CORPORATE GOVERNACE PRACTICE IN THE FINANCIAL SECTOR OF BANGLADESH

Submitted To
Dept of Accounting & Information Systems

University of Dhaka
Submitted By Md. Aslam Hossain
Roll # 13010 BBA 13th Batch, Section: A Dept of Accounting & Information Systems

University of Dhaka
Supervisor

Dr. Riazur Rahman Chowdhury

Professor Dept of Accounting & Information Systems University of Dhaka Date of submission: 10th August, 2011

Letter of Transmittal

10th August, 2011 Riazur Rahman Chowdhury Professors University of Dhaka

Subject: Submission of study report on Corporate Governance Practice in the financial sector of Bangladesh. Sir, I have the honor to state that I am submitting a study report to you named Corporate Governance Practices in the financial sector due on 10th August, 2011. In this report, I have discussed the corporate governance, it objectives, the practice of it in the Banking sector of Bangladesh, different variables of corporate governance etc in four chapters.

For any question or comment regarding to this report, I request you to call me at any time you desire. I thank you to provide me necessary support for completing this challenging and interesting issue as my research work.

Yours sincerely, Md. Aslam Hossain BBA 13th Batch, Section- A, Roll-13010

Abstract
Corporate governance (CG) is an important effort to ensure accountability and responsibility and is a set of principles, which should be incorporated into every part of the organization. This study focused on the state of Corporate Governance (CG) in financial sector of Bangladesh.

To understand the state of CG, three broad aspects of governance and management issues were studied. These are: a) shareholders rights, b) public disclosure of information, c) effectiveness of the Board. Within each of these many sub-categories were studied which were discussed in this paper. The study used interviews with key stakeholders, experts and executives of these types of companies, a questionnaire survey and also group discussions. From the result of the interviews, a comparative analysis about the practice of corporate governance has been made between the nationalized financial institutions and the Private financial institutions. In this report focus has been given on the practice of corporate governance in the financial sector of Bangladesh and the total things have been covered in four broad chapters. In the first chapter introduction of the corporate governance has been given and the methodology that have been followed to prepare this report has also been stated here. In the literature review part, the detail discussion on the present scenario of corporate governance practice in Bangladesh has been made. In the third chapter, analysis of the responses of questionnaire and assessment of the corporate governance practice in different financial institutions have been stated. In the last chapter, the recommendations about the scope of improvement of practice of corporate governance in different financial institution and the conclusion have been stated.

Table of Contents

Chapters
Chapter-1: Introduction 1.1 Introduction

Contents

Page No.
1 2 3 4 4 5 8 9 10 12 13 14 15 16 18 22 23 28

Chapter-2: Literature Review

1.2 Aims & Objectives of the report 1.3 Research Background 1.4 Problem statement and the significance of the study 1.5 Limitations of the study 1.6 Methodology of the study 2.1 Corporate Governance 2.2 What does good governance involve? 2.3 Objectives of the Corporate Governance 2.4 Corporate Governance: The Conceptual Framework 2.5 Corporate Governance scenario in Bangladesh 2.6 Need for Corporate Governance in Bangladesh 2.7 Code of Corporate Governance in Bangladesh 2.8 The concept of Corporate Governance and financial institutions 2.9 Deficiencies and weaknesses in Corporate Governance within financial institutions 2.10 Corporate Governance in financial enterprises in Bangladesh 2.11 Corporate Governance-Best practices and Guidelines 2.12 Challenges ahead to the banking sectors for the implementation of Corporate Governance 3.0 Analysis & Findings

Chapter-3: Analysis & Findings Chapter-4: Recommendatio ns & Conclusions

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4.1 Recommendations 4.2 Conclusions 4.3 References 4.4 Appendix

39 44 46 48

1.1 Introduction:
The need for corporate governance arises from the potential conflicts of interest among stakeholders in the corporate structure. These conflicts of interest often arise from two main reasons. First, different stakeholders have different goals and preferences. Second, the stakeholders have imperfect information as to each others actions, knowledge, and preferences. (Osman 2006) Corporate governance (CG) is an important effort to ensure accountability and responsibility and is a set of principles, which should be incorporated into every part of the organization. Though it is viewed as a recent issue, there is, in fact, nothing new about the concept. Because it has been in existence as long as the corporation itself-as long as there has been large scale trade, reflecting the need for responsibility in the handling money and the conduct of commercial activities. In the wake of accounting, leadership, and governance scandals at such large companies as Enron, Tyco, and WorldCom, corporate governance has succeeded to attract a great deal of interest as it focuses not only the long term relationship, which has to deal with checks and balances, incentives for managers and communications between management and investors but also the transactional relationship, which involves dealing with disclosure and authority. Numerous works, studies, and researches have been conducted to enact principles, codes, and guidelines for ensuring good corporate governance systems and culture within the organizations. Sir Adrian Cadbury in 'Global Corporate Governance Forum defined corporate governance as: "Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society" (Cadbury, 2000)

The Dhaka Chamber of Commerce and Industry (DCCI) has been implementing a project, entitled Economic Reform and Research Enterprise, in co-operation with The Center for

International Private Enterprise (CIPE) an affiliate of the US Chamber of Commerce, Washington D.C. One of the objectives of this project is to prepare economic policy papers on selected business sectors. DCCI requested to prepare a paper on Principles of Corporate Governance for Public and Private Enterprise in Bangladesh. According to the Term of Reference (TOR) the scope of the study was limited to analyze the situation of corporate governance in the Public Limited Company- Financial Institutions.

1.2 Aims & Objectives of the Report:

The recent corporate collapses in the business world, such as Enron and WorldCom, have increased interest on corporate governance. As it was mentioned earlier, the corporate governance is a set of rules that is exclusively made to regulate and monitor a firms business activities and reporting. The intention is to ensure whether the managers are taking good care of the stakeholders wealth. Business is run by the management; as a result, it is extremely important for them that their stakeholders rely upon them in terms of their managerial capabilities and reporting. The broad objective of the research is to understand the state of corporate governance in practice in banking sector of Bangladesh. In particular, the research is expected to describe the followings: Understand the meaning of good corporate governance The current practice of Corporate Governance in terms of accountability to its stakeholders in financial institutions of Bangladesh How far the current practice of Corporate Governance passes the test of fairness? Whether Corporate Governance system in Bangladesh is transparent for all stakeholders. How does Corporate Governance affect firm performance? Evaluation how and who would be benefited if proper adoption of corporate governance is made by the banks of Bangladesh.

So serve these purpose, it has been tried that this paper seeks to examine the relationship between four corporate governance mechanisms (board size, board composition, chief executive

status and audit committee) and performance measures of firms (return on equity, ROE, and profit margin, PM).

1.3 Research Background:

According to Barker (2010), corporate governance deals with the safety of a firms financiers who are mainly its investors, lenders and creditors. In the modern era, in relation to Zinkin (2010) definition, corporate governance can be referred to as a set of rules and regulations that are exclusively there to be practiced by a firm in order to maintain a good relationship with all its stakeholders through transparency. This gives birth to some key concerns such as: Segregation of duties Internal control system Audit committee Transparency of disclosure etc.

Principle objective of this study is to identify and facilitate the initiatives to institutionalize CG. With this objective, this study paper is structured as follows. First it gives an overview of corporate governance, as that determines the scope of the issues. It briefly describes the growth of international practices to institutionalize CG.

Then a short description of the evolution of Corporate Governance is given. The current state of CG practices in Bangladesh, India, Sri Lanka, Pakistan, Thailand and Hong Kong are discussed briefly. From the outset, it has been observed that Bangladesh lagged behind its neighbors and important trading partners with regard to CG standards and practice.

A comparative analysis provides regional examples of initiatives that could be applied in Bangladesh to improve the situation.

1.4 Problem Statement and the Significance of the Study:

The world has experienced an economical calamity and corporate breakdowns in the past couple of years, exposing the extent of problems in corporate governance. It was noticed that governing corporations was not an easy task in any way. This lack of management capability has raised quite a few eyebrows in the field of corporate governance that needs to be rectified in order to allow smooth operation in any business across the globe (McGee, 2008). There seems to be difficulties for firms to organize their business since most of them are busy laying numerous strategies, planning and budgeting, information systems, performance management, accounts, etc. Furthermore, this phenomenon can be observed in the companies of banking sector. These companies engage themselves in compiling data from a wide range of the above mentioned sources that eventually makes the gathered information so complex that it ends up compounding the problem of corporate governance. This paper attempts to seek out the corporate governance problems, state the importance of it and establish the positive impacts of it once it is applied correctly. This is going to assist not only the banking sectors applying corporate governance the right way but also help out other researches that would be conducted further on this topic in future (Zinkin, 2010).

1.5 Limitations of the Study:

This study has certain limitations that need to be taken into account when considering the recommendations and its implications. Some of these limitations can be seen as fruitful avenues for future research under the same theme.

This study has focused on a phenomenon that is a very extensive and major one, i.e. corporate governance. In this paper, assessment of this complex phenomenon has been studied from a rather narrow empirical perspective.

