ICSB Journal- Practice of Corporate Governance in the Banking Sector of Bangladesh by ICSB Bangladesh

A CORPORATE PROFESSIONAL JOURNAL Volume : XIX Issue : 4

October-December-2017

Practice of Corporate Governance in the Banking Sector of Bangladesh

Institute of Chartered Secretaries of Bangladesh (ICSB) established under an Act of Parliament i.e. Chartered Secretaries Act 2010 is the only recognized professional body in Bangladesh to develop, promote and regulate the profe55ion of Chartered / Company Secretaries in Bangladesh. The Institute was initially established under a license from the Ministry of Commerce in 1997 as the Institute of Chartered Secretaries and Managers of Bangladesh (ICSMB) and subsequently converted to Institute of Chartered Secretaries of Bangladesh (ICSB). The affairs of the Institute of Chartered Secretaries of Bangladesh 0CSB) are managed by a Council consisting of thirteen elected members and five nominees of the Government. The major contribution of a Chartered Secretary is in the corporate sector. Chartered Secretary is a requisite qualification to become a Company Secretary. Company Secretary is an important professional, aiding the efficient management of the corporate sector. Company Secretary is a Statutory Officer under the Companies Act 1994. According to Bangladesh Securities and Exchange Commission (BSEC) all the listed companies should have a Company Secretary. Company Secretary is the compliance officer of the company, who has to interact, coordinate, integrate and cooperate with various other functional heads in a company.

IN THIS ISSUE The Council 2016-2019

Editorial

Message from the President

Year at a Glance-2017

Institute News

ARTICLES Corporate Governance in the Banking Sector of Bangladesh Prof Dr Feroz I. Faruque FCS

Are the Corporate Governance Practices in the Banking Sector of Bangladesh Inevitable? Mohammad Shahajahan FCS

Company Secretary and Corporate Governance at Banks-Surging Ahead Bipul Kumar Bhowmik FCS

Basel committeeâ&#x20AC;&#x2122;s revised principles on Corporate Governance Md. Shiful Islam ACS

Prospect of Corporate Governance in Financial Institution to improve ďŹ nancial sector: Bangladesh Perspective Dr. A.Q. Adeleke (M.I.M, A.C.P.M); Md. Lipon Hossain; Md. Julker Naim

Does Good Corporate Governance Practice have Impact on the Financial Performance? Evidence from Private Banks of Bangladesh Md. Sharif Hasan ACS; Sabreya Khanom Zuma

Corporate Governance-A dire need of Banking Industry Babul Meah ACS

Banking Sector in Bangladesh: Regulations, Compliance and Good Governance Md.Mizanur Rahman QCS

THE COUNCIL 2016-2019

Secretary to the Council

Kazi Shamsul Alam

OCTOBER-DECEMBER-2017

BSEC CORPORATE GOVERNNCE GUIDELINES Composition of Board: While we appreciate BSEC’s endeavor to further streamline Corporate Governance issue in the country, strict compliance is the essence of success of such good initiatives. The intention of directors is of paramount importance in this respect. We have few suggestions such as: Under sub-clause (iii) at least 1/10th (one tenth) of the board of directors shall be selected/elected/appointed from the personalities of age between 25 (twenty five) years to 40 (forty) years. This appears to be a little premature age for being a director; it is suggested to be rather 35 years of age as a minimum as education and experience is important for a director to effectively contribute in the management of a company. Management maturity and attaining majority after crossing 18 years of age is not the same kind of maturity. Independent Director: It is further observed in case of Independent Director of a publicly traded company the selection of an Independent Director is very stringent which is perfectly appreciable. Independent director shall not be an Independent Director in more than 3 listed Companies at a time, instead of 5 and must be of diversified nature of business, meaning not in the same field of business. The post of independent director(s) cannot remain vacant for more than 60 days instead of 90 days. No auditor in public practice, his spouse and his children be allowed for the position of independent director, while appointing independent director(s). The formal letter of appointment specifying the roles and responsibilities of independent director(s) as well as code of conduct of the board members shall be issued, read and signed by the person concerned as a matter of oath. Compulsory Committees: For ensuring good governance in the listed companies, the board of directors shall have among 5 compulsory committees Environment and Social Responsibility Committee, not to be an Optional committee. Whistle Blower Policy: This appears to have been totally left out. In this age of rampant scams, where economic motives precede

over all virtues and traditions, protection of larger public interest from great corporate scandals has become a matter of great importance. A whistleblower as defined by policy is an employee of an Organization who reports an activity that s/he considers to be illegal or dishonest to one or more of the parties specified in Policy. The Whistle-blower policy has been recognized as one of the basic features of Corporate Governance Norms by most of the nations across the world. It also suggested that the whistle blower policy of the company should be widely publicized to the target segments. It is to report to the management, their concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. There are global legislations in place, which protect whistle blowers such as The Public Interest Disclosure Act, 1998, in the UK, which protects whistle blowers from victimization and dismissal and the Sarbanes Oxley Act, 2002, which provides for the protection of whistle blowers and is applicable to employees in public listed companies. A non-executive director could act as an ombudsman and take charge of such an investigation related to matters raised by a whistle blower. If the disclosures are found to be true, it is suggested to initiate adequate actions as to be a deterrent against such offences in future. The policy should be such that it encourages such disclosures to be made but ensures that frivolous accusations do not become a means to harass management.

Prof. Dr. Feroz I. Faruque FCS Editor

OCTOBER-DECEMBER-2017

ear Professional Colleagues,

I convey my very best wishes and sincere thanks to all of you as we wrap up an eventful 2017 and shift our momentum into the next calendar year. The past 12 months have been marked by noteworthy achievements and changes in the Institute. As we reﬂect on the past year, I believe that we have many reasons to have enormous pride in our accomplishments and look forward with enthusiasm to next year. I always express my profound gratitude and congratulations to all the Members who contributed for the continuous growth of the Institute. Unity is our strength. This idea dates back to the earliest years of our beloved Institute, when the foundation was ﬁrst proposed. The idea behind it was simple: that an Institute with Members who had a wide variety of backgrounds and abilities would be capable of better service with professional education than others in the Corporate World. You are aware that the ‘4th ICSB National Award of Corporate Governance Excellence 2016’ was OCTOBER-DECEMBER-2017

organized at the Celebrity Hall of BICC Dhaka with great enthusiasm where Mr. Tofail Ahmed MP, Hon’ble Minister, Ministry of Commerce, Government of the People’s Republic of Bangladesh graced the occasion as the Chief Guest and handed over the Certificates and Trophies to the Winning Companies. Mr. Shubhashish Bose, Secretary, Ministry of Commerce, Government of the People’s Republic of Bangladesh and Prof. Dr. M. Khairul Hossain, Chairman, Bangladesh Securities and Exchange Commission (BSEC) graced the occasion as the Special Guests. In this great gathering of the corporate leaders it was emphasized that practicing good Corporate Governance is the need of the time. I would like to thank all the members working in different companies for their whole hearted supports only for which it was possible to make the event a grand success in spite of some unexpected unimaginable complexities. I would like to take the opportunity to congratulate the 18 qualified Chartered Secretaries who were inducted as Associates and 4 Associate Members who were elevated as Fellow Members during the 4th quarter. I wish a glorious career for them and expect that they will contribute generously for the development of the Institute.

MESSAGE FROM THE PRESIDENT

You will also be happy to know that a workshop on ‘Retail Investors Education and Protection’ was organized during this quarter at TCB Auditorium, Dhaka to celebrate the World Investors Week (2-8 October). Prof. Dr. M. Khairul Hossain, Chairman, Bangladesh Securities & Exchange Commission (BSEC) graced the occasion as the Chief Guest while Prof. Md. Helal Uddin Nizami, Mr. Md. Amzad Hossain, & Prof. Dr. Swapan Kumar Bala, Commissioners of BSEC graced the occasion as the Special Guests. It is also my pleasure to inform you that a number of initiatives have been for the gradual development the institute. A delegates of ICSB met Honorable Minister for Commerce at the Bangladesh Secretariat and was apprised about the various initiatives that ICSB undertook for the development of its Members. The Minister praised the excellent arrangement of the 20th Anniversary Celebration Programme of ICSB and expressed his satisfaction being present as the Chief Guest of the Programme. The 46th anniversary of the great Victory Day was celebrated at the Institute premises on with a renewed pledge to build ‘Golden Bangla’ imbued with the spirit of the War of Liberation. An art competition and poetry recitation on the War of Liberation were also organized where a good number of children of ICSB Members participated.

delegation for a whole hearted support from the World Bank for the development of the Institute in future. Bangladesh Securities and Exchange Commission (BSEC) issued the revised draft Corporate Governance Guidelines in December 21, 2017. Comprehensive comments have duly been submitted to the (BSEC). I am sure that the new changes will deﬁnitely improve the Corporate Governance environment of Bangladesh. I wish you all a very happy and prosperous new year, 2018. May Almighty Allah help us to make the Institute a world class professional Institute in the country. Kind Regards,

Mohammad Sanaullah FCS President

For the third time we have participated in Bangladesh Capital Market Expo 2017 at the Diploma Engineers’ Institute. The Programme was inaugurated by the Hon’ble Commerce Minister, Tofael Ahmed MP as the Chief Guest. A delegation from the institute met C.Q.K Mustaq Ahmed, Chairman of Financial Reporting Council (FRC) on December 6, 2017 at his oﬃce. The President requested to include the name of ICSB in the list of their stakeholders. Mr. Ahmed assured him to look after the matter with importance. A delegation of ICSB also met Ms. Suraiya Zannath, Lead Financial Management Specialist for the Governance Global Practice of the World Bank at her oﬃce on December 2017. She assured the

OCTOBER-DECEMBER-2017

Year at a Glance-2017 February   

Organized ICSB Annual Picnic on February 3, 2017 at the Rover Scout Training Center Bahadurpur, Gazipur. Around 700 people participated in this great annual congregation of ICSB. Organized an Orientation Programme for the newly enrolled 39th Batch students of ICSB at the Conference hall of ICSB on February 11, 2017. Organized a rally towards the Shaheed Minar with ﬂowers, garlands, banner and festoon on 21st February, 2017 to commemorate the Language Martyrs.

March  

 

ICSB Delegates met with Shubhashish Bose, the newly appointed Secretary In-charge, Ministry of Commerce at Bangladesh Secretariat on March 14, 2017. The newly elected Council Members of ICSB led by its President Mohammad Sanaullah FCS met Prof. Dr. M. Khairul Hossain, Chairman and other high Oﬃcials of Bangladesh Securities and Exchange Commission (BSEC) at his oﬃce. Celebrated the 46th Independence Day of Bangladesh at the Institute. An Art Competition for the children of the Members of the Institute was also organized. Published the results of the Chartered Secretary July–December Session-2016.

April  

Arranged a Training Programme on ‘Company Secretarial Practice’ for the Company Secretaries of diﬀerent companies under the Power Division, Ministry of Power, Energy & Mineral Resources, GoB. Organized a Continuing Professional Development (CPD) Programme on ‘One Stop Service Act 2017 (proposed) Initiated by Bangladesh Investment Development Authority (BIDA) at Hotel Purbani International, Dhaka. Mr. Kazi M. Aminul Islam Executive Chairman of BIDA graced the occasion as the Chief guest.

May 

 

Arranged a Certificate Awarding Ceremony on successfully completion of a Professional Training Programme on ‘Company Secretarial Practice’ for the Company Secretaries of different companies under the Power Division, Ministry of Power, Energy & Mineral Resources, GoB. Organized Professional Training Programme on ‘Management of Provident Fund, Workers’ Profit Participation Fund and Gratuity Fund’. Organized a 3 days Professional Training Programme on ‘Standardization of Annual Report’.

June    

Delegates of ICSB met Mr. Abul Kashem Md. Shirin, Managing Director & CEO of Dutch Bangla Bank Limited. Celebrated 7th anniversary of Enactment of Chartered Secretaries Act-2010. ICSB delegation met Md. Nojibur Rahman, Chairman, National Board of Revenue (NBR). ICSB delegation met Dr. Md. Abdur Razzaque MP, Chairman, Parliamentary Standing Committee for Ministry of Finance.

July    

Undertook relief operations among around 100 affected families at village Khidrochapri, Bilmohisha and Jangalia Char areas of Sirajganj district which were severely affected by the recent devastating flood. ICSB President met the newly Qualified Chartered Secretaries (QCS) of the Institute. Organized a workshop on Reforms of Companies Act-1994 at BICC. Mr. Shubhashish Bose, Hon’ble Secretary, Ministry of Commerce chaired the session. Celebrated 20th Anniversary of ICSB at BICC. Mr. Tofail Ahmed MP, Minister for Commerce, GoB graced the occasion as the Chief Guest and Mr. Shubhashish Bose, Secretary, MoC attended as Special Guest.

OCTOBER-DECEMBER-2017

Year at a Glance-2017 August 



   

Organized a CPD Programme on ‘National Budget 2017-18 and Finance Act, 2017’ at Hotel Purbani where M A Mannan, MP, Hon’ble State Minister of Finance and Planning, Govt. of Bangladesh graced the occasion as the Chief Guest. A delegation of ICSB attended a discussion meeting on Draft New Companies Act 2016 at the Conference Room of the Ministry of Commerce. The Council submitted a comprehensive recommendation to incorporate in the new Companies Act. The 7th AGM of the Institute was held at BIAM Auditorium, Dhaka. A 4 Day Professional Training Programme on ‘Internal Audit and Control Environment’’ was arranged at the Institute. Published the results of the Chartered Secretary examination held in July 2017. October Organized a CPD Workshop on ‘Retail Investors Education and Protection’ to celebrate the World Investors Week (2-8 October). Prof. Dr. M. Khairul Hossain, Chairman, Bangladesh Securities & Exchange Commission (BSEC) graced the occasion as the Chief Guest.

November  



A delegates of ICSB met Honorable Minister for Commerce. Organized the ‘4th ICSB National Award of Corporate Governance Excellence 2016’ BICC, Dhaka. Mr. Tofail Ahmed MP, Hon’ble Minister, Ministry of Commerce, GoB graced the occasion as the Chief Guest while Mr. Shubhashish Bose, Secretary, Ministry of Commerce, GoB and Mr. Prof. Dr. M. Khairul Hossain, Chairman, BSEC graced the occasion as the Special Guests. Celebrated the Recognition of 7th March Speech of the Father of Nation Bangabandhu Sheikh Mujibur Rahman in ‘the Memory of the World International Register’ as the ‘World’s Documentary Heritage’ declared by the UNSECO.

