Code of Corporate Governance A Critical Comparison between Bangladesh and Malaysia

James Bakul Sarkar Assistant rofessor in Accounting and MBA Coordinator !aculty of Business ASA "niversity Bangladesh #$mail% &amssarkar'yahoo(com Mob% )*+*$,-..-.. /ewan Muhammad 0ur A 1a2dani 3ecturer in Marketing !aculty of Business ASA "niversity Bangladesh #$mail% dewanm'hotmail(com Mob% )*+4$+,5*5*+

Md( Abdul Mannan Assistant rofessor /epartment of Business Administration Stamford "niversity Bangladesh Mob%)*+*$,6*55.4

Code of corporate governance A critical comparison between Bangladesh and Malaysia Abstract% Corporate governance is the way in which the corporate entities are governed. The question is: Who will determine the way- the entity itself or the regulator. Different stakeholders with quite diversified interests have stakes (interests in the operation of !usiness. Consequently" the !usiness entity should not !e allowed to operate in every respect in the way it likes# the regulators should come forward to impose certain restrictions and principles on the corporate affairs to upkeep the !est interests of stakeholders like investors" creditors and after all the capital market. $uch restrictions and principles can !e termed as Code of Corporate %overnance. &n this study" the authors make an attempt to critically e'amine the Codes of Corporate %overnance of (angladesh and of )alaysia" contrast and compare these two Codes lucidly and finally recommend a few suggestions for Code of (angladesh. The suggestions have !een developed on the !asis of weaknesses of e'isting Code in (angladesh. 7ey 8ords% Corporate %overnance" $*C" Code" %uidelines" +rinciples" (est +ractices.

9ntroduction% Corporate governance is a concept that has drawn attention from the corporate world glo!ally in the last decade. , corporate entity can not survive in a social vacuum. &t has to satisfy the needs of diversified interest groups including shareholders" creditors" auditors and regulators. They are interested to know how the !usiness is governed and whether it is governed in the right way or not. -egulators would like to know to what e'tent companies comply with preset rules and.or how they apply principles in practice. &t is o!served that in some countries (like (angladesh " there is rule-!ased code on corporate governance# there is principle-!ased code on corporate governance in some other countries (like ,ustralia and there is also hy!rid code on corporate governance in others. With this end" this paper is an attempt to critically analy/e and compare the codes of two different countries on corporate governance. The rest of the sections have !een organi/ed as follows: $ection 0 presents the concept of corporate governance# $ection 1 and 2 descri!es the functioning of code on corporate governance and the necessity of having a code

respectively. $ection 3 and 4 entail a precise description of the e'isting Codes of two different countries- (angladesh and )alaysia# $ection 5 presents a critical !ut lucid comparison of these two Codes and $ection 6 provides few constructive suggestions for (angladesh and draws a conclusion of the study. 8hat is corporate governance: Corporate governance is not a!out rules and regulations" principles and procedures. &t is a!out the spirit in which the !usiness is operated in the !est interest of stockholders and others. 7either rule-!ased approach nor principle-!ased approach of corporate governance works !etter if there is no constant awareness on the part of key players of corporate governance- !oard of directors" corporate shareholders and auditors. Despite the fact it is e'perienced that principle-!ased approach of corporate governance is !etter than rule-!ased approach over the world to ensure good governance in the corporate sectors. The hy!rid approach (com!ination of rule-!ased approach and principle-!ased approach is !est suited in most of the cases. The regulators have to prescri!e Codes on corporate governance so that companies will comply with rules in some cases where regulation seems to work and at the same time they will !e encouraged to develop and disclose their own corporate governance practice. 8n the other hand" key players in ensuring corporate governance should also !e constantly watchful of such practice. $takeholders particularly auditors and investment community have to enhance their role to have !etter governance in the corporate sectors in conte't of (angladesh. This is how# (angladesh can go a long way to achieve good governance in the corporate sectors. ;he functioning of a code of Corporate Governance% The o!vious function of a Code of Corporate %overnance is to improve the general quality of corporate governance practices and scenario. The Code does this !y defining !est practices of corporate governance and specific steps that organi/ations can undertake for good governance. The Code" there!y" !egins to raise the quality and level of corporate governance to !e e'pected from organi/ations. (asically" the Code can !e rule-!ased (providing certain guidelines only " principle-!ased (providing certain !road principles only or a hy!rid (com!ination of rule-!ased and principle-!ased . The Code provides certain principles" which allows the companies to develop their own 9udgment and disclose corporate governance practice of their own- where

