The Practice of Corporate Governance in Bangladesh: A Short Overview

Bijoy Chakraborty: Corporate Governance is the set of rules, regulations, laws, or a process by which internal and external factors of a company are directed, operated, monitored, and regulated to protect the interest of outside investors and minority shareholders from the opportunistic behavior of the board of directors or majority shareholders. Here, internal factors of a company consist of the company’s policies, strategies, reporting system, chairman, board of directors, chief executive officer, the appointment of independent directors, employees, establishing audit committee and executive committee, etc. On the other hand, external factors consist of suppliers and distributors, customers, markets, legal authorities, financial institutions, society, government, etc. Thus, the fundamental object of corporate governance is to protect and satisfy the claims of creditors, employees, minority shareholders, customers, and suppliers and achieve the long-term strategic goals of a company by fulfilling all the legal and regulatory requirements and taking an independent, accountable, fair and transparent decision.

There are numerous models of corporate governance in the world. But among these two most dominant models of corporate governance are the Anglo-American Model and the Control Based Model. Under the Anglo-American model, the investors’ interests are recognized and given more importance than other factors of a company, where the board of directors of a company shall be comprised of a certain number of independent directors besides executive directors to protect the rights of the investors. USA, UK, New Zealand, Australia, Canada, India, etc., are those countries that follow this model to govern their corporate environment. On the other hand, in the Control-based model, the corporate structure, particularly the company’s board, is dominated and controlled by the family members where the appointment of the independent directors on the board is the discretion of the executive directors. Under this model, all the executive directors of a company come from a particular family or people with close ties. Ultimately, they are the only authority who take decisions and manage the day-to-day affairs to protect the interests of investors. This model is well-practiced in Bangladesh, Pakistan, France, Italy,  etc.

We know Bangladesh is a common law country. The present legal and judicial system has its foundation mainly in 200 years of British rule. However, it passed through various stages, and the process of evolution has been partly indigenous and partly foreign. The present-day legal system emanates from a hybrid system with structure, legal principles, and concepts modeled on both Indo-Mughal and English law. For being a hybrid legal system, there is also some influence of the British and Indian legal systems in the CG-related laws of Bangladesh. To govern the corporate environment in Bangladesh, some legal measures are in practice. These are the Securities and Exchange Ordinance 1969, the Bangladesh Bank Order 1972, the Bank Companies Act, 1991, the Financial Institutions Act, 1993, the Securities and Exchange Commission Act, 1993, the Companies Act, 1994, the Bankruptcy Act, 1997, the Insurance Act, 2010, the Corporate Governance Guidelines, 2016, the Corporate Governance Code, 2018, etc.