December    

Celebrated the 46th anniversary of the great Victory Day at the Institute premises. ICSB Participated in Bangladesh Capital Market Expo 2017 for the third time at the Diploma Engineers’ Institute. ICSB delegation met C.Q.K Mustaq Ahmed, Chairman of Financial Reporting Council (FRC) at his oﬃce. ICSB delegation met Ms. Suraiya Zannmath, lead Financial Management Specialist of World Bank at her oﬃce.

OCTOBER-DECEMBER-2017

INSTITUTE NEWS

he 4th quarter (October – December) of the year 2017 was eventful for the Institute.

•

Education Committee Meeting held on November 16, 2017

•

Corporate Governance Award Committee Meeting held on November 20, 2017

Seminar and Conference Sub Committee met on October 31, 2017

•

Membership & Registration Committee Meeting held on December 20 , 2017

Professional Development Sub Committee met on November 14 and 21, 2017

•

Research and Development Committee Meeting held on December 26, 2017

Dhaka Regional Chapter Sub Committee met on December 9, 2017

•

Examination Committee Meeting held on November 4, November 11 and December 30, 2017

Members’ Placement Sub Committee met on December 13, 2017

•

Members’ Welfare and Recreation Sub Committee met on November 4 and December 14, 2017

MEETINGS INTERNAL Council Meeting During the 4th quarter, the Council met on October 30 and December 30, 2017 in which the following actions and major decisions were taken: •

Inducted Mr. Mohammad Abu Faruque , Joint Secretary, Ministry of Finance as Councilor of the Institute in place of Mr. Ekhlasur Rahman, Additional Secretary Ministry of Finance, GoB

•

Appointed Mr. Kazi Md. Shamsul Alam, Former Joint Secretary, GoB as the Secretary of the Institute

•

13 Associate Members were elevated as Fellow Members and 18 Qualiﬁed Chartered Secretaries were inducted as Associate Members

Meetings of Committees

the

Meetings of Sub Committees Meetings of the following Sub-Committees were also held during the 4th quarter •

Journal & Publication Sub Committee met on October 14 & December 3, 2017

•

Information Technology Sub Committee met on October 14, 2017

•

Secretarial

Practice

Sub

Committee met on October 21 and December 12, 2017

MEETINGS EXTERNAL Meeting with Honorable Commerce Minister Tofail Ahmed, MP ICSB delegation led by its President, Mohammad Sanaullah FCS met Tofail Ahmed MP, Hon’ble Minister for Commerce, Government of

Standing

Meetings of the following Standing Committees were held during the 4th quarter •

•

The Executive Committee Meeting held on October 28, 2017 Audit Committee Meeting held on October 31, 2017

OCTOBER - DECEMBER - 2017

From the left: Shubhashish Bose, Honorable Commerce Secretary, Tofail Ahmed MP, Hon’ble Minister for Commerce, Mohammad Sanaullah FCS, President, Itrat Husain FCS, Past President and Council Member, Md. Selim Reza FCS, Vice President, Nazmul Karim FCS Treasurer of the Institute

INSTITUTE NEWS Bangladesh in November, 2017. The President expressed his sincerest thanks and gratitude to the Hon’ble Minister for his gracious presence during the 20th Anniversary Celebration Programme of ICSB. The President then apprised the Hon’ble Minister about the various initiatives that ICSB undertook for development of its Members. The President specially briefed the Hon’ble Minister about the upcoming ‘4th ICSB National Award for Corporate Governance Excellence-2016’ to be held on November 30, 2017 and invited him for his kind consent to grace the occasion as the Chief Guest of the Programme. Honorable Commerce Minister gave a patient hearing to various activities of the Institute and gave consent to be the Chief Guest at the 4th ICSB National Award for Corporate Governance Excellence-2016. He praised the excellent arrangement of the 20th Anniversary Celebration Programme of ICSB and expressed his satisfaction being present as the Chief Guest of the Programme. He then appreciated the role of ICSB in promoting professionalism and development of the Company Secretaries profession in the country and also lauded ICSB’s international standard professional education for

developing Corporate Governance and professionalism in corporate world. He assured that the Ministry of Commerce will do everything possible for further development of the profession in the country. Mr. Shubhashish Bose, Hon’ble Commerce Secretary were also present in the meeting. The Council Members thanked the Hon’ble Minister for giving his valuable time and hoped that his continued support and guidance will help the Institute to move forward to achieve its objectives. Md. Selim Reza FCS, Vice President, Nazmul Karim FCS Treasurer, Itrat Husain FCS, Past President and Council Member of the Institute were also present during the meeting. Meeting with Honorable Chairman of Financial Reporting Council (FRC) ICSB delegation led by its President Mohammad Sanaullah FCS met C.Q.K Mustaq Ahmed,

Chairman of Financial Reporting Council (FRC) on December 6, 2017 at his office. The President of ICSB congratulated Mr. Ahmed at his new office and said that FRC will ensure accountability and improve performance of the professional accountants of Bangladesh. The President further said that FRC will bring transparency of the firms listed with the stock market. He requested the Chairman of FRC to include the name of ICSB in the list of their stakeholders. The Chairman of FRC said that the local stock markets are doing great and there is no abnormal behavior in the stock prices. The FRC will be the sole watchdog to monitor the functions of auditors and ensure transparency and accountability in accounting and auditing of financial organisations including various government autonomous and non-government institutions, he added.

From the left: Mohammad Bul Hassan FCS, Senior Vice President, Mohammad Sanaullah FCS, President of ICSB, C.Q.K Mustaq Ahmed, Chairman of Financial Reporting Council (FRC), Itrat Husain FCS, Past President and Council Member and Kazi Shamsul Alam, Secretary of the Institute

OCTOBER - DECEMBER - 2017

INSTITUTE NEWS Meeting with Honorable Financial Management Specialist of the World Bank ICSB delegation led by its President Mohammad Sanaullah FCS met Ms. Suraiya Zannath, Lead Financial Management Specialist for the Governance Global Practice of the World Bank at her oﬃce on December 20, 2017. A livey discussion took place regarding the current activities of the Institute for establishing Governance Excellence in the Corporate Sector of Bangladesh. Ms.

Md. Selim Reza FCS Vice President, Itrat Husain FCS, Past President and Council Member, Kazi Ashiqur Rahman FCS, Fellow Member of ICSB, Kazi Shamsul Alam, Secretary, Md. Shamibur Rahman ACS, Director of the Institute. Workshop of ICSB on ‘Retail Investors Education and Protection’ ICSB in collaboration with Dhaka Stock Exchange Limited (DSE) organized a workshop on ‘Retail Investors Education and

Suraiya Zannath, Financial Management Specialist of the World Bank along with the delegation of ICSB

Zannath gave a patient hearing and assured the delegation for a whole hearted support from the World Bank for the development of the Institute in future.

Protection’ on October 7, 2017 at TCB Auditorium, Karwan Bazar, Dhaka to Commemorate the World Investors Week (2-8 October), 2017.

The Council Members thanked for her valuable time and hoped her valuable guidance for the Institute to move forward to achieve its objectives.

Prof. Dr. M. Khairul Hossain, Chairman, Bangladesh Securities & Exchange Commission (BSEC) graced the occasion as the Chief Guest while Prof. Dr. Swapan Kumar Bala, Mr. Md. Amzad

The delegation also included OCTOBER - DECEMBER - 2017

Hossain, & Prof. Md. Helal Uddin Nizami, Commissioners of BSEC graced the occasion as the Special Guests. Mr. Mohammad Sanaullah FCS, President of ICSB chaired the session. The Keynote paper was presented by Mr. K. A. M. Majedur Rahman, Managing Director, DSE. Appreciating the timely initiative of ICSB, the Chief Guest Prof. Dr. M. Khairul Hossain in his speech mentioned that Bangladesh as one of the Category A Level members of the International Organization of Securities Commissions (IOSCO) is celebrating the World Investors Week, 2017 for the ﬁrst time. For this BSEC has jointly undertaken a weeklong literacy programme on share market in collaboration with various statutory bodies, merchant banks and professional institutions. The main objective of this programme is to create awareness and enlighten our small investors about the risks and protection of the share markets before going to invest. Mohammad Sanaullah FCS, President of ICSB in his speech mentioned that the main objective of the workshop is to explore more comprehensive and eﬀective way to raise consciousness among the retail investors. ‘I strongly believe that we will come up with more ideas for the protection of the interest

INSTITUTE NEWS

From left: M. Naseemul Hye FCS, Former Sr. Vice President, ICSB, Prof. Dr. Swapan Kumar Bala, Commissioner, BSEC, Mr. Md. Amzad Hossain, Commissioner, BSEC, Prof. Dr. M. Khairul Hossain, Chairman, BSEC, Mr. Mohammad Sanaullah FCS, President, ICSB, Prof. Md. Helal Uddin Nizami, Commissioner, BSEC, Mr. K. A.M Majedur Rahman, Managing Director, DSE, Hossain Sadat FCS, Former Council Member, ICSB and Md. Selim Reza FCS, Vice President, ICSB

of retail investors from this workshop,’ he added. The keynote paper presenter Mr. K. A. M. Majedur Rahman put a precise global interexchange comparison vis-à-vis inter country comparison. He also mentioned about the present situation of Bangladesh Stock Exchange Market and the future prospects of the local exchanges of its economy. The oﬃcial

discussants of the session were Mr. M. Naseemul Hye FCS, former Sr. Vice President and Hossain Sadat FCS, former Council Member, ICSB. A large number of Professionals, Qualiﬁed Chartered Secretaries and Corporate Executives from the leading corporate houses of Bangladesh also attended the programme.

Members Present at the CPD Seminar

Victory Day Celebrated at Institute of Chartered Secretaries of Bangladesh (ICSB) Amid patriotic zeal and enthusiasm, the 46th anniversary of the great Victory Day was celebrated at the Institute of Chartered Secretaries of Bangladesh (ICSB) on Saturday with a renewed pledge to build ‘Golden Bangla’ imbued with the spirit of the War of Liberation. The celebration began with the recitation from the Holy Quran and then playing of the national anthem in the Institute premises. Freedom Fighter Engineer Rejaul Karim Chowdhury, one of the Founders of the Shadhin Bangla Betar Kendra graced the occasion as the Chief Guest while President of ICSB, Mohammad Sanaullah FCS inaugurated and chaired the programme. OCTOBER - DECEMBER - 2017

INSTITUTE NEWS the life of the Bengalis. It is a both glorious and tragic chapter of history – glorious as we achieved independence and tragic as we lost over three million lives of our brothers and sisters.

The Celebration of the Victory Day in Progress

An art competition and poetry recitation on the War of Liberation were also organized

President of ICSB in his speech mentioned that the Liberation War is the most crucial event in

Participants of the Art Competition

Among others, Nazmul Karim FCS, Treasurer, Mohammad Asad Ullah FCS, Immediate Past President and Council Member, Md. Shahid Farooqui FCS, Council Member, A.K.M Mushﬁqur Rahman FCS, Council Member, Salim Ahmed FCS, Council Member and Syed Moniruzzaman FCS, Chairman, Dhaka Regional Chapter Sub Committee also spoke on the occasion. A good number of Members, Qualiﬁed Chartered Secretaries (QCS) and students along with their spouses and kids were present in the programme. The day’s program concluded with a special prayer seeking divine blessings for salvation of the departed souls of the

where a good number of children of ICSB Members participated. The Chief Guest in his speech described his personal account of the crucial days that he passed during the Liberation War of Bangladesh. He also described how the Pakistan launched the illogical war, and swooped on the helpless and innocent people of Bangladesh. Mohammad

Sanaullah

OCTOBER - DECEMBER - 2017

A Participant receiving Award from the President of the Institute

FCS,

INSTITUTE NEWS

Members along with their Spouse and Kids Participated in the Programme

nation’s valiant freedom ﬁghters who sacriﬁced their lives for the liberation of Bangladesh from the occupation force of Pakistan in 1971. ICSB Took Part in Bangladesh Capital Market Expo 2017

The Programme was inaugurated by the Hon’ble Commerce Minister, Tofail Ahmed MP as the Chief Guest. Prof. Dr. Khairul Hossain, Chairman, Bangladesh Securities & Exchange Commission (BSEC), Justice Siddiqur Rahman Mia,

prospectuses, brochures, handbooks, journals, souvenirs and multi-media presentations to provide information to the visitors regarding the Corporate Governance, procedure of becoming a Chartered Secretary, future prospects of the profession of Chartered Secretaries in Bangladesh, how to become a member of ICSB, admission process and other relevant information. A good number of visitors visited the stall with enthusiasm and collect information about the various aspects of Chartered Secretary Profession. Mohammad Sanaullah FCS, Honourable President and Md. Selim Reza FCS, Honourable Vice President of ICSB also visited the Expo among the others. ICSB Took Part in a Seminar on 'FRC and Capital Market: Expectations and Challenges '

From the left: Dilruba Sharmin, Education Oﬃcer, Kazi Shamsul Alam, Secretary and Md. Shamibur Rahman ACS, Directory, Accounts and Finance of the Institute

ICSB Participated in Bangladesh Capital Market Expo 2017 for the third time held on December 7 to 9, 2017 at the Diploma Engineers’ Institute. The Expo was organized by the ‘Arthosuchak’, an online news portal on Business and Economics as an annual event.

