Professional Documents
Culture Documents
Introduction
Corporate governance (CG) guidelines (codes) are a set of best
practices recommendations regarding the behavior and structure of a
firms board of directors issued to compensate for deficiencies in a
countrys corporate governance system regarding the protection of
shareholders rights (Aguilera and Cuervo-Cazurra 2004, 415). These
recommendations generally include a comprehensive set of norms on
the role and composition of the board of directors, relationships with
shareholders and top management, auditing and information disclosure,
and the selection (nomination), remuneration, and dismissal of
directors and top managers. Although the content of the codes varies
across countries probably reflecting their unique economic, social,
cultural and institutional characteristics, two main objectives of every
code are: (a) to improve the quality of companies board governance;
and (b) to increase the accountability of companies to minority
shareholders while maximizing shareholder or stakeholder value
(Aguilera and Cuervo-Cazurra 2004).
The Enron debacle and other notable corporate failures in different
parts of the world during the early 2000s raised widespread community
concerns about inadequate governance standards. The affected
economies responded to such scandals by establishing different
corporate governance related acts, codes, guidelines, or rules.
International Financial Agencies (IFAs) also included corporate
governance as a development goal. Following the footsteps of the
developed nations, developing economies also started programs on
corporate governance legal reform to develop their capital markets, to
ensure continuing support from the IFAs, and to attract a constant flow
of foreign investment to those economies. Bangladesh is no exception.
The market regulator of Bangladesh (the Securities and Exchange
Commission of Bangladesh, hereafter the Commission) issued the CG
Guidelines in 2006 on comply or explain basis. Following its
widespread adoption by listed firms irrespective of their size, and
considering the limitations of the guidelines, the Commission issued
revised CG guidelines on 3 July 2012 on comply basis.
The purpose of this paper is to discuss the implications of the revised
guidelines on the listed companies and market regulators. It is based on
Corporate Governance
facing an organization is greatly reduced. This may have some
implications for the capital market, which is discussed in later section.
1
2
3
CG Guidelines of 2012
Separation between the Chairman
and CEO roles is required
At least 1/5th independent
directors (IDs)
The definition of 'independent'
director has been expanded by
including additional criteria
Specific qualification criteria for
independent directors
n
CG Guidelines of 2006
Separation between the Chairman
and CEO roles is proposed
At least 1/10th independent
directors (a minimum of one)
Specific criteria for a director to
be considered 'independent'.
independent directors
No qualification criteria for independent
directors
CG Area
CG Guidelines of 2012
CG Guidelines of 2006
Board
n The company has not entered into any fraudulent n IDs need to be appointed by the
Effectiveness
or illegal transaction, or any transaction violating appointed directors
the company's code of conduct.
n Specific qualification criteria for independent
n No such requirement
directors
n No such requirement
n IDs need to be nominated by the Board of
Directors (BOD) and approved by the shareholders
at the Annual General Meeting (AGM)
n The post of an ID cannot remain vacant for more n No such requirement
than 90 days
n Any member of the AC can be its
n Code of conduct for all board members and
Chairman
annual compliance with the same
n The roles of AC have been expressed in
n The normal tenure of an ID is three years which
general terms 4
can be extended for another one term only
n The AC Chairman shall be an ID
Audit
Committee n 10 specific roles of AC have been identified
(AC) Affairs
n Professional qualification requirement for all
members of the AC
No such requirement
Auditor
n Neither any partner nor any employee of the
Independence external audit firm should hold any share of the
client firm during the term of the audit assignment
Additional n Industry outlook and possible future
developments in the respective industry
Statements
by the BOD n Segment-wise or product-wise performance
n Different risks facing the organization and related
concerns
n Discussion on the cost of goods sold, gross profit
margin and net profit margin of the company
n Discussion on continuity of any extra-ordinary
gain or loss
n A statement of all related party transactions
including the basis of such transactions
n Application of funds raised from public issues,
rights issues or through other instruments
n An explanation when the company's financial
results deteriorates after major events such as the
Initial public offering (IPO), Repeat Public
Offerings (RPO), Rights Offer
n Reasons for significant deviation between
quarterly financial performance and annual
financial performance need to be discussed
n Remuneration to the board members
n Key operating and financial data of a minimum of
last five years shall be summarized
No such restriction
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
No such requirement
4 Guideline 3.00 requires the AC to assist the BOD in ensuring that the financial statements
present a true and fair view of the state of affairs of the company and in ensuring a good
monitoring system within the business.
