards, individual and stakeholder requirements and a strong legal framework. In the absence of such devices, asymmetries of information between managers and external investors may facilitate the misappropriation of corporate resources.

The legal framework refers to the rules of law as these relate to government organizations, the public and private sectors and financial institutions made through the Government of Bangladesh. In Bangladesh although separation of the Judiciary from the Administrative arm of government has officially occurred, still the institutions of Parliament, the Judiciary, and Administration do not cooperate in a coherent manner. The result is frustration among the judges including the Chief Justice of the apex body (the Supreme Court of Bangladesh).

Jalan (2007) commented that as the sub-prime crisis in the United States (US) and the United Kingdom (UK) has demonstrated, non-transparency and non-disclosure of financial obligations is not confined to developing countries. He argued that for all countries, it has become very important to revisit banking, auditing and accounting standards and lay down guidelines which would ensure full disclosure of all obligations, including off balance sheet items.

In Bangladesh business organizations can be divided into four types (1) private ownership (self/partnership); (2) public ownership; (3) joint ventures; and, (4) multinational companies. Private ownership of businesses is the dominant entity form, with most companies small in size (90% small and medium sized) and family orientated. This form of intense ownership structure limits the usefulness of corporate governance devices, a flaw cannot be rectified by setting rules and laws. As such the implementation of sound corporate governance principles in the country is problematic.

In 2004, the Bangladesh Enterprise Institute (BEI) had published a code of corporate governance for Bangladesh suitable for the private sector, financial institutions, state owned enterprises (SOEs) and non-government organizations (NGOs). According to the BEI (2004) the relevant laws and supervision applying to all commercial enterprises owned or undertaken by the government and their directors should be clearly stated and preferably all government entities engaged in commercial activities should be governed by the BEI code of corporate governance.

The Bangladesh Company Act 1994 (the Act) sets the rules for companies with regard to its management and administration. Before its enactment in 1994, Bangladesh was governed by the Company Act of 1913. As stated in the (1994) Act the board of directors are the management of the business of the company.

The board of directors is required to appoint auditors within one month of the registration of a company who are thereafter re-appointed in general meetings. Only certified chartered accountants can be appointed as auditors, and the Act provides that they can have access to the companys books, papers and official documents. The act also covers the scope of inquiry of the auditors and the certification the auditors must provide. The Act also compels companies to keep proper books of account with respect to all sums of money received and expended by the company, all sales and purchases of goods, the assets and liabilities, and other overhead costs of the company. Companies Act 1994 also defines the rights of majority and minority shareholders.

Models of corporate governance differ sometimes on the basis of the geographical, cultural, demographic, political and legal code and practices of nations. Ooghe and Vuyst (2001) observed that the Anglo-Saxon and the Continental European models of corporate governance differ strongly, and the differences are mainly due to differences in the business context reflecting differing shareholder concentration, shareholder identity, and that the liquidity of the market for company shares, and interlocking ownership are organized in different ways in the two country-groups.

The problems arising from the separation of ownership from control also need to be solved. One important mechanism is via the board of directors. Jackson (2002) observed that Germany and Japan share certain features as stakeholder models of corporate governance in contrast to the more shareholder-orientated US model of corporate governance. Both can be described as non-liberal models because their institutions regulate the marketization of both capital and labor. Stakeholders in these countries tend to display strong commitment and exercise their voice rather than exit in order to promote the long-term survival of the firm. This contrasts with the US where capital markets are more

liquid, labor more mobile, and management more exclusively focused on the creation of shareholder value.

The major regulators in the Bangladesh corporate sector and capital market are the Securities and Exchange Commission (SEC) and the Registrar of Joint Stock Companies and Firms (RJSC). In the monetary sector the main regulator is the Bangladesh Bank. In Bangladesh, shareholder activism indicates that the share market is immature, regulatory forces are weak, shareholders are not properly educated, and manipulative trading occurs. Boards of directors of banks tend to be populated on the basis of political affiliation and familial connections.

The Office of the Comptroller and Auditor General (OCAG) of Bangladesh is responsible for auditing government receipts and public spending and to ascertain whether expenditures have yielded value for money in government offices, public bodies and statutory organisations (www.cagbd.org). Appointed by the President of the Republic, the Comptroller and Auditor General (CAG) heads the Supreme Audit Institution. The Insurance Bill 2010 and Insurance Development and Regulatory Authority Bill 2010 provide the formal institutional rules for the insurance sector.

It is suggested that monetary, fiscal and exchange rate policies should be applied with appropriate diligence by the Securities and Exchange Commission, the Bangladesh Bank and the National Board of Revenue. It is expected that value can be added through arranging primary and supportive activities. Attention to inbound and outbound logistics is likely to improve productivity, enhancing profitability, long run sustainability and creating distinct competencies for the Bangladesh economy. Ultimately this may help to improve gross domestic product and the basic needs of the population.