According to a 2003 Bangladesh Enterprise Institute (BEI) assessment on corporate governance in Bangladesh, corporate governance in the country is sub par. The institutions, government agencies, legal enforcement, and market behavior do not support corporate governance, and there are rarely repercussions for noncompliance. The assessment recommends that reforms be targeted in institutions and sectors to create motivation for transparency and accountability that will ultimately contribute to improved corporate governance. It also emphasizes the importance of raising awareness of the importance of corporate governance and related issues to empower stakeholders. As a response to the 2003 BEI assessment, the BEI established a taskforce to formulate a code of corporate governance. In 2004, it released the Code of Corporate Governance for Bangladesh. In 2006 the Bangladeshi Securities and Exchange Commission (SEC) introduced guidelines for corporate governance which are enforced on a 'comply-or-explain' basis. The Organization for Economic Cooperation and Development indicates that the SEC's capacity building and system development has improved. Also, the SEC has greater authority to sanction and is gradually using its authority more. However, the judiciary serves as a continuing impediment to corporate governance, due to poor training of judges in corporate governance matters and lengthy processes.

General Overview

According to a 2003 Bangladesh Enterprise Institute (BEI) assessment on corporate governance, corporate governance is sub par. The institutions, government agencies, legal enforcement, and market behavior do not support corporate governance. Few incentives promote the implementation of good corporate governance practices, and there are no penalties for not doing so. The assessment recommends that reforms be targeted in institutions and sectors to create motivation for transparency and accountability that will ultimately contribute to improved corporate governance. It also emphasizes the importance of raising awareness of the importance of corporate governance and related issues to empower stakeholders. There are a number of obstacles to the implementation of sound corporate governance principles, including poorly functioning supervisory agencies, the cultural perspective that corporate governance is not important, regulatory enforcement to improve confidence in the market, agency coordination, and the role of auditors. The World Bank's 2007 report, "Bangladesh Strategy for Sustained Growth," indicates that there has been progress in the corporate governance of banks and suggests that the improvements may provide an example for and encourage change in the non-financial sector.

The Asian Development Bank (ADB) and the Bangladeshi government entered into a technical assistance program in 2003 to strengthen the Security and Exchange Commission's (SEC's) enforcement capacity. The Organization for Economic Cooperation and Development (OECD) indicates in its 2006 report on the Implementation of the White Paper on Corporate Governance in Asia that the program involves improving regulation and supervision, including the implementation of corporate governance best practices. The areas that were, and continue to be addressed are: board structure and independent directors, minority shareholder protection, transparency, revising the Companies Act of 1994, and designing a corporate governance code. As a result of these efforts, the SEC's capacity building and system development have improved. Also, the SEC has greater authority to sanction and is gradually using its authority more. However, the judiciary serves as a continuing impediment to corporate governance, due to poor training of judges in corporate governance matters and lengthy processes.

The BEI website reports that, as a result of its own 2003 assessment, it had established a taskforce to formulate a code of corporate governance. In 2004, the BEI released the Code of Corporate Governance for Bangladesh, which includes principles and guidelines for corporate governance for public listed companies, private companies, financial institutions, state-owned enterprises (SOEs), and non-government organizations (NGOs). The Code draws on international best practices. The BEI recommended that companies incorporate provisions of the Code into their Articles of Association, company policy, and reporting practices. Management and boards should be guided by the Code when carrying out their responsibilities of evaluation and accountability. Also, all companies should have an employee Code of Conduct. The Code recommended that the SEC apply a 'comply-or-explain' approach to company compliance with the Code and incorporate it into the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange's (CSE's) Listing Requirements. The SEC does not require that companies comply or provide explanation for non-compliance with the Code of Corporate Governance. However, the BEI website indicates that, in February 2006, the SEC introduced guidelines for corporate governance that are enforced on a 'comply-or-explain' basis. In addition, in 2006, the Asian Development Bank (ADB) approved the Improvement of Capital Market and Insurance Governance TA Loan, which will be directed at improving governance practices. A 2006 speech by Hua Du of the ADB indicates that the loan will be focused on training the staff of the stock exchanges to increase their management capacity and improving the governance structure of the exchanges.

