Corporate Governance Practices In Bangladesh: The New Paradigm In

Management Education

Professor Dr. Mohammed Solaiman

Project director & dean
Zia international institute of business administration
University of science & technology Chittagong
Foy’s lake, Chittagong, Bangladesh.
Telephone: 880-31-659069(off.), 880-31-627639( Res.)
E-mail: fbaustc@gononet.com
&
Mohammad Shamsuddoha
Lecturer
Department of Marketing
University of Chittagong
Telephone: 880-31-659353( Res.)
Mobile: 880-186248
E-mail: shipul1@hotmail.com
doha_cu@yahoo.com
&
Mohammad Zahir Raihan
Lecturer in Business School
Bangladesh Open University
Gazipur, Bangladesh.
E-mail: raihan@bou.bangla.net

Abstract:
Successful corporate governance depends to a great extent of trade-off among the
various conflicting interest groups like Government, Society, Inventors, Creditors, and
Employees of the organization. The basic governance issues related to the effectiveness
and accountability of board of directors.
The present paper highlights the information collected through a survey of the 180
sample respondents based on random sampling. This paper shed light on the question
of transparency and accountability of corporate governance. It identifies the major
challenges in this process. The data reveal that the Bangladeshi corporate management
suffers from transparency, independence in decision-making and accountability. It has
been identified that among the various reasons of this scenario, the important ones are
absence of professionalism in management, paternal style of leadership, lack of skilled
human resources, absence of dynamism in management culture and the likes. The paper
concludes with some strategies, which are considered essential for the exercise of good
governance in the company management of Bangladesh such as accountability to
shareholders, transparency of disclosures, quality of directors, independence of
decision -making etc.

Keywords: Corporate Governance, Transparency, Accountability

 Corporate Governance Practices in Bangladesh: The New

Paradigm in Management Education

prelude

At the outset of the 21st century, confidence in the effectiveness and legitimacy of established
forms of Governanc e is ebbing (Michalski, et al 2000). The corporate Governance practices of
many Asian companies have come under increasing challenges in recent years, particularly
following the Asian Economic crisis (Walker and Fox 2000). Further, the possibilities of good
Governance depend on institutional structures and the economic resources available for
ensuring good governance (Roy and Tisdell, 1998). It calls for establishing a proper and
viable relationship amongst the various participants of a corporation namely, the board, the
management team, shareholders, and the other stakeholders (Agarwal 1998). It is the system
by which companies are initiated directed and controlled. The role of corporate governance is
to ensure that the directors of a company are subject to their duties, obligations and
responsibilities , to act in the best interest of their company, to give direction and to remain
accountable to their shareholders and other beneficiaries for their actions (Chandatre 1997).
In Bangladesh, the question of corporate Governance in business sector becomes more
relevant keeping in view the dominance of business organizations as a sine -a-quanon of
economic progress. Corporate Governance may be cons trued as a system of managing large
enterprises with the tools of planning, organizing, directing, coordinating, and controlling
with a view to achieve both individual and corporate goals. As per provisions of the
companies Act 1994 (Which is Practiced in Bangladesh), ‘Board of Directors’ is responsible
for the good Governance of their companies. Thus, good governance is a system to ensure that
the company is managed is the best interests of all stakeholders and other various interest
groups.

Research Objectives & Methodology

The present paper highlights the scenario of corporate governance practices in Bangladesh.
The study shade light on the question of transparency and accountability of corporate
governance. In order to achieve the mansion objectives, both primary and secondary data have
been collected through a survey of the 180 sample respondents on the basis of random
sampling from selected 10 types of business organizations in Bangladesh. In empirical survey,
the quantitative research techniques like questionnaires, informal discussion, and participative
observation have been used. Focus group has been used for collecting qualitative data for this
purpose. Respondents were asked to weigh the importance of five variables regarding
adequacy and efficiency of corporate governance system as identified through the in-depth
interview on a seven-point bi polar scale system.