During this study, it has been found that not much of research has been conducted on the CG landscape in banking sector of Bangladesh. Indeed, there are ample of studies available on the methods and principles of CG from Bangladeshs perspectives but there is a substantial lack of sector specific empirical and real- life studies. There is an absence of credible data and relevant

information on the real CG concerns in Bangladesh. The Annual Reports dont showcase all the information. Many aspects required clarifications directly from the company personnel which was difficult and quite impossible to obtain.

Again the issue is too broad to complete within the stipulated time period. Hence in some cases scheduled walk in interviews could not be so successful. Moreover, things are changing apart from time to time. So, it has not always been possible to produce enough information for comparison. Given the time limitation, comprehensive access to information was a difficult task. A systemic and periodic survey of CG practices in Bangladesh has thus become an important task for the organizations like DCCI, BEI, and SEC.

1.6 Methodology of the report:

1.6.1 Sources of information: For the preparation of the report, Information sources were identified first. Information is mainly collected from two sources. They are Primary sources: Primary data has been collected from direct interview with some professional of the banks. The secondary sources of information were the Annual Report, and several publications like books, magazines, trade journals & websites of the company etc. Sources of information can be summarized as follows; Sources of Information

Primary sources

secondary sources

- Direct

interview with the personnel - Data collection through questionnaire

-Annual

reports of different banks - Newspapers - Megazines - Other publications

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1.6.2 Methodology of the Report: The following structured methodology has been followed while preparing the report.
Defining the objective Selecting the specific secotor for research Collection of data Analysis of data Findings Conclusion & Recommendation Completion of the research

This structured format helps to make analysis in a better manageable way. All the above mentioned steps were undertaken to perform the calculations and to prepare the Final report. A brief description of all the above stages is given below: Selection of specified sector: For the preparation of this report the sectors or area of research have been determined at first. As the report serves the purpose of Corporate Governance disclosure, I have selected the banking sector. A set of banks has been taken as the sample for exploring the research.

1.6.3 Collections of Data: It was an extensive research and hence much importance has been given on collection of data & analysis of data. The primary method of data collection was preparation of questionnaire and direct interview with the managers of different banks and collection of information on the disclosure of Corporate Governance and the related matters. A great source of information was the DSE Training Academy Programs held on a regular basis on Corporate Governance & related disclosure, Accountability in Accounts and Compliance of

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Listing Regulations, Role of Company Secretary in Compliance with Corporate Governance & extent of Compliance of Corporate Governance Guidelines by Listed Companies. The annual reports of different banks were collected from the Dhaka Stock Exchange. Then related literatures were collected from the secondary sources. All the related books, magazines were thoroughly reviewed to grab all the related information. The news paper that were especially used were The Financial Express, Banik Barta, The daily star. Moreover a great deal of information of primary source was the teachers, clients of the banks, shareholders of different companies as well as students of different institutions specially students from business background. 1.6.4 Analysis of Data: Then the research was developed based on some hypotheses. The hypotheses were developed firstly to find the correlation between Corporate Governance and Firms performance and then again hypotheses were developed again to find the rate of Corporate Governance disclosures. Both dependent variables and independent variables were developed and then the variables were used to test the hypotheses. Statistics was used to make perform the test. And finally the all these tests were used to draw the conclusion & give the research result. 1.6.5 Findings: From the analysis findings were highlighted on the Corporate Governance and the performance of the banks in Bangladesh.

1.6.6 Giving Recommendations: The work finally seeks to recommend the best practices for the banks and then shows how it might be beneficial for them. The recommendations are given mainly on the view of the different Corporate Governance Personnel, regulatory bodies (i.e. SEC, DSE, CSE etc) and also from the enlightened society. Last but not the least a powerful group of stakeholders were also given significant consideration for the preparation of the report.

1.6.7 Drawing Conclusions: From the summarized results the conclusions are drawn regarding the Corporate Governance and firm performance and all significant aspects and issues were properly resolved.

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2.1 Corporate governance:

Different authors view the meaning of corporate governance differently. For example, one school of thought describes corporate governance as a system by which companies are directed and controlled (Cadbury and Greenbury Report, CFACG 1992); Another school views corporate governance as structures and processes for decision making, accountability, control and behavior at the governing body (Public accounts and Estimates Committee, 2002); to others corporate governance is about finding ways to ensure effective decision making (Pound 1995). But it must be kept in our mind that the fundamental concern of corporate governance is to ensure the conditions whereby a firms directors and mangers are held accountable, ensure better and effective protection to all stakeholders. The World Bank argues that the framework of corporate governance should be based on four pillars of Responsibility, Accountability, Fairness and Transparency (RAFT).

However, Kocourek (2003) believes that to counter the accounting, leadership, and governance scandals, organizations are rushing to institutionalize corporate governance, which may be even be counterproductive. The drive to more tightly regulate the membership and functions of corporate boards is already encouraging companies to view governance as a legal challenge rather than a way to improve performance. By reducing the critically important issue of corporate governance to what amounts to boxchecking exercise, corporate directors and senior executives are addressing the symptoms, not the root cause, of the governance crisis. Kocourek states that governance begins at home inside the boardroom, among the directors. It is embedded in how, when, and why they gather, interact, and work with one another and with management in other words, the soft stuff. But qualitative reforms to the behaviors, relationships, and objectives of the directors and CEO are meaningless unless they are subject to the hard mechanisms of performance criteria, processes, and measurement. According to Kocourek, this combination of soft and hard solutions can turn corporate governance from vague concept into a means to deliver organizational resilience, robustness, and continuously improved performance.

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2.2 WHAT DOES GOOD GOVERNANCE INVOLVE?

The Board Members are qualified for their positions, have a clear understanding of their role in corporate governance and are not subject to undue influence from management or outside concerns The Board must play a leadership role in approving the objectives, strategy and business plans of the bank, monitoring the performance of management and ensuring that the internal control and risk management systems of the banks are effective. The strategy, vision, missions, goals and the values should be communicated throughout the organization. The Board must also make sure that the Bank conducts its affairs with integrity and in accordance with high ethical standards. The Board is part of the system of checks and balances that ensure that neither large shareholders nor management abuse their power and that decisions are taken with the Banks best interests in mind. If the Board does not play its full part, a vacuum in leadership will be created. This vacuum may be filled by the shareholders becoming directly involved in running the Banks affairs or by the Executive Management acting more or less in isolation. In either case, the Board of Directors is bypassed and checks and balances are lost. The day-to-day running of Banks should be left in the hands of the Management but the Board should set and enforce clear lines of responsibility and accountability throughout the organization. The Board must also ensure that there is appropriate oversight by Senior Management. The Directors should have fair understanding of the banking business, the nature of its risks and its strategic direction. It should be clear that ultimate responsibility for ensuring that risks are properly identified monitored and controlled lies in the Boardroom. There is considerable importance attached to having an adequate representation of nonexecutive and independent directors on the Board and a clear separation of the position of Board Chairman and Chief Executive Officer. Directors should ensure individually and collectively that potential conflicts of interest are avoided or, at least, managed in ways that do not compromise the interests of the company.

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 Rigorous and independent internal and external audit arrangements are at the heart of corporate Governance debate. The work conducted by internal and external auditors in performing an important control function should be effectively utilized by the Board in discharging its oversight function. Strong emphasis should be placed on regular, timely, comprehensive, meaningful and reliable financial disclosures of affairs. This disclosure should specify the following information: Board structure (size, membership, qualifications and committees); Senior management structure (responsibilities, reporting lines, qualifications and experience); Basic organizational structure (line of business structure, legal entity structure); Information about the incentive structure of the Bank (remuneration policies, executive compensation, bonuses, stock options); Nature and extent of transactions with affiliates and related parties.

2.3 OBJCETIVE OF CORPORATE GOVERNANCE:

There is a global consensus about the objective of good corporate governance: maximizing long term shareholder value. Since shareholders are residual claimants, this objective follows from a premise that, in well performing capital and financial markets, whatever maximizes shareholder value must necessarily maximize corporate prosperity, and best satisfy the claims of creditors, employees, shareholders, and the State. Since the concept of government controlling the economy is gradually eroding, it has made the market a decisive factor in settling economic issues. This has also coincided with the thrust given to globalization because of the setting up of the WTO and every member of the WTO trying to bring down the tariff barriers.

CG represents the value framework, the ethical framework and the moral framework under which business decisions are taken. In other words, when investments take place across national borders, the investors want to be sure that not only is their capital handled effectively and adds to the creation of wealth, but the business decisions are also taken in a manner which is not illegal or involving moral hazard.

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Corporate governance therefore calls for three factors: 1. Transparency in decision-making; 2. Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and; 3. The accountability is for the safeguarding the interests of the stakeholders and the investors in the organization.

Over the last few years different country groups have been establishing their own common set of benchmarks for corporate governances, for instance, the OECD Council called upon the OECD to develop a set of CG standards and guidelines and published in May 1999 a common set of guiding principles on corporate governance for all OECD member countries.