The BEI website discloses that, in order to raise awareness of corporate governance, the BEI instituted a number of training programs to teach companies about the importance of corporate governance and the Code of Corporate Governance for Bangladesh. In early 2004, the BEI's training efforts were not terribly successful, due to lack of participation on the part of chairmen and directors. The same year, they introduced advocacy workshops and seminars. In 2005, the BEI organized the "The Leadership Program on Corporate Governance," which consisted on one-day programs for listed companies, banks and financial institutions, insurance companies, and SOEs. Also in 2005, the BEI collaborated with the Malaysian Institute of Corporate Governance to hold a workshop in Kuala Lumpur. In February 2006, the BEI held a training program in corporate governance practices, in collaboration with the Academy of Corporate Governance (ACG) of Hyderabad, India. The organization is also planning a program that incorporates corporate governance into the core curriculum of Bangladesh's universities.

The regulatory agencies that are relevant to corporate governance are the SEC, the Registrar of Joint Stock Companies (RSJC), the Bangladesh Bank, the DSE, the CSE, and the Institute of Chartered Accountants of Bangladesh (ICAB), as listed in the 2003 BEI assessment. The SEC and RSJC exhibit many of the faults of government agencies in Bangladesh, including insufficient staff and expertise. They often extend their authority beyond their authority and arbitrarily create rules and rulings.

The DSE, established in 1954, and the CSE, established in 1995, are the stock exchanges in Bangladesh, but all stocks listed on the CSE are also listed on the DSE. According to the U.S. Department of Commerce's 2007 Country Commercial Guide, the DSE is one of the smallest share markets in the world. The DSE has 316 listed companies and a market capitalization of US$5 billion, whereas the CSE has 213 listed companies and a market capitalization of US$4.3 billion. They both have had automatic trading systems since 1998.

The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators. The Investment Protection Index consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indexes range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Bangladesh scores 6 in the Disclosure Index, against a regional average of 4.3 and an OECD average of 6.3. It scores 7 in the Director Liability Index, against a regional average of 4.3 and an OECD average of 7 and 10 in the Shareholder Suits Index against regional average of 6.4 and an OECD average of 6.6.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

ID

According to a 2003 BEI assessment on corporate governance in Bangladesh, corporate governance is sub par. The institutions, government agencies, legal enforcement, and market behavior do not support corporate governance. Few incentives promote the implementation of good corporate governance practices, and there are no penalties for not doing so. The assessment recommends that reforms be targeted in institutions and sectors to create motivation for transparency and accountability that will ultimately contribute to improved corporate governance . It also emphasizes the importance of raising awareness of the importance of corporate governance and related issues to empower stakeholders . There are a number of obstacles to the implementation of sound corporate governance principles, including poorly functioning supervisory agencies, the cultural perspective that corporate governance is not important, regulatory enforcement to improve confidence in the market, agency coordination, and the role of auditors . The World Bank's 2007 report, "Bangladesh Strategy for Sustained Growth," indicates that there has been progress in the corporate governance of banks, and suggests that the improvements may provide an example for and encourage change in the non-financial sector .

The ADB and Bangladeshi government entered into a technical assistance program in 2003 to strengthen the SEC's enforcement capacity. The OECD indicates, in its 2006 report on the Implementation of the White Paper on Corporate Governance in Asia, that the program involves improving regulation and supervision, including the implementation of corporate governance best practices. The areas that were and continue to be addressed are board structure and independent directors, minority shareholder protection, transparency, revising the Companies Act of 1994, and designing a corporate governance code. As a result of these efforts, the SEC's capacity building and system development has improved. Also, the SEC has greater authority to sanction and is gradually using its authority more . However, the judiciary serves as a continuing impediment to corporate governance due to poor training of judges in corporate governance matters and lengthy processes .

