Corporate Governance

Overview and assessment

of the Life Insurance
Sector of Bangladesh


TANMOY DAS
RAKIBUL ISLAM
Undergraduate Students, BBA 2
nd
Batch
Department of International Business
University of Dhaka




Introduction

Corporate governance is an indispensable issue of measuring the performance of a firm.
Performance mostly depends upon the smooth functioning of firm which is maintained by
good corporate governance. The measurement of the profitability and in the value of the
firm, the role of corporate governance can be depicted by various social, economic and
regulatory condition of that country. To understand the need for corporate governance,
causes of potential conflicts of interest among participants in the corporate structure have
to realize which are often arise from different goals and preferences of different
participants and the variances of information to them.
Corporate governance plays an effective role in improving the value of the firm with
profitability by developing firm performance. The practice of corporate governance
varies from firm to firm. Here lies the difference in nature, magnitude, direction and
processes of operation due to the economic, social, regulatory framework and market
behavior.
A very recent study about the corporate governance scenario of Bangladesh (Daily
Prothom Alo, 19
th
may, 2013) have showed that 101 listed companies under SE
regulations or 32% of all publicly listed companies do not have any compliance with the
code of corporate governance suggested by SEC. The study is conducted t see the
compliances about the regulations of appointing Independent Directors, Audit Committee
Members and Board of Directors. Among 46 companies of whole Insurance sector,
including life insurance sector, only 14 companies have total compliance and 24
companies have partial compliance with the SEC regulations of Code of corporate
governance. 8 companies have showed up with No Compliance and unfortunately, 4 of
them are from life insurance sector.

Corporate Governance Overview of
Bangladesh:

Bangladesh has taken steps to improve corporate governance practices in recent years,
but continues to face significant challenges. For example, in 2006 Bangladeshs
Securities and Exchange Commission (SEC) issued Guidelines on Corporate Governance
and the Bangladesh Enterprise Institute (BEI) has been providing training to a number of
board directors of listed companies and state-owned enterprises, but implementation of
the Guidelines and professionalization of the board of directors and management remain
in question, and additional institutional and legal reform are needed
Bangladeshs capital markets still remain some of the most underdeveloped in the region.
The basic legal framework for corporate governance in Bangladesh is dated. There is a
need to streamline rules and regulations that apply to listed companies. Shareholders do
not have sufficient rights regarding related party transactions, the choice of board
members, or the disclosure of control.
In most of the companies, the Board's general approach is to act as a self-declared leader-
with the 'my company' or 'my governance' attitude. As such the Board likes to stay
beyond accountability and perform its duty in whatever way it likes. But under corporate
governance, the Board is a corporate leader being accountable to the shareholders having
fiduciary responsibilities to them. Sometimes, the Board emphasizes keeping the
management under their control with policy and procedures instead of making the Board
members accountable with any written policy and reporting framework. Thus the tiers of
corporate responsibility and accountability do not work well, that is not a good sign for
the corporate governance and sustainable development of the company.
The selection and appointment of independent directors stems from the requirement of
Securities and Exchange Corporate Governance Guidelines, where the Board appoints
such director(s), subject to approval at the Annual General Meeting (AGM). Basically,
they hardly have any guts to play the role independently in the Board. Internal control
and compliance team, other teams for other purposes and internal audit department may
have just only advices of regulators. The effectiveness and efficiency for working
independently on the part of these teams and departments are subject to questions as the
senior management or even the Board may interfere in these teams prompted by their
'dishonest interest'.
The regulator has very little strategy to strengthen these internal teams and departments
except dealing with them on reporting. The functions of the audit committee have really
been, in most cases, on papers and to present them in the report.
The picture of independence of independent director(s), internal team and department and
the audit committee of the Board as stated above is a general practice in our corporations
or companies. Some companies may have sound and remarkable independence in
practice, but the number of such companies is really negligible.
The role of external audit is also under a question mark of independence. If the client is
large for the auditor with a large amount of professional fee, the auditor may lose its
independence because of fear of losing audit engagement. In cases of small clients, the
auditor may overlook their professional responsibilities to review and give views on
financials. In case of the Hall-Mark group loan scam involving the Sonali Bank Ltd.,
independence of all of these wings is surely under question. If the internal control and
compliance system is strong, the process of in which the loan was disbursed could be
blocked. If the internal audit team had functioned well, they could have checked the
process of loan disbursement with documentation for big chunks of money with different
brunches and the scam could be unearthed on time. If the external audit exercised the
audit risk, they could find the Ruposhi Bangla branch under risk having no internal audit
done for a long period of time. Hence, to work with independence with due professional
care is a very big challenge in corporations
In protecting the interest, challenges arise in order to ensure compliance of laws and
policies. The nomination committee may be biased to nominate any directors instead of
someone who may act for the interest of shareholders. The company meets for exercising
their right on time, protection of related party transactions and disclosures. Extraordinary
transactions, either income or expenses, may not be provided properly or may not be
brought to the notice of the shareholders. It is really very challenging to work for a
company sustaining interest of all shareholders, where the Board or members of the
Board do not care about shareholders' interest and act for their own benefit using the
platform of the company
A developing country like Bangladesh, fighting against challenges in Establishing
Corporate Governance is really difficult due to
(i) proprietorship or partnership or limited-liability company having capital
market participation but wanting to hold family business control;
(ii) government's political participation in the Board of state-owned banks and
financial institutions or any other state-owned organizations;
(iii) Outdated laws to govern and cater to corporate governance framework and the
failure to face the challenges on many grounds and to establish the rule of law,
and
(iv) Substandard human resources or badly cultured workforce who fail to adopt
the changes or accept challenges with professional integrity and ethical value,
which resemble the points presented by Sir Adrian Cadbury.