To institutionalize CG practice, OECD has introduced following principles:

Rights of shareholders

1.Recognition of basic shareholder rights 2. Shareholders have the right to participate in decisions concerning fundamental corporate changes 3. Voting rights of shareholders 4. Disclosure of disproportionate voting rights of certain shareholders to obtain a degree of control 5. Markets for corporate control should be allowed to function 6. Shareholders should consider the costs and benefits of exercising their voting rights

Equitable treatment of shareholders Role of the Stakeholders

1. All shareholders of the same class should be treated equally 2. Insider trading and abusive self-dealing should be prohibited 3. Board members and managers should disclose material interests Assure that rights of stakeholders are protected by law 2. Stakeholders should have the opportunity to obtain effectiveness redress for violation of their rights 3. Permit performance-enhancing mechanisms for stakeholder participation 4. Stakeholders should have access to relevant information in the corporate

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governance process Disclosure and transparency 1. Scope of material information to be disclosed 2. Information should be prepared in accordance with high accounting standards 3. Annual audit should be conducted by an independent auditor 4. Fair, timely and cost-effective means of disseminating information Responsibilities of the board 1.Board members should act on the best interest of the company with due diligence and care 2. The board should treat all shareholders fairly 3. The board should ensure compliance with the law and take account the interest of stakeholders. 4. Definition of key functions of the board 5. The board should exercise objective judgment independent from management 6. Board members should have access to accurate, relevant & timely information. Source: OECD Principles of Corporate Governance (1999).

2.4 CORPORATE GOVERNANCE: THE CONCEPTUAL FRAMEWORK:

The essence of corporate governance is about how owners (principals) of firms can ensure that the firms assets (and the returns generated by those assets) are used efficiently and in their best interests by managers (agents) delegated with powers to operate those assets. This problem is intrinsic to any arrangement where owners themselves do not undertake the management functions directly. The corporate governance problem arises due to the existence of separation of ownership and control rights, informational asymmetry, and incomplete or state-contingent contracts (Lin, 2001:5). In such a regime, the prerequisite for effective corporate governance involves: Alignment of risk-bearing and control (e.g. rights of shareholders in appointing management, approval of strategy and cash-flow); Monitoring and oversight of management and firms performance based on transparency, regular and reliable disclosures, and internal checks

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and balances; and Incentives (managerial incentives to enhance effort and align interests of management with those of owners). It is generally accepted that the governance problem entails a tension between accountability and managerial initiative i.e. between the need for directors or management to be accountable to shareholders on one hand and the need for management to have the discretion to maximize profits. An apt analogy (with apologies to the Cadbury Report) is in terms of unleashing the tiger (management) into the jungle of the market to seek and exploit opportunities while ensuring that the tiger brings home the meat without consuming it all himself, or that it does not eat up the owner in the process (Lin, 2001:6). To address the corporate governance problem in practice, owners (and stakeholders) need to devise a governance system comprising effective mechanisms of control, oversight and monitoring over management and of incentives for management to behave in the owners interest. Such corporate governance system can be perceived as institutional attempts to create a structured dialogue between companies and their shareholders and stakeholders with the purpose of paving the way for understanding the companys strategic and operational goals, including critical success factors for achieving those goals (Parum, 2005).

2.5 CORPORATE GOVERNANCE SCENERIO IN BANGLADESH:

Corporate governance practices in Bangladesh are quite absent in most companies and organizations. In fact, Bangladesh has lagged behind its neighbors and the global economy in corporate governance (Gillibrand, 2004). One reason for this absence of Corporate Governance is that most companies are family oriented. Moreover, motivation to disclose information and improve governance practices by companies is felt negatively. There is neither any value judgment nor any consequences for corporate governance practices. The current system in Bangladesh does not provide sufficient legal, institutional and economic motivation for stakeholders to encourage and enforce corporate governance practices; hence failure in most of the constituents of corporate governance is witness in Bangladesh. Poor bankruptcy laws, no push from the international investor community, limited or no disclosure regarding related party transactions, weak regulatory system, general meeting scenario, lack of shareholder active participations are some of the individual constituents that

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have been identified by Mamtaz Uddin Ahmed and Mohammad Abu Yusuf in their research study Corporate Governance : Bangladesh Perspective (Mamtaz and Yusuf, 2005).

2.6 NEED FOR CORPORATE GOVERNANCE IN BANGLADESH:

The history of corporate governance in Bangladesh is not very old. About 60 years back from now, the land, which is now Bangladesh, had a few bodies incorporated under the Companies Act. At the time of independence of Bangladesh, many industries and business houses owned by non-locals were abandoned and the government of Bangladesh took possession of these industries by establishing corporate bodies like BCIC (Bangladesh Chemical Industries Corporation) and BSEC (Bangladesh Steel and Engineering Corporation). During 80s, Bangladesh Govt. took privatization policy and since then, private sectors have a substantial impact on the pace and pattern of economic growth (ICAB, 2003:6-7). In Bangladesh, though no remarkable corporate scandals emerged to feel the necessity of corporate governance, yet the stock market crush of 1996 is worth remembering.

Above scenarios suggest that for effective CG in Bangladesh; it requires a clear understanding of the respective roles of the board and of senior management and their relationships with others in the corporate structure. Removing these weaknesses requires appropriate reform and implementation thereof are highly necessary in Bangladesh. Following policy is intended to clarify these relationships and responsibilities and to promote effective CG: Disclosure of information should be the pre-requisite for the shareholders or for the capital market to act against errant managements. The regulator can enhance the scope, frequency, quality and reliability of the information that is disclosed. Regulatory measures that promote an efficient market for corporate control would create an effective threat to some classes of dominant shareholders as discussed earlier. Reforms in bankruptcy and related laws would bring the disciplining power of the debt holders to bear upon recalcitrant managements. Large blocks of shares in corporate Bangladesh are held by public sector financial institutions who have proved to be passive spectators. These shareholdings could be

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transferred to other investors who could exercise more effective discipline on the company managements. Alternatively, these institutions could be restructured and privatized to make them more vigilant guardians of the wealth that they control.

2.7 CODE OF CORPORTATE GOVERNANCE IN BANGLADESH:

Since the early 1990s, CG has been receiving increasing attention from regulatory bodies and practitioners worldwide. Corporate sectors are still in its initial stage; nevertheless awareness of the importance of CG is growing. Bangladesh's small size and lack of natural resources have necessitated an open trade policy. Bangladesh also has a liberal policy towards foreign direct investment (FDI). However, when compared to those of the India, Sri Lanka, Pakistan, Thailand and Malaysia, CG in practice and philosophy have up till now remained relatively underdeveloped in Bangladesh. Further, there appears to be a lack of either market or structural governance mechanisms to discipline errant managers. To govern the corporate environment in

In Bangladesh, the following legal measures are in practice: Securities and Exchange Ordinance 1969 Bangladesh Bank Order 1972 Bank Companies Act 1991 Financial Institutions Act 1993 Securities and Exchange Commission Act 1993 Companies Act 1994 Bankruptcy Act 1997 However, to institutionalize the practice of CG in Bangladesh, first initiative was undertaken by the Securities and Exchange Commission (SEC). SEC issued a notification on Corporate Governance Guidelines (CG Guidelines) for the publicly listed companies of Bangladesh under the power vested on the Commission by Section 2CC of the Securities and Exchange Ordinance, 1969. The CG Guidelines were issued on a comply or explain basis, providing some breathing space for the companies to implement on the basis of their capabilities. Nevertheless, the overall framework for investor protection and CG has a number of important weaknesses that have

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hindered the capital market development. Most of the companies depend on the banks as their major source of financing. Capital market in Bangladesh is still at an emerging stage with market capitalization amounting to only 6.5% of GDP with low investor confidence on corporate governance and financial disclosure practices in many companies listed in the stock exchanges.1 The neighboring countries are well ahead vis--vis Bangladesh in terms of depth of capital market. For example, in India, Pakistan and Sri Lanka, the market capitalization is 56%, 30% and 18% of their GDP respectively. CG practices in Bangladesh are gradually being introduced in most companies and organizations. 66.7 percent of the companies have adopted CG and 43.3 percent have compliance policy with national or international benchmarks. A considerable percentage of the top management does not fully understand the concept of CG. However, Bangladesh has lagged behind its neighbors and the global economy in CG. One reason for this slow progress in adopting CG is that most companies are family oriented. Such concentrated ownership structures affects the effectiveness of corporate governance mechanisms, which weaknesses cannot be rectified by laws and regulations. Motivation to disclose information and improve governance practices by companies is also felt negatively. There is neither any value judgment nor any consequences for CG practices. The current system in Bangladesh does not provide sufficient legal, institutional and economic motivation for stakeholders to encourage and enforce CG practices.

2.8 THE CONCEPT OF CORPORATE GOVERNANCE AND FINANCIAL INSTITUTIONS:

The traditional definition of corporate governance refers to relations between a company's senior management, its board of directors, its shareholders and other stakeholders, such as employees and their representatives. It also determines the structure used to define a company's objectives, as well as the means of achieving them and of monitoring the results obtained.