Corporate Governance and Management Education

Management education in South Asia is still at an infant stage that draws extensively on
external traditions and techniques. In Bangladesh, several historical circumstances including
partition and the war of liberation in 1971 have caused an out migration of private sector
managers along with a diversion of managers to the public sector. Very little emphasis has
been given to management development or management education facilities in Bangladesh
since independence. It is now widely admitted that if Bangladesh is to benefit from the
emerging pro-market policies, it must professionalize industrial and business management,
expand, and improve existing management development programs and facilities. Further,
corporate governance is concerned with accountability of persons who are managing it
towards the stakeholders. It is concerned with the morals, ethics, values, conduct, and
behavior of the institutions and allied organs. It has been identified that the present system of
governance in educational institutions is based on the principle of the antinomy and elected
bodies. In this context, World Bank report pointed out that good Governance is not a
sufficient condition for achieving high quality in management schools but it is certainly a
necessary condition for the purpose. It is important to mention that corporate governance is
not the subject that is limited to fixing the responsibility of corporate sector alone. It appears
that there is a need to evolve a voluntary code of conduct in management educational
institutions too.

Corporate Governance Objectives

Corporate governance includes the policies and procedures adopted by a company in

achieving its objectives in relation to its stakeholders. During the course of investigation, the
respondents were requested to point out the objectives of corporate governance in their
respective organizations. Table - 1 shows the theoretical objectives of Corporate Governance
vis-à-vis responses of the sample respondents. Table 1 portrays that the main objectives of
Corporate Governance is to protect the interest of all stakeholders. Further, it has been
identified that Corporate Governance mainly consists of two elements, viz. long-term
relationship between management and investors and transactional relationship involving
matters relating to disclosure and authority.

Table 1. Matrix of Corporate Governance Objectives

SL Corporate Governance objectives as SL Corporate Governance objectives as

recognized by the authors opined by the respondents.
1. Protection of minority shareholders. 1 Full and effective control of board over
the company.
2. Legal protection of investors. 2. Ensure the direction and control of the
company is firmly in the hands of
directors.
3. Preferential treatment of managers and 3. Accountability to shareholders will be
employees. ensured.
4. Establishing a proper and viable 4. Transparency of disclosures will be
relationship among the various updated.
stakeholders.
5. Creating environment for growth of 5. Board may be balanced between
capital market activities. executive and non-executive directors.
[Source: Field Survey]

Code of Good Corporate Governance

Corporate governance deals with laws, procedures, rules that determine a company’s ability to
take competitive decision making in changing environment. At this stage, the respondents
were requested to point out the main considerations for code of good Corporate Governance
in their organizations. Table – 2 shows the picture.
Table-2. Main considerations of code of good Corporate Governance

Main Considerations Frequency in Percentage (%)

1. Independent non-executive Directors 100
2. Nomination committee to make board appointments 100
3. Issues clearly specified for board decisions 80
4. Audit committee consisting non-executive Directors 60
5. Greater accountability in setting corporate priorities 40
Total 100+
[Note: Percentage exceeds 100 because the respondents mentioned more than one factors]

Table-2 shows that the main consideration of code of good Corporate Governance is based
mainly on independent non-executive director and nomination committee to make board
appointments. Moreover, on query, it was revealed that the code of good corporate
governance based on issues clearly specified for boards decisions. Further, audit committee
consists of non-executive directors for code of good corporate governance.