regulation may not work !etter. The Code also provides certain guidelines- where the companies have to comply with rules and regulations. The Code functions well when it consists of !oth rules and principles (the hy!rid approach . 0ecessity of having a Code of Corporate Governance% Developing and using a Code to strengthen good governance can not only !enefit the organi/ations at the micro level !ut also the whole nation at the macro level. The Taskforce on Corporate %overnance2 sought out several potential !enefits of having a code of corporate governance as follows: a ,n economy with sound system of corporate governance will !e rewarded with more investment and higher quality investors# ! Corporate governance systems can !etter ena!le the capital market" private investors" international donors and financial institutions to identify and fund successful enterprises# c (y identification of !etter performing enterprises" and there!y through more efficient allocation of capital" corporate governance can lead to greater economic growth !y ena!ling the country to ma'imi/e the resources it has# and d a culture of corporate governance will !egin to address the pervasive corruption that is crippling the (angladesh economy and development as a whole. &n short" corporate governance can !e a catalyst for change" for higher economic growth" for a more efficient use of resources" for private sectors that are accounta!le to investors and society" for a reduction in corruption" and for a healthy climate of investment atmosphere. <b&ectives of the Study% The study has !een conducted to: a ! c precisely narrate the Code of Corporate %overnance of (angladesh and )alaysia" critically compare and contrast the Codes of these two countries" and finally" recommend certain reforms in the e'isting Code on Corporate %overnance of (angladesh !ased on its weaknesses as have !een found on comparison. Methodology% The literatures used in this paper have !een collected from different pu!lished articles and papers at home and a!road on this issue. $econdary data has !een used in the study. ,n interview has

!een conducted with the $*C 8fficials to collect information regarding e'isting Code of Corporate %overnance of (angladesh. Code on Corporate Governance$ Bangladesh perspective% The corporate governance scenario is not up to the mark in (angladesh. )oreover" there e'isted no specific code on corporate governance in the country up to 0::2. *ven corporate people were not also aware of this issue. -ecently there is a growing awareness of corporate governance among the corporate sectors. Consequently" The Taskforce on Corporate %overnance (0::2 convened and supported !y (angladesh *nterprise &nstitute ((*& developed a full-fledged Code on Corporate %overnance for (angladesh in order to improve the general quality of corporate governance practices. $ecurities and *'change Commission ($*C of (angladesh has not fully adopted this code. The Taskforce suggested that the $*C could adopt the Code on ;Comply or *'plain< !asis as a regulatory step (which was later accepted !y $*C . =inally" $*C (angladesh has felt the necessity of having a code on corporate governance for the listed pu!lic limited companies. $*C3 has issued ;Corporate %overnance %uidelines< in 0::4" in order to enhance corporate governance in the interest of investors and the capital market. Companies listed with Dhaka $tock *'change (D$* and Chittagong $tock *'change (C$* shall !e su!9ect to certain conditions underlying these guidelines on >Comply or *'plain? !asis. They should comply with these conditions or shall e'plain the reasons for non-compliance. The Corporate =inance Department of $*C monitors the compliance status of listed companies. They also e'amine the Directors? report# ,uditors report etc. to check whether the requirements have duly !een complied with. ,s $*C newly introduced such guidelines for the listed companies" these are fle'i!le. There are few issues which $*C did not take into consideration under the !road scope of rules such as compensation committee" ethical issues" nomination committee etc. ,s far as these issues are concerned" companies are at li!erty to choose their own way of doing and disclose their own practice. This regulatory !ody !asically follows the governance framework practiced !y Thailand. (roadly" these guidelines comprise of five conditions# @. (oard of Directors" 0. Chief =inancial 8fficer (C=8 " Aead of &nternal ,udit" 1. ,udit Committee" 2. *'ternal.$tatutory ,uditors and 3. -eporting the compliance in the Director?s report. &mposition of aforesaid guidelines is compelling the listed companies to improve their corporate practices to a significant e'tent. Despite the fact" corporate governance scenario is yet to develop much.

