CORPORATE GOVERNANCE

Mushtaque Ahmed
Principal
SBSC. Dhaka.
With the dismantling of administered banking and since the winds of liberalization
and deregulation blowing hard, several crucial areas like asset management,
interest rates etc have to be decided by the banks themselves, These fundamental
reasons make corporate governance essential.
Greater freedom brings greater responsibility. Globalisation has also given this subject
a totally new dimension and wider interest. It is essential for risk containment by
providing early warning system to facilitate prompt corrective action to prevent
failure. It is not risk aversion but it involves risk assessment and coverage because
earlier detection, lower the cost. Three essential ingredients of corporate governance
merit attention.
 Check & balances like audit committees, independent accounting, systems
etc.
 Clear demarcation of responsibilities for effective accountability.
 Complete disclosure and transparency.
What is Corporate Governance ? The Cadbury Committee report say- “it is
the system by which companies are directed and controlled”. It tries to enunciate the
responsibility of Board of Directors and managers, whether defined by the law or not,
to ensure good performance. Corporate Governance establishes the relationship
between the shareholders and other stakeholders with the management and its Board.
Good Corporate Governance should provide proper incentives for the Board and
Management to pursue objectives that are in the interest of the company and
shareholders and should facilitate effective monitoring, thereby encouraging firms to
use resources more efficiently.
It may be appropriate to say that good corporate governance should result in making a
corporate to a responsible corporate citizen, who will not only protect and enhance
shareholders wealth but will also contribute towards the good of the community at
large.
The need for good corporate Governance:
A Responsible Corporate Citizen should not only enhance the shareholder’s wealth
but also exhibit fairness to other stakeholders like consumers, employees and the
community in general. Maximization of shareholder wealth has to be achieved by
adherence to ethical values and transparency in dealings. The principles of Corporate
Governance are developed
to ensure that the companies do justice to all the shareholders, investors and society in
general. It has also to be ensured that investors are not ‘enronised’ by corporates in
future.
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Evolution of corporate Governance:
Increasing competition all over the world led to failure of a large number of
companies. (a) The demand to make the Board of Directors and Management
accountable and (b) the need for ethical practices in the corporate management and (c)
adherence to the law of the land are responsible for the emergence of Corporate
Governance.
Internal pressure to Adhere to good corporate Governance:
The good practice followed by Corporate like Banks to meet the representatives of the
media and the investment analysts who dissect and discuss the details of performance
at quarterly intervals puts internal pressure to prepare the organization for exposure in
public.
Transparency in operations is the hallmark of a good corporate citizen. Access to
information may be made a fundamental right of an investor in respect of the
operations of every corporate.
Limited Liability Vs no liability: The concept of limited liability of shareholders is a
great step forward in capital formation, which enabled many corporate to take up
entrepreneurial projects.
Focus on the investors:
Retention of investor’s confidence is essential to help capital formation which is very
important for economic development Therefore, good Corporate Governance has to
recognize the following facts:
- The shareholders are the real owners of a company and the BOD and the
Managers are the agent of the shareholders.
- A company comes into existence only out of the shareholders willingness to
put a part of their resources at risk.
- If the company makes loss it is the shareholder who has to bear the loss.
- A shareholder cannot leave the company unless someone else steps into his
shoes or the company buys back his shares.
The Rights of shareholders:
- A shareholder has the right to know as frequently as possible details of the
performance of the company.
- It is the shareholders right to decide who should represent him in the BOD
(Board of Directors).
- The criteria of fairness to all shareholders should decide the composition of the
BOD.
- The BOD should conduct the affairs of the company in such a manner that they
are fair to all the shareholder.
- The BOD are accountable to the shareholders.
- The shareholders are entitled to protection from ‘Insider Trading’.

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Regulatory Framework: to ensure corporate governance:

I) Mandatory Requirements
 BOD - Composition and category of Directors, details of Board Meetings
held with details of attendance.
 Audit Committee - Composition, name of chairperson, details of meeting
with attendance and the terms of reference. The head of the committee shall
be a non- executive director.
 Shareholders committee - to look into shareholders grievances with details of
composition and details of grievances received & settled. The head of the
committee shall be a non-executive director.
 Details of general body meeting.
 Remuneration committee.
 Disclosures.
 Means of Communication to the shareholders.
 General shareholder information - AGM, dividend payment date and book closure,
market share price data, listing details, distribution of shareholding, plant
locations, address for correspondence and Registrar and Transfer Agents. .

2) Non Mandatory Requirements.