Chairman, Dhaka Stock Exchange Ltd. & Dr. Abdul Majid, Chairman, Chittagong Stock Exchange Ltd. were also present on the occasion as Special Guests. In the Expo, ICSB had a stall with

Arthosuchak, the online business news portal organized a seminar on 'FRC and Capital Market: Expectations and Challenges ' on December 8, 2017 at the National Theatre Plaza of Bangladesh Shilpakala Academy. Mr. C. Q. K Mustaq Ahmed, Chairman, Financial Reporting Council (FRC) attended the programme as the Chief Guest. Mr. Mohammad Sanaullah FCS, President of ICSB, Mr. Mohammad Hosain FCA, Vice President, ICAB and Mr. Mahbub H. Mazumdar FCMA, CEO, AFC OCTOBER - DECEMBER - 2017

INSTITUTE NEWS

Mohammad Sanaullah FCS, President of ICSB Delivering his Speech in a Seminar on on 'FRC and Capital Market: Expectations and Challenges '

Capital were discussants.

present

Mr. Shaﬁqul Alam ACS, Group CFO & Company Secretary, Supar Star Group presented a key note speech on the theme of the seminar 'FRC and Capital Market: Expectations and Challenges '. Mr. Mohammad Sanaullah FCS, President of ICSB in his speech focused on the role of Chartered Secretary profession in the development of corporate management. He also pointed out that FRC will ensure transparency and accountability in accounting and auditing of government and non-government organizations. The FRC will also oversee the activities of the accounting professions in the country.

speech of Father of the Nation Bangabandhu Sheikh Mujibur Rahman in ‘the Memory of the World International Register’ as the ‘World’s Documentary Heritage’ declared by the UNSECO. On 25th November 2017, the Institute organized a colorful rally from the Institute premise to the Suhrawardy Uddyan where the original speech was delivered in 1971. The President of the Institute Mohammad Sanaullah FCS inaugurated the rally and said that this recognition from the UNESCO is a remarkable achievement for our country in the international

arena. This extempore deliberation of the Father of the Nation ignited the aspiration for freedom among our countrymen to achieve the independence in 1971, he commented. It inspired the Freedom Fighters not only during the Liberation War to sacrifice themselves and will do so for years to come. The Senior Vice President of the Institute Mohammad Bul Hassan FCS explained that the Memory of the World International Register is a list of documents having global significance. The objective of creating the International Register is to ensure preservation of, and access to, documentary heritage in various parts of the world. A good number of Fellow and Associate Members including Vice President Md. Selim Reza FCS & the Treasurer Nazmul Karim FCS, Institute Officials and Students joined the rally. The rally was organized jointly by Members Welfare & Recreation Sub Committee and DRC Sub Committee of ICSB.

ICSB Celebrated the Recognition of 7th March Speech of Bangabandhu ICSB celebrated the inclusion of the 7th March historical OCTOBER - DECEMBER - 2017

The Rally from the Institute in Progress

INSTITUTE NEWS 4th ICSB National Award for Corporate Governance Excellence, 2016

The Award Programe in Progress

4th ICSB National Award for Corporate Governance Excellence, 2016 was held on November 30, 2017 at BICC, Dhaka where 22 Companies were honored for complying with Corporate Governance

companies. The award giving ceremony was also addressed by Shubhashish Bose, Hon’ble Secretary, Ministry of Commerce, Government of Bangladesh and Prof. Dr. M. Khairul Hossain,

Chairman of the Jury Board for the 4th ICSB National Award for Corporate Governance Excellence, 2016 while Mohammad Sanaullah FCS, President of ICSB chaired the Award Program. Among the awardees in the Banking sector Prime Bank Limited got the Gold while Southeast Bank Limited and Eastern Bank Limited bagged Silver and Bronze respectively.

Honorable Chief Guest

based on Bangladesh Securities and Exchange Commission Guidelines along with transparency and accountability in the overall management of the respective industries during the year 2016. Commerce Minister Tofail Ahmed MP graced the occasion as the Chief Guest and presented the awards and certiﬁcates to winning companies of 8 categories covering all listed

Hon’ble Chairman, BSEC as the special guests and Dr. A.B. Mirza Md. Azizul Islam, Former Finance Advisor to the Caretaker Government of Bangladesh as

Similarly, in Non-Banking Financial Institutions IDLC Finance Limited got the gold while International Leasing And Financial Services Limited and Union Capital Limited achieved Silver and Bronze respectively.

Awardees with the Chief Guest

OCTOBER - DECEMBER - 2017

INSTITUTE NEWS

Inauguration of the Award Souvenir

Likewise in Insurance Companies category, Green Delta Insurance Company Limited received the gold while Prime Insurance Company Limited and Phoenix Insurance Company Limited ensured Silver and Bronze respectively.

Limited bagged Silver Bronze respectively.

In the same way in Pharmaceutical, Food and Allied Companies category the IBN SINA Pharmaceutical Industry Limited got the gold while Golden Harvest Agro Industries Limited and Square Pharmaceuticals Limited took Silver and Bronze respectively.

In Engineering, Fuel & Power Companies category, MJL Bangladesh Limited got the gold while Singer Bangladesh Limited achived the silver.

In Textiles and RMG Companies category, Envoy Textiles Limited got the gold and Shasha Denims Limited and Square Textiles

won the gold on the other hand British American Tobacco Bangladesh Company Limited and Heidelberg Cement Bangladesh Limited achieved the

OCTOBER - DECEMBER - 2017

and

In IT, Telecom & Services Companies category, Grameenphone Limited won the gold while Eastern Housing Limited achieved the silver.

In the Manufacturing & Chemicals Companies category, RAK Ceramics Bangladesh Ltd.

Silver and Bronze respectively. While extending heartiest congratulation to all award recipients, the Commerce Minister underscored the present government’s commitment to ensure good governance and corporate culture in the listed companies of Bangladesh. He applauded the role of the Institute of Chartered Secretaries of Bangladesh for developing professional skills in the listed companies. President of the Institute Mohammad Sanaullah FCS emphasized that practicing good Corporate Governance is the need of the time. It requires the whole hearted commitment of all individuals working in the company for the purpose of sustainable development of all stakeholders in general and maximization of the shareholders’ value in particular. Good Governance practice helps to improve employees’ morale and high productivity and also ensure long term goals of the business.

Moments of the 4th ICSB National Award for Corporate Governance Excellence, 2016

OCTOBER - DECEMBER - 2017

Speeches of the 4th ICSB National Award for Corporate Governance Excellence, 2016

OCTOBER - DECEMBER - 2017

Gold Awardees of the 4th ICSB National Award for Corporate Governance Excellence, 2016

OCTOBER - DECEMBER - 2017

Silver Awardees of the 4th ICSB National Award for Corporate Governance Excellence, 2016

OCTOBER - DECEMBER - 2017

Bronze Awardees of the 4th ICSB National Award for Corporate Governance Excellence, 2016

OCTOBER - DECEMBER - 2017

Drama on the History of Bangladesh

OCTOBER - DECEMBER - 2017

Drama on the History of Bangladesh

Success Greeting Md. Selim Parvez ACS, an Association Member of the Institute has recently joined in Electro Group as Company Secretary. Prior to joining this company he was the Deputy Company Secretary of the Dacca Dyeing & Manufacturing Company Limited. Mr. Parvez has more than 15 years of experience. He has also completed LL.B from National University of Bangladesh and PGDHRM from Bangladesh Institute of Management (BIM).

OCTOBER - DECEMBER - 2017

13 4

OCTOBER - DECEMBER - 2017

ARTICLE CORPORATE GOVERNANCE IN THE BANKING SECTOR OF BANGLADESH Prof. Dr. Feroz I. Faruque FCS

ntroduction

entire network of formal and informal relations involving the corporate sector and their consequences for society in general. John and Senbet (1998) proposed a more comprehensive deﬁnition that “corporate governance deals with mechanisms by which stakeholders of a corporation exercise control over corporate insiders and management such that their interests are protected. In the broader sense ethics is a matter of mind set/self discipline/choice of one’s clean and ﬂawless life

accountability and responsibility from the companies concerned. However, assessment is required as to what extent these codes are actually practiced in the real world. This paper attempts to examine the CG practices in the banking sector of Bangladesh, where institutional credibility and transparency are believed to be even more crucial.

Corporate Governance (CG) has become one of the most common buzzwords in business world. The Cadbury Report (1992) defines CG as a “system” by which companies are directed and controlled. Kocourek, Burger & Birchard (2003) state that governance begins at home, inside the boardroom and Corporate governance (CG) is a among the directors. combination of corporate Governance is embedded as well policies and best practices as synonymous with Ethics, adopted by corporate bodies to which starts with the early achieve their objectives in hood/family life through parents relation to their stakeholders’ and rolls over to working expectations. It life until we go to grave. fundamentally aims to However, qualitative Corporate Governance largely enhance corporate reforms to the behaviors, determines how well the transparency and relationships and accountability (Thapa, 2008). interests of the stakeholders are objectives of the directors It is widely recognized that being maintained. and CEO are meaningless transparency enhances trust unless they are subject to among the major players the “hard” mechanisms of within the governance performance criteria, processes style, while ethics work well, CG and measurement. According to is fulfilled by default, but CG is a framework and CG is equally Tricker (1994), CG is an umbrella matter of law/compulsion and is significant for all types of institutions. term that includes specific issues required when ethics fail, it may corporate arising from the interactions have loopholes and may be Additionally, good CG in the among senior management, bended, misinterpreted as we financial sector is considered to shareholders, Board of Directors can observe in the legal world in be an integral part of the development of sound, and other corporate many cases. transparent and properly stakeholders. In its narrowest functioning money and capital Corporate GovernanceA sense, the term may describe markets by stimulating investor blending exercise the formal system of accountability of senior Corporate Governance (CG) confidence. Furthermore, it is a management to the entire largely determines how well the very crucial and essential element for the banking system stakeholders community. interests of the stakeholders are because bank and financial At its most expansive sense, the being maintained. CG codes institutions depend on Other term is stretched to include the have been established as an Peoples’ Money (OPM). In important effort to ensure OCTOBER-DECEMBER-2017

ARTICLE addition, lack of adequate control mechanisms and transparency in banks may lead to issues of moral hazard. The reports by the Banking Reform Commission (1999) and BEI (2003) raised serious concerns about the banking sector and criticized the quality of governance that prevails there in Bangladesh. Governing without Governance Recent financial scams one after another and so much together and increasing default loan size has brought the banking sector of Bangladesh under criticism. The estimated amount of default loanis said to be Tk. 1 lac 30,000 crore, while the banking sector portraits the whole economy of a country. Undoubtedly, the industry is increasing day-by-day with new banks and their branches unnecessarily. Unfortunately, the health check fails to conceal the problems suffered by the sector from time to time. The current situation of large financial frauds and high non-performing loans (NPL) of banks call for a close scrutiny of this sector and necessitates taking required measures.Inefficient fund management, loan sanction for the political purpose and social and economic irresponsibility compel them to fall in this situation. Auditing and Ticking While efficiency of audit team is important in case of detecting fraud, irregularities and scam, but both the internal, external as well as regulatory audit teams are seriously weak in knowledge,

efficiency and in ethics. The audit committee must disclose the detected scams to the board of directors to take necessary steps. Sometimes the audit committee has nothing to do because of political and management pressure. From the discussion it was found that conflict of interest exists between the board of director and audit committee. An invisible clash between them were found in some cases i.e. the audit committee tries to detect shortfalls but some members of the board want to ignore those shortfalls. Management Influence Like political influence, banks’ management has influence on the lending process. Sometimes the management approves loans at a special rate; even with shortage of documents; and not having enough collateral as security. Involvement of authority Officials

regulatory

In an informal discussion with some high officials of different commercial banks as well as with some other related officials, it has been revealed that some dishonest officials of Bangladesh Bank are also associated in the forgery. Unaware of Bangladesh Bank Circulars: Bangladesh Bank provides circulars to the commercial banks time to time for their smooth operation and own safety and security. All commercial banks must have to follow those circulars. It was found that sometimes officials are unaware of those circulars

and/or ignore those due to malafied intensions. Incomplete Sanction Advice: Sometimes the credit department sends proposal with incomplete information of the borrower to the Head Office and based on that HO also issue incomplete sanction advice in favor of the client. Fund Diversion Fund diversion is one of the major problems in Bangladeshi banking sector which becomes more crucial now-a-days, including defective follow up of the banks. Fake Mortgage Mortgaged property which is used to secure the loan in case of default should be evaluated properly. Sometimes the clients make arrangements of the fake property by making linkage with land officials, legal advisor of the banks and sometimes with the bank officials too. Audit team is also responsible because they sometimes overlook such activities intentionally or unintentionally. Insufficient Audits

and

Ineﬃcient

Proper auditing is the main tool that can eradicate all the fraud and scams from the banks. But the audit process cannot be made properly for various reasons. People who are auditing may remain under management pressure or they may be ineﬃcient, corrupted as well. In some banks, only one audit takes place in a year whereas minimum three audits are mandatory.Presence of OCTOBER-DECEMBER-2017

ARTICLE sound corporate governance and its proper practices is the key requirement for efficient and stable banking system. In general banks prefer to engage low caliber employees in the Audit department, sometime transfer to audit department is taken as a punishment transfer. In the credit committee meeting participation of the head of internal audit is a compulsory matter and sign the relevant loan documents for sanction of loan, a funny process in the bank as you make the cake and eat the same-an angelic! task which is in fact a devil task exercised altogether. It is done intentionally and it is unethical as a matter of conflict of interest. Ethical Banking:An ethical bank, also known as a social, alternative, civic, or sustainable bank, is a bank concerned with the social and environmental impacts of its investments and loans. The ethical banking movement includes: ethical investment, impact investment, socially responsible investment. Internal ethics are concerned with the well being of employees, employee and customer satisfaction, benefits, wages, unionization, fair sex and race representation, and the banks environmental standing. Environmentally the potential combined effect of banks switching to more environmentally friendly practices i.e. less paper use, less electrical use, solar power, energy efficient light bulbs, more conscientious employee travel policies with concern to commuting and air travel is huge. External ethics are OCTOBER-DECEMBER-2017

concerned with the wider ramifications of banks actions. External ethics looks at the impacts that their business practices, such as who they loan to or invest in, will have on society and the environment. In applying external ethics, one looks at how the products of banks can be used unethically, for example how borrowers use the money that is lent out by the bank. Corporate Governance- A matter of both Banks and Customers:It is not only the bank itself needs CG but also the borrowers need it equally and bank must also justify the soundness of CG of its customers.People having ethics in their personal life is likely o have ethics in their official life, though not guaranteed. Whistle blowing Corporate governance encourages whistleblowing practices and recommends his protection too, but this not or rarely done in the bank as everyone is the party to benefits.Surprisingly central bank official borrowed money from several commercial banks, which is a unique example of conflict of interest and daylight robbery.Too much greed has been there among the directors and the employees particularly senior bankers. Too many bonuses and profit sharing of the CEO is also responsible for too many corruptions. Industries seriously polluting the environment are also heavily invested by banks,showing the thumb to the environmental laws. Few bankers even know very little or nothing about

Equator principle/green banking law now having in the country. Auditors- the Scot free Guys Not only the bankers and directors to be punished for frauds, forgeries etc, but auditors alsoto be punished and penalized for their failures.Who justifies the role of the internal as well as external auditors efficiency, though in many cases an ornamental audit committee is there by name only. Why there is no punishment of the statutory auditors as well as the internal auditors. You need not to punish in huge number, but needs exemplary to punishment to big shorts. Statutory auditors audit report language is seriously questionable, it must re- worded to make the auditors accountable and responsible for their failure.Audit specializations in bank, insurance etc are required not to fit one size for all. Service sector particularly financial service sector such as audit service to be made free.CIB report is also forged a well as property documents forgery, which a common practice. In many cases pocket bank is practiced by many bankers, particularly branch managers and the operations heads. Comprehensive Governance