Management of Corporate Governance

Successful Corporate Governance depends upon to a great extent on trade-off among the
various conflicting groups like government, society, investors, creditors and employees of the
organization. It appears that the basic governance issues related to the effectiveness and
accountability of management of the organization. Against this background, an attempt was
made to ascertain the factors that are considered by the management of the sample enterprises
in management of Corporate Governance . Table -3 shows the data thus collected. An analysis
of the table -3 reveals that the success of an organization depends on the effective leadership,
availability of human resources and efficient management, flows of information for input
based decision making and commitment of management for the betterment of the
organization. It has been identified that the complex growth of modern business and
emergence of global business enterprises requires professionalized approach in management
of business organizations. Thus, there is need for value committed professional institutions
providing opportunities to the professional managers growth and development for making the
organization competitive and success.
Table-3. Factors influencing management of good governance

Factors Frequency in Percentage (%)

v Leadership 100
v Human resource 100
v Management Information System 100
v Commitment of management 100
v Responsiveness 60
v Organizational culture 40
v Relationship management 20
Total 100+
[Note: Percentage exceeds 100 because respondents mentioned more than one factors]

Regulatory Framework

Corporate Governance deals with the laws, procedures, rules etc. regarding to functioning of
corporate organizations. The companies act, 1994 is the main legislation providing formal
structure for the Corporate Governance. Beside this, other legislations have a bearing on
governing the corporate governance of the organizations. Among these act, the most
important ones are Law Relating to Money Laundering, Stock-Exchange Act, Foreign
Exchange Regulation Act, and the likes. According to the companies Act 1994, the
responsibilities of the board include setting the company’s strategic aims, providing the
leadership to put them into effect, supervising the management of the business and reporting
to shareholders on their stewardship. According to this act, a statement of accounts audited by
the auditors and a report of the Board thereon shall be furnished to the government body by
the organization as soon as possible after the end of every financial year. Out of its earnings,
the organization shall establish a general reserve fund and create from time to time such other
special reserves as the Board may determine. The accounts of the organizations shall be
audited by not less than two auditors who shall be chartered accountants and appointed for the
purpose by the organization. The auditors shall report to the shareholders upon the annual
balance sheet and account and in the report they shall state whether in their opinion the
balance sheet is a full and fair balance sheet containing all necessary particulars and properly
drawn up so as to exhibit a true and correct view of the state of the organization affairs, and in
case they have called for any explanation or information from the board whether it has been
given and whether it is satisfactory.

Board of Directors and their Role

The board of directors are governors of the management of corporate sector. The board plays
a significant role in ensuring the best interest of all interlinked stakeholders. It has been
opined that realignment and restructuring of board is very essential for enhancing Corporate
Governance of the organization. Further, the sample respondents advocated that training and
development of board is the key factor in improving the efficiency and effectiveness of the
‘Board of Directors’. However , the quality of the board of directors can be examined on the
following parameters.

Accountability and stakeholders

The director’s report may incorporate financial statements, accounting records, internal audit
and other relevant data for the information of interest groups in general and shareholders in
particular. Directors are accountable for their activities to the shareholders. This
accountability may ensure good governance in the business organizations.

Transparency in Disclosures

The annual reports contained information, which were made mandatory for the business
organization by the companies’ act 1994. It seems that transparency of disclosures may ensure
the good governance in corporate sector. Further the disclosure should contain some
characteristics which are:- (i) Relevancy (ii) Understandability (iii) Reliability (iv)
Completeness (v) Objectivity (vi) Timeliness and (vii) comparability.

Quality of Directors

Quality of directors may contribute significantly in the process of good governance of an

organization. On query, it was pointed out that the characteristics of quality directors are
educational competencies, track record, integrity, skills, knowledge, experience and the likes.
Independence of decision-making:

Freedom of decision-making is one of the most crucial factors in the case of corporate good
governance system. It empowers the concerned groups for taking competitive decision in
changing business environment.

Efficiency and Adequacy of the Corporate Governance System

In this stage, information was collected as to the adequacy and efficiency of the Corporate
Governance system. Table-4 shows the responses of the sample respondents evaluated
through seven-point bi-polar scale system wherein +3 would indicate quite satisfactory
position, +2 moderate state and +1 would indicate low degree of satisfaction. The minus
scores would indicate the reverse position i.e. unsatisfactory condition in the same degree as
plus sign would reveal.

