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Term paper on
Corporate Governance practice in banngladesh
Corporate Finance
[FIN – 361]
SUBMITTED TO:
Nazmul Hasan
Senior lecturer of school of business
SUBMITTED BY:
A.S.M.Jobayer ID: 08
410022
Raihan shikder
ID: 08410085
Shafiqul Islam ID:09510272
Dept.: BBA
Sl Topics
Pages
1 Introduction 1
2 Literature review
2-5
3 Findings
5-15
4 Conclusion & Recommendation 15-18
5 Bibliography
19
Executive Summary
During the last decade, Bangladesh's economic and social development achievement
s have been impressive. Gross domestic product (GDP) growth averaged 5% per annu
m with fiscal and current account imbalances contained at manageable levels, low
rates of inflation, sustainable public debt, and stable interest and exchange r
ates. During the 1990s, income poverty fell from 59% to 50%, infant mortality wa
s halved, and life expectancy increased from 56 to 65 years. Over the past 5 yea
rs, average economic growth exceeded 5% and poverty incidence continued to decli
ne. The vast majority of children attend primary school, and gender parity has b
een achieved in primary and secondary education with a committed Government poli
cy for girls' education.
Although the overall governance setting is marked by poor law and order, systemi
c corruption, and declining quality of the civil service, several positive aspec
ts of governance explain Bangladesh's success in accelerating growth and poverty
reduction. Since the 1990s, the Government has increasingly supported private s
ector development through sound macroeconomic management and measures to open up
the economy. Macroeconomic stability and an increasingly open trade environment
have contributed to vigorous annual export growth of 11% with substantial emplo
yment generation, especially in the ready-made garment sector. The sustained use
of public resources to support technological progress in agriculture, rural inf
rastructure, health, and education, combined with progressive policies to ensure
participation and strong partnerships with nongovernment organizations (NGOs) t
o deliver grassroots public services, have helped Bangladesh make a strong start
in meeting the Millennium Development Goals (MDGs). Open labor market policies
have resulted in income from remittances and peacekeeping equivalent to 50% of e
xport earnings, much of which directly benefits the rural poor.
However, nearly half of the population remains poor and per capita GDP remains e
xtremely low at $418 in fiscal year 2004. Maternal and child mortality rates are
extremely high, the quality of education is poor, gender discrimination continu
es, and efforts to overcome poverty face numerous constraints. Broad-based growt
h and social development is needed to create the opportunities and capacities re
quired to accelerate poverty reduction.
Although the investment climate in Bangladesh compares favorably with many Asian
countries, the cost of doing business is high, due to the combination of poor i
nfrastructure, corruption, burdensome regulation, and limited access to finance.
Government revenues (at only 10.6% of GDP compared with a regional average of 1
9%) remain far too low to meet growing demand for infrastructure and social serv
ices.
Introduction
Corporate governance is nothing more than how a corporation is administered or c
ontrolled. Corporate governance takes into consideration company stakeholders as
governmental participants, the principle participants being shareholders, compa
ny management, and the board of directors. Adjunct participants may include empl
oyees and suppliers, partners, customers, governmental and professional organiza
tion regulators, and the community in which the corporation has a presence.
Because there are so many interested parties, it’s inefficient to allow them to co
ntrol the company directly. Instead, the corporation operates under a system of
regulations that allow stakeholders to have a voice in the corporation commensur
ate with their stake, yet allow the corporation to continue operating in an effi
cient manner. Corporate governance also takes into account audit procedures in o
rder to monitor outcomes and how closely they adhere to goals, and to motivate t
he organization as a whole to work toward corporate goals. By using corporate go
vernance procedures wisely and sharing results, a corporation can motivate all s
takeholders to work toward the corporation’s goals by demonstrating the benefits,
to stakeholders, of the corporation’s success.
Corporate governance may include:
- Control and direction processes
- Regulatory compliance
- Active ownership and investment in a company
Primarily, though, corporate governance refers to the framework of all rules and
relationships by which a corporation must abide, including internal processes a
s well as governmental regulations and the demands of stakeholders. It also take
s into account systems and processes, which deal with the daily working of the b
usiness, reporting requirements, audit information, and long-term goal plans.
Corporate governance provides a roadmap for a corporation, helping the leaders o
f a company make decisions based on the rule of law, benefits to stakeholders, a
nd practical processes. It allows a company to set realistic goals, and methodol
ogies for attaining those goals.
Literature review
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 ow
n common
set of benchmarks for corporate governances, for instance, the OECD Council call
ed upon
the OECD to develop a set of CG standards and guidelines and published in May 19
99 a common set of guiding principles on corporate governance for all OECD membe
r countries.
Findings
Short-term
Code of Corporate Governance and Best Practice Recommendations:
The current status is that many Asian countries have adopted governance guidelin
es and codes of best practice. Like these countries, Bangladesh needs to have a “C
ode of Corporate Governance and Best Practice Recommendations” which can be either
rule based or principles based. Bangladesh Enterprise Institute (BEI), Corporat
e Governance Committee of ICAB, and SEC have developed separate Codes for Corpor
ate Governance for Bangladesh. The Government must take initiatives to make thes
e implemented by making necessary changes in the Companies Act.
Implement Competition Policy:
An effective competition policy fosters a flexible, dynamic, and competitive pri
vate sector that leads to sustained and widely shared economic development. Bang
ladesh needs to formulate a Competition Policy which will ensure a culture of go
od corporate governance to thrive. Competition policy helps bring about efficien
cy, reduce price distortions, lower the risk of poor investment decisions, promo
te greater accountability and transparency in business decisions, and lead to be
tter corporate governance.
Medium-term
The legal and regulatory framework should ensure that non-controlling shareholde
rs or minority shareholders are protected from exploitation by insiders and cont
rolling or sponsor shareholders:
Government should introduce measures, or enhance existing measures, to provide n
o controlling shareholders with adequate protection from exploitation by control
ling
Shareholders.
These measures may include, among other things: (i) strengthening disclosure req
uirements (particularly of self-dealing/related-party transactions and insider t
rading);60 (ii) ensuring that regulators have the capacity to monitor companies
for compliance with these requirements and to impose substantial sanctions for w
rongdoing; (iii) clarifying and strengthening the fiduciary duty of directors to
act in the interest of the company and all of its shareholders; (iv) prohibitin
g indemnification of directors by companies for breaches of fiduciary duty; and
(v)
providing shareholders who suffer financial losses with private and collective r
ights 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 ma
nagers, controlling shareholders and other insiders. There is a need for directo
r training, voluntary codes of conduct, expectations for professional behavior a
nd directors’ resources and authority vis-àvis management. Also it is required to re
duce or eliminate loopholes by tightening standards for director “independence”, by
making “shadow” directors liable for their actions, by increasing sanctions for viol
ations 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 rig
hts 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 ens
ured 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 imperat
ive.
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 strengthen
ed so that it can devise and enforce a code for good CG. The Companies Act has t
o be amended and updated to have consistency with Bangladesh Accounting Standard
s (BAS), SEC requirements and the Bank Companies Act. Independent Audit Committe
e should be made compulsory for all listed companies. Strict implementation of a
ccounting and auditing standards are very important. As the lead regulatory body
overseeing corporate accounting and reporting, the SEC has a critical role to e
nsure that public co mpany boards are properly structured and organized and have
the resources to accomplish the objectives of adding value to shareholders, min
imize risk of key shareholders and hold management responsible for corporate res
ults. Ruthless monitoring of compliance and severe punishment of transgressors c
an 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.