Corporate

There must be comprehensive CG guidelines for specialized institutions such as banks, insurance, aviation etc comprising their respective laws such as banking law, insurance law etc. not the same size for all.It is learnt that board members interviewing the CEOs

ARTICLE one common question is “What can you do forme/us” CEOs when change a bank usually takes away a group of his hence men from his previous bank as well as big customers with lucrative illicit advantages. Putting non banking background people in the ministry, central bank too. Not only in the banks there must be ethical professional oﬃcers in the Finance ministry too including the BB high oﬃcials not just put one at the top having good relation with a one having not even gone to the bank in his life.Whatever the rule, but bending of such rules even smashing those is a matter of choice only. Huge gap between deposit rate of interest and lending rate of interest, Forex buying and selling rates, a shylock interest rate simply. Too much salary in banks like in the civil service now. Has too much salary has reduced corruption even by one percent point? This is another danger decision having 4 members from the same family and for 9 years tenure. There exists more banks then are required, still three more are coming up while 13 deserve merger. Are these still too little to damage\smash the banking sector completely. People are now scared of putting their money in the banks. Credit Rating! What does it rate? Credit Rating Reports and There have been serious questions about the quality of credit rating agencies and their reports on banks and others. The auditors are also involved in credit rating, audit and consultancies in that case there appears to have

serious conflict of interests and the regulatory authority such as Central bank, FRC must look into it and take appropriate actions as may be required. The financial sector deserves serious scrutiny to bring discipline in the entire sector, not only the banks and other financial institutions. The sector must be under watch/monitor constantly. Unfortunately retired non-professionals are heading those organizations. Job Rotation!Job rotation is a common issue, which the bank branches are reluctant of. Cyber heist, money laundering issues are very serious and most risky issues too, which need dedicated, efficient experts but very little care taken of. Bangladesh seems to have turned deaf ear to these matters. Basel Committee on Banking Supervision The Basel Committee on Banking Supervision or BCBS (BIS, 2010) defines the following critical areas of CG: Board Qualifications Structure

Board members should be and remain qualiﬁed, including through training, for their positions. They should have a clear understanding of their role in corporate governance and be able to exercise sound and objective judgment about the aﬀairs of the bank. • Board Practices:the Board’s overall responsibilities include approving and overseeing the

implementation of the bank’s strategic objectives, risk strategy, corporate governance and corporate values. The board is also responsible for providing oversight of senior management. • Internal Control:Establishing effective internal control system for accountable and efficient operations. • The Committees of the Board:Establishing and overseeing different committees to perform duties including the audit committee, the Risk Management Committee and the Governance Committee with the combined responsibilities of nomination, remuneration, succession planning, training and performance evaluation. Preventing Abusive Related-Party Transactions: Inspection of the existing firewall. Creation of specialized committees to monitor and approve related-party transaction and then publicly disclose such transactions. Thoughts from Indian scriptures The Puruṣārtha (Dharma, Artha, Kama, Moksha) Concept: This ethical guideline speaks about the necessity to keep Dharma (Righteousness) as the foundation for every choice that is made. Artha stands for generation and sustenance of wealth, including monetary wealth. Kama is related to choices made regarding fulfillment of desires, and OCTOBER-DECEMBER-2017

ARTICLE Moksha is about spiritual fulﬁllment. Exploration related to Artha and Kama has to be done within the contexts of Dharma and Moksha. Moksha is considered the supreme goal. These four are considered to be Purusartha. References Jennings, Marianne (September 2013). "Ethics and Financial Markets: The Role of the

OCTOBER-DECEMBER-2017

Analyst". Research Foundation Literature Reviews: 1–89. Retrieved 20 July 2015. "Ethical Investing - February 2014". FT Adviser. Retrieved 20 July 2015. Steiner, Rudolf (1999). Towards social renewal: rethinking the basis of society. London: Rudolf Steiner Press. pp. 8 and Chap. "MICROCAPITAL STORY: Global

Alliance for Banking on Values Launched in The Netherlands; Eleven Banks Join to Form the Alliance". Microcapital.org. 2009-03-16. Retrieved 2013-07-20.

» About the Author

A Fellow Member of the Institute & former senior vice president

ARTICLE Are the Corporate Governance Practices in the Banking Sector of Bangladesh Inevitable? Mohammad Shahajahan FCS

ackground

Bangladesh and the performances of banks. The secondary data, diﬀerent journals, research papers, newspapers and diﬀerent publications on situations of the banking sector have been considered for judging the necessity of CG practices in the banking sector, assessing the CG practices and identifying reasons of non-compliance of CG guidelines in the banking sector of Bangladesh. Finally the study has recommended a list of actions to ensure CG practices in the banking sector of

etc., and therefore, it is considered as a crucial part of Different stakeholders in the CG (Jan & Sangmi, 2016). CG corporate structure have aims to ensure the different preferences and goal in accountability of certain congruence. The necessity of individuals in an organization Corporate Governance (CG) through mechanisms that try to arises from the potential reduce or eliminate the conflicts of interest among principal-agent problem. Sound stakeholders in the corporate corporate governance is structure. A well governed dependent on external institution is expected to use its marketplace commitment and resources optimally and, thus, legislation, along with a healthy perform more efficiently and board culture which safeguards contribute positively to the policies and processes. It is economic development of a about commitment to values, country. Due to very recent crisis about ethical business conduct in Bangladeshi banking and about making a sector, corporate Banks play a vibrant role to distinction between personal governance have gained and corporate funds in the ensure sustainable economic considerable attention. growth in Bangladesh and hence management of a company. Nation witnessed huge Banks deal in public money; factors should be considered withdrawal of deposits public confidence is of from a Bangladeshi bank which have great influence on utmost importance in occurred due to lack of financial performance of banks. banking industry. Deposits confidence of depositors are blood of a bank which are and the bank failed to meet the Bangladesh for sustainable public money that are financed depositors’ demand of economic growth and by the banks as investments. The withdrawal which is alarming for development of the country. profit or loss of the bank the financial sector of Corporate Governance and depends on the success and Bangladesh. Hence, CG practices Banking Sector failure of these investments and in the banking sector become inevitable in Bangladesh. It is Corporate Governance (CG) this has influence on the expected that the CG practices in systems provide several depositors’ risks. Priority in the banking sector of mechanisms to ensure that protection of depositors through Bangladesh will bring positive companies/ firms run effectively ensuring CG within bank can change in the financial sector and maximize shareholder reduce such risks of depositors. and it is crucial to assess and/or stakeholder value Macey and O’Hara (2001) argue whether complying with (Aguilera, 2005). CG is very much that a broader view of CG should governance codes leads to concerned with the functioning be adopted in the case of desired outcome or not. This of Board of Directors within its banking institutions. Because of study aims to examine the CG structure, styles, process, their the peculiar contractual form of practices in the banking sector of relationships and roles, activities banking, CG mechanisms for

OCTOBER-DECEMBER-2017

ARTICLE banks should depositors as shareholders.

encapsulate well as

It is widely argued that effective CG practices are fundamental to gain and maintain the confidence of the people involved banking sector (BCBS, 2006). As per Asian Round Table on Corporate Governance (ARCG) Task force, the main issues and priorities for reforms in CG of banks in Asia are: a) Individual board m e m b e r s ’ responsibilities- fiduciary duties of bank board members need of skills, personal abilities, training programs, integrity and professionalism.

responsibilities of n o m i n a ti o n , r e m u n e r a ti o n , succession planning, training, performance evaluation, etc. e) Related party transactions- inspection of the existing ﬁrewall, creation of specialized committee to monitor and approve related part transaction, publicly disclose such transaction. f)

Bank holding companies and groups of companies holding banks- a bank’s parent company should not impede the full exercise of the CG of the bank within the banking group.

b) Board roles/functionsguiding, approving and o v e r s e e i n g strategies/policies rather than being immersed in day-to-day operations, creating clear accountability lines and internal control systems, suﬃcient ﬂows of information and managerial support.

g) Disclosure- eﬀort on meeting into international standards on accounting, etc. should be encouraged.

Board compositionbanks are more encouraged to have independent directors, separation between Chairman and CEO.

d) Board committees- audit committee, risk m a n a g e m e n t committee, governance committee with combined OCTOBER-DECEMBER-2017

h) Bank’s autonomy in relation to the statestate as owner should respect the legal corporate structures of State Owned Commercial Banks. Bank’s monitoring of the CG structure of its corporate borrowersextent to which banks should assess/monitor CG of their corporate borrowers or seek to improve it.

CG Practices in the Banking Sector of Bangladesh In Bangladesh, there are 57 scheduled banks (6 state owned

commercial banks, 2specialized banks, 40 private commercial banks and 9 foreign commercial banks) 6 non-scheduled banks and 33 Non-Bank Financial Institutions (FIs) across the country (BB, 2017). Banks play a vibrant role to ensure sustainable economic growth in Bangladesh and hence factors should be considered which have great influence on financial performance of banks. CG is one important factor that has influence on the performance of banks in Bangladesh. But CG practices in Bangladesh are quite absent in most companies and organizations. One reason of absence of CG practices is identified as most companies are family dominated. Motivation to disclose information and improve governance practices by companies is felt negatively. There is a few value judgment or very few consequences for CG practices. Bangladesh does not provide sufficient legal, institutional and economic motivation for stakeholders to encourage and enforce CG practices and hence failure is witnessed in CG practices. Poor bankruptcy laws, no push from the international investor community, limited or no disclosure regarding related party transactions, weak regulatory system, general meeting scenario, lack of shareholder active participations are some of the individual constituents of CG (Ahmad and Yusuf, 2005). Bangladesh Securities Exchange Commission (BSEC) has issued notification on CG for listed companies to enhance CG in the

ARTICLE interest of investors and the capital market in 2006, BSEC issued notiﬁcation on CG and its amendment in 2012 where mentioned the size of board, independent director (ID), qualiﬁcations of ID, their appointment, code of conduct and tenure, Chairman and CEO

separate person, statements of directors’ report, CFO, Head of internal audit and company secretary, audit committee and its independence, role and reporting of audit committee, reporting to shareholders and investors, external or statutory auditors, subsidiary companies,

duties of CEO and CFO, reporting and compliance of CG guidelines. Huq and Bhuiyan (2012) conducted a survey on CG practices in the banking sector of Bangladesh and the respondents responded on some variables of CG practices which are as follows:

No. Speciﬁc Problems % of respondents 1 Corporate ownership structures are dominated by family members 100% 2 Accounting standards and disclosure and its impacts on CG and management 100% practices in Bangladesh are mixed Inadequate Bankruptcy Laws Inconsistency between Companies Act, Bangladesh Accounting Standard and Security Exchange Commission requirements

60% 80% 100% 75% 60%

Weak Regulatory System Weak Capital Market Role Most companies in Bangladesh are closely held and a negative correlation exists between good Corporate Governance and defaulting in holding annual general meetings in due time Independent directors do not act as an advocate for minority shareholders or as a source of innovative ideas Lack of Shareholder’s Activism

Weak Pressure Groups

75%

Lack of Auditor Independence

80%

3 4

10 Poor Audit Report

60% 50%

60%

Source: Huq and Bhuiyan (2012)

Scenario of the Banking Sector in Bangladesh In Bangladesh, banking industry is expanding day-by-day with new banks and branches. Simultaneously, deposits and credits are also increasing which have contribution to the economic development of the country. Unfortunately, the current situation of large ﬁnancial frauds and high non-performing loans (NPL) of banks call for a close scrutiny of this sector and necessitates taking required measures

(Mahmood and Islam, 2015). Some pitfalls of the banking sector of Bangladesh are as follows: Fraudulent activities as mentioned above indicate the lack of CG practices and/or inappropriate practices among the banks in Bangladesh which aﬀected the national economy. Bangladesh Bank instructed all commercial banks to have strong and healthy corporate governance so that such fraudulent activities can strictly be monitored.

Another issue is classified loan which is the result of weak/ non practice of CG in banking sector of Bangladesh. Bangladesh Bank disclosed in a report that the banking sector has BDT 42,725 crore of classified loans till December-2012. Among them three state owned banks and two specialized banks have BDT 26,800 crore which consist 62.70% of total classified loans. It increased in 2013 till June to BDT 52,309 crore of which 63% of classified loan is possessed by the five banks and 67% of this is OCTOBER-DECEMBER-2017

ARTICLE bad loans which have less chance to be recovered. Due to ineﬃcient fund management, loan sanction for the political purpose and social and economic responsible compelled banks to fall in this situation. Risk management and ensure corporate governance within banking sector is now become obvious to improve the situation.

the loans but the assigned people do not do their duty properly. 4.

No drastic legal or other ﬁnancial actions were taken place against the loan defaulters and/or the person/ ﬁrms associated with such defaults.

Some banks are failed to comply with collateral policy (to investigate mortgage property properly) to recover default loans.

Banks should follow strictly KYC (Know Your Customer). Some banks are unable to select the right individuals or organizations for lending.

Political InﬂuencePolitically biased decisions lead the loans towards being default and the banking sector towards a vulnerable position.

Non Compliance of CG practices in the Banking Sector of Bangladesh The study found the following non-compliance of CG practices in the banking sector of Bangladesh: 1.

Credit policies approved by the board of directors and top management are not communicated by the banks to its down line. In order to make the policies efficient and effective, all the associated officials must know the policies very well. Board of directors of the banks remain busy with loan approval rather than nurturing corporate good governance practices within the bank. The credit policy of each bank must reflect the roles and responsibilities of all related officials such as who make proposal, who analysis the loan applications, who disburse loans, who supervise and monitor clients and who recover

OCTOBER-DECEMBER-2017

Management InfluenceThe management (chairman, board of directors, Managing Director, and other high officials) influence in the credit decision making process and the consequences is higher classified and default loans. Unaware of Bangladesh Bank circulars- Officials of commercial banks are unaware of those circulars. This may lead the bank towards

operational as well reputational risks.