The BEI website reports that as a response to its own 2003 assessment, it has established a taskforce to formulate a code of corporate governance. In 2004, the BEI released the Code of Corporate Governance for Bangladesh, which includes principles and guidelines for corporate governance for publicly listed companies, private companies, financial institutions, SOEs, and NGOs. The Code draws on international best practices and it is recommended that companies incorporate provisions of the Code into their Articles of Association, company policy, and reporting practices. Management and boards should be guided by the Code when carrying out their responsibilities of evaluation and accountability. Also, all companies should have an employee Code of Conduct . The Code recommended that the SEC apply a 'comply-or-explain' approach to company compliance with the Code, and incorporate it into the DSE and CSE Listing Requirements. The SEC does not require that companies comply or provide explanation for non-compliance with the Code of Corporate Governance. However, the BEI website indicates that in February 2006, the SEC introduced guidelines for corporate governance, which are enforced on a 'comply-or-explain' basis. In addition, in 2006, the ADB approved the Improvement of Capital Market and Insurance Governance TA Loan, which will be directed at improving governance practices. A 2006 speech by Hua Du of the ADB indicates that the loan will focus on training the staff of the stock exchanges to increase their management capacity and improve the governance structure of the exchanges.

The BEI website discloses that, in order to raise awareness of corporate governance, it has instituted a number of training programs to teach companies about the importance of corporate governance and the Code of Corporate Governance for Bangladesh. In early 2004, the BEI's training efforts were not terribly successful, due to a lack of participation on the part of chairmen and directors. The same year, they introduced advocacy workshops and seminars. In 2005, the BEI organized the "The Leadership Program on Corporate Governance," which consisted of one-day programs for listed companies, banks and financial institutions, insurance companies, and SOEs. Also in 2005, the BEI collaborated with the Malaysian Institute of Corporate Governance to hold a workshop in Kuala Lumpur. In February 2006, BEI held a training program in corporate governance practices, in collaboration with the ACG of Hyderabad, India. The organization is also planning a program that incorporates corporate governance into the core curriculum of Bangladesh's universities.

Principle II: The Rights of Shareholders and Key Ownership Function

ID

The rights of shareholders are included in the Companies Act 1994. The Act grants shareholders certain supervisory responsibilities such as attending meetings, appointing and removing directors, obtaining financial information, and approving the annual balance sheet. Shareholders are also given mechanisms to enforce their rights. In addition, as a protection for shareholders, the directors and management of a company are subject to such penalties as fines and imprisonment for not filing periodic returns with the RJSC . Also, shareholders decide on dividends but they may not exceed the amount recommended by the board . The 2003 BEI assessment reports that shareholders are not involved in the daily management of the company. There are a number of factors that are detrimental to shareholders rights including insufficient board disclosure, board size and makeup, and a lack of independent directors. It is difficult to exercise minority shareholder rights . Corporate governance in SOEs is poor because there is little oversight by the government, and the majority shareholders rarely play a role in the financial and managerial oversight of an SOE .

The 2007 OECD report notes that the state, as the dominant shareholder in SOEs, fails to always exercise its shareholder rights. For this reason, non-controlling shareholders may be negatively affected. Shareholder protection is also stunted by poor disclosure of the identities of beneficial owners. It was anticipated that with the establishment of the Central Depository, transparency of shareholder identity would improve, but thousands of fictitious accounts have been discovered. However, the SEC is working on upgrading the Central Depository. The monitoring of the board by institutional investors needs to be improved. Institutional investors fail to take advantage of their power as block shareholders, in part because of incomplete proxy legislation. Also, there is no legislation for class actions, and the high cost of litigation discourages collective shareholder action.

The Code of Corporate Governance includes mandates for the protection of shareholders' interests, including provisions for transparency and accountability for the protection of minority shareholders. The Code recommends that companies empower their shareholders beyond the legal and regulatory requirements. Regulators are required to uphold the rights of shareholders . The Code also recommends that companies ensure that shareholders are informed of their rights, particularly voting rights, so that they may fully assert their power .

Principle III: The Equitable Treatment of Shareholders

II

According to the 2003 BEI assessment, the Companies Act of 1994 provides adequate protection for minority shareholders, especially Section 233. However, most shareholders do not know about Section 233 and other minority shareholders rights . The assessment recommends increased minority shareholder participation . There are a number of provisions for the protection of minority shareholders. Minority shareholders with at least 10 percent of shares may take court action against the company. However, exercising minority shareholder rights may be costly, and proving a director is at fault is difficult . The SEC protects minority shareholders, sometimes overzealously, at the expense of the majority shareholders in listed companies . The Code of Corporate Governance expands upon the existing legislation and suggests that minority shareholders be able to elect a director. However, there is insufficient information publicly available addressing this principle. According to the International Monetary Fund's 2005 Selected Issues paper on Bangladesh, there have been improvements in corporate governance in banks. There is a requirement that independent directors represent the interests of minority shareholders.