%uidelines issued !y $*C have !een issued as conditions under $ection 0CC of $ecurities and *'change 8rdinance" @B4B. ,ny condition imposed under said $ection has overriding effect i.e. !e adhered to" despite the fact that those conditions contradict with any other ,cts including Companies ,ct" @BB2. =ailure to comply or e'plain" therefore" shall !e violation of securities law and hence lia!le to !e disciplined. The %uidelines have specified that Chairman and C*8 should prefera!ly !e manned !y separate person. The word ;prefera!ly< should not have !een used. &n that situation the listed companies would !e compelled to have separate person as Chairman and C*8. $*C?s %uidelines !orrowed certain provisions from $ar!anes 8'ley ,ct of C$,. ,uditors have !een !arred to carry out non-audit functions. &n a recent follow-up it has !een found that significant num!er of companies is complying with $*C %uidelines. $*C has put pressure on delinquent companies to comply with the guidelines. Companies that informed that they have complied with the guidelines have !een asked to inform $*C how they have complied with the guidelines. $*C %uidelines put ma'imum emphasis on disclosure and transparency issues" especially" functions of audit committee and functions and reporting of auditors. The guidelines ela!orately focus on the constitution of the audit committee" reporting of auditors to the !oard of directors" $ecurities and *'change Commission" shareholders and general investors also restrict the nonaudit services !y the e'ternal auditors. The listed companies 9ust comply with certain guidelines only# they do not feel encouraged to disclose their own corporate governance practice. The reasons why they are not inclined to disclose are many. The main reason is that they try to conceal their profit and they try to evade ta'. *ntrepreneurs and management in the corporate sectors lack necessary skill and awareness to disclose corporate governance practices of their own. )oreover" many listed companies in (angladesh are family-oriented. They are not also ethically sound. While the awareness of the corporate management does not suffice" the implementation and strict monitoring with reward and punishment remain a far cry.

&n order to have o!9ective reporting of issuer" $*C has !een e'erting pressure on statutory auditors. &f it is found that financial statements have not !een prepared !y the issuer in accordance with &,$ and financial statements have not !een audited in adherence to &$," $*C issue show cause notice and provide the auditor an opportunity of !eing heard to refute the allegation raised !y $*C as to not discharging professional responsi!ility while auditing. &f the auditor fails to defend" Commission under securities laws may take disciplinary measures against the auditors. (ecause of Commission?s efforts statutory auditors are !ehaving more professionally. Despite the fact that Companies ,ct" @BB2 addresses entire array of governance issues" yet administration of the same is very dismal. 8ffice of the -egistrar of Doint $tock Companies and =irms are not capa!le of enforcing Companies ,ct due to shortage of manpower and dearth of skill. Code on Corporate Governance$ Malaysian erspective% The )alaysian Code on Corporate %overnance was developed !y the Working %roup on (est +ractices in Corporate %overnance and su!sequently approved !y the high level =inance Committee4 on Corporate %overnance. The mem!ers of the Working %roup comprise a mi' of private and pu!lic sector participation. The private sectors play a key role to initiate the Code in order to lead a review and to esta!lish reforms of standards of corporate governance at a micro level. The Code essentially aims at setting out principles and practices on structures and processes that companies may use in their operation so that they can achieve optimal governance framework. This structures and processes includes issues such as the composition of the !oard" procedures for recruiting new directors" remuneration of directors" the use of !oard committees" their mandates and their activities etc. This is !ased on the fact that there are some aspects of corporate governance" where statutory regulation is necessary and others where self-regulation" complemented !y market regulation is more appropriate. There are three !road approaches to the issue of corporate governance that have !een undertaken !y 9urisdictions around the world# +rescriptive approach (This approach simply requires compliance of certain corporate governance guidelines along with specifying desira!le practices " non-prescriptive approach (This approach simply requires corporate governance practices in a company to !e disclosed and hy!rid approach ( This approach requires that there is a need for !road principles and that all