10. Sometimes the credit department sends loan proposal with borrower’s incomplete information to the Head Office and based on that HO also issue incomplete sanction advice in favour of the client. 11. Banks are not always abided by the obligation of having minimum 10% margin of the total Letter of Credit (LC) amount. If the client is unknown to the bank then cash margin should be 100%. But the client makes arrangement with the branch officials and keeps the margin to 5% or sometimes they do not keep the cash margin at all. 12. Wrong information provided by Head Office. 13. Insufficient personal guarantee for higher amount of loan lead to non-recovery of default loans. 14. Lack of proper information about importer and exporter. 15. Investment in risky project due to competition and meeting the high profit target. 16. Lack of monitoring and supervising the borrower in utilizing disbursed loan. 17. Conventional banks

ARTICLE disburse the money directly to the clients account and the clients can do anything with the money they want even in any unproductive sector such as invest in share market, buy cars, purchase land, and spend without any goal which makes loan disbursed risky. 18. Corrupted bankers are quiet responsible for the ﬁnancial fraud or scams.

approved credit policies to its down line to know and follow strictly. 4.

19. Use of fake mortgage in association of the insider of banks. 20. Lack of independence of audit and insuﬃcient audit cannot eradicate all the fraud and scams from the banks. Actions Needed Combating Non-compliances of CG practices in the Banking Sector, BD Considering the non-compliance of CG practices in banking sector, the study has identiﬁed the following actions needed to ensure corporate good governance in the banking sector: 1.

Commitments from the tone of the top (Board of directors and top management) to comply with the corporate governance practices and avoid the conﬂict of interest. Reform in bankruptcy laws adequately and strengthen the role of regulator and regulatory system.

All banks should eﬀectively communicate the

The credit policy of each bank must reﬂect the roles and responsibilities of all related oﬃcials and any deviation from this should be punishable in true sense. Relationship managers should be separated from investment department to assess credit/ investment risks accurately. Collateral policy to investigate mortgaged property should be strictly followed by the banks.

Selection of borrowers should be proper and based on suﬃcient information (KYC).

Banks should avoid politically biased decisions in case of loan approval to minimise loan default.

All members of management and board should follow the ethics and code of conducts and be aware of conﬂict of interest.

10. Bangladesh Bank audit should be more transparent and audit team should be selected considering their honesty, sincerity and background.

11. All commercial banks must have to preserve and follow the updated circulars issued by the central bank. 12. Credit department should send loan proposal with complete information of the borrower to the Head Oﬃce. 13. Maintain obligatory margin of

exact minimum

the total Letter of Credit (LC) amount. 14. Avoid bad practices by the bank branch to give different extra benefit to customers. 15. Head office should give accurate directives for reporting to regulatory body. 16. Discourage the insufficient personal guarantee to avoid non-recovery of default loan. 17. Collect and preserve sufficient and proper information about importer and exporter. 18. Avoid unnecessary risky investment projects. 19. Proper monitoring and supervision of the disbursed loan to borrowers to ensure the expected utilization of disbursed loan in the planned projects. 20. Fight with the fake mortgage arrangement. 21. Ensure

proper

OCTOBER-DECEMBER-2017

ARTICLE documentation of each transaction with the clients. 22. Independence of both internal and external audit and take actions as per valid audit r e c o m m e n d a ti o n s without any delay. 23. Create environment for the Independent directors to act as an advocate for minority shareholders or as a source of innovative ideas. 24. Ensure annual report covers all areas of disclosures as per BSEC guidelines. 25. Encourage pressure groups and activism of shareholders. Conclusion Recommendations

and

In Bangladesh, banking industry is expanding day-by-day with new banks and branches but unfortunately, it is passing a critical time where depositors becoming to lose their conﬁdence, grabbers are very active to grab the money of depositors and Board of Directors and top management of the banks are busy to approve the loan rather than ensuring the good governance practices within the bank. The ﬁnancial

OCTOBER-DECEMBER-2017

sector of the country has repeatedly seen and suﬀered with the consequences of the large banking frauds, scams and cyber heists. Both inside and outside forces are active to achieve their own beneﬁts by demolishing the rules, regulations and norms of the banking sector and the regulator become shaky to punish the actual culprits. It is high time to raise voice against deposit grabbers in the banking sector to protect reputation of the banks and to ensure the sustainable economic growth/ development of Bangladesh. Hence, Corporate Governance practices in the banking sector become inevitable in Bangladesh. The authority of the banking sector should follow the actions recommended in this study to ensure the corporate good governance within banks and thus banks can play a vibrant role to ensure sustainable economic growth and development of Bangladesh.

they really matter?’ Banks and Bank Systems, Volume 12, Issue 1, 2017 3. BB (2017) Bangladesh Bank Website 4. BCBS (2006) ‘Enhancing corporate governance for banking organizations’, Basel Committee on Banking Supervision, BIS, Basel 5. Huq and Bhuiyan (2012) ‘Corporate Governance-Its Problems & Prospects in Banking Industry in Bangladesh’ World Review of Business Research, Vol. 2 Issue No. 2 March 2012 6. Macey and O’ Hara (2001) ‘The Corporate Governance of Banks’ Federal Reserve Bank of New York, Economic Policy Review 7. Mahmood and Islam (2015) ‘Practices of Corporate Governance in the Banking Sector of Bangladesh’ International Journal of Managing Value and Supply Chains, Vol. 6, No. 3

References 1. Ahmad and Yusuf (2005) ‘Corporate Governance: Bangladesh Perspective’ The Cost and Management Vol. 33 No. 6 2. Ahmed, Zannat and Ahmed (2017) ‘Corporate governance practices in the banking sector of Bangladesh: do

» About the Author

Individual Consultant (FM), NATP-2 Project, Ministry of Agriculture, Bangladesh& Fellow Member, ICSB

ARTICLE COMPANY SECRETARY AND CORPORATE GOVERNANCE AT BANKS – SURGING AHEAD Bipul Kumar Bhowmik FCS

ompany secretaries by virtue of their in-depth knowledge in multifarious corporate and related laws, as well as ﬁnance and management disciplines and their professional trainings, are entrusted with several key functions in the banking companies. This article outlines how company secretaries can excel better governance of corporate practices in the banking industry in general.

procedures and carrying out business dealings in a transparent manner.

responsibilities, which, if laid down, would be a never ending list. CSs in the Banking The role of Company Secretary Companies have to discharge (ies) [CS/CSs] in the banking onerous responsibility not only company derives from the to ensure compliance with the nature of assignments various statutory provisions, but performed by him/her in that also to ensure fulfillment of the organization. It is indeed an requirements of various allied arduous task for the Board of Statutes, Rules, Regulations by statutory Directors to see that not only the issued authorities/Govt. agencies shareholders, but also the other stakeholders, viz. the customers, including Bangladesh Bank (BB), suppliers, investors, employees SEC, Ministry of Finance, Govt. of In any country, banking industry and the society at large, are Bangladesh (GOB) etc. on issues plays a key role in the economic benefited by the result of related to the banking sector. development by providing excellent management CSs are in a better position to discharge this responsibility necessary impetus to The role of CS’s to render proper with greater confidence. each and every sector,

and timely advice to the Board which contributes to the of Directors and other top achievement of national goals. As one of the most executives in adhering to the important factors of any various prudent corporate economic activity, governance practices is very financial assistance and important. related services extended by the banks facilitate national practices, so as to justify the development. Proper survival and sustenance of the governance of the affairs of any organization. CS’s role in the organization, particularly in the banking sector is crucial, since he banking sector is of paramount acts as a facilitator in the entire importance. Such organizations, corporate management process, both in the private sector or to ensure that the corporate public sector, be it a statutory entity is run on sound body under any specific management principles and legislation or under the Banking practices. CS’s roles in different Companies Act, 1991 or under management hierarchy vary the Companies Act, 1994, are to from the positions held in the be managed properly by the organization and the functions Board of Directors by adhering looked after by him/her. CS’s to the prescribed rules, functions encompass a wide regulations, prudent systems & spectrum of duties and

CSs also play an important role in the process of conforming to the different statutory/regulatory requirements as prescribed by BB such as maintaining Statutory Liquidity Ratio, Cash Reserve Ratio, and Capital Adequacy etc. Banks are also required to ensure compliance with the lending norms in different sectors/categories as specified by BB from time to time. CSs generally take part in the formulation of various corporate policies for approval by the Board of Directors. Threadbare discussions are held by the Corporate Management Team including the Company Secretary, before any policy is firmed up. Smooth and systematic conduct of OCTOBER-DECEMBER-2017

ARTICLE Board/Directors’ Committees/ shareholders’ meetings in conformity with the provisions of the Companies Act, Banking Companies Act etc. and to comply with all related statutory functions are the inherent functions performed by the CS. His administrative acumen is reflected in the manner in which all such Corporate Meetings are conducted right from convening such Meetings till their completion. CS generally involves himself/herself in the establishment of various corporate governance practices in the organization. In the banking sector also, such role is played by the CS, who acts as Secretary to the different Directors’ Committees constituted to look after various matters, either under the Listing Regulations, or for better management practices. CS also keeps a close liaison with the different departments in the organization to enable the Statutory Auditors to complete the audit process in time, till the Accounts are considered/recommended/appr oved by the Audit Committee/ Board and finally adopted by the shareholders at the AGM. He/she also ensures compliance with statutory/regulatory requirements including reporting to the Stock Exchanges (in case of listed banking organization), finalization and submission of quarterly/half-yearly/quarterly accounts, which are subjected to review by Statutory Auditors.

OCTOBER-DECEMBER-2017

To render proper and timely advice to the Board of Directors and other top executives in adhering to the various prudent corporate governance practices, enable a systematic development of core ethical standards is within the domain of the CS’s functions. Being assigned with the task of Secretary to the various Directors’ Committees in the banking organization, he/she ensures compliance with the various statutory obligations/requirements, which include formulation of Code of Conduct for the Directors and Senior Management Personnel, adherence to the proper internal control systems, etc. CS’s advice is generally sought by the Board of Directors/top management to ensure that the relevant laws, rules, regulations, guidelines, if any, are complied with. Another important area where CS generally renders eﬀective and fruitful services is to participate in the formulation of appropriate recovery policy for approval by the Board. CS also plays an important role in the process of merger and amalgamation in the Banking sector and/or for any takeover, acquisition of any target/weak bank either as a strategic decision to bail out any weak bank, as may be advised/ permitted by Central Bank of Bangladesh, or as a policy decision to expand the bank’s business domain. Armed with adequate professional knowledge/expertise in this ﬁeld, the role played by the CS in such tasks, to ensure compliance with the various statutory

requirements under the Companies Act, Banking Companies Act and other allied legislations/ Regulations, is quite significant. The CS in the Banking organization also acts as a compliance officer, where the shares/securities of the Banking organization are listed with any Stock Exchange. He/she also advises on various compliance requirements, applicable to the concerned Banking organization and periodically certifies to the appropriate authority (ies). CS’s role in the Banking organization need not be over emphasized. He/she is the person who generally participates in the key decision making process at various stages besides attending Meetings of the Board of Directors/various Directors’ Committees, Corporate Management Team and other various crucial Committees in the top management hierarchy, so as to ensure highest standard of excellence in various activities/functions. Enforcement of corporate governance practices by rules or legislative measures may not only yield a desired result unless there is a key man behind the scene in achieving this task, which is best performed by the CS. The expertise of the CS in the banking industry can be best utilized by the top management with a view to ensuring enhancement of the value of the company to the stakeholders viz. customers, borrowers, lenders, suppliers, Government and public at large, which is ultimately reflected in the Annual Report, generally drafted by the CS, in association with

ARTICLE other key executives in the organization and ultimately approved by the Board of Directors and adopted by the shareholders. Legal necessity to have a professional CS in place for all such banking

organizations, with a view to ensuring a satisfying standard of governance is a need of time. Hence, Company Secretary, well equipped with the entire requisite wherewithal to shoulder such onerous

responsibility, deserves appreciation from all concerned.

Âť About the Author

A Fellow Member of the institute

OCTOBER-DECEMBER-2017

ARTICLE BASEL COMMITTEE’S REVISED PRINCIPLES ON CORPORATE GOVERNANCE Md. Shiful Islam, ACS

ood governance carries Supervision, Joint Forum and public trust and faith in the importance universally. different national authorities stability and soundness of the OECD says Corporate particularly the Central Bank and banks in particular and the governance relates to the Securities and Exchange system in general. The history on internal means by which Commission authority who play bank failures in many countries corporations are operated and roles for promoting governance indicated that loss of public controlled. Showing the in bank and financial institutions. confidence in banks could be importance of governance, Good governance in the banking contagious and could easily lead Benigno Aquino III, a Filipino and financial system is more to systemic banking crisis politician and former President important than any other situations. of the Philippine quoted that sectors for various reasons. Overall, the banking business ‘with proper governance, life will Firstly, bank is involved in lays the foundation for monetary improve for all’. On the other fiduciary business. Secondly, conditions which in turn keep side Ban Ki-moon, the former unlike normal business entities impact on all other business Secretary General of United which are funded mainly activities and finance. Velocity of Nations said that ‘Sustainable through shareholders’ funds, money and control of economic development is the pathway to banks’ business involves funds activity and consumption is also the future we want for all. guided by country’s It offers a framework to monetary system. Banking generate economic Banks should have an effective business thus casts a huge growth, achieve social responsibility on the independent risk management justice, exercise function, under the direction of monetary authorities to environmental facilitate, regulate, and a chief risk officer stewardship and protect the banking and strengthen governance’. payments system. But when we talk about corporate governance in banking raised mainly through deposits. Lack of proper corporate business, it gives us more The business of raising public governance can contribute to cautionary stance with utmost deposits places greater fiduciary financial instability and that importance as the industry has responsibilities on the institution would increase the risk profile of sensitivity and very uniqueness and its managers, since companies in the corporate in nature and functions. Various depositors’ funds need to be sector and expose the banks and national and international safeguarded in a special way. financial institutions to a greater authorities worked on it and Thirdly banks perform as risk. In a more direct sense, continuing to promote the financial intermediaries by weaknesses in CG arrangements banks and financial importance and implication of lending and investing the funds in institutions reduce their capacity corporate governance. Here we mobilized and funding economic to identify, monitor and manage may mention the name of activities of others. Fourthly, Organization for Economic banks are the agents of the their business risk and that can Co-operation and Development payments system.Fifthly, banks result in poor quality lending and (OECD), International Monetary are able to undertake all such excessive risk-taking by the Fund (IMF) and World Bank, business operations as a result of financial institutions. Depending on the resilience of the financial Basel Committee on Banking