It has been 50 years since our country got its independence, yet corporate governance practices in Bangladesh are not satisfactory and absent in most companies and organizations. Many corporate bodies, including the banking and jute sectors, paper and textile mills, etc., presented a harrowing experience to the nation since its inception. For example, the Adamjee Jute Mills Corporation Ltd., the largest jute mill in the world, collapsed in 2002, costing the jobs of 17,000 workers because of a failure of corporate governance in terms of mismanagement and corruption. Between 2010 and 2012, ‘Sonali Bank Ltd’ the largest state-owned commercial bank, illegally distributed loans of BDT 36.48 billion (US$460 million), which was the largest financial fraud in the banking sector of Bangladesh. Then, Shajalal Islami Bank, South-East Bank, Jamuna Bank, Premier Bank, and Janata Bank were involved with the BDT 200 crore loan scam of the Bismillah Group. The Basic Bank also scammed BDT 4,500 crore loan approvals without proper documentation and security. The board of directors and the bank’s top management were found guilty as they helped those offenders steal the money. Such fraudulent practices suggest a lack of proper corporate governance and inappropriate mechanisms. One of the principal reasons behind the lack of proper corporate governance practice in Bangladesh is that our laws regarding corporate governance are theoretically designed based on the Anglo-American model. Because these laws reflect the shareholder-outside investor perspective of governance enacted based on British and Indian laws. For example, in Bangladesh, the companies are governed by the Companies Act, 1994, which is based on the English Companies (consolidation) Act, 1908. But in practice, most of the companies of Bangladesh follow the control-based model as the board of the Bangladeshi companies, and the corporate structure is mostly family-dominated, and executive management is family-aligned. A few researches have been conducted regarding the control-based model where most of the authors try to establish that this model cannot ensure corporate governance as the appointment of the independent directors is optional on the board. Here the executive directors can exercise extensive discretion and influence on the board decision-making process and customize the governance mechanism according to their own needs, which ultimately curtail the overall interest of the investors even; such practice hinders the level of fairness, accountability, and transparency. Another reason is that there are some lacunas in our corporate legal framework. For instance, In Bangladesh, corporate governance practices in banking companies are mainly controlled and regulated by the Bank Company Act, 1991, which also provides some mechanisms for ensuring transparency, accountability, and better corporate governance in the banking sector. However, the definition of the deliberate loan defaulters and actions against them are not much clear, and some definitions like Loan, Money Laundering, Fiduciary Duties, Financial Offences, and Terrorist Financing are ambiguous and do not maintain an international standard of practice and principle. Then, there is no Nomination and Remuneration Committee and Ethics and Compliance Committee to deal with the relevant matters in the said Act. It does not require a personal guarantee and security before getting a grant of Loan or Advances. Besides, the Act contains some arbitrary provisions that directly contradict with the Right to Justice. For example, when officers are disqualified over allegations of financial offenses, they cannot challenge the decision in the court. More importantly, there is a lack of the proper requirement of academic, professional, and practical qualifications of the directors, a lack of provisions for irregularities of bankers to face criminal charges, and a lack of strict punishment/penalties mechanisms as it still represents 1991’s social and economic context of the country. Then the Companies Act, 1994 is the main governing law for the companies in Bangladesh, which regulates the relationship between shareholders and a company, the audit system, transparency, disclosure procedure, and the jurisdiction of the courts in relation to companies, but this Act does not say anything regarding the ultimate share ownership, director’s qualifications, age, the composition of the board, and the leadership structures in the board and management, particularly the role of chairperson and CEO, director’s responsibility, etc. instead, the law is very much concerned with the formation, management, and liquidation of companies. Besides this, some accounting