concerned should then apply these fle'i!ly and with common sense to the varying circumstances of individual companies. This is the approach preferred !y the Aampel Committee . )alaysia has accepted the Aampel approach5 in 0::: for two reasons# =irst" !est practice prescriptions are necessary as the standards of corporate governance in )alaysia were lacking and therefore there was a need to raise these standards. $econd" companies must !e encouraged to consciously address their governance needs. The Code comprises of four parts such as: a +art @ specifies !road +rinciples of good corporate governance for )alaysia" which allow companies to apply these fle'i!ly and scrupulously considering the varying circumstances of individual companies# ! +art 0 consists of (est practices in corporate governance for companies" which identifies a set of guidelines or practices intended to assist companies in designing their approach to corporate governance# c +art 1 is addressed to investors and auditors to enhance their role in corporate governance# and d +art 2 provides e'planatory notes for the Code set out so far. A critical comparison between codes of Corporate Governance of these two countries% The Code practiced in (angladesh is more than a rule-!ased approach (+rescriptive approach as this follows certain guidelines with a greater emphasis on the condition of >Comply or *'plain !asis?. The !iggest pro!lem with such approach is that it would encourage directors to concentrate on form rather than on e'ercising their discretion on what corporate governance practices are !est suited for their companies. Directors simply adopt a practice of ticking a series of !o'es to indicate that they have complied with the prescri!ed !est practices. )oreover" the checklist method of ticking every !o' may !e perceived !y investors as implying endorsement !y the regulator (the *'change of the company?s corporate governance practices. $hareholders or their advisors would !e interested only in whether the letter of the rule has !een complied with- yes or no. , ;Ees< would receive a tick. (esides" la/y or unscrupulous directors may get the unfair opportunity to arrange matters in such a way so that the letter of every governance rule is complied with !ut not the su!stance. *ven it might !e possi!le to emerge in a company with" on paper" a @::F compliance with rules. $o !o' ticking is neither fair to companies" nor likely to !e efficient in preventing a!use.

(angladesh !asically follows the findings of the Cad!ury and %reen!ury reports with certain conditional rule- comply or e'plain !asis. The strongest point in this Code is that companies need to e'plain in case of non-compliance with any rule" otherwise" the regulator can adopt any legal action upon the respective company. Cnlike the rule-!ased approach" )alaysia follows the Aampel Committee recommendations" which is !asically the com!ination of rule-!ased approach and principle-!ased approach. The principle-!ased approach is that companies apply the !road principles fle'i!ly and with 9udgment as individual companies may encounter varying circumstances. &t was recommended that companies should include in the annual report a narrative statement of how they apply the relevant principles to their particular circumstances. %iven that good corporate governance lies with the !oard of directors" the written description of the way in which the !oard has applied the principles of corporate governance represents a key part of the process. $uch clarification or e'planation ensures that the investment community receives an e'planation for the company?s approach to governance so that it is in a position to support the approach or work to influence change. &n such a way" the investors may confide in the corporate affairs. The Code does not prescri!e the form and content of the narrative statements. -ather it aims to secure sufficient disclosure so that investors and other can assess the company?s performance and governance practices" and can respond in an informed way. &n contrast with the rule-!ased approach" )alaysian Code on Corporate %overnance is more fle'i!le in the sense that it allows companies to develop and nourish their own corporate governance approach. (ecause the reality is that corporate governance scenario and practice vary from company to company. (o'-ticking system won?t inspire companies to develop such practice. The Working %roup in )alaysia has the very real e'perience regarding !o'-ticking system in the form of audit committees" where companies merely comply in form !y setting up such committees without giving heed to the spirit of the requirement !y ensuring" for e'ample" the quality of the people within the committee. Cnder this Code" there is no hard and fast rule as to the strict compliance with !est practice prescription as while the prescriptions esta!lish a