OCTOBER-DECEMBER-2017

ARTICLE institutions and markets, these risks have the potential to spread across the wider financial system. Needless to say that inadequate Corporate Governance can also lead to a poor credit culture, excessive exposure concentration, poor management of interest risk/exchange risk and inadequacies in the management of connected exposures. Some of these risks, singularly or collectively, can lead to potential insolvency and financial instability. T.G. Arun in his article rightly pointed out that the corporate governance of banks in developing economies is important for several reasons. First, banks have an overwhelmingly dominant position in developing-economy financial systems, and are extremely important engines of economic growth (King and Levine 1993a,b; Levine 1997). Second, as financial markets are usually underdeveloped, banks in developing economies are typically the most important source of finance for the majority of firms, Third, as well as providing a generally accepted means of payment, banks in developing countries are usually the main depository for the economy’s savings. Fourth, many developing economies have recently liberalized their banking systems t h r o u g h privatization/disinvestments an dreducing the role of economic regulation. There are lot of incidents the world has experienced recent

years such as Allied Irish Bank, and many more organization failure around the world. Consequently, different authorities have been developed and prepared guidelines and codes to promote corporate governance. Here the Basel code of Corporate Governance for banks and financial institutions is briefly presented. Principle 1: Board’s overall responsibilities The board has overall responsibility for the bank, including approving and overseeing management’s implementation of the bank’s strategic objectives, governance framework and corporate culture. Principle 2: Board qualifications and composition Board members should be and remain qualified, individually and collectively, for their positions. They should understand their oversight and corporate governance role and be able to exercise sound, objective judgment about the affairs of the bank.

and manage the bank’s activities in a manner consistent with the business strategy, risk appetite, remuneration and other policies approved by the board. Principle 5: Governance group structures

In a group structure, the board of the parent company has the overall responsibility for the group and for ensuring the establishment and operation of a clear governance framework appropriate to the structure, business and risks of the group and its entities. The board and senior management should know and understand the bank group’s organizational structure and the risks that it poses. Principle 6: Risk management function Banks should have an effective independent risk management function, under the direction of a chief risk officer (CRO), with sufficient stature, independence, resources and access to the board. Principle 7: Risk identification, monitoring and controlling

The board should deﬁne appropriate governance structures and practices for its own work, and put in place the means for such practices to be followed and periodically reviewed for ongoing eﬀectiveness.

Risks should be identiﬁed, monitored and controlled on an ongoing bank-wide and individual entity basis. The sophistication of the bank’s risk management and internal control infrastructure should keep pace with changes to the bank’s risk proﬁle, to the external risk landscape and in industry practice.

Principle 4: Senior management

Principle 8: Risk communication

Under the direction and oversight of the board, senior management should carry out

An eﬀective risk governance framework requires robust communication with the bank

Principle 3: Board’s structure and practices

own

OCTOBER-DECEMBER-2017

ARTICLE about risk, both across the organization and through reporting to the board and senior management.

stakeholders participants.

and The

Principle 9: Compliance

Principle 13: supervisors

Supervisors should provide guidance for and supervise corporate governance at banks, including through comprehensive evaluations and regular interaction with boards and senior management, should require improvement and remedial action as necessary, and should share information on corporate governance with other supervisors.

The bank’s board of directors is responsible for overseeing the management of the bank’s compliance risk. The board should establish a compliance function and approve the bank’s policies and process for identifying, assessing, monitoring and reporting and advising on compliance risk. Principle 10: Internal audit The internal audit function should provide independent assurance to the board and should support board and senior management in promoting an eﬀective governance process and the long-term soundness of the bank. Principle 11: Compensation The bank’s remuneration structure should support sound corporate governance and risk management. Principle 12: Disclosure and transparency The governance of the bank should be adequately transparent to its shareholders, depositors, other relevant

OCTOBER-DECEMBER-2017

market role

The Basel Committee on Banking Supervision mentioned that the primary objective of corporate governance should be safeguarding stakeholders’ interest in conformity with public interest on a sustainable basis. Among stakeholders, particularly with respect to retail banks, shareholders’ interest would be secondary to depositors' interest. The also uttered that an Eﬀective corporate governance is critical to the proper functioning of the banking sector and the economy as a whole. Banks perform a crucial role in the economy by intermediating funds from savers and depositors to

activities that support enterprise and help drive economic growth. Banks’ safety and soundness are key to financial stability, and the manner in which they conduct their business, therefore, is central to economic health. Governance weaknesses at banks that play a significant role in the financial system can result in the transmission of problems across the banking sector and the economy as a whole. Therefore, obeying the revised principles definitely help us create an atmosphere as well as a widened responsibility for all stakeholders particularly bank and financial institutions and the supervisors which will ensure a proper governance along with its sensitivity and sustainability. Source: a.

http:www.un.org

www.bis.org

www.oecd.org

» About the Author

An Associate Member and Adjunct Faculty of the Institute

ARTICLE PROSPECT OF CORPORATE GOVERNANCE IN FINANCIAL INSTITUTION TO IMPROVE FINANCIAL SECTOR: BANGLADESH PERSPECTIVE Dr. A.Q. Adeleke (M.I.M, A.C.P.M); Md. Lipon Hossain; Md. Julker Naim

he concept of corporate Key Words: Corporate g o v e r n a n c e Governance; Financial encompasses general Institutions; sustainable values and basic freedoms that Introduction include accountability, competence, the reign of the In the financial institution rule of law and absence of corporate governance practices human right abuse. A dramatic are regarded as important in change has come in financial reducing risk for investors, institutions towards good attracting investment capital and governance and sustainable improving the performance of Corporate developments. The paper gives companies. governance means the manner an overview of corporate governance with focus on the in which power is exercised in financial institution which the management of a country’s economic and social resource for contributed to the current level of development of the nation. The study aims A dramatic change has come in at finding out way of financial institutions towards improving Corporate Governance practice in good governance and financial institutions to sustainable developments. make sustainable financial sector. Here also focus on the process of corporate governance. In this study, the development in an efficient secondary data were used. The and transparent way. It has now secondary data were collected become a fashionable term in through an extensive literature the contemporary global politics survey on the subject. The study and economy that ensure has identified some major goodness and quality of problems in Corporate governance. In the recent times, Governance practice in the particularly from the second half financial institutions of the of 1980s, the issue of governance country. The prospect of and good governance has been Corporate Governance is bright emerging at the forefront of the in financial institution if all group global agenda for development. make their responsibility in right Bangladesh like other developing countries has been marked by way. the failure of financial sector to meet the demand of its citizens,

ineffective public services, and unfavorable environment for the proper growth of private sector, leadership crisis, lack of transparency and accountability in administration, ineffective political institutions and so on. For such poor performance in governance mechanisms, effective democratic governance continued to be the elusive golden deer that the nation doggedly sought but could not find. Against this backdrop, it is essential to examine how far financial institution lags behind the corporate governance. Back ground of the study The concept of governance is as old as the concept of governance itself. However, in the recent times, particularly during the last decade of the twentieth century, widespread poverty, rampant corruption and other socioeconomic problems prevailing in the Sub-Saharan African countries and its linkage with the quality of governance has brought about an interest in the discussion of good governance. Governance had three major components: that of process, contents and deliverables. The process of governance includes factors such as transparency and accountability. Content includes OCTOBER-DECEMBER-2017

ARTICLE values such as justice and equality. Governance cannot be all process and values. It must ensure the basic needs and security of its citizens. In this sense, it is only when all these three conditions are fulfilled that governance becomes good governance. Good governance implies an administration that is sensitive and responsive to the needs of the people is effective in coping with emerging problems in society by framing and implementing appropriate laws and policies. I believe five (5) main interdependent factors led to the creation of an extremely fragile financial system that was tipped into crisis by the global financial crisis and recession. These five factors were – 



Macro-economic instability caused by large and sudden capital inﬂows Major failures in corporate governance at banks



Lack of investor and consumer sophistication



Inadequate disclosure and transparency about ﬁnancial position of banks



Critical gaps in regulatory framework and regulations

Literature Review Andres and Vallelado (2008) have examined the corporate governance in banking: the role of the board of directors. They pointed out that bank board composition and size are related to directors‟ ability to monitor and advice management, and OCTOBER-DECEMBER-2017

that larger and not excessively independent board might prove more efficient in monitoring and advising functions, and create more value. Kutubi (2011) has examined board of director’s size, independence and performance: an analysis of private commercial banks in Bangladesh. This study has examined the impact of board size and the independent directors on the performance of the local private commercial banks in Bangladesh. The study has found that statistically significance positive relationship existed between the proportions of the independent directors and the performance of the banks. Hossain (2011) highlighted the corporate governance practices in Bangladesh. The study has pointed out that good corporate governance has implication for company behavior towards employees, shareholders, customers & banks. He has suggested that improving corporate governance can provide significant rewards to both individual companies and countries. Rashid et al (2010) have examined board composition and firm performance from Bangladesh perspective. The study has also examined the influence of corporate board composition in the form of representation of outside independent directors on firm’s economic performance in Bangladesh. The finding of the study has provided an insight to the regulators in this quest for harmonization of internal corporate governance practices.

Rashid et al (2009) have made an overview on corporate governance in Bangladesh. The study has identified six specific corporate governance characteristics in relation to current corporate governance practices in Bangladesh namely legal and regulatory frame work, weak institutional control, pre-dominant of individual investors, limited transparence & weak disclosure practices etc. Objective of the Study The specific objectives of the study area) to define governance;

corporate

b) to analyse the mechanism of corporate governance in ﬁnancial institution; c)

To way improving governance

out the corporate

Methodology of the Study Intensive desk study had been conducted to have a clear idea about corporate governance and its process in the form of related literature review to design the necessary conceptual and theoretical framework of the study. Corporate governance legislations of home and abroad are basically, consulted carefully in developing the appropriate measures for its proper utilization. Data have been collected from concerned books, journals, periodicals, daily newspapers and other materials. Origin and Concept of Corporate governance The word governance derives from the Greek verb [kubernáo]

ARTICLE which means to steer and was used for the first time in a metaphorical sense by Plato (Kjaer, A.M. 2005). It then passed on to Latin and then on to many languages. Governance is a multi-faceted concept that encompasses a number of political, economic and social issues concerned with the government and administration. It is an ever- changing issue of which meaning has been changing over time. Since the days of Plato and Aristotle, governance has meant the task of running government and administration. Subsequently, governance took the different meanings and dimensions. Different governance theorists and international organizations have defined the term of governance from different angles. Despite many attempts, there is still no clear-cut unanimity as to its meaning. However, to simply put it, governance means the process of decision making and the process by which decisions are implemented or not implemented. The concept of governance can be applied in different contextsglobal, national, institutional community (Dhiraj Kumar Nath, 2004). Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.

Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. Corporate governance ﬁnancial institutions Bangladesh

and in

There have been long-standing allegations about irregularities in the financial sector of Bangladesh. Extensively rising figures of defaulted loans, lack of accountability and inadequacy of good governance are frequently glaring up in this sector. Banking and financial institution laws and regulations of our country are not being applied properly which is one of the blazing reasons behind the alarming escalation of defaulted loans. Nepotism, undue political influence and lack of actions by the government against financial culprits are responsible too. Good governance is intensely missing among the boards of directors, managements and officials of different financial institutions.(Asain Age Report) Higher officials of banks should carry out their duties transparently so that the practice of transparency and integrity can be constituted among all employees of banks. Corporate Governance

Financial Institutions

Bangladesh Bank has been pursuing the best corporate governance framework for the ﬁnancial institution and banking

system. The first principle suggested by the Basel Committee on Banking Supervision on corporate governance focuses on the board's overall responsibilities. In some financial institutions that have a more traditional, hierarchical structure, it may be difficult to implement a policy of escalating problems or ethical lapses to the attention of the board, without fear of reprisal. The second principle is about the board's qualifications and compositions. Initial and ongoing training of board members in their duties and responsibilities is very important, but in some banks it may be difficult to sustain that kind of training because of time constraints and reluctance of certain board members to attend. Mechanism governance Institutions

of in

corporate Financial

Corporate governance mechanisms and controls are designed to reduce the ineﬃciencies that arise from moral hazard and adverse selection. There are both internal monitoring systems and external monitoring systems in ﬁnancial institutions. (a) Internal corporate governance controls 

Monitoring by the board of directors: The board of directors, with its legal authority to hire, ﬁre and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identiﬁed, discussed and OCTOBER-DECEMBER-2017

ARTICLE avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more eﬀective corporate governance and may not increase performance. 



Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit c o m m i tt e e , management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other's actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people ( c u s t o m e r s ,

OCTOBER-DECEMBER-2017

sh areh o l ders, employees) outside the three groups are being met. 

R e m u n e r a ti o n : Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other beneﬁts. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour.