Due to the nature of their activities and interdependencies within the financial system, the bankruptcy of a financial institution, particularly a bank, can cause a domino effect, leading to the bankruptcy of other financial institutions. This can lead to an immediate contraction of credit and the start of an economic crisis due to lack of financing, as the recent financial crisis demonstrated. This systemic risk led governments to shore up the financial sector with public

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funding. As a result, taxpayers are inevitably stakeholders in the running of financial institutions, with the goal of financial stability and long-term economic growth.

Furthermore, the interests of financial institutions' creditors (depositors, life insurance policy holders or beneficiaries of pension schemes and, to a certain extent, employees) are potentially at odds with those of their shareholders. Shareholders benefit from a rise in the share price and maximization of profits in the short term and are potentially less interested in too low a level of risk. For their part, depositors and other creditors are focused only on a financial institution's ability to repay their deposits and other mature debts, and thus on its long-term viability. As a result, depositors can be expected to favor a very low level of risk.

Largely as a result of the particularities relating to the nature of their activities, most financial institutions are strictly regulated and supervised. For the same reasons, financial institutions' internal governance cannot be reduced to a simple problem of conflicts of interest between shareholders and the management. Consequently, the rules of corporate governance within financial institutions must be adapted to take account of the specific nature of these companies. In particular, the supervisory authorities, whose mission to maintain financial stability coincides with the interests of depositors and other creditors to control risk-taking by the financial sector, have an important role to play in shaping best practices for governance in financial institutions.

Various legal instruments and recommendations at different level applicable to financial institutions and in particular banks, already take account of the particularities of financial institutions and the role of supervisory authorities.

However, the existing rules and recommendations are based first and foremost on supervisory considerations and focus on the existence of adequate internal control, risk management, audit and compliance structures within financial institutions. They did not prevent excessive risk taking by financial institutions, as the recent financial crisis demonstrated.

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2.9 DEFICIENCIES AND WEAKNESSES IN CORPORATE GOVERNANCE WITHIN FINANCIAL INSTITUTIONS:

An effective corporate governance system, achieved through control mechanisms and checks, should lead to the main stakeholders in financial institutions (boards of directors, shareholders, senior management, etc.) assuming a higher degree of responsibility. Conversely, the financial crisis and its serious economic and social consequences have led to a significant loss of confidence in financial institutions, particularly with regard to the following. 2.9.1 The question of conflicts of interest: The questions arisen by the issue of conflicts of interest and management of such conflicts are nothing new. Indeed, the issue arises in every organization or company. Nonetheless, given the systemic risk, the volume of transactions, the diversity of financial services provided and the complex structure of large financial groups, the issue is particularly pressing in the case of financial institutions. Potential conflicts of interest can arise in a variety of situations (for example, exercising incompatible roles or activities, such as providing advice on investments while managing an investment fund or managing for one's own account, incompatibility of mandates held on behalf of different clients/financial institutions). This problem can also arise between a financial institution and its shareholders/investors, particularly where there is cross shareholding or business links between an institutional investor (for example through the parent company) and a financial institution in which it is investing.

2.9.2 The problem of effective implementation by financial institutions of corporate governance principles: The general consensus is that the existing principles of corporate governance, namely the OECD principles, the recommendations of the Basel Committee, and Community legislation14, already cover to a certain extent the problems highlighted by the financial crisis. In spite of this, the financial crisis revealed the lack of genuine effectiveness of corporate governance principles in the financial services sector, particularly with regard to banks.

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Several theories have been put forward to explain this situation: The existing principles are too broad in scope and are not sufficiently precise. As a result, they gave financial institutions too much scope for interpretation. Furthermore, they proved difficult to put into practice, in most cases leading to a purely formal application (i.e., a box-ticking exercise), with no real qualitative assessment. The lack of a clear allocation of roles and responsibilities with regard to implementing the principles, within both the financial institution and the supervisory authority. The non-binding nature of corporate enterprise principles: the fact that there was no legal obligation to comply with recommendations by international organizations or the provisions of a corporate governance code, the problem of the neglect of corporate governance by supervisory authorities, the weakness of relevant checks, and the absence of deterrent penalties all contributed to the lack of effective implementation by financial institutions of corporate governance principles.

2.9.3 Boards of directors: The financial crisis clearly shows that financial institutions' boards of directors did not fulfill their key role as a principal decision-making body. Consequently, boards of directors were unable to exercise effective control over senior management and to challenge the measures and strategic guidelines that were submitted to them for approval. The failure of the board to identify, understand and ultimately control the risks to which their financial institutions were exposed is at the heart of the origins of the crisis. Several reasons or factors contributed to this failure: Members of boards of directors, in particular non-executive directors, devoted neither sufficient resources nor time to the fulfillment of their duties. Furthermore, several studies have clearly demonstrated that, faced with a chief executive officer who is omnipresent and in some cases authoritarian, non-executive directors felt unable to raise objections to, or even question, the proposed guidelines or conclusions due to a lack of technical expertise and/or confidence.

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 Boards of directors, in particular the chairman, did not carry out a serious performance appraisal either of their individual members or of the board of directors as a whole. Boards of directors were unable or unwilling to ensure that the risk management framework and risk appetite of their financial institutions were appropriate. To provide sufficient information upstream to their supervisory authorities. Furthermore, even where effective dialogue existed, corporate governance issues were rarely on the agenda. . 2.9.4 Risk management: Risk management is one of the key aspects of corporate governance, particularly in the case of financial institutions. Several large financial institutions no longer exist precisely because they neglected the basic rules of risk management and control. Financial institutions have too often failed to take a holistic approach to risk management. The main failures and shortcomings can be summarized as follows: A lack of understanding of the risks on the part of those involved in the risk management chain and insufficient training for those employees responsible for distributing risk products; A lack of authority on the part of the risk management function. Financial institutions have not always granted their risk management function sufficient powers and authority to be able to curb the activities of risk-takers and traders; Lack of expertise or insufficiently wide-ranging experience in risk management. Too often, the expertise considered necessary for the risk management function was limited to those categories of risk considered priorities and did not cover the entire range of risks to be monitored; A lack of real-time information on risks. To allow those involved to react quickly to changes in risk exposures, clear and correct information on risk should be available rapidly at all relevant levels of the financial institution. Unfortunately, the procedures for getting information to the appropriate level have not always functioned. Furthermore, it is crucial to upgrade IT tools for risk management, including in highly sophisticated

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financial institutions, as they are still too disparate to allow risks to be consolidated rapidly, while data are insufficiently consistent to allow the evolution of group exposures to be followed up effectively in real-time. This concerns not only the most complex financial products but all types of risk. 2.9.5 The role of shareholders: The financial crisis has shown that confidence in the model of the shareholder-owner who contributes to the company's long-term viability has been severely shaken, to say the least. The growing importance of financial markets in the economy, due in particular to the multiplication of sources of financing/capital injections, has created new categories of shareholders. Such shareholders sometimes seem to show little interest in the long-term governance objectives of the businesses/financial institutions in which they invest and may be responsible for encouraging excessive risk-taking in view of their relatively short, or even very short (quarterly or halfyearly) investment horizons. In this respect, the sought-after alignment of directors' interests with those of these new categories of shareholder has amplified risk-taking and, in many cases, contributed to excessive remuneration for directors, based on the short-term share value of the company/financial institution as the only performance criterion. Several factors can help to explain the disinterest or passivity of shareholders with regard to their financial institutions: Certain profitability models, based on possession of portfolios of different shares, lead to the abstraction, or even disappearance, of the concept of ownership normally associated with holding shares. The costs which institutional investors would face if they wanted to actively engage in governance of the financial institution can dissuade them, particularly if their participation is minimal. Conflicts of interest the lack of effective rights allowing shareholders to exercise control, the maintenance of certain obstacles to the exercise of cross-border voting rights, uncertainty over certain legal concepts and financial institutions' disclosure to shareholders of information which is too complicated and unreadable, in particular with regard to risk, could all play a part, to varying degrees, in dissuading investors from playing an active role in the financial institutions in which they have invested.

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2.9.6 The role of supervisory authorities: Generally speaking, the recent financial crisis revealed the limits of the existing supervision system: in spite of the availability of certain tools enabling them to intervene in the internal governance of financial institutions, not all supervisory authorities, either at national or Furthermore, the supervisory authorities also failed to establish best practices for corporate governance in financial institutions. In many cases, supervisory authorities did not ensure that financial institutions' risk management systems and internal organization were adapted to changes in their business model and financial innovation. Supervisory authorities also sometimes failed to adequately enforce strict eligibility criteria for members of boards of directors of financial institutions.

2.10 Corporate Governance in Financial Enterprises in Bangladesh:

As in many developing countries, banks play a vital role in Bangladesh economy, as the dominant financier for the industrial and commercial activities. Since the independence in 1971, the government until 1982, when the ownership reform measures started in the financial sector, had carried out the regulation and ownership of all the financial institutions. During the reform period, two out of six National Commercial Banks (NCBs) were denationalized and private commercial banks were allowed to operate in the country. In 2003, out of the 49 banks operating in Bangladesh, 9 belong to the public sector, 30 are local private and 10 are foreign owned banks (Bangladesh Bank, 2003).