Life Insurance Sector of Bangladesh

Insurance sector has the highest number of companies that are publicly listed in
Bangladesh. There are 17 listed life insurance companies which have got permission to
operate business and registered with IDRA Bangladesh (Insurance Development &
Regulatory Authority, Bangladesh). These are as follows.
List of Life insurance companies in Bangladesh-
1. American Life Insurance Company (Foreign Company)
2. Baira Life Insurance Company Ltd.
3. Delta Life Insurance Company Ltd. *
4. Farest Islami Life Insurance Co. Ltd. *
5. Golden Life Insurance Ltd.
6. Homeland Life Insurance Company Ltd.
7. Meghna Life Insurance Company Ltd. *
8. National Life Insurance Company Ltd. *
9. Padma Islami Life Insurance Company Ltd.*
10. Popular Life Insurance Company Ltd. *
11. Pragati Life Insurance Ltd. *
12. Prime Islami Life Insurance Company Ltd.*
13. Progressive Life Insurance Company Ltd. *
14. Rupali Life Insurance Company Ltd. *
15. Sandhani Life Insurance Company Ltd*.
16. Sunflower Life Insurance Company Ltd.
17. Sunlife Insurance Company Ltd. *
Among this 17 companies, 12 of them (the * marked) are listed as public limited
company under the laws of SEC (Securities and Exchange Commission) in the capital
market of Bangladesh.
Life insurance has been considered as a minimum risk business in Bangladesh because of
the re-insurance bindings for the private owned life insurance companies. These
companies also performed well in the stock market on the basis of P/E ration, NPV value
and in share prices as almost all companies have its market share price almost 10 times
that the face value of the shares.













The Corporate Governance Regulators for
the LICs of Bangladesh:

The life insurance companies are organized and operated under the rules and regulations
of IRDA Bangladesh. IRDA prepares the regulatory frameworks for the whole insurance
industry, for both the general insurance and life insurance companies.
The SEC (Securities and Exchange Commission) commences the code of corporate
governance for the publicly listed companies of Bangladesh. When a company wants to
be listed as the public limited company and collect funds from the market, then it have to
comply with the rules and regulations of the corporate governance.
SEC also checks and run surveys to assess the scenarios of the corporate governance of
the publicly listed companies.
So, there are 2 regulators for the Life Insurance Companies of Bangladesh to ensure
proper corporate governance-
1. IRDA ( Insurance Development and Regulatory Authority)
2. SEC (Securities and Exchange Commission)








A Case Study about the Corporate Governance
Practice in Bangladesh: Green Delta Life Insurance.