 Chairman of the Board to be a non executive director.
 To set up a Remuneration committee.
 Shareholders right - half yearly disclosures of financial performance.
 Postal ballot in case of important decision at the AGM such as alterations to the
Memorandum of Association, sale of whole or substantially whole of the
undertaking, corporate re-structuring, matters relating to change in the
management, entering a new business area not germane to the existing business of
the company, making a further issue of shares through preferential allotment or
private placement basis.

3). Also requires to place various information before the BOD such as-
 Annual operating plans.
 Capital budgets & updates.
 Quarterly results.
 Minutes of the meeting of Audit Committee & other committee.
 Details of joint ventures, if any.
 Non-compliance of any regulatory requirements.

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Role of Directors
Corporate Governance envisages major role to the Board of Directors. The Board
of Directors is ultimately responsible for the operations and financial soundness of
the company. The Board of Directors must receive on a timely basis, sufficient
information to judge the performance of the management. The members of the
Board should be capable of exercising judgement, independent of the views of the
management inclusion of qualified directors on the Board, who are not members
of the company’s management, can enhance independence and objectivity. The
Board of Directors should periodically assess its own performance, determine
where weakness exists and take appropriate corrective actions.
The Board of Directors add strength to the corporate governance of a company
when they:
► Understand their role and responsibility to the company and its shareholders.
► Serve a “checks & balances” function vis-a vis the day to day management of
the bank.
► Feel empowered to question the management.
► Recommend sound practices.
► Guide the company to achieve its objectives in a prudent and efficient manner.
►Develop vision to imagine crisis and have the will to act preemptively.
► Take strategic decisions develope corporate strategies.
► Meet regularly with senior management and auditors to establish and approve
policies, establish communication lines & monitor progress towards corporate
objectives .
► Do not interfere in day to day management of the company.
Corporate Governance in Banking:
► Corporate Governance in a service Industry like Bank is Not only to ensure
compliance with regulatory requirements but also to be responsive to the
expectations of all the shareholders who deal with the Bank.
► Banks shall have strive for excellence with twin objectives of enhancing
customer satisfaction and shareholders value.
► The BOD shall support the broad principles of corporate Governance.
► The BOD should lay strong emphasis on transparency, accountability and
integrity.
Bangladesh Bank initiated various measures to improve Corporate
Governances.
► Better disclosure and transparency standards have been introduced; fit and
proper tests prescribed for Bank Directors, Chief Executives and Advisors;
restriction imposed on the composition of the membership of the Board of
Directors; the roles and functions of the Board and Management were
clarified and redefined. Audit Committee has been mandated for all banks with
clear guidelines and TORs. Besides Early Warning System (EWS) also been
introduced.
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► To strengthen the banking operation capital Adequacy measures (minimum

CAR 9%) introduced.
► Introduced Secondary Market of shares which depends on the
quality of governance, vision of the Board, Earnings per share (EPS) Return on
Assets (ROA).
Features of Good Corporate Governance Principles:
► Openness, integrity and accountability must be the key elements of corporate
Governance

► Functioning of the Board needs to undergo qualitative change.

► A bifurcation of the role of the Chairman and the Managing Director may
ensure that the Chairman is free from operational chores and is able to give
focused attention to the working of the Board.

► Composition of the Board should be broad based through the induction of

independent Director and the Board should adopt code of corporate
governance.
► Code of best practices shall be evolved to achieve the necessary high standards
of corporate behaviors
Disclosure standards:
► The emergence of Capital Adequacy, Income Recognition, Asset Classification,
the requirement of improved disclosure and transparency have enhanced
dependability of the financial statements in respect of banking companies.
A suggested Model code of Best Practice for Banks.
►Men of eminence who can contribute towards the vision, control and guidance
should be chosen as Director.

► Bifurcation of the post of Chairman and MD, so that the Chairman is free from
operational chores and able to give focused attention to the working of the
Board.
► Boards should have a formal schedule of matters reserved for them for decision
to ensure that the direction and control of the Bank is firmly in their hands.
► Non- executive directors should be Conversant with Bank accounts.
► Reappointment of directors should be based on appraisal of their contribution to
the boards functioning. Directors who have not been present for at least 50% of
the board meetings should not be considered for reappointment.
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► Chairman & MD should have a minimum tenure of 2 years to ensure proper
direction and continuity of policy.

► BOD should form a effective audit committee comprising non -executive

directors and this committee should be given access to all financial
information.
► The Report of BOD should contain adequate MIS.
► The quality of shareholders communication should be improved.
► Adoption of code of self-discipline will improve quality of governance.

► Directors should be paid reasonable fees.

Conclusion: The code of corporate governance cannot be static. It is not just
compliance with statutory requirement; it is doing the best in the interest of all
the shareholders and the society at large in transparent and ethical way so that
the company always remains a responsible corporate citizen.

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