Despite the expansion, the operational efficiency of the banking institutions has continued to be dismal (Sayeed, 2002; Raquib, 1999). The sector witnessed decreasing profitability, increasing non-performing assets, provision and capital shortfalls, eroded credit discipline, rampant corruption patronized by political quarters, low recovery rate, inferior asset quality, managerial weaknesses, excessive interference from government and owners, weak regulatory and supervisory role etc (Hassan, 1994; USAID, 1995).

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Internal control system along with accounting and audit qualities are believed to have been substandard (World Bank, 1998; Raquib, 1999; CPD, 2001). Many of the problems have been attributed to lack of sound corporate governance among the banks. The reports by the Banking Reform Commission (1999) and BEI (2003) raises serious concerns on the banking sector and criticize the quality of governance that prevails in the banking sector in Bangladesh, which provides an impetus to explore the governance issues in detail in this paper. However, there are some additional reasons that are unique to the financial sector which necessitate attention to this issue. These are: The rapid changes brought about by globalization, deregulation and technological advances are increasing the risks in banking systems. The failure of a bank affects not only its own stakeholders, but may have a systemic impact on the stability of other banks. All the more reason therefore to try to ensure that banks are properly managed. Private sector banks are motivated by profit maximization and their own financial stakes are limited and relatively low and they are therefore prone to excessive risk taking with the depositors money. Strong corporate governance is, therefore, required to discourage them from following this course.

2.11 Corporate Governance - Best Practices and Guidelines

Public Limited Company Financial Institutions: Given the important financial intermediation role of banks in an economy, their high degree of sensitivity to potential difficulties arising from ineffective corporate governance and the need to safeguard depositors funds, corporate governance for banking organizations is of great importance to the international financial system and merits targeted supervisory guidance. The Basel Committee on Banking Supervision published guidance in 1999 to assist banking supervisors in promoting the adoption of sound corporate governance practices by banking organizations in their countries. This guidance drew from principles of corporate governance that were published earlier that year by the Organization for Economic Co-operation and Development (OECD) with the purpose of assisting governments in their efforts to evaluate and

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improve their frameworks for corporate governance and to provide guidance for financial market regulators and participants in financial markets.

Banking companies pose unique corporate governance attention as they differ greatly with other types of firms in terms of broader extent of claimants on the banks assets and funds. A group of entrepreneurs and/or executives could set up a banking business by putting very little equity from their own pocket as the nature of business itself guarantees flow of enormous amount of funds in the form of deposits. The general approach to corporate governance argue in favor of the shareholders rights only, as managers/executives may not always work in the best interest of the shareholders (Henderson, 1986; Jensen and Meckling, 1976; Fama and Jensen, 1983). But the shareholders actually account for a very tiny portion of the banks assets and funds. Rather almost every bit of banks investments are financed by the depositors funds. In case of losses or failures it will be depositors savings that the banks would lose. Such risks demand priority in protection of depositors that ushers in a broader view of corporate governance that suggests the interest and benefits of the suppliers of funds for a firm should be upheld (Shliefer and Vishny, 1997; Vives, 2000; Oman, 2001). Macey and OHara (2001) also argue that a broader view of corporate governance should be adopted in the case of banking institutions, arguing that because of the peculiar contractual form of banking, corporate governance mechanisms for banks should encapsulate depositors as well as share holders. Arun and Turner (2003) supported the need for the broader approach to corporate governance for banking institutions and also argue for government intervention to restrain the behavior of bank management. In many countries, deposit insurance is used as a mechanism to safeguard the banking system as well as the depositors. However, Macey and OHara (2001) argues that in many instances, the presence of deposit insurance mechanism by the governments may encourage many bank insiders to embark upon self-benefiting risky deals taking the advantage of insurance protection. The self-dealing activities by the bank insiders are very dangerous to the performance and survival of the banks as scores of previous bank failures have been caused by risky self-dealing by the bank insiders (Jackson and Symons, 1999; Clarke, 1988). The presence of heavy liquid assets and potential lack of depositors interest to actively

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control and monitor banks risky decisions as a result of the insurance guarantees simplifies and aggravates the sharking in the banking firms.

Banks in developing countries are faced with high risk of sharking as a result of heavy government ownership, lack of prudential regulation, weak legal protection and presence of special interest groups ((BCBS, 1999; Arun and Turner, 2003). The independent regulatory agencies are important in developing countries to act against the frequent collusion among government, businesses and bankers to serve special interest groups (Shleifer and Vishny, 1997; Arun and Turner, 2002). However, there is an argument that active role by regulators may cause problems as well, as regulators may not have a convincing/sufficient motivation to monitor the banks as they do not have much at stake in case of bank failures (Macey and Garrett, 1988). Recently, the financial markets of developing economies have experienced rapid changes due to the growth of wider range of financial products. As a result of this, banks have been involved with high risk activities such as trading in financial markets and different off-balance sheet activities more than ever before (Greuning and Bratanovic, 2003), which necessitates an added emphasis on quality of corporate governance of banks in developing economies.

Asian Roundtable on Corporate Governance (ARCG) Task force developed the Policy Brief on Corporate Governance of Banks in Asia (June 2006). The main issues and priorities for reforms in CG of banks in Asia that were identified are: The responsibility of individual board members fiduciary duties of bank board members, need of skills, personal abilities, training programs on integrity and professionalism. The roles/functions of the board guiding, approving and overseeing strategies/policies rather than being immersed in day-to-day operations. Creating clear accountability lines and internal control systems. Sufficient flows of information and managerial support. The composition of the board banks are more encouraged to have independent directors than other firms. Separation between Chairman and CEO. The committees of the board audit committee, the Risk Management Committee, The Governance Committee with combined responsibilities of Nomination, remuneration, succession planning, training, performance evaluation, etc.

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 Preventing abusive related party transactions inspection of the existing firewall. Creation of specialized committee to monitor and approve relatedpart transaction. Publicly disclose such transaction. Bank holding companies and groups of companies holding banks a banks parent company should not impede the full exercise of the CG of the bank within the banking group. Disclosure effort on convergence into international standards on accounting, etc. should be encouraged. Banks autonomy in relation to the state state as owner should respect the legal corporate structures of State Owned Commercial Banks (SOCB). Banks monitoring of the CG structure of its corporate borrowers Extent to which banks should assess/monitor CG of their corporate borrowers or seek to improve it.

Public Limited Company Non Financial Institutions In practice, corporate governance and monitoring mechanism recently focused on matters like the composition of the Board of Directors, the duties and responsibilities of the executive directors, regular monitoring by shareholders, voting rights of shareholders and detailed disclosure of company information that are material for decision making by interested parties. The guideline that good corporate governance frameworks project and facilitate is the exercise of shareholders rights. Shareholders should have right to participate in, and to be sufficiently informed on, decisions concerning fundamental corporate changes. The equitable treatment of all shareholders, including minority and foreign shareholders should be ensured by corporate governance also. Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal and unethical practices to the board and their rights should not be compromised for doing this. Another important responsibility of corporate governance is time and accurate disclosure of all matters regarding the corporation. Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial disclosures. Board members should act on fully informed basis, in good faith, with due diligence and care, and in the best interest of the organization and shareholders.

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The board of Directors is the central entity in a functioning corporate governance system, since it is the governing body of any organization. The board is accountable to the shareholders and/or stakeholders of the organization. To meet its organizational objectives the board must provide strategic policy and directions to the management, but should not involved in day-to-day operational decisions. Management is accountable to the board, and therefore information systems that provide relevant, transparent, and material information to the board are imperative. (The Code of Corporate Governance For Bangladesh, Mar 2004, BEI)

The board size should be optimal with diverse expertise and experience to ensure a well functioning and involved board. BEI guidelines states that ideally internationally successful corporate boards have memberships of 7 to 15 directors. BEI also stresses the need for mandatory retirement by rotation of 20% of the board; and the vacancies to be filled at the AGM. SEC in the their notification dated 20th March 2006 in order to enhance corporate governance in the interest of investors and the capital market, imposes the some further conditions to the companies listed with any stock exchange in Bangladesh. These conditions are imposed on comply or explain basis. The companies listed with any stock exchange in Bangladesh should comply with these conditions or shall explain the reasons for non-compliance. Board size propose by SEC is not be less than 5 (five) and not more than 20 (twenty). Cadbury report, Sarbanes-Oxely Act, BEI, SEC and other major works on CG also emphasizes on the importance of independent directors in the board. All companies should encourage effective representation of independent directors on their Board of Directors so that the Board, as a group, includes core competencies considered relevant in the context of each company. For this purpose, the companies should comply with at least one tenth (1/10) of the total number of the companys board of directors, subject to a minimum of one, should be independent directors. According to SEC Independent Director means a director who does not hold any share in the company or who holds less than one percent (1%) shares of the total paid-up shares of the company, who is not connected with the companys promoters or directors or shareholder who holds one percent (1%) or more than one percent (1%) shares of the total paid-up shares of the company on the basis of family relationship; who does not have any other relationship, whether pecuniary or otherwise, with the company or its subsidiary/associated companies, who is not a

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member, director or officer of any stock exchange, and who is not a shareholder, director or officer of any member of stock exchange or an intermediary of the capital market. The independent director(s) should be appointed by the elected directors.