Effective functioning of board is a vital concern for public limited company. Board
function is highly depended on its composition. In Bangladesh, family ties and nepotism
have a strong influence in the composition of the BOD.
Farzana Chowdhury is going to be appointed as MD/CEO of Green Delta Insurance
Company Ltd. The BOD approved his appointment and sent it to the Insurance
Development and Regulatory Authority (IDRA) for approval. Prior Farzana Chowdhury
worked in the same company for four years. Before joining in Green Delta Insurance
Company Ltd she was the head of SME department of Brac Bank. Question arises
regarding her appointment as she has only four years experience on insurance company.
After gazette notification, government confined the minimum experience level for the
MD/CEO post. At least 10 years experience is the same field will one the eligibility for
the MD/CEO post. This criterion indicates that at present Farzana Chowdhury is not
eligible for MD/CEO post. Which insist the BOD approving her appointment? Her family
ties. Her father, Nasir-a-Chowdhury, was the last MD of this company.
Nasir-a-Chowdhury is also alleged for challenging government gazette on age and
education qualification limit. Filling a writ appeal, he was able to extend his tenure for
five years. Now he is trying his best to make his daughter as the MD of the company. In
this connection it is said that Finance Minister of BD Government is alleged for
recommending the approval of Farzana Chowdhury as MD of the company to IDRA.
Finance Minister is the childhood friend of Nasir-a-Chowdhury.
Its a subject to approval of IDRA. If IDRA approved it then again it would be another
example of family influence and nepotism practice in Bangladesh.
Stakeholders of life insurance Companies

A corporate stakeholder is that which can affect or be affected by the actions of the
business as a whole. The following parties are the stakeholders of Life Insurance
Company.
Stakeholders Stakeholders concerns
Shareholder Profitability, longevity, market share, market standing,
succession planning, raising capital, growth, social goals
Customers value, claim fulfillment, service, customer care
Creditors Credit score, new contracts, liquidity.
Borrowers Interest rate, fund accumulation, liquidity
Suppliers Timely payment, respect, effective communication.
Employees Rates of pay, job security, compensation, respect, truthful
communication.
Competitors Strategy formulation, customer loyalty, performance,
Public Ethical business practices
Government Taxation, VAT, legislation, employment, truthful reporting,
diversity, legalities, externalities
Media Irregularities, violation of rules, regulation and policy.
Alumni (Ex-employees) Payment from provident fund, respect.

In Bangladesh 11 listed life insurance companies are now in operation. All these
companies are category A listed that means these companies are satisfying its
shareholders. People have a negative attitude towards life insurance as they think claim
recovery would very tough after insurer death. Insurance companies are a vital source of
fund of banks and financial institutions. In view of keeping this sector stable,
Government monitors the sector regularly and makes necessary rules and regulations.
Media is playing an important role by bringing irregularities in light

Assessment of the LIC corporate
governance practices

The life insurance companies are practicing the 3 tier corporate governance model which
is suggested by the SEC. It is constituted in the listed life insurance companies that the
appointment of the Board of Directors will be made by democratic concerns from the all
shareholders attending on the AGM (Annual General Meeting). The BOD will look after
to serve the shareholders interests in best ways and theyll direct the Management
committee to run the entire organization effectively.


Assessment about Board of Directors:

From the analysis of the annual reports of the life insurance companies, we have got the
number of directors which are figured among 12-25 members in the board of directors in
the life insurance companies in Bangladesh. As we know from the code of corporate
governance of Bangladesh, it is sufficient to have 7-15 members in the board but we have
at least 5 LIC companies which have more than 15 directors on the board.
It is very much overwhelming that the presence of family members on the board does not
have any disclosures on the annual reports. No annual reports consists any data about the
presence of family members or relatives in the board and also do not consists any data
about their remuneration as directed in the code of corporate governance of Bangladesh.
There is available information about the sponsor shareholders but only few annual reports
have the disclosed information about the shareholdings by the board of directors. Only
Management
BOD
AGM
Meghna Life insurance company and Pragati Life Insurance has disclosed
information about the shareholdings of the sponsor directors and Directors on the Board.
We have the worst scenario at the progressive life insurance company where the sponsor
shareholders and the directors are almost same face.
A better scenario about appointing directors have been seen in National Life Insurance
where three directors are selected to be on the board among the general shareholders but
the selection criteria and their remuneration package is still undisclosed.




