Professional Documents
Culture Documents
Introduction
Ever since international financial agencies (IFAs)
such as the World Bank included corporate governance reforms as a development goal, significant
changes have taken place in the regulatory environment guiding corporate governance in emerging economies1 (World Bank, 2002a). Developing
economies, in great need of external funds, have
been forced to open up their economies as part
of the IFA-sponsored globalisation process. The
IFAs have encouraged adoption of internationally
accepted accounting and corporate governance
practices as a prerequisite for obtaining loans. In
many cases, these agencies have prescribed models of
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TABLE I
Comparative economic, financial and capital market indicators as of December 31, 2006
Bangladesh
Population (million)
GDP per capita (US $)
Number of stock exchanges
Market capitalisation (% GDP)
Number of companies registered
Number of companies listed
Number of chartered accountants
Presence of second-tier accountants
Number of commercial banks
158.6
470
2
7.5
1327
325
727
None
49
India
1079
620
4
91.5
N/A
4700
130,000
None
88
Pakistan
Sri Lanka
152
600
2
28.8
N/A
671
3700
1
28
19
1010
1
33.3
N/A
237
2700
1
19
Source: ADB quarterly economic update, December 2006, Economic Survey India, 2006, Securities and Exchange
Commission of Sri Lanka, South Asian Federation of Accountants website www.esafa.org; Wikipedia list of banks http://
en.wikipedia.org; South Asian Federation of Exchanges website www.safe-asia.com. Number of companies listed data for
Bangladesh, India, Pakistan, and Sri Lanka are for Dhaka Stock Exchange, Mumbai Stock Exchange, Karachi Stock
Exchange and Colombo Stock Exchange, respectively.
Ownership structure
Like many other developing countries, most companies in Bangladesh are either family owned or
controlled by substantial shareholders (corporate
group or government). Company managements are
effectively just extensions of the dominant owners
(Farooque et al., 2007). They are closely held small
and medium-sized firms where corporate boards are
owner driven. Consequently, most of the companies
have executive directors, CEO and chairman from
the controlling family. Farooque et al. report that, on
average, the top five stockholders hold more than
50% of a firms outstanding stocks. Imam and Malik
(2007) analyse the ownership patterns of 219 companies from 12 different industries listed on the Dhaka
Stock Exchange, the major stock exchange in the
country. It is reported that, on average, 32.33% of
the shares are held by the top three shareholders,
the results being even higher for real estate, fuel
and power, engineering, textile and pharmaceutical
sectors.
Shareholder involvement
The capital market
Uddin and Choudhury (2008), investigating the
state of CG practices in Bangladesh, report that
Bangladeshi companies are reluctant to hold annual
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Also, Bangladesh lacks the presence of any second-tier accountancy bodies to cater to the needs of
the corporate world, although neighbouring countries have similar institutions.4 This means that a vast
majority of accountants working in the corporate
sector do not possess any accounting qualifications.
In addition to this, the other second-order institutions, such as the judiciary, suffer from lack of skills
and proper training, especially in dealing with corporate cases (BEI, 2003).
Legal structure
Bangladesh is a former British colony, and has
inherited the common legal system. The Companies
Act 1994 (revised after 81 years from Companies
Act 1913, when Bangladesh was part of British
India) defines the structure of the firms, including
the composition of the board of directors, appointment of the CEO, appointment and remuneration of
the auditors etc. The financial sector is also regulated
by the Banking Companies Act (1994) and the
Insurance Act (1973). However, the problem with
the legal environment has always been its poor
implementation (BEI, 2003). Uddin and Hopper
(2003), examining the success of privatisation of
state-owned companies in Bangladesh, also identified the lack of legal enforcement as a major problem. A World Bank study on the state of financial
accountability and governance in Bangladesh (World
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(2003), which reports presence of political interference in lending decisions by banks. The Centre for
Policy Dialogue (2003) reports that the existence of
this default culture is not only having adverse impact
on profitability and liquidity, but also raising the cost
of lending substantially. This, in turn, means that
good borrowers are affected and in some cases, they
have been influenced not to repay bank loans.
are not unique to Bangladesh. Rather, such conditions prevail in many emerging economies; for
example, Ahunwan (2002) reports presence of
concentrated ownership, inefficient capital market,
unsophisticated legal system and lack of shareholder
activism in Nigeria; Rwegasira (2000) identifies low
degree of capital market sophistication, high ownership concentration and lack of economic and
political stability in Africa. Paredes (2005) mentioned that the prerequisites for efficient functioning
of the shareholders model include an efficient capital
market, competent manpower working in the
second-order institutions, sound legal structure
and long-term political stability. Also, shareholder
involvement and timeliness of financial reporting
were considered important prerequisites for success
of the shareholder model (Letza et al., 2004; Rwegasira, 2000). It seems that all of these factors are
absent in Bangladesh, justifying the non-adoption of
the shareholder model of CG. Also, the poor
working conditions and unsatisfactory levels of loan
recovery make a case for representatives of workers
and banks to be present on the board of directors.