(b) External corporate governance controls managerial labour market

media pressure

competition

government regulations

debt covenants

performance information

Steps to Improve Corporate Governance in Financial Institutions:Recommendations  Recognize that good governance is not just about compliance Boards need to balance conformance (i.e. compliance with legislation, regulation and

codes of practice) with performance aspects of the board’s work (i.e. improving the performance of the organization through strategy formulation and policy making). As a part of this process, a board needs to elaborate its position and understanding of the major functions it performs as opposed to those performed by management. These speciﬁcs compliance will vary from board to board. Knowing the role of the board and who does what in relation to governance goes a long way towards maintaining a good relationship between the board and management.  Clarify the board’s role in strategy It is generally accepted today that the board has a signiﬁcant role to play in the formulation and adoption of the organization’s strategic direction. The extent of the board’s contribution to strategy will range from approval at one end to development at the other. Each board must determine what role is appropriate for it to undertake and clarify this understanding with management.  Monitor organizational performance Monitoring organizational performance is an essential board function and ensuring legal compliance is a major aspect of the board’s monitoring role. It ensures that corporate decision making is consistent with the strategy of the organization and with owners’ expectations. This is best done by identifying the organization’s key

ARTICLE performance drivers and establishing appropriate measures for determining success. As a board, the directors should establish an agreed format for the reports they monitor to ensure that all matters that should be reported are in fact reported.  Understand that board employs the CEO

the

In most cases, one of the major functions of the board is to appoint, review, work through, and replace (when necessary), the CEO. The board/CEO relationship is crucial to effective corporate governance because it is the link between the board’s role in determining the organization’s strategic direction and management’s role in achieving corporate objectives.  Recognize that the governance of risk is a board responsibility Establishing a sound system of risk oversight and management and internal control is another fundamental role of the board. Effective risk management supports better decision making because it develops a deeper insight into the risk-reward trade-offs that all organizations face.  Ensure the directors have the information they need Better information means better decisions. Regular board papers will provide directors with information that the CEO or management team has decided they need. But directors do not all have the same informational requirements, since they differ in their knowledge, skills, and

experience. Briefings, presentations, site visits, individual director development programs, and so on can all provide directors with additional information. Above all, directors need to be able to find answers to the questions they have, so an access to independent professional advice policy is recommended.  Build and maintain an effective governance infrastructure Since the board is ultimately responsible for all the actions and decisions of an organization, it will need to have in place specific policies to guide organizational behavior. To ensure that the line of responsibility between board and management is clearly delineated, it is particularly important for the board to develop policies in relation to delegations. Also, under this topic are processes and procedures. Poor internal processes and procedures can lead to inadequate access to information, poor communication and uninformed decision making, resulting in a high level of dissatisfaction among directors. Enhancements to board meeting processes, meeting agendas, board papers and the board’s committee structure can often make the difference between a mediocre board and a high performing board.  Build board

skills-based

What is important for a board is that it has a good understanding of what skills it has and those

skills it requires. Where possible, a board should seek to ensure that its members represent an appropriate balance between directors with experience and knowledge of the organization and directors with specialist expertise or fresh perspective. Directors should also be considered on the additional qualities they possess, their “behavioral competencies”, as these qualities will influence the relationships around the boardroom table, between the board and management, and between directors and key stakeholders.  Evaluate board and director performance and pursue opportunities for improvement Boards must be aware of their own strengths and weaknesses, if they are to govern effectively. Board effectiveness can only be gauged if the board regularly assesses its own performance and that of individual directors. Improvements to come from a board and director evaluation can include areas as diverse as board processes, director skills, competencies and motivation, or even boardroom relationships. It is critical that any agreed actions that come out of an evaluation are implemented and monitored. Boards should consider addressing weaknesses uncovered in board evaluations through director development programs and enhancing their governance processes. Conclusion Good governance is an umbrella and elusive concept. It includes a variety of factors which are inter-related to each other. At OCTOBER-DECEMBER-2017

ARTICLE present, financial institution has been facing a number of challenges in the path of corporate good governance like institutionalized political groups, lack of accountability and transparency, lack of rule of law, inefficient leadership, rampant corruption, and widespread poverty and so on. This study pinpoints a number of problems involved in Corporate Governance practice in financial institutions in Bangladesh. These problems are related to the composition of board, role of shareholders, annual general meeting of the board, role of senior management, role of auditors and position of capital market for corporate control in Bangladesh. These problems may be overcome on the basis of short term, medium-term & long-term initiatives. If the above mentioned suggestions are implemented, the future of Corporate Governance is very bright in the context of financial institutions in Bangladesh. References 1. Kjaer, Governance, Cambridge.

A.M. Polity

(2005) Press,

2. Landell, M. and Serageldein (1991) Governance and Development Process, Finance and Development, Washington D. C.

OCTOBER-DECEMBER-2017

3. March, J.G. and Olsen J.P. (1995); the concept of Good Governance, Washington D.C. 4. Nicholas R. (1999) Powers of Freedom: Reforming Political Thought, Cambridge University Press. 5. Rahman, Z. H. (2005) Engaging on Good Governance: A Search for Entry Points, the Weekly Holiday, Dhaka, February 25. 6. World Bank Report (1993), Good Governance and Sustainable Development: A UNDP Policy Document, 1997. 7. Jensen, MC &Meckling, WH 1976, „Theory of the Firm Managerial Behavior, Agency Costs and Ownership Structure‟, Journal of Financial Economics, Vol. 3, No. 4, pp. 305-360. 8. King, RG & Levine, R 1993a, „Finance and growth: Schumpeter might be right‟, Quarterly Journal of Economics, Vol.108, pp. 717-37. 9. King, RG & R. Levine 1993b, „Finance, Entrepreneurship and Growth: Theory and Evidence‟, Journal of Monetary Economics, Vol.32, pp. 513-42. 10. Hye, A. H.(2000)(ed) Governance: South Asian Perspectives, Dhaka. Pp. 15. [37] 11.

Rahman,

Mizanur.

(2000) ‘Governance and Judiciary’ in Hye, A.H. (ed) Governance:South Asian Perspectives, Dhaka, pp. 146. [38] 12. Hussain, Zulﬁqur(2006) ‘ Control and Accountability of Bangladesh Public Administration: An Overview’ Journal of Politics and Administration, Vol. 1 No. 1, July-December, pp. 67. [39] 13. Rahman, Mizanur, (2001) ‘Some Measures of Bureaucratic Eﬃciency and Accountability: Bangladesh Perspectives’ Bangladesh Journal of Public Administration, Vol. x, No. 1, pp. 14. [40] 14. Humes, S. and Martin, E.(19961) The Structure of Local Government Throughout the World, London, pp. 54.

» About the Author

Senior Lecturer in Universiti Malaysia Pahang, Ph.D Technology, Operation and Logistics Management (Universiti Utara Malaysia),B.S.c Business Information System (University of East London ). Assistant Secretary, Institute of Chartered Secretaries of Bangladesh (ICSB). MPhil Fellow of Bangladesh University of professionals (BUP).

ARTICLE DOES GOOD CORPORATE GOVERNANCE PRACTICE HAVE IMPACT ON THE FINANCIAL PERFORMANCE? EVIDENCE FROM PRIVATE BANKS OF BANGLADESH Md. Sharif Hasan ACS; Sabreya Khanom Zuma

ntroduction

integral parts of ﬁnancial sector of Bangladesh, good corporate governance practice can be used as a means of sound growth and development. One of the reports by the Banking Reform Commission (1999) and BEI (2003) raises serious concerns on the banking sector and criticize the quality of governance that prevails in the banking sector in Bangladesh, which was strengthen by ﬁnancial scam and a credit card scam by Hallmark and Bismillah

growth of ﬁrm’s performance. This study attempts to identify the relationship between good corporate governance practices and the ﬁnancial performance of private banks of Bangladesh.

Corporate governance becomes as buzzword in today’s world and the need for it increases with the rise of corporation. It maintains how efficiently mitigate the interests Objectives of the Study of the stakeholders enhancing This study aims to achieve the corporate transparency and following objectives: accountability. However, good practice of it in Bangladesh is i. To measure the impact quite vague in the most of good corporate companies and organizations governance practice on comparing to its neighbors and financial performance of the global economy of corporate the private banks in governance (Gillibrand, Bangladesh. 2004). One of the reasons ii. To show an is that, most of the Corporate governance becomes analytical maneuver companies are family as buzzword in today’s world of the corporate oriented. Thus, family and the need for it increases governance practices members are occupying among the private with the rise of corporation. important posts such as commercial banks of the managing director or Bangladesh. CEO which leads to inefficient corporate governance iii. To identify different Group where six commercial practices (Brennan, Solomon, affecting factors on good banks and their officials were Uddin, & Choudhury, 2008). The corporate governance in involved. Such fraudulent most of the failure of corporate Bangladesh. activities indicate the lack of governance in Bangladesh are good corporate governance and Literature Review caused due to poor bankruptcy its improper practices among laws, no push from the the banks. Bangladesh Bank Corporate governance is the international investor instructed all commercial banks combination of laws, rules, community, limited disclosure to have strong corporate regulations, policies through regarding related party governance so that such which the corporations are transactions, weak regulatory fraudulent activities can strictly administered and controlled. It supervision system, lack of the responsibility, be monitored. Moreover, Good ensures shareholders’ active corporate governance practices accountability, transparency and participations etc. (Mamtaz and make sure the gain of effective internal and external Yusuf,2005). Although the competitive advantage which controlling. Thus, it enhances banking sector is one of the can ensure the incremental the rights of the related

OCTOBER-DECEMBER-2017

ARTICLE stakeholders (shareholders, investors, employees, c u s t o m e r s , regulators).Corporate governance has been taking increasing attention from regulatory bodies and practices worldwide since 1990s (Ullah, 2009). It is because of the highest number of corporate bodies collapses after 1990s in UK, USA such as Barings Bank in 1995 (England’s oldest established banks), Enron in December 2001 (USA’s fortune top 10 list of companies), Royal Ahold in 2003 (Dutch retail group), Worldcom etc. Thus, it creates a pessimistic impact on several shareholders, employees, suppliers of goods or services, and the economic impact on the local and international communities. Furthermore, different scholars and researchers linked those problems with the inefficient and ineffective corporate governance (Mallin, 2003). Eminent economist and Bangladesh Economics Association's former president Professor Dr. Abul Barakat recently made a few alarming remarks about the country's rampaged banking sector which have reportedly jolted those associated with banking administration. Dr. Abul Barakat has expressed grievous worries about the deadly risk of dire mishaps on the country's financial and banking turfs. According to him, if all private banks are monitored and audited precisely and if transparency can be applied in their financial reports, then half of these banks would become OCTOBER-DECEMBER-2017

bankrupt. There is a blazing lack of integrity, good governance and accountability in the banking arena, Dr. Abul Barakat remarked which is why immense irregularities are going on across banks. The concern about corporate governance came into light in the wake of stock market debacle in Bangladesh in 1996 by organizing seminars, conferences and discussion by Organization for Economic Co-operation and Development (OECD), SEC and other scholars of corporate culture (Talukdar, 2007). In Bangladesh, the corporate governance is practiced through imposing the Securities and Exchange Ordinance 1969, Bangladesh Bank Order 1972, Bank Companies Act 1991, Financial Institutions Act 1993, Securities & Exchange Commission Act 1993, Companies Act 1994 and Bankruptcy Act 1997. For instance, most of the company of Bangladesh does not completely follow the corporate governance guidelines issued by Bangladesh Securities and Exchange Commission (BSEC) and the average compliance score is 85 percent where a large number of companies’ compliance score is below average compliance (Uddin and Begum, 2012). The present scenario of corporate governance practices in Bangladesh is not so satisfactory; the investors are willing to invest in companies where there is good corporate governance practice (Sharoar, Zahirul and Arafat, 2009). Good corporate

governance tends to ensure sound corporate performance by providing protection for shareholders interest (OECD, 2004). Because the return on investment is heavily depends on the good corporate governance practices. The responsibility of the individual corporate personnel, proper accountability and transparency in transactions ensure the highest level of preserving the interests of the related stakeholders. To measure the impact of good corporate governance practices on the financial performance of the organization, the following mechanisms were identified with the relevant sources of information: (a) Composition of the Board & Size: The Board of Directors contributed to the Company's strategy and policy formulation in addition to maintaining its performance as well as its executive management. According to the Bangladesh Securities and Exchange Commission (BSEC) Notification No. SEC/CMRRCD/2006-158/ 129/Admin/43 dated 07 August 2012; the number of the Board members of the company shall not be less than 5 (five) and more than 20 (twenty). Among them at least one fifth (1/5th) of the total number of directors in the company’s board shall be independent director and at least one tenth (1/10th) female director(s). Provided that in case of banking company, no banking company shall have directors exceeding 20 (twenty) in total including at least 3 (three) independent directors: Provided

ARTICLE further that if the number of directors of a banking company is less than 20 (twenty), the number of independent directors shall be at least 2 (two).So, the board has a signiﬁcant impact on banks’ performance including the following compositions: i.

Independence of board from management

ii.

Separation of chairman and managing director/CEO

iii. Financial expertise of directors iv. Number meetings v.

board

Role of external auditors

vi. B o a r d committees(Executive, Audit, Nomination &Remuneration andRisk Management) (b) Audit Committee:The company shall have an audit committee as a sub- committee of the Board.This committee shall be composed of at least 3(three) membersin which one member must be an independent director and the chairman of the audit committee shall be the independent director. The audit committee shall conduct at least four meetings in a ﬁnancial year and the time gap between two meetings of the said committee not be more than four months. The quorum of the meeting of the audit committee shall be constituted in presence of either two members or 2/3 of the members of the audit committee, whichever is higher,

where presence of an independent director is must. (BSEC, 2012) The audit committee shall assist the board of directors in ensuring that the financial statements reflect true and fair view of the state of affairs of the company and in ensuring a good monitoring system within the business. The audit committee shall be responsible to the board of directors. The duties of the audit committee shall be clearly set forth in writing. The board of directors shall appoint members of the audit committee who shall be directors of the company and shall include at least 1 (one) independent director. All members of the audit committee should be “Financially Literate” and at least 1(one) member shall have accounting or related financial management experience.The main objective of establishing an Audit committee is to uphold the integrity of financial statements by reflecting economic substance of transactions and present a true and fair view (Ojo, 2006). (c) Financial Performance Mechanisms; ROA and EPS: One of the influential corporate governance measures is the board composition and size where the core driving factors have positive impact on the overall financial performance as shareholder returns, profitability, and dividend payouts and yields (Brown and Caylor, 2004). GMI’s global database shows that top 10% companies have achieved a higher ROE, ROA and Return on

Capital (ROC) can ensure the best corporate governance ratings and financial performance (Governance Metrics International and Byun, 2006). Several previous studies have shown the limited scope of the corporate governance practices in the private sector of Bangladesh while this study represents the wide extent of private banks consisting of 30 DSE and CSE listed banks and the impact of good corporate governance practices on their financial performance. All independent variables; the board composition & size and audit committee were regressed against the ROA and EPS as the financial indicators. Methodology The prime focus of this study is to find out the relationship between the good corporate governance mechanisms and the overall organization’s financial performance. In this regard, data were collected from the 5 years’ annual reports from 2012 to 2016 of Dhaka Stock Exchange (DSE)and CSE (Chittagong Stock Exchange) listed 30 private banks. Linear Regression Model was used to analyze the dependency rate of dependent variable (Return on Asset-ROA and Earnings Per Share-EPS) on independent variables (Composition of the board & size and audit committee). The test results show the actual corporate governance practices in private banks of Bangladesh through calculating the following hypotheses: OCTOBER-DECEMBER-2017

ARTICLE H0 : Corporate governance mechanisms have no impact on banks’ financial performance. H1 : Board composition& size has significant impact on banks’ financial performance. H2 : Audit committee has significant impact on banks’ financial performance. Y = β0+β1X1+β2X2+Ɛt Here, Y is ROA-Return on Asset and EPS-Earnings Per Share(dependent variables),

Table-1: Descriptive Statistics Descriptive Statistics N Minimum Maximum Mean Std.Deviation 30 .57 1.57 .9860 .36104 30 1.02 11.30 3.8553 2.61138

ROA EPS Board Composition 30 & Size Audit Committee 30 Valid N (list wise) 30

7.00 3.00

19.00 12.433 5.00 4.2667

2.64814 .82768

Regression

In the Linear Regression Model, ROA& EPS are regressed by all independent variables (Board composition & size and Audit committee) with 5% level of signiﬁcance.