Name of the Company Number
of
Directors
No. of
Independent
Directors
% of Independent
Directors in BOD
Delta life insurance 13 0 0%
Fareast Islami life
insurance
15 2 13.33%
Meghna life insurance 13 1 7.69%
National life insurance 22 2 9.09%
Padma islami life
insurance
13 No data available
Popular life insurance 12 1 8.33%
Pragati life insurance 16 1 6.25%
Prime islami life insurance 18 1 5.55%
Progressive life insurance 14 2 14.29%
Rupali life insurance 25 2 8.00%
Sandhani life insurance 20 No data available.

Assessments about Independent Directors:

The Code of Corporate governance suggests having a balance on the Independent
directors and executive directors on the Board of Directors. The Life Insurance sector of
Bangladesh shows up with a major non-compliance with this part of Independent
Director For Example; Pragati life insurance annual report shows that it has complied
with the code of corporate governance in appointing independent director but who is the
independent director, that information was absent.
Not6 a single LIC company provides the information of Sharedoldings by the
independent directors. Some companies like Pragati life insurance and Progresive life
insurance has put a mark beside the compliance with the independent director
appointment code, but no further information.
Delta Life Insurance shows up with no independent directors. Padma Life Insurance
and Sandhani life Insurance have no information available both in the annual report
and in their websites.
Guidelines say that 1/10 of the board members should be independent but the chart says,
almost no companies have at least 10% independent directors on their BOD. We can see
another thing that National life Insurance and Rupali life insurance has more than
independent directors but the BOD consists 22 and 25 directors on the board. Well se
the same scenario in the audit committees of the Life insurance companies where there is
no presence of independent directors in the audit committees in most of the companies.
So, as we see that, 1 or 2 independent directors in the board, where the executive
directors are 10 times in number, has a very little to do, like whistle blowing or directing
the board to any further compliance with the rules or helps in making strong suggestions
about anything to keep the stakeholders rights.





Scenario of the Separation of Board and the Executive
management:

In this assignment we just tried to focus on the scenario of the life insurance sector and
see what is the corporate governance scenario of this industry of Bangladesh. But we
actually overwhelmed with the poor performance in corporate governance of life
insurance sector of Bangladesh.
The Regulatory body IRDA and SEC strongly suggest separating the management and
the Board of directors but at least 6 companies do not comply with that regulation about
the separation of management and BOD. These companies have presence of MD or CEO
and company secretary in the Board of directors. And most of the cases the CEO and the
Board Chairman is the same person.
Name of the Company Number
of
Presence of
MD/CEO in BOD
Presence of Company
Secretary in BOD
Directors
Delta life insurance 13 No No
Fareast Islami life insurance 15 No No
Meghna life insurance 13
Yes Yes
National life insurance 22
Yes Yes
Padma islami life insurance 13 No No
Popular life insurance 12
Yes Yes
Pragati life insurance 16 No No
Prime islami life insurance 18
Yes Yes
Progressive life insurance 14
Yes
No
Rupali life insurance 25
Yes Yes
Sandhani life insurance 20 No No

Directors are selected by the shareholders but the nomination process is opaque. Neither
the selection nor the remuneration as any disclosed information. Where the CEOs are the
board chairman, those companies have the largest expenditure on the salaries. As the
chairman of the board, the CEO or the MD himself decides his remuneration package.
There is a little or no obligation to the rotation and voluntary retirement from the post of
directors or management as the management executives themselves are the part of the
board. As the chairman of the board, they re-elect themselves for years and years.
The argument for not separating the BOD and the Management is that the Code ob
Corporate Governance of Bangladesh do not have proper guideline about the
responsibilities. So, to eliminate the contradictions of this not-well defined rule, they
think it is better to be the BOD chairman and also the MD. Itll ensure the unity of
command too.