Principle IV: The Role of Stakeholders in Corporate Governance

II

The 2003 BEI assessment reports that creditors are the primary stakeholders in Bangladesh because commercial financing is principally obtained through borrowing from banks and financial institutions, as opposed to equity or the capital market. The assessment recommends that stakeholders' awareness of corporate governance issues be fostered in order to strengthen their role. However, there is insufficient information publicly available addressing this principle.

Principle V: Disclosure and Transparency

ID

In Bangladesh, company disclosure to shareholders and the public is the only mechanism that shareholders and investors have to evaluate a company's performance and oversee the activities of the board. The 2003 BEI assessment points out the importance of strict enforcement of regulations pertaining to disclosure. However, disclosure is often inaccurate and incomplete . The law requires that books recording the company finances be kept at the registered office and be available for inspection by government officials. Sanctions for noncompliance include fines and imprisonment . The assessment evaluates that company disclosure based on the requirements of the Bangladesh Accounting Standards (BASs) is "inadequate" (p. 26) and "not consistent" (p. 54), with practically no consequences. It adds that weak auditing and regulation perpetuate the situation. Other relevant information frequently goes unreported .

According to the World Bank's 2003 Report on the Observance of Standards and Codes (ROSC), the Companies Act of 1994 includes accounting and financial reporting requirements for all companies incorporated in Bangladesh, such as the preparation and publication of financial statements, disclosure requirements, and auditing. However, financial statement disclosure requirements are unclear, and the formatting and disclosure requirements are outdated. In addition, there are inconsistencies with the International Accounting Standards (IASs). The ROSC recommends that the committee formed to update the Companies Act of 1994 should consider these problems . The SEC is responsible for the regulation of the financial reporting of listed companies. In 2000, the SEC issued a rule that requires companies to verify that their financial reports are consistent with IASs and their audits are carried out in accordance with International Standards on Auditing (ISAs) which were adopted by the ICAB. However, the rule is not fully enforced. The ROSC recommends that the SEC issues a new rule that makes compliance with IAS mandatory.

The BEI website indicates that in February 2006 the SEC introduced guidelines for corporate governance which are enforced on a 'comply or explain' basis. The 2007 OECD report states that the SEC has issued disclosure requirements for substantial shareholdings which is progress in the strengthening of the non-financial disclosure framework. In addition, the SEC has imposed procedures for the disclosure of price sensitive information . According to the International Monetary Fund's 2005 Selected Issues paper on Bangladesh, there have been improvements in corporate governance in banks, for example, banks are required to publish their annual financial statements in newspapers .

Principle VI: The Responsibilities of the Board

ID

The 2003 BEI assessment noted that most directors do not know their duties or responsibility to shareholders interests, and they consequently do not fulfill their duties. There is also no forum in which directors may carry out their functions, as board meetings and AGMs do not serve as such. Companies have low expectations for their boards. Qualified and independent directors are rare. There are no training prerequisites for directors . Also, there are poor requirements for the disclosure of information about the board to the shareholders. According to the International Monetary Fund's 2005 Selected Issues paper on Bangladesh, there have been improvements in corporate governance of banks. CEO's are subject to the fit and proper test, and a similar test is applied for bank directors. There is the requirement that independent directors represent the interests of minority shareholders. Also, the number of board directors and the time they serve has been limited, as well as restrictions placed on multiple members of one family serving on the same board . The Code of Corporate Governance includes mandates pertaining to the board and directors. Also, the BEI website indicates that in February 2006 the SEC introduced guidelines for corporate governance which are enforced on a 'comply or explain' basis. In addition, a South Asian Federation of Accountants report indicates that there are requirements for the chairman to be an independent director and a separation of the roles of chairman and CEO . There are guidelines for director remuneration . The board is responsible for company oversight, determining risk management and internal control systems and monitoring and approving financial reports. There are also requirements for board meetings.