sound approach to corporate governance" companies may develop alternatives that may !e 9ust as sound. To quote the Aampel report (@BB6 " ;With guidelines" one asks" how far are they complied withG With principles" the right question is ;Aow are they applied in practiceG< The Aampel Committee did not add any radical recommendations over findings of the two earlier committees" vi/. The Cad!ury (@BB0 and %reen!ury Committees !ut set out a num!er of general principles of good corporate governance. $erious application of Cad!ury and %reen!ury Codes ended up in ;!o'-ticking< rather than the application of informed and independent 9udgment !y e'perienced and qualified individual from e'ecutives and non-e'ecutive directors" shareholders and auditors. &t was recommended that companies should include in their annual reports as a narrative statement as to how they apply the principles and the e'planations for any e'ception. The principles focused in the Aampel Committee include directors? appointment# remuneration etc." shareholders? voting" ,%) and finally accounta!ility and audit. Aence the Aampel report is the most accepta!le Code of Corporate %overnance to the !usiness community worldwide. Aence the Aampel report is the most accepta!le code of corporate governance to the !usiness community worldwide. =ecommendations% =rom the previous discussion and comparison" the following recommendations can !e developed: @. *ntrepreneurs of (angladesh mostly !elong to first generation of entrepreneurs. (ecause of lesser knowledge a!out running companies com!ining with poor state governance at post independence period governance scenario could not take a good shape. %uidelines on corporate governance could not !e a panacea unless improvement in ethical area improves. Dustice system" police enforcement system and a!ove all dismal status of state governance need to !e improved that have different ramification. 0. Cnless investor !ecomes vocal a!out their rights governance scenario will not !e improved to a desired level whatever efforts put !y regulators. &nvestors have hardly ever filed a case against the directors" auditors or officers for violating fiduciary responsi!ility.

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1. (o'-ticking system (-ule-!ased approach may not improve the corporate governance scenario in (angladesh as dishonest and unscrupulous directors are likely to comply @::F with rules on paper without regard to the spirit of them. $o the regulators can take necessary steps to critically monitor and check the compliance status of listed companies. &f such monitoring is carried out !y the regulators even on sample !asis" this will give a message to those companies" where directors tend to unscrupulously play the game. 2. *ven in case of non-compliance" the $*C should carefully 9ustify the reasons as set out !y the companies in the annual report and take actions if the reasons are not proper for the non-compliance. 3. Corporate entities can set up an independent Corporate %overnance Committee" which will continuously monitor and oversee the Corporate %overnance affairs inside the organi/ations. The Committee should include at least one mem!er appointed !y the regulatory !ody. The !oard should !e held responsi!le and accounta!le to the Corporate %overnance Committee in case of Corporate %overnance affairs. The Committee can also suggest any change or direct the !oard of directors regarding how the entities comply with and implement the Corporate %overnance guidelines. =inally" this will su!mit a report on corporate governance on !i-annually or yearly !asis to the regulatory !ody. 4. ,s corruption has mushroomed in all the sectors of (angladesh and there is no or low moral or ethical standards in !usiness practice" the regulators should go for rigorous standards for corporate governance like )alaysian Code on corporate governance. &f it is possi!le to shift from the rule-!ased approach to principle-!ased approach" each company will !e at li!erty to develop their own governance framework. 5. %radually (angladesh should go for the hy!rid approach- the com!ination of rule-!ased approach and principle-!ased approach. &n this regard" two-fold !enefits can !e o!tained# a companies will follow the !est practice prescriptions (rules accompanying with a narrative statement in the annual report H where statutory regulation is necessary" and ! companies will !e encouraged to develop their own governance practice and disclose it in the interest of investors and others- where self-regulation is necessary. $uch hy!rid system will prevent the a!uses as possi!ly suffered from the !o'-ticking system# rather regulators will get a true picture of corporate governance. The narrative statement given