Assessments about Audit Committees:

While analyzing the audit committees of the life insurance companies in the annual
reports and the websites of those companies, we found that at least 4 companies do
not have any disclosed information about the audit committee! The most hilarious
thing is that Pragati Life insurance has also put a mark beside the audit
committee compliance issue with the SEC guide line but do not have any disclosed
information about the audit committee not even if in the annual report.
As we see in the table related to the audit committee of the companies that consist of
3-11 members in the audit committee. The role of audit committee is to ensure the
transparency and establish the link between the internal auditor and the external
auditor.
Appointing Independent directors in the audit committee is the most effective way of
making the audit committee effective and serves the cause. But, as we can see, only 4
companies have independent directors in the audit committee and they are less than
one thirds in numbers. So in the audit committee, the independent directors do not
possess any power to have obligation about any decision making or in protecting the
stakeholders rights.
Most of the audit committees consist mainly of the board members and who are not
also from the management committees. So, this situation raise a question mark about
the proper judgments are made or not here by or through the audit committees. It is
more like checking the own exam papers by the examinee himself.
Inclusion of FCA degree holders in the audit committee can ensure the more
accountability and transparency as the FCA holders are well trained to these factors.
But the scenario shows that only 3 companies comply with this voluntary but
effective condition.

Name of the
Company
Number
of
Members
Form BOD From
Management/outside
of BOD
FCA
Director Independent
Director
Delta life
insurance
04 04 0 0 0

Fareast Islami
life insurance
O6 04 01 01 01
Meghna life
insurance
03 02 01 0 no
National life
insurance
No Data No
Data
No Data No Data No
Data
Padma islami
life insurance
O3 03 0 0 02
Popular life
insurance*
No Data No
Data
No Data No Data No
Data
Pragati life
insurance
No Data No
Data
No Data No Data No
Data

Prime islami
life insurance
No Data No
Data
No Data No Data No
Data
Progressive life
insurance
06 05 01 MD who is a member
of BOD
no
Rupali life
insurance
11 07 01 2 1

Sandhani life
insurance
No Data No
Data
No Data No Data No
Data
*Committee option is available in its website but there is no data.




Empowerment of women:

This may or may not be a Corporate Governance Issue but it is a burning issue in the
present world that is the empowerment of the women. Weve noticed that most of the
LIC boards have a significant number of women members in the board. A question is
automatically raised that is these appointments are on performance basis or not?
When we have a deep look at the identity of those women members of the boards, we
found that most are the family members of the Sponsor directors or the Chairman of the
Directors and the CEO. The women members have significant numbers of shares on their
possession and they are included to the BOD only because of strengthening the position
of the chairman or the CEO as the head of the company and ensures that the decisions
made by the head of the organization will never be counterfeited.
So, we found that this is not really the women empowerment, actually it is establishing
and strengthening the family possessions in a public limited company and creating a way
of weakening the general shareholders rights.
Name of the Company Number
of
Directors
Number of
Women Directors
% of Women
Directors in
BOD
Delta life insurance 13 4 30.77%
Fareast Islami life insurance 15 4 26.67%
Meghna life insurance 13 4 30.77%
National life insurance 22 3 13.64%
Padma islami life insurance 13 3 23.08%
Popular life insurance 12 2 16.67%
Pragati life insurance 16 3 18.75%
Prime islami life insurance 18 6 33.33%
Progressive life insurance 14 2 14.29%
Rupali life insurance 25 6 24.00%
Sandhani life insurance 20 4 20.00%

Need for Corporate Governance in
Insurance Sector

Life Insurance industry bears a fiduciary relationship with policyholders and long term
performances. The honesty and integrity of insurers are paramount important as the
industry has financial functions. Officers and employees can break the regulatory
measures and enjoy the money of policyholder. No insurer will be successful unless his
integrity is tested as sound and useful for the effective performances of the functions. The
need of corporate governance is realized for confidence building change-management,
investment and viability.
Confidence
Insurance is based on confidence. New insurance companies can develop only if the old
insurance companies have demonstrated honestly and integrity. For example, LIC has
proved the insurance has sore reign guarantee. Long term contract is built only on
confidence. Insurance particularly life insurance is long-term contract. There should be
benchmark standards against which insurers should demonstrate public image.
Change management
Insurance companies are facing several changes in the society. They have to cope with
changes and come forward to challenge the changes. It has been observed that insurance
industry is growing faster than GDP. Specialized insurance companies are entering in the
market. Many foreign companies have entered in India to conduct insurance business.
Health insurance is becoming a need of the hour. The insurance companies have to
manage themselves for maintaining safety and solvency. Non- insurers are growing in
detarrified era challenging their fair play, policyholders servicing and transparency.