Few other guidelines and best practices on corporate governance which receive considerable emphasize are: The position of the Chairman of the Board and CEO should be filled by different individuals. A company should appoint Chief Financial Officer (CFO), a Head of Internal audit and a Company Secretary. A company should have an audit committee as a subcommittee of the board. Directors, in the Annual Report, should give representation of the true and fairness of accounts, compliance with accounting standard and proper internal control.

2.12

Challenges

ahead

to

the

Banking

sectors

for

implementation of corporate governance:

The most pressing challenges facing the banking sector arise mainly from the adoption of Basle II Accord and consequential management of risks. Early adoption of the Basle II Accord presents an unparalleled opportunity for banks. Those that embrace the new standard will find they enjoy a distinct competitive and high-performance advantage in international markets. Idle capital is freed up, ready to be put to best use. The main challenges ahead are: Induction and retention of highly skilled human resources and keeping their skills in hone will be the number one priority for all of us the regulators, the shareholders, the educational institutions and the Chief Executive Officers. In this respect, those of you who are aspiring to join the financial sector have to equip yourselves with the knowledge, skills and attitudes required for professionalism. The difference between the successful and not so successful graduates will lie in the acquisition for life long and continuous learning. Those who keep up with the times and strive to improve themselves throughout their career, through learning, will have bright and promising future. Those who become smug and complacent and adopt short cuts may have immediate gains but will find it hard to survive in competitive financial markets over the long run.

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 The other challenge is that the banks will have to automate and reengineer their business processes, move to E-banking and multi channel delivery modes and use technological solutions to reduce transaction costs providing satisfaction to the customers. The record of the banking system in adoption and diffusion of technology has been mixed so far but greater efforts will have to be made in the future. Credit, market and operational risks should be identified, quantified and mitigated instead of dealing with credit risks only as was the case under Basle I. Strong Internal Rating Systems and Management Information Systems are essential for managing these risks. The increased transparency provided by Basle II means that clients, regulators and investors all will have a clear understanding of the institutions operations. Consumers and commercial clients will benefit from more timely and accurately assessed lending decisions leading to increased customer satisfaction and loyalty in a highly competitive market. The fog created by best guesses has to be replaced by an objective historical track record and reliable data on which future decisions can be made. Regulators will also have access to stronger sets of historical data and transaction trails for detailed examination and policy decisions. Finally, investors will reward banks that capitalize on the advantages afforded by the Accord. Market discipline will have to be strengthened to make governance effective in Banks. Credit ratings, listing on the Stock Exchanges, raising funds through capital markets are some of the mechanisms that can fortify market discipline. Lower capital requirement for lending to good rated borrowers will improve the overall Governance emphasis amongst the corporations. Good internal controls will be established which are essential for capital assessment process. To conclude, good Corporate Governance is something we have to live with and in the financial sector the imperatives are even stronger than the rest of the corporate sector. In Bangladesh, we have made a modest beginning but the challenges ahead are still quite daunting. We have to continue the journey on the path we have chosen i.e. to strengthen the Corporate Governance in our Financial Sector.

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3.0 Analysis & Findings:

The state and nature of corporate governance has been studied under some general headings. For this analysis the financial institutions like banks which are listed in the Stock Exchange have been chosen. The specific aspects of good corporate governance practices that are examined are briefly explained in the following sections. 3.1 Responsibilities of the Board: For the fair operation of the company the members who are in the Board must know what the responsibilities they have in the organization. If the board members are not aware of their actions they will not be able to perform the right job in right time and will not be able to provide proper directions to the management. The result of the questionnaire indicates that most of the respondents strongly agree that those members of the board of their respective organization are very aware of the responsibilities. 3.2 External auditor of the company: It has been found from the results of the questionnaire that in all the organizations, there is the presence of external auditors. This may be the reason of statutory requirement to have the financial statements audited by the qualified independent auditors. The most of the respondents opines that the works of the external auditors are reviewed properly. But the real picture may be different. Most often the external auditors are influenced to give the results desired by the authority. This tendency is seen more in the Private Commercial Banks than that of Nationalized Commercial Banks. It is also opined by the respondents that financial statements made by the company will not be same if made by the independent auditors. The reason may be that the directors and management company will try to maximize its interest and for this they will compromise their independency and integrity.

Internal auditor of the company: Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organizations operations. It helps an organization accomplish its

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objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

This definition recognizes two roles for internal audit: To provide an independent assurance service to the board, audit committee and management, focusing on reviewing the effectiveness of the governance, risk management and control processes that management has put into place. To provide advice to management on governance risks and controls, for example, the controls that will be needed when undertaking new business ventures. The most of the respondents informs that they have internal auditors in the organization and the internal auditors works are routinely reviewed. The internal auditors of these banks help the external auditors and the audit committee providing necessary information focusing on reviewing the effectiveness of the governance, risk management and the control process that management has put in place. 3.3 Shareholder Rights and Disclosure of Information: On the issue of shareholders rights and disclosure, the study investigated several key issues: i) the practice of voting in the Annual General Meeting of the companies, ii) disclosure of information in terms of knowing the agenda, iii) lead time to analyze information, iv) information on equity of major shareholders, v) practice of nomination and disclosure of director candidates in the meeting, vi) rights of the minority shareholders in nominating candidates, and vii) rights of the shareholders in terms of opposing candidates nominated by the management. To understand shareholders rights the study used several proxy variables like a) length of the meeting, and b) attendance in the meetings. Duration of the meetings indicates whether shareholders are given opportunities to debate on issues related to their interest or not. Similarly, higher attendance of the meeting indicates presence of a pluralistic environment in the decision making process. It was found that duration of the AGMs in these companies were mostly between 2-3 hours. For these companies number of shareholders attended the last AGM are between 300 and 6000.

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It is found from the questionnaire analysis that the companies have own disclosure policies about which type of information will be disclosed and which one is not. It is also found that the shareholders are provided adequate information in the agenda of shareholders meeting. It is also found that the all the PCBs disclose quarterly, semi-annual financial statements to make the stakeholders know about the interim performance of the banks. But the NCBS do not disclose the quarterly or semi-annual financial statements to the stakeholders on a routine basis. 3.4 Review of the management performance: For ensuring the better performance of the company, the performance of the management of the company should be reviewed on a regular basis. From the questionnaire analysis it is found that the performance of the banks management is reviewed on a routine basis. It is also found from the discussion that this review is done in more proper way in the private commercial banks that that of the NCBs. 3.5 Participation of independent directors in the board discussion: For ensuring the transparency and fairness the active participation of the independent directors in the board discussion should be ensured. The independent directors will give their opinion while decision regarding anything is being made by the executive directors in the board meeting. From the analysis of the questionnaire it is found that there is no active participation of the independent directors in the boards discussion. For this reason, the executive directors get the scope to adopt unfair means in case of decision making. They try to maximize their own interest ignoring the interest of different stakeholders. 3.6 Right way to go in terms of corporate governance for a company: It was wanted to know from the respondents about the right way to ensure the good governance for a company. The respondents replay that good business management with established long term strategies plan and successful implementation of those plans and fair view company reports and disclosure to focus on investors could be right way to ensure the good governance for the companies. The respondents argue that the successful implementation of the good governance practice will help the company ensure accountability of the persons who are involved in the strategic decision making of the organization.

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3.7 Ease of participation in voting by shareholders Figure 1 illustrates that in terms of ease of participating in the meetings, shareholders used several options to express their opinion. Most of the shareholders either participate in person or nominate an individual to vote.

3.8 Knowledge on AGM Agenda and Equity of Major Shareholders: It is important that shareholders know the agenda of the meeting well in advance, can discuss their views in the meeting and have knowledge about the equity position of the major shareholders. These are important elements for ensuring good governance at the corporate level to safeguard rights of the smaller investors in the company. Figure 2 shows that except for equity of the major shareholders, this is not of a matter of concern in Bangladesh.

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3.9 NomiNatioN of Directors caNDiDate: Nomination of candidates in the meeting is an important element to ensure transparency in the governing the company. Study result shows that while a majority of the shareholders knew about the Directors candidate prior to the AGM, however, some had no idea about it. This information should have been known to all. A failure implies lack of transparency in the corporate governance. Similarly, only 50% of the shareholders mentioned that minority shareholders could nominate their candidates.

Table: Disclosure and Rights of the Shareholders-nomination of candidates.

3.10 Public disclosures and transparency: Public disclosure in an important element of governance in the corporate world because it builds trust, helps brining new investors and ensures smooth functioning of the capital markets and excels the company growth. It is, therefore, a requirement in our SECs code of conduct.