Corporate Governance
CG Area
CG Guidelines of 2012
The statements present a true and fair view of the
Reporting
and
Compliance
of CG
CG Guidelines of 2006
No such requirement
No such requirement
No such requirement
Except for the US, most countries follow the 'comply or explain' basis of
adoption of CG code. Consistent with the Implementation Review Group Report
(p. 1), the Corporate Governance Council of the Australian Securities Exchange
(ASX) justifies such approach by stating that (p. 6): " there is no typical
organization and no single readily identifiable model for corporate
governanceAt different times and stages in a company's life, some governance
structures may be better for the generation of wealth for investors than others"
The Cost and Management, July-August, 2012
Corporate Governance
CEO-duality (where the CEO is also the Chairman of the board) is
generally discouraged in the literature (largely from advanced
economies) to avoid any role conflict and to promote accountability
and facilitate division of responsibilities between them. Bangladesh is
no exception to this. The new guidelines require the positions to be
filled by two individuals and their roles and responsibilities also need
to be clearly defined (Guideline Condition 1.4). It is to be noted that the
debate on whether CEO-duality is beneficial or detrimental to
improved firm performance is still not over (Baliga, Moyer, and Rao
1996; Brickley, Coles, and Jarrell 1997; Abdullah 2004; Elsayed 2007).
While agency theory suggests that CEO duality is detrimental to the
firm performance as it often compromises the monitoring and control
of the CEO, stewardship theory supports CEO-duality on the ground
that it presents unity of command. Therefore, the efficacy of the revised
guidelines mandatory requirement of separate individuals to fill these
two positions remains questionable. On the other hand, since most of
the listed companies in Bangladesh are family-owned and family
members often sit on the board, there is possibility that this condition
will be complied in letter rather than in spirit when members of the
controlling family fill the positions of the CEO and the board
Chairperson.
Another concern in the context of emerging countries like Bangladesh
is: how much independent are the independent directors? In a recent
study, Ong (2010) argues that true independence is possible when
certain conditions are met: (i) the political and legal environment of the
country should nurture the independent directors and allow them to act
in order to carry out their intended tasks; (ii) the securities market of
the country should allow for the possibility of competing shareholder
groups to be present within the corporation; (iii) the corporation must
be free to pursue profit maximization as its ultimate goal; (iv) a strong
and independent judiciary should be present to equitably decide on
lawsuits that may be filed to vindicate shareholder or director abuses;
and (v) the responsibilities for policing corporate action must be
properly organized so that independent directors can proceed with their
tasks keeping in mind their legal responsibilities. To what extent these
conditions are met in Bangladesh remains an open to question.
As an alternative, the Code of Corporate Governance in Singapore
(issued on 2 May 2012) can be considered. In order to ensure an
independent element on the board, the Code in Singapore requires the
firm to have at least one-third of the board to be independent directors
(Guideline 2.1). However, it also requires that (Guideline 2.2):
The independent directors should make up at least one half of the
Board where:
(a) The Chairman of the Board (the Chairman) and the chief
executive officer (or equivalent) (the CEO) is the same person;
(b) The Chairman and the CEO are immediate family7 members;
(c) The Chairman is part of the management team; or
(d) The Chairman is not an independent director.
The guidelines in Bangladesh do not require any annual assessment of
the board members including the independent directors. Although the
guidelines require a number of criteria to fulfil before considering any
director as independent, this does not undermine the requirement of
an annual assessment. Malaysian Code on Corporate Governance 2012,
Corporate Governance
service background of directors is Condition 3.1(iii), where all the
members of the Audit Committee (AC) is expected to be financially
literate8 and at least one of the members is expected to have accounting
or related financial management expertise.
Read together, it is reasonable to infer that if a company wishes to
form a board of 10 members, the guidelines require that there be at
least two financially literate and experienced independent directors,
one financially literate non-independent director and by inference,
these three should be the members of the AC with one of the
independent directors being the Chairperson of the AC. In situations
like this, since majority (70 per cent) of the board members may serve
the company without being financially literate or having accounting or
related financial management expertise, question remains on the
effectiveness of the board in effectively monitoring the activities of
management. Therefore, although the requirement in Guideline
Condition 1.5 (xxii) is expected to improve the users understanding of
the directors level of expertise in different functional areas, and their
busyness in other boards and committees, it does not warrant the
requirement of a minimum level of educational and service
background on part of the remaining non-independent directors. This
is further necessitated by the fact that the minimum board
independence requirement is 20 per cent. Prior literature also supports
the view that financially literate and experienced directors can monitor
management more efficiently and thereby limit the likelihood of
accounting fraud (Agrawal and Chadha 2005; Rahman and Azim 2007).
7. Conclusion
The Securities and Exchange Commission of Bangladesh issued a
revised version of CG guidelines on 3 July 2012. The revised
guidelines include many new provisions in the areas of board
independence, audit committee affairs, boards declaration on the
corporate governance issues, certification by the CEO and CFO of the
company on the truthfulness and fair presentation of the company
affairs, and compliance certificate from selected professionals.
However, the guidelines did not include any provision in the areas of
remuneration committee, nomination committee, performance
evaluation of the board, audit committee independence, among others.
In spite of the shortcomings, the revised guidelines are believed to be
beneficial to both capital market participants and its regulators.
However, the cost of compliance on part of the listed firms may
increase since the revised guidelines are issued on a comply basis.
Therefore, it would be interesting to examine the extent to which the
listed companies comply with the guidelines not merely in letter but in
spirit, and the extent to which the market regulators become successful
in ensuring enforcement of the regulation.
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