Β1-2refers to two independent variables.

Table- 2: Regression Coeﬃcients

Y1 (ROA) = composition & committee +Ɛt

Model

Y2 (EPS) = composition & committee +Ɛt

β0+β1Board size+β2Audit β0+β1Board size+β2Audit

Data Analysis and Findings Descriptive Statistics Table-1 illustrates the summary of descriptive statistics of total 30 DSE and CSE listed private banks in Bangladesh of last 5 years from 2012 to 2016 on the basis of four dependents and independent variables. The summary indicates that the highest level of ROA is 1.57 where average is 0.9860 which is comparatively positive for private banks. Similarly, the highest EPS range is 11.30 and average is 3.8553. The average board size is 12.433 but most of the banks constitute the standard audit committee of average 4.2667 members.

OCTOBER-DECEMBER-2017

(Constant)

Board Composition & Size

Audit Committee

Coef�icientsa Unstandardized Standardized t Coef�icients Coef�icients B

-.217 .040 .209

Std. Error

.260 .017 .062

Beta

Sig.

-.835 .411

.350 2.380 .025 .492 3.339 .002

R: 0.676a, R Square: 0.458, Adjusted R Square: 0.417, F value: 11.387, ANOVA Sig: 0.000b

Dependent Variable: ROA

Table-2 represents the regression coefficient ‘R’ = 0.676 or 67.6% which means that correlation between dependent variable (ROA) and independent variables (board composition & size and audit committee) is positive. The coefficient R2= 0.458 which shows that 45.8% of variation in corporate governance is explained by all independent variables. The relationship is positive with adjusted R square = 0.417 or 41.7% and the F-test value = 11.387 which is also significant. The regression coefficient for board composition& size (β1)= 0.350 or 35% which implies that one percent increase in board composition & size will ensure

35%increase in ROA of banks if other variables are kept controlled. The T-test value is 2.380 and insignificant at 0.025 which is quite higher than 0.005 but the regression model is valid and the relationship is also positive. The result exhibits that the maximum number of board members are not required but efficient composition of the board can ensure effective decision making. The audit committee (β2)= 0.492 or 49.2% which implies that one percent increase in audit committee will ensure 49.2% increase in ROA if other variables are kept controlled. The T-test value is 3.339 and significant at 0.002 because significance level is less than 0.005 and regression model is valid and also relationship is positive. Through the guidelines of Bangladesh Bank and Bangladesh Securities Exchange Commission, most of the banks constitute the proper composition of audit committee ensuring the independent director’s participation. Table- 3: Regression Coefficients Model 1 (Constant)

Board Composition &Size Audit Committee

Coef�icientsa Unstandardized Coef�icients B

-10.286 .635

1.465

R: 0.696a, R Square: 0.484, Adjusted

Std. Error

2.913

Standardized t Coef�icients Beta

.141 .450

R Square: 0.446, F value: 12.681, ANOVA Sig: 0.000b

Sig.

-3.531 .002

.644 4.517 .000 .464 3.259 .003

Dependent Variable: EPS Table-3shows the regression coeﬃcient ‘R’ = 0.696 or 69.6% which means that correlation between dependent variable (EPS) and independent variables

ARTICLE (board composition & size and audit committee) is positive. The coefficient R2 = 0.484 which shows that 48.4% of variation in corporate governance is explained by all independent variables. The relationship is positive with adjusted R square = 0.446 or 44.6% and the F-test value = 12.681 which is also significant. The regression model is statistical significant and valid too. The board composition & size (β )= 0.644 or 64.4% which implies 1 that one percent increase in board composition & size will ensure 64.4% increase in EPS of banks if other variables are kept controlled. The T-test value is 4.517and significant at 0.000 which is quite less than 0.005. The regression model is valid and there is significant as well as positive impact of board composition & size on the banks’ EPS. The coefficient audit committee (β2)= 0.464 or 46.4% which implies that one percent increase in audit committee will ensure 46.4% increase in EPS if other variables are kept controlled. The T-test value is 3.259and significant at 0.003 because significance level is less than 0.005. The regression model is valid and there is significant relationship of audit committee with banks’ EPS. Conclusion Good corporate governance is the bedrock of sustainable financial performance of an organization. This study tries to reveal the good corporate governance practices of private

banks in Bangladesh. To measure that there were identified two independent variables as board composition & size, audit committee against the Return on Investment (ROA) and Earnings Per Share (EPS) as the indicator of financial performance. The regression result shows that the scenario of corporate governance practices such as board composition & size and audit committee of private banks have significant relation with the banks’ financial performance. In this regard, we may say that the board members should be efficient in their activities as well as decision-making rather than the numbers. On the other hand composition of Board and Committees is essential ensuring the participation of 1/5 (one fifth) independent directors and 1/10 (one tenth) female board members along with the entire board of directors. Another thing is that Bank management need to work with integrity and to increase good governance practice ensuring the accountability & transparency. For instance, the board composition & size has no direct relationship with the ROA and EPS of an organization rather these were taken as mechanisms of good corporate governance. The audit committee must compose not less than 3 and not more than 5 and the participation of at least one independent director. Moreover, the Chairman and the Managing Director should hold the separate role to preserve the board independence. Good corporate governance is not only

to determine the ﬁnancial growth of the organization rather to assist them to propagate in a transparent way to preserve the right of the stakeholders. References Bangladesh Securities and Exchange Commission (BSEC) Notiﬁcation No. SEC/CMRRCD/2006-158/129/ Admin/43 dated 07 August 2012. Brennan, N. M., Solomon, J., Uddin, S., &Choudhury, J. (2008). Rationality, traditionalism and the state of corporate governance mechanisms: Illustrations from a less-developed country. Accounting, Auditing & Accountability Journal, 21(7), 1026-1051. Brown, L. D., &Caylor, M. L. (2004). Corporate Governance Study: The Correlation between Corporate Governance and Company Performance. Institutional Shareholder Services (ISS). Retrieved from http://www.stybelpeabody.com /issscoresandshareholdervalue. pdf Gillibrand, M. 2004. Corporate Management Essential for Industrialization. The Bangladesh Observer, April 17, 2004. Governance Metrics International, & Byun, S. J. (2006, September).Governance and Performance: Recent Evidence. Governance Metrics International. Retrieved from http://www.gmiratings.com/ Performance.aspx OCTOBER-DECEMBER-2017

ARTICLE Organization for Economic Co-operation and Development (OECD) 2004,'The OECD Principles of corporate governance', OECD PublicationsService, France. Ojo, M. (2006).Auditor independence-its importance to the external auditor's role in banking regulation and supervision. Ahmed M.U. and Yusuf M. A. (2005)“Corporate Governance: Bangladesh Perspective”

Talukdar,M.B.U.(2007).Corporat e governance:An essential mechanism to c u r b m a l p r a c ti c e s b y r g a n i z a ti o n s . BangladeshBank,PolicyAnalysisU nit(PAU),ResearchDepartment,P olicyNoteSeries:PN-0801. U l l a h , M . M (2009).Corporategovernancepra cticesinBangladesh:Acasestudyo nTrustBankLimited. Southeast University Journal of Business Studies, V (2),P, Dhaka.

The Daily Asian Age newspaper dated 21 December 2017, www.dailyasianage.com

» About the Author

Member Secretary, CS Regulations Sub-Committee. Faculty, School of Business Studies, Southeast University.

Training Program for 1st Quarter (January to March) 2018 Sl No. Name of the Program

Date & Time

Internal Audit & Control Environment

1 Week Programme

Corporate Governance Practice in the Listed Companies

1 Week Programme

Management of Initial Public Oﬀering (IPO)

1 Week Programme

Finance for Non-Finance Executives

3 Days Programme

Management of Company Meetings

Day Long Programme

All Round Leadership

1 Week Programme

Management of PF, Gratuity & WPPF

3 Days Programme

Compliance for Banking Companies

3 Days Programme

Eﬀective Audit Committee

3 Days Programme

OCTOBER-DECEMBER-2017

ARTICLE CORPORATE GOVERNANCE-A DIRE NEED OF BANKING INDUSTRY Babul Meah ACS

overnance, in general terms, means the process of decision-making and the process by which decisions are implemented (or not implemented), involving multiple actors. Good governance is one which is accountable, transparent, responsive, equitable and inclusive, eﬀective and eﬃcient, participatory and which is consensus oriented and which follows the rule of law”.

four “pillars” – of Responsibility, Accountability, Fairness and Transparency (RAFT). Corporate Governance from the view point of Banking Corporate Governance ensures to bring transparency, accountability and professionalism in the management system of a corporate body that enhances the credibility and acceptability to the shareholders, employees, potential investors, customers, lenders, governments and all other stakeholders. This is

Different schools of thought define the meaning of corporate governance The need for corporate differently. One school of thought describes corporate governance as a “system” by which companies are directed and controlled (Cadbury and Greenbury Report, CFACG 1992);

governance arises from the potential conﬂicts of interest among stakeholders in the corporate structure.

Another school views corporate governance as “structures and processes for decision making, accountability, control and behavior at the governing body” (Public accounts and Estimates Committee, 2002); To others corporate governance is about “ﬁnding ways” to ensure eﬀective decision making (Pound 1995). The World Bank argues that the framework of corporate governance should be based on

mostly true in case of Banking Industry. Since Banks deal in public money, public confidence is of outmost importance in this Industry. From a banking industry perspective, corporate governance involves the manner in which the business and affairs of banks are governed by their boards of directors and senior management, which affects how, they: - Set corporate objectives; - Operate the banks business on

a day-to-day basis; - Meet the obligation of accountability to their shareholders and take into account the interests of other recognized stakeholders - Align corporate activities and behavior with the expectation that banks will operate in a safe and sound manner, and in compliance with applicable laws and regulations; and - Protect the interests of depositors (Basel Committee on Banking Supervision, 2006). Need for Corporate Governance of Banks In developing countries like Bangladesh, corporate governance of banks plays very signiﬁcant roles. Corporate governance in the banking sector is not just a formality but a dire need of society. The importance of ensuring good corporate governance in banking can be stated in line with the BASEL Committee where the Committee noted that: “Supervisors … should consider issuing guidance to banks on sound CG and the pro-active practices that need to be in place. They should also take account of CG in issuing guidance on other topics.” Supervisors must have a keen interest in sound corporate governance, as it is an essential OCTOBER-DECEMBER-2017

ARTICLE element in the safe and sound functioning of a bank and may adversely affect the bank’s risk profile if not operating effectively. Well governed banks contribute to the maintenance of an efficient and cost-effective supervisory process, as there is less need for supervisory intervention”. Apart from the BASEL Committee’s propositions, some noted researchers have also identified the various logical reasons for good corporate governance as under: 1. Sound practices of corporate governance help to mobilize the capital effectively which ensures the efficient use of resources. 2. As a result of good corporate governance, the domestic and international investors’ confidence in the institution can increase and lead to a lower cost investment capital. The investors thus have the perception that the financial institution is stable and predictable. 3. The need for corporate governance arises from the potential conflicts of interest among stakeholders in the corporate structure. These conflicts of interest often arise from two main reasons. First, different stakeholders have different goals and preferences. Second, the stakeholders have imperfect information as to each other’s actions, knowledge, and preferences. 4. The purpose of corporate governance in banking sector without any doubt build OCTOBER-DECEMBER-2017

and strengthen the accountability, credibility, trust, transparency and integrity. If there won’t be any regulatory watchdog which regulates the governance of the banks then banks can decide things by their own whims and fancies. Corporate governance in banking sector protects not just economy of the country but also the shareholders, employees, supervisors, customer and public at large. The specificity of the corporate governance of banks CG for banking organizations is arguably of greater importance than for other companies, given the crucial financial intermediation role of banks in an economy … and …. is essential to achieving and maintaining public trust and confidence in the banking system. Corporate governance in banks differs from the standard (typical for other companies), which is due to several issues:  a bank’s failure to follow good practices in corporate governance and the lack of effective governance are among the most important internal factors which may endanger the solvency of a bank.  Banks are subject to special regulations and supervision by state agencies (monitoring activities of the bank are therefore mirrored); supervision of banks is also exercised by the purchasers of securities issued by banks and depositors ("market discipline", "private monitoring"); 

The bankruptcy of a

bank raises social costs, which does not happen in the case of other kinds of entities’ collapse; this affects the behavior of other banks and regulators;  Regulations and measures of safety net substantially change the behavior of owners, managers and customers of the banks; rules can be counterproductive, leading to undesirable behavior management (take increased risk) which expose well-being of stakeholders of the bank (in particular the depositors and owners);  Between the bank and its clients there are fiduciary relationships raising additional relationships and agency costs;  Problem principal-agent is more complex in banks, among others due to the asymmetry of information not only between owners and managers, but also between owners, borrowers, depositors, managers and supervisors;  The number of parties with a stake in an institution’s activity complicates the governance of financial institutions. Corporate governance principles for banks and its application in Bangladesh The BASEL Committee’s October 2010 Principles for enhancing corporate governance represented a consistent development in the Committee’s long-standing efforts to promote sound corporate governance practices for banking organizations. The 2010 principles sought to reflect key

ARTICLE lessons from the global ﬁnancial crisis that began in 2007, and enhance how banks govern themselves and how supervisors oversee this critical area. In the light of ongoing developments in corporate governance, the Committee has decided to revisit the 2010 guidance. The BASEL Committee on Banking Supervision published revised guidance on corporate governance principles for Banks in July 2015 to assist banking supervisors in promoting the adoption of sound corporate governance practices by banking organizations in their countries. With a view to ensuring good and corporate governance in the bank management in Bangladesh, Bangladesh Bank has adopted the BASEL principles and issued detailed guidelines. A detailed discussion of the BASEL Principles and it’s application in banking sector of Bangladesh has been drawn in following : BASEL Principles Principle 1: Board’s overall responsibilities. Summary The board has overall responsibility for the bank, including approving and overseeing management’s implementation of the bank’s strategic objectives, governance framework and corporate culture. Application in Bangladesh The concept of “risk appetite” is still not very well developed in

this regard, and board members may have difficulty being actively involved in its preparation, approval, and communication throughout the bank. Also, in some banks that have a more traditional, hierarchical structure, it may be difficult