Figure: Public Disclosure through different modes

Seven different aspects of corporate governance with respect to public disclosure were studied. These are:

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i) ii) iii) iv) v) vi) vii)

Directors selling and/or buying shares of the company, Background of the directors, Remuneration of the directors, Fees paid to consultants, Policies on risk management, Significant changes in the ownership, and Governance structure and policies.

Above figure shows Annual Reports, and Reports to Regulatory Agencies consist the bulk of the disclosure tool for these companies. In other words, companies used box checking method to provide information to the regulatory agencies rather than understanding the essence of public disclosure as a whole. On four of the aspects (stated above), some companies had zero disclosure. The study found that 17% of the companies did not disclose directors selling or buying of shares, 14% did not disclose background or profile of the directors, 14% did not disclose remuneration paid to the directors and 37% did not disclose significant changes in the ownership of the company. These are contrary to the principles adopted in the best practice of CG. 3.11 Transparency and fairness in the organization: It has been opined by the respondents of the questionnaire that if the fairness and transparency could be ensured in the governance of the organizations the performance of the organizations will improve and at the same time, potential investors will be interested to enter in this sector. 3.12 Effectiveness of Board: On this issue, to determine the effectiveness of the board several factors were examined: a) Size of Board and structure b) Presence and effectiveness of the independent directors c) Separation of chairman and CEO d) Performance evaluation of the CEO by the board.

In the SOEs, on an average eight out of nine directors are independent directors, in public limited companies financial and non-financial institutions, board size and number of independent

40

directors were found to be within the statutory requirement stated by SEC. Study found that CEOs and the Chair of the Board are always separate individuals in all cases. 3.13 Role of the Independent Directors: On the issue of active participations of the independent directors in the board meetings, State Owned Enterprises had a better rating than others. This is possibly due to the fact that at SOEs the Board mostly consists of independent directors. In the financial sectors, the study did not find a significant role of independent directors whereas in the nonfinancial public limited enterprises the role of independent directors is intermediate in nature. Factors that were investigated to measure the role of independent directors in the board meeting in i. ii. iii. iv. Altering the agenda set by CEO, Participating discussions, Disapproving the agenda, and Recording opinions in the minutes.

The stated figure shows that in 20% of the cases, cases, independent directors were never active in the meetings of the board. In another 20% of the cases, independent directors rarely intervened to alter the agenda of the meetings and in 40% of the cases; they rarely disapproved the agenda placed in the board. Independent directors rarely participated in the meeting of the private companies.

Figure: Role of Independent Directors in the AGM

( Source: State of Corporate Governance in Bangladesh by Enamul Haque)

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3.14 Committees: Interests of the investors and other stakeholders in the company are safeguarded through various committees. In the best practice guideline, three major committees are recommended. These are: a) Audit committee, b) Remuneration committee and c) Nomination committee. From the result of the questionnaire it is found that all three committees are found to be present in both private commercial banks and Nationalized Commercial Banks (NCBs). But from the discussion with the managers of the some Private commercial banks and NCBs, the committees of the PCBs are more active than that of NCBs. It is also been found that audit committees are more active than other committees in the organizations. The existence of the audit committee in all companies may be in the effect of the statutory requirement for the all the public limited companies to have.

To measure the effectiveness and independence of the audit committee several variables were used. i) presence of expert domain knowledge ii) chairing by the independent directors iii) recording of the minutes iv) approval of remuneration by the shareholders, and v) presence of an audit rule of companies, vi) use of external auditor were investigated, and vii) use of internal auditors by the company,

Above figure shows that in the audit committee, members have requisite knowledge to work in the committee and it is valid for all types of enterprises. It has been observed that in the organization the audit committees are most often chaired by the independent directors. Interestingly, on the remuneration of the members of the audit committee discusses the matter in the AGMs separately in the PCBs while for NCBs generally there is discussion on the remuneration issue. The respondents tell that the remuneration committee reviews the performance of the boards to while fixing remuneration for them.

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What is more interesting is that all non-financial enterprises (listed companies) did not have written audit rules; neither had they regularly reviewed functions of the external and the internal auditors. This shows a weakness in the function of the audit system in nonfinancial enterprises public limited companies.

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4.1 Recommendations:
To implement reforms in CG, with a view to have good corporate governance in Bangladesh, the following proposals/recommendations can be put forward:

4.1.1 Short-term: Code of Corporate Governance and Best Practice Recommendations: The current status is that many Asian countries have adopted governance guidelines and codes of best practice. Like these countries, Bangladesh needs to have a Code of Corporate Governance and Best Practice Recommendations which can be either rule based or principles based. Bangladesh Enterprise Institute (BEI), Corporate Governance Committee of ICAB, and SEC have developed separate Codes for Corporate Governance for Bangladesh. The Government must take initiatives to make these implemented by making necessary changes in the Companies Act.

Implement Competition Policy: An effective competition policy fosters a flexible, dynamic, and competitive private sector that leads to sustain and widely shared economic development. Bangladesh needs to formulate a Competition Policy which will ensure a culture of good corporate governance to thrive. Competition policy helps bring about efficiency, reduce price distortions, lower the risk of poor investment decisions, promote greater accountability and transparency in business decisions, and lead to better corporate governance.

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4.1.2 Medium-term:

Introduction of the legal and regulatory framework to protect the right of minority shareholders: Government should introduce measures, or enhance existing measures, to provide noncontrolling shareholders with adequate protection from exploitation by controlling shareholders.

These measures may include, among other things: (i) strengthening disclosure requirements (particularly of self-dealing/related-party transactions and insider trading) (ii) ensuring that regulators have the capacity to monitor companies for compliance with these requirements and to impose substantial sanctions for wrongdoing; (iii) clarifying and strengthening the fiduciary duty of directors to act in the interest of the company and all of its shareholders; (iv) prohibiting indemnification of directors by companies for breaches of fiduciary duty; and (v) providing shareholders who suffer financial losses with private and collective rights of action against controlling shareholders and directors.

Improve the capacity of the Boards of directors: The directors must improve their participation in strategic planning, monitoring of internal control systems and independent review of transactions involving managers, controlling shareholders and other insiders. There is a need for director training, voluntary codes of conduct, expectations for professional behavior and directors resources and authority vis--vis management. Also it is required to reduce or eliminate loopholes by tightening standards for director independence, by making shadow directors liable for their actions, by increasing sanctions for violations of duties of loyalty and care and by advocating delineation of a core set of related-party transactions (such as company loans to directors and officers) that should be prohibited outright. It is important to facilitate mechanisms to adequately empower the shareholders to seek redress for violations of their rights and to ensure director accountability. The most vital thing that can ensure good CG is high standards of ethical and personal behavior. This can only be ensured if the value system of society imposes this on their people as the norm in every aspect of life. Good CG must become an unshakable social and moral imperative.

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4.1.3 Long-term:

Strengthen the Capacity of the Government to Monitor and Enforce the Implementation of Corporate Governance: The Securities and Exchange Commission (SEC) of Bangladesh need to be strengthened so that it can devise and enforce a code for good CG. The Companies Act has to be amended and updated to have consistency with Bangladesh Accounting Standards (BAS), SEC requirements and the Bank Companies Act. Independent Audit Committee should be made compulsory for all listed companies. Strict implementation of accounting and auditing standards are very important. As the lead regulatory body overseeing corporate accounting and reporting, the SEC has a critical role to ensure that public co mpany boards are properly structured and organized and have the resources to accomplish the objectives of adding value to shareholders, minimize risk of key shareholders and hold management responsible for corporate results. Ruthless monitoring of compliance and severe punishment of transgressors can ensure good CG. But Bangladesh has to wait a lot to ensure enforcement of any corrective measures properly. If the policymakers implement the recommendations suggested above, undoubtedly a good CG environment will prevail in Bangladesh.

Strengthen the Capacity of PublicPrivate partnership: Public- and private -sector institutions should continue to raise awareness among companies, directors, shareholders and other interested parties of the value of good CG. Bangladesh has made little progress in raising awareness of the value of good CG. To Achieving the desired CG framework in Bangladesh requires not only a strong national commitment to CG, but one that is also broad based.

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Government should intensify its efforts to improve the regulation and corporate governance of SOEs: Shortcomings in the governance of SOEs and FIs not only lower returns to the banks shareholders, but, if widespread, it destabilizes the financial system. To restore confidence to both debt and equity markets, policy- makers and regulators need, in addition to ensuring adequate banking laws and regulations and supervision of banks operations, to promote sound corporate-governance practices in the banking sector. Ownership and financial relationships should be disclosed. Self-dealing/related-party transactions should be subject to both banking and corporate-governance restrictions. Bank directors should be able to pass fit and proper tests for service. These directors should also assume responsibility for bank systems and procedures that ensure sound lending and monitoring practices, as well as the capacity to handle distressed debt. Lastly, local insolvency systems must protect and enforce creditors rights and provide efficient liquidation of debtors which cannot be expeditiously restructured into commercially viable enterprises.