Therefore, it seems that the corporate environment
in Bangladesh is more conducive for the adoption of
a stakeholder-based model. This addresses the first
research question. The next section will analyse
what type of CG model Bangladesh has adopted, and
a subsequent section will attempt to analyse the
reasons for such adoption.
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External auditors
Audit committees
BEI (2004) suggests forming a number of committees such as audit committee, nomination committee
Basis of compliance
External auditors
Skill, experience,
qualifications
Meetings
Separation of
chairman and CEO
Audit committees
Formulation
Composition
CG order considered
part of best practice
Advised
Three members
Chairman to consult
CEO regarding rule-setting
13
Not mentioned
Suggested
At least three members and
a chairman
Required for chairman
715
Majority should be independent
and non-executive
Separation proposed
Required
Three members including a chairman
Separation proposed
520
TABLE II
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Basis of compliance
All three CG regulations are also similar in terms of
the bases of compliance. Although the BB circular
on CG makes it mandatory for the banking companies to follow the rules relating to composition of
the board of directors, regarding the formulation of
audit committee, the BB is much more lenient,
mentioning this as a part of best practice, and
advising banks to formulate such committees
(Bangladesh Bank, 2002). The BEI code (2004)
advises that the SEC should adopt their CG code on
a compliance or explain basis. Subsequently, the
SEC has made adoption of their CG order (2006) by
listed companies on a comply or explain basis.
From the above discussion, it is apparent that,
despite the inappropriateness of the shareholder
model, as reported in the earlier section, Bangladesh,
like many other developing countries, has adopted
this model. The BB, BEI and SEC CG initiatives all
suggest a single-tier board structure where directors
are elected by the shareholders, the presence of
independent directors on the board and the separation of the chairman and the CEO. Consistent with
the Organisation for Economic Cooperation and
Development (OECD) guidelines for CG (1999 and
2004), all the CG regulations recommend an
extended role of the audit committees. Also, Bangladesh Bank (2002, 2003a, b), BEI (2004) and SEC
(2006) are similar in terms of audit committee
composition, qualification of committee members,
presence of independent directors and frequency of
the meetings. The BEI (2004) and the SEC (2006)
also have similar views regarding auditor providing
non-audit services, as both actors seem to suggest a
blanket prohibition on a number of services.
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of comments were made on the appropriateness of
certain provisions of the order.
Discussion
This section attempts to explain the behaviour of the
principal actors in the Bangladeshi CG scenario.
Diagram 1 presents a model for such analysis.
As development of CG has been attributed to the
principal agency model (Roberts, 2004), the agency
theory is considered to be the primary basis of
analysis. Paredes (2005) mentioned that the success
of the Anglo-Saxon model actually depends on
agency-theory-based assumptions, such as the efficiency of the capital market, sophistication of the
investors, availability of qualified personnel to supplement the capital markets, incentives for equity
financing and political stability leading to long-term
expectations. The low level of sophistication of the
Bangladeshi capital market and its investors, high
ownership concentration and high rates of bank
financing would therefore indicate that the shareholder model would not be very effective in Bangladesh. Therefore, the agency theory perspective
does not really explain such adoption. In a recent
round-table discussion on the SEC (2006), a number
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Conclusion
This paper investigates the development of CG
codes in Bangladesh. More specifically, three questions are investigated: What type of CG regulations
would fit into the corporate and socio-economic
environment of Bangladesh? What type of CG
model has Bangladesh adopted in fact? and What
prompted the adoption of a particular model of CG?
It is found that the Bangladesh corporate and economic environment is characterised by high ownership concentration, primitive capital markets, high
government dependence on IFAs, easy availability of
bank credit and subsequent default culture, and poor
labour conditions. The presence of all these factors
suggest that the Anglo-American shareholder model
of CG, based on agency-based notions of market
efficiency, will not be entirely suitable for Bangladesh. Rather, the presence of representatives of
banks and workers, as suggested by the stakeholder
model, could contribute to better loan recovery and
improvement of working conditions. The adoption
of the stakeholder model may be even more
appropriate against the backdrop of the ongoing
financial crisis, which has seen major slowdown in
global economy. Although emerging economies
such as Bangladesh have been largely unaffected by
the first phase of the financial crisis, it is expected
that these economies will be severely affected by the
second phase of such crisis, as exports and remittances suffer (ADB, 2009). This may further
Notes
1
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