requirements mentioned in the Act are inconsistent with International Accounting Standards (IAS); as a result, both the Act and IAS make conflict with each other at the time of application. For example, the Company Act requires capitalizations of gains and losses arising from changes in foreign exchange rates under all circumstances which are contrary to IAS. Another inconsistency is that the Company Act does not require preparing and presenting a Consolidated Balance Sheet for a holding company, but it is required under the IAS. Though this Act contains some strict provisions regarding breach of the fiduciary relationship of the director or officer with the company, these provisions provide huge scope to breach as these are more honored in the breach than the observance. In 2016, revised Corporate Governance Guidelines 2016 was issued by the Bangladesh Securities and Exchange Commission (BSEC) for the publicly listed companies under the power vested on the commission by section 2CC of the Securities and Exchange Ordinance, 1969. The aim was to improve the CG situation and thereby better protect the interests of outside investors and minority shareholders and systematically develop Bangladesh’s capital market, but there was no provision for punitive measures for non-compliance. Under these guidelines, the companies should comply with at least one-tenth (1/10) of the total number of the company’s board of directors, subject to a minimum of one, should be independent directors to ensure better governance, but most of the listed companies in Bangladesh does not fulfill this requirement as this guidelines provide comply or explain approach. Even, there is no information about the qualifications of independent directors, tenure of office, and remuneration of the directors, including independent directors, besides at the time of appointment of director, the company need not disclose any brief resume of the director to the shareholders under the Corporate Governance Guidelines, 2016 which were mandatory in the Corporate Governance Guidelines, 2012. However, both the Corporate Governance Guidelines, 2012 and the Corporate Governance Guidelines, 2016, are almost silent on protecting the minority shareholders’ rights. Then to eradicate those lacunas, some crucial governance issues have been introduced by enacting the Corporate Governance Code, 2018 (CGC). Still, this code is also not well-practiced as it is voluntary in nature. It also contains some gaps, like it does not focus on female participation in the Board of Directors. It does not include the formation of the Executive Committee and Stakeholders Relationship Committee, environmental and social policies, rewarding and punitive measures as per the governance performance. Even there is no specific provision requiring disclosure of risk type and risk tolerance limit. So, this code remains some areas that are yet to be incorporated into the best practices recommendations. More importantly, the Code and the Guidelines both are issued by the BSEC only to govern the listed companies, and these are completely denied the existence of non-listed companies like many State-owned Enterprises (SOEs), Small and Medium Enterprises (SMEs), and Non-Governmental Organizations (NGO). So, to enhance accountability, transparency, and sustainability in the corporate sector, non-listed companies also should introduce both the code and guidelines. However, according to the Extent of Corporate Transparency Index, 2020, Bangladesh got 42.86 points out of 100. Then, the World Bank Report on the Observance of Standards and Codes Bangladesh argues that the framework of corporate governance should be based on four pillars. These are Responsibility, Accountability, Fairness, and Transparency (RAFT), but both accounting and auditing practices in Bangladesh are institutionally weak in terms of their regulation, compliance, and enforcement of the accounting standards and professional rules. In addition to these problems, there are other deficiencies in shareholders’ rights in Bangladesh, like inaccessibility of information, the unclear process of electing directors, no rights on approving directors’ remuneration, and no restrictions on informing shareholders before any related party transactions happen, etc. Besides all of these, an independent survey was conducted in our domestic jurisdiction with the help of the BSEC where it revealed that about 55 percent of companies do not comply with the corporate governance guidelines and only about 33 percent of companies appointed independent directors, where most of the cases independent directors are influenced and gratified by the executive directors as their remuneration is low.