Investment
Insurance companies manage their funds through investment which involves safety
solvency risk management and protection of policyholders interest. The actuarial
experiences also help decide insurance expansion. It grapples greater challenges such as
increasing number of good governance standard against which the companies conduct
and performance would get measured against these backdrops. They have to live up with
securities market and governing rules. SEBI has formulated several rules and regulation
which have to be followed by the insurer.
Viability
The insurers have to prove their viability. Many new and existing companies now enter in
the insurance business. Foreign, insurance companies have to prove their viability. Public
sector insurers have proved their viability and private sector insurers have to operate in a
safe and sound manner and in accordance with the applicable rules and regulations









Recommendations:

Ensuring Disclosure
The LICs are having shown up with a very low or little disclosure about the companies.
The mostly undisclosed factors are-
The information about relatives and family members on the board or management
of the firm
The remuneration package of the board members
The shareholding portions of the board of directors members
The shareholding information of the independent directors and the background of
the independent directors
Disclosures about this information will make the financial disclosures much more valid to
the both shareholders and stakeholders. As weve noticed that the annual report of almost
all LIC companies consists mainly of financial information and the customer services
with a view to earn customer confidence on their services. Ensuring the disclosure about
the more sensitive information about these factors will serve that purpose more closely.
Strengthen key law and institutions
While assessing the corporate governance performance of the Life Insurance Industry of
Bangladesh, we found that IRDA is a Governmental regulatory body established to
regulate the Insurance industry which works only the paper works. No enforcement of
laws and regulations, no activity to modernize the rules and regulations regarding
corporate governance or even for the operational works for the insurance firms.
SEC is another regulatory body for the publicly listed companies to ensure the corporate
governance practices in all publicly listed companies to serve the shareholders and related
stakeholders interests in best. But, SEC has minimal power to enforce the laws and the
regulations as e companies are given some privileges by the justice system of
Bangladesh.
So, it is time to strengthening the law and regulatory bodies to ensure proper corporate
governance not only in the LIC industry, but also in the all business organizations of
Bangladesh.

Enforcement of rules and regulations
As weve stated earlier that the regulatory organizations for ensuring the good corporate
governance in Bangladesh are weak, thus the enforcement of the rules and regulations are
also weak. The justice system should get some power to enforcement of rules and
regulations made by other regulatory institutions.
As the re-insurer and bankers of the life insurance companies plays a vital role in earning
revenues and risk management of the life insurance organizations, they shouldve given
some enforcement power to ensure good corporate governance practices by these LIC
companies.
Ensure greater transparency
The assessment of this paper reveals that the life insurance companies do not maintain the
transparent process in selection of board members, the chairman of the board and
deciding the remuneration package of the directors. Audit committee and the independent
directors works are also having a big question mark as those are also opaque.
So, the life insurance companies should take initiative to make these process more
transparent to earn more confidence among the shareholders and also to the stakeholders.

Concluding Remarks:

The assessment about the life insurance industry of Bangladesh went up with the
conclusion that this sector has minimal corporate governance practices like the other
industries. Though, these sectors companies are traded in almost 10 times to their face
values of the shares in the capital market, there is mostly little or no compliance with the
code of corporate governance by these companies. The shareholding rights gives the
family control over the publicly listed companies and the head of the organization
practices his authority in appointing keens and relatives in the BOD and management
committees of the LIC companies of Bangladesh which we reveal as the most threatening
factor in ensuring good governance. Lack of laws and policy implementation are also the
causes for having poor governance scenario. But, still it is true that, if the companies
want to earn the shareholders and stakeholders confidence, there is no alternative to
establish good governance. Some recent occurrences of removing the directors from the
board for not complying with the regulations proves the fact that the consciousness about
having good Corporate Governance is increasing day by day I Bangladesh.