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in the annual report will e'plain how companies apply principles in practice. Companies can disclose its practice and !e transparent to the investors. 6. Iike the )alaysian Code on Corporate %overnance" the regulators in (angladesh can also include a part in its Code towards investors and auditors- two other !ig players in good corporate governance to enhance their role in corporate governance. This will increase their awareness of good governance. B. Corporate governance is a continuous process in which many can contri!ute. *very!ody" who is a part of it" should play their role in the way they are e'pected of. $tockholders" auditors" directors and regulators should contri!ute to the working of good governance in the corporate sectors. @:. $*C has also shortage of manpower and to some e'tent lacks skill. Compensation package of $*C staff mem!ers is similar to government servants. Capacity of $*C should !e enhanced so that effectively e'ercise oversight on companies and contri!ute towards elevation of good corporate governance. @@. Companies ,ct" @BB2 needs to !e updated. )oreover" manpower and efficiency of the 8ffice of the -egistrar of the Doint $tock Companies and =irms need to !e enhanced for their effective enforcement of Companies ,ct. Conclusion% Corporate governance is not a!out rules and regulations" principles and procedures. &t is a!out the spirit in which the !usiness is operated in the !est interest of stockholders and others. 7either rule-!ased approach nor principle-!ased approach of corporate governance works !etter if there is no constant awareness on the part of key players of corporate governance- !oard of directors" corporate shareholders and auditors. Despite the fact it is e'perienced that principle-!ased approach of corporate governance is !etter than rule-!ased approach over the world to ensure good governance in the corporate sectors. The hy!rid approach (com!ination of rule-!ased approach and principle-!ased approach is !est suited in most of the cases. The regulators have to prescri!e Codes on corporate governance so that companies will comply with rules in some cases where regulation seems to work and at the same time they will !e encouraged to develop and disclose their own corporate governance practice. 8n the other hand" key players in ensuring corporate governance should also !e

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constantly watchful of such practice. $takeholders particularly auditors and investment community have to enhance their role to have !etter governance in the corporate sectors in conte't of (angladesh. This is how# (angladesh can go a long way to achieve good governance in the corporate sectors.

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=eferences%
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$arkar" D. (. and ,hmed" A. (0::5 " ;Disclosure on corporate governance !y listed companies in (angladesh<" +arker" -. A. (@BB0 " Macmillan Dictionary of Accounting" Iondon: The )acmillan +ress Itd. ,hmed" D.C. and ).,. (aree. (0::: " Corporate %overnance for Transparency and ,ccounta!ility" The Taskforce on Corporate %overnance (0::2 " The Code of Corporate Governance for Bangladesh. The $ecurity and *'change Commission ($*C " Corporate Governance Guidelines" 0::4. =inance Committee on Corporate %overnance (0::: " Malaysian Code on Corporate Governance. =inal -eport of the Committee on Corporate %overnance (@BB6 " Hampel Committee.

The Cost and Management" Danuary-=e!ruary.

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Bangladesh Accountant" Jol. 0B# 7o. 0" ,pril-Dune.

2 3 4 5

&nterview with $*C 8fficials as on @6th 8cto!er 0::5

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