From the discussion mentioned earlier, it is clear that corporate governance practice is not well-established. It is still in its initial stages in Bangladesh; nevertheless, it is receiving greater attention from the corporate sector day by day. So, some initiatives must be taken to enhance the present condition and raise awareness of good corporate governance practices. This article recommends some initiatives that must be taken to improve the corporate governance scenario in Bangladesh. Firstly, as a regulatory body, the Registrar of Joint Stock Companies and Firms (RJSC), the Bangladesh Bank (BB), the Bangladesh Securities and Exchange Commission (BSEC), the National Board of Revenue (NBR), and the Institute of Chartered Accountants of Bangladesh (ICAB) must have extended its effective and strict watchdog mechanism in the corporate sectors throughout the country to implement the Anglo-American Model for ensuring corporate governance in their corporate environment because we know that Bangladeshi laws regarding corporate governance theoretically follow Anglo-American Model, but it practically follows the Control Based Model which ultimately curtails the main object of CG as under this family-controlled model the board members are not regarded themselves as representing the interests of the minority shareholders; instead, they customize the governance mechanism according to their own needs or sometimes represent the interests of the controlling owners who appointed them. Even in the absence of proper monitoring by the regulators, many of the companies are defaulting in holding Annual General Meeting (AGM) in due time and submitting false reports of compliance. There is also a lack of proper appointment procedure of independent directors and auditors and lack of independence, lack of shareholders’ active participation, non-disclosure of material facts, and unavailability of information to investors for the absence of their active and strict mechanisms. Secondly, the practical implementation of the existing legal provisions relating to corporate governance must be ensured. Although some loopholes exist in the existing regulatory framework, these laws still contain some good provisions to ensure corporate governance. But these legal provisions are not properly implemented to govern Bangladeshi corporate sectors. Thirdly, existing corporate laws, especially the Bank Companies Act, 1991, the Companies Act, 1994, the Corporate Governance Guidelines, 2016, and the Corporate Governance Code, 2018, should be revised in accordance with the International Accounting Standards (IAS) and Bangladesh Accounting Standards (BAS) to eradicate all sorts of lacunas and best practice of corporate governance culture since these laws are directly connected with the corporate environment of Bangladesh. So, removing lacunas there should include more issues in the existing corporate legislation, such as the Companies Act, 1994 should include the definition, qualifications, age, extent of power, roles and responsibilities of the chairperson, CEO, and independent directors; the composition of the board and the leadership structures in the board and management, audit practices, auditors’ independence, auditor’s pay; individual and overall performance analysis and true independence of the board and independent directors; separate nomination and remuneration committee, ethics and compliance committee, compensation committee, audit committee, preparation and presentation of a Consolidated Balance Sheet, ultimate share ownership, risk management and reporting system, tax management, and reporting system, etc. In the same way, the Bank Company Act, 1991 should include the definition of the loan, deliberate loan defaulters, money laundering, fiduciary duties, financial offenses, and terrorist financing; then, it should also incorporate the nomination and remuneration committee and ethics and compliance committee, the formal requirement of academic, professional, and practical qualifications of the directors, provisions for irregularities of bankers to face criminal charges, strict punishment mechanisms for non-compliance, etc. Similarly, qualifications of independent directors, tenure of office, remuneration of the directors, including independent directors, minority shareholders’ rights, etc., should insert in the Corporate Governance Guidelines, 2016. And then the Corporate Governance Code, 2018 also should focus on some crucial issues like female participation in the BoD, the formation of the Executive Committee and Stakeholders Relationship Committee, environmental and social policies, and rewarding and punitive measures as per the governance performance. So, I think these issues need to be taken to overcome the inadequacies of the current legislation and ensure a higher quality of corporate governance and transparency. Fourthly, separation of ownership and control mechanisms in the corporate structure of Bangladesh should be ensured. It is said fairness, accountability, responsibility, and transparency are the four core principles of corporate governance, but when the corporate structure like in  Bangladesh is owned and controlled by the family members or people of their close ties, this directly affects the level of fairness, accountability, responsibility, and transparency because the family board members can control the actual executive functions of the company here, as they do not keep any scope for the independence of the board. Fifthly, a mandatory code and guidelines should be introduced in Bangladesh for both listed and non-listed companies since the Corporate Governance Code, 2018 and the Corporate Governance Guidelines, 2016 suggest a voluntary mechanism of compliance and comply-or-explain mechanism of compliance, respectively, which are ultimately applicable only on the listed companies and where the listed companies have the chance to escape easily from its obligations just showing a simple ground as the Code and the SEC Guidelines both suggest non-binding obligations on a company, in fact, non-listed companies get actual benefits from here since these companies do not fall under the purview of the Corporate Governance Guidelines, 2016, and the Corporate Governance Code, 2018. So, the Code and the SEC Guidelines both need to be revised. Sixthly, academic and professional institutions should include corporate governance principles in their syllabus to develop a good corporate governance culture by expanding the knowledge and competence amongst top executives, middle-level managers, and the general workforce because the absence of proper knowledge, competence, professional ethics, ineffective and poor quality of professional education contribute to unsatisfactory corporate governance practice in Bangladesh. Seventhly, institutionalized corruption should be abolished from the corporate sector. In most cases, independent directors are influenced and gratified by the executive directors as their remuneration is low, which leads them to take bribes and do unlawful activities for extra income to support their families. So, the appointment and remuneration of the independent directors must be based on their impartiality, legal knowledge, expertise, foresight, management quality and ability to understand financial statements, etc.

In conclusion, the study’s overall findings indicate that the practice of corporate governance in Bangladesh is vulnerable and still in its initial stages as the corporate legal environment has not been widely recognized by the companies in Bangladesh for its numerous weaknesses. Removing these weaknesses requires appropriate reform, and implementation is highly necessary for Bangladesh. So, if the policymakers adopt and then properly implement the recommendations mentioned above, undoubtedly, a better Corporate Governance environment will prevail in Bangladesh as those recommendations are provided after considering the country’s socio-economic conditions.

Writer: Bijoy Chakraborty; Student, Department of Law & Human Rights, University of Asia Pacific.