Table 4. Opinion of the respondents towards adequacy and efficiency of Corporate

Governance system of sample organizations

Variables Average Score

v Funds serves the desired purpose 2.0
v Company is adequate ly staffed 1.5
v Internal control is effective 1.5
v Directors play an effective role 1.0
v Accounts reports an evaluated property 2.5
1.7

Table-4 shows that the aggregate overall score as per opinion of the respondents based on five
sub variables is 1.7 indicating nearer to moderate efficiency of the system. In fact, the
Corporate Governance system practiced in sample organizations is not quite efficient and it
does not fall very much short of desired requirement either.
Problems in enforcing effective Corporate Governance :

Corporate Governance is interplay among shareholders, financial markets, creditors, company

act and the likes. Thus, there is a need to monitor the functioning corporates in order to ensure
the betterment of organizational growth and development. In such a context, our query as to
problems in enforcing effective Corporate Governance in sample organizations and the
responses of the sample respondents in this regard showed a number of problems which are
depicted in Table-5 in order of magnitude.

Table-5. Problems faced by sample respondents

Problems Frequency in Percentage (%)

v Lack of powerful institutional shareholders 100.00

v Absence of professional managers 100.00
v Dominance of directors 80.80
v Lack of effective internal audit 80.80
v Absence of proper evaluation of financial reports 75.00
v Lack of code of conduct 33.33
v Absence of dynamic legal measures 25.25

Table-5 portrays that the most important problems are ‘lack of powerful institutional
shareholders’ and’ Absence of profess ional managers’ which in fact are utmost essential for
good Corporate Governance in sample enterprises. It has been identified that the next two
important problems are ‘Dominance of directors in management’ and ‘lack of effective
internal audit system’. Table-5 depicts that ‘absence of proper evaluation of financial reports’
is identified as the most important problem in good governance system in study areas. Lack of
code of conducts is reportedly affects ideal practice of Corporate Governance to avoid
themselves of all competitive advantages in changing markets. Absence of dynamic legal
measures was reported by some sample respondents to be one of the problems in practice of
effective and adequate governance as a whole.
Policy Implications

The present paper clearly demonstrated that there is a lacking in enforcing effective Corporate
Governance in Bangladeshi companies in general and in sample enterprises in particulars. In
such a context, the inefficiencies and inadequacies in this regard need to be pr operly identified
and removed as per as possible for the growth and development of economic sectors of the
country. To this end, the following recommendations may be considered worthwhile.

Code of corporate Governance

An effective and adequate code of Corporate Governance may include the relevant essential
aspects of business organization such as business policy, long term dividend policy, long term
policy on return on net worth, transparent financial audit and the likes.

Director’s report

The report of the ‘Board of Directors’ occupied a very important place in the annual reports.
The directors in their report surveyed the economy and business during the period covered by
the accounts. It also threw light on planning, training, public relations and employee relation.
Further, the report should incorporate statements on their responsibilities regarding
accounting records, internal audit, financial statements etc.

Committee management

Commitment management may play a significant role in dynamic Corporate Governance

system. Different committees may be formed such as audit committee, investment committee,
compensation committee, and nomination committee etc. Among the committees, audit
committee examines internal audit reports and find out any loopholes in this regard.

Accountability

Boards of directors are accountable for their activities to the shareholders. Accountability may
be used as a tool by the concerned group for effective and efficient corporate governance in
the business organizations in study areas.
Conclusion

In the new millennium, Corporate Governance has become one of the characteristic to judge
the efficiency and quality of the management of any business organization. Thus, sound
economic policies must be supported by appropriate organizations or dynamic organizational
changes for sustainable growth and development. Therefore, the organizations of Bangladesh
in general and sample business enterprises in particular should make changes in their
organizational behavior to meet the standards of good Corporate Governance for making the
institutions dynamic and competitive to face the challenges of coming days in the context of
globalization and liberalization.
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1128.

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Roy, K.C. and Tisdell, C.A., (1998), Good Governance is sustainable Development : The impact of Institutions,
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