Introduction of Good Governance Practices in SOEs: In order to provide a strong demonstration effect, CG reforms in strategic SOEs that handle electricity gene ration and distribution, gas distribution, telecommunications, and air transportation can be undertaken. These enterprises are fully owned by the Government.

Effective implementation and enforcement of corporate-governance laws and regulations: Over the past several years, most South Asian countries have substantially revamped their laws, regulations and other formal corporate-governance norms. Bangladesh is still lagging behind in this matter. Leadership from the uppermost reaches of government is necessary to promote public confidence in the states commitment to the rule. In this regard, adoption of international accounting, audit and financial disclosure standards and practices will facilitate transparency, as well as comparability, of information across different jurisdictions. Such features, in turn, strengthen market discipline as a means for improving CG practices.

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Institutional Capacity Building: There is a need for disseminating CG and enterprise restructuring principles and for implementing the related guidelines and standards. Public awareness and development of governance structure i.e., enforceable regulation, ensuring financial transparency, stop financial malpractice and any form of market manipulation are essential for enabling a sound framework for CG. It is, therefore, required to educate the public about their rights as shareholders and about the work of modern corporations through our own specialized publications and through the national and regional l mass media.

Improving the quality of Financial Reporting: In Bangladesh, quality of financial reporting needs to be improved. This requires a robust regulatory regime and effective enforcement of the accounting and auditing standards. True independence of the auditor is at the crux of good CG. Auditors need to be able to function with real independence and without fear or favor. Simultaneously, auditors also need to be monitored through strict enforcement of professional code of ethics of auditors. In the long run, auditors will become irrelevant if they fail to act independently. 63 There must be a consolidating financial report for the group of companies.

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4.2 Conclusion:
Corporate governance is a system by which the companies are directed and controlled. The good governance in the organization ensure the protection of the right of minority shareholders, equitable treatment of shareholders, recognition of the roles of stakeholders, the proper disclosure and transparency and the clarification of the responsibilities of the board of the company Every organization operates its business in a business environment and every organization is a part of a society. Both the stockholders and stakeholders group have impact on the smooth functioning of the business. Proper functioning of the organization is must to ensure the betterment of this stakeholder group. Practice of good governance in the organization can ensure this betterment. In my research, I have tried to focus the corporate governance practice in the financial sectors of Bangladesh. For this I have prepared a questionnaire and tried to get an idea about the governance of different financial institutions. I tried to know about whether the boards of directors understand their responsibilities, the different committees in the organization, the audit procedures or systems, auditors, number of independent and executive directors, disclosure policy of the organization. On the basis of these responses, I have tried to evaluate the extent of corporate governance practice in different financial institutions. I have analyzed the replies obtained on the questionnaire by the respondents of different banks and accumulated the findings in my report. Corporate Governance is vital for growth and stability of various economic sectors. Amongst them the banking sector, which happens to be the engine behind developing countrys economic activities, is in utmost need for prudent and effective regulation both at firm and macro level. At a time when Bangladesh is making all out effort to achieve higher economic growth through expanding export and industrial base of the economy, an efficient, stable banking sector is of huge importance for the country for its role to facilitate efficient resource allocation and flow of economic activities. However, the literature and evidence clearly suggests that the quality of the regulation in Bangladesh banking system stands at a very unsatisfactory level. Government ownership,

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political interventions, concentrated ownership of the private banks, lack of accountability of public sector bankers, faulty, incomplete and ineffective audit and disclosure have led to widespread corruption in the banking sector which saw banking assets and depositors fund waning away in the pockets of interest group. Such widespread corruption and lack of other weak infrastructural back up to banning scoter absolutely demanded a strong and effective monitoring and control the competitive activities in the banking sector has threatened the stability of the banking sector as well as the safety of millions of depositors.

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4.3 References:
1. Osman, Mahmood (2006) Seminar Paper on Firm Performance and Corporate Governance through ownership Structure: Evidence from Bangladesh Stock Market, 1415 March, Bangladesh China Friendship Conference Center. 2. Cadbury, Sir Adrian., 2000, The Corporate Governance Agenda, , Blackwell Publishing, Vol-8, Number 1, pp. 7- 15(9) 3. Cadbury Committee (1995), Cadbury Reports, London Stock Exchange London. 4. Khan, Zaman. Habib-uz-Zaman., Ghosh, Kumar. Sunto., Akter Shahriar (2006) Corporate Governance Reporting as a Voluntary Disclosure: A Study of the Annual Reports of Square group BRAC University Journal,Vo.III No.2,2006,pp.10 5. Bangladesh Enterprise Institute (BEI) (2003) A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh BEI, Dhaka, Bangladesh. 6. Bangladesh Enterprise Institute (BEI) (2004) The Code of Corporate Governance For Bangladesh, Department for Development (DFID) ISBN: 984-32-1353-X 7. Ahmad, M.U., Yusuf .M.A (2005), Corporate Governance: Bangladesh Perspective, The Cost and Management, Vol. 33, pp. 18-26. 8. Bangladesh Enterprise Institute (BEI) (2006) Round Table Discussion on the OECD guideline on Corporate Governance for SOE, Nov-14-15, 2006,(BEI) Conference Room. 9. Cadbury, A. (2003), Corporate Governance An Indian Perspective: Diverse Demands; Disciplined Approach, The Instituteof Chartered Accountants of India (Publication of the 125th All India Conference of Chartered Accountants, January, Delhi). 10. Ahmed, Muzaffar (2003): Seminar Paper on Corporate Governance Bangladesh financial Sector: Bangladesh China Friendship Conference Center. 11. Sang-Woo Nam, IL Chory Nam (2004): Corporate Governance in Asia, Annual Development Bank Institute. 12. Chaudhury, A.M. (2004) Corporate Governance An Industry Perspective, The Bangladesh Accountant, October-December 13. Khalily, B. (2005), Views expressed in the International Conference on Corporate Governance in Bangladesh, held at Dhaka.

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14. Shleifer, A. and R, Vishny (1997) A Survey of Corporate Governance, Journal of Finance, Vol. 52, pp. 737-783 15. Fama, E. and M, Jensen (1983) Seperation of Ownership and Control Journal of Law and Economics, Vol. 26, pp, 301-325. 16. Fan, J (2004) What Do We Know About Corporate Governance of Banks, Presented at Asian Development Bank Institute Seminar on Corporate Governance of Banks in Asia, June 10-11, Tokyo. 17. Hassan, K (1994) The Financial Sector Reform in Bangladesh in Hassan, K Banking and Finance in Bangladesh, Dhaka, Bangladesh. 18. Basel Committee on Banking Supervision (BCBS) (1999) Enhancing Corporate Governance for Banking Organizations, Bank for International Settlement. 19. Bangladesh Enterprise Institute (BEI) (2003) A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh BEI, Dhaka, Bangladesh. 20. Haque, Enamul. A. K., Jalil, M. B., Naz. Farha (2007) State of Corporate Governance In Banladesh Cetre For Research and Training.

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4.3 Appendix

Questionnaire on Corporate Governance Practice

Q1: Do you think members of the board understand their responsibilities? Strongly agree agree Somewhat agree disagree Strongly disagree

Q2: Is there any Audit committee in the company? Yes No Dont know

Q3: Is there any remuneration committee in the company? Yes No Dont know

Q4: Is there any Nomination committee in the company? Yes No Dont know

Q5: Is there an external auditor of the company? Yes No Dont know

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Q6: Does your company make a proper review of external auditors work? Very much so To some extent Hardly

Q7: Does the board remuneration committee formally evaluate the CEOs performance? Yes, as a routine Sometimes Rarely never

Q8: The financial statement made by Company itself would be exactly the same had it been made by independent auditors Strongly agree agree Somewhat agree disagree Strongly disagree

Q9: Does your company approve the appointment of the internal auditor and supervise his work routinely? Actively Occasionally Never

Q10: Is there any information disclosure policy which dictates the type of information that could be disclosed to the stakeholders? Yes No Dont know

Q11: Shareholders are provided with the adequate information on the agenda items of the shareholders meeting: Strongly agree agree Somewhat agree disagree Strongly disagree

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Q12: Is the management of the Company reviewed on its performances? Yes No Dont know

Q13: Do you believe that greater transparency and fairness brings in prosperous investors into a business? Strongly agree agree Somewhat agree disagree Strongly disagree

Q14: Does your company disclose semi-annual reports and quarterly financial statements? Yes No Dont know

Q15: Independent directors participating actively in board discussion Often Sometimes Rarely never

Q16: Does corporate governance have anything to do with... Strategic decision making and accountability Enhancing the organization performance Ensuring more transparency and fairness Accomplishment sustainable development None of the above

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Q17: What is the right way to go in terms of corporate governance for a Company? Good deliberation for stuff Good business management with established long term strategic plan and successful implementation Good relation with trading partner Fair view company report and disclosure to focus on investor None of the above

Q18: How many directors does your board have in total? Q 19: How many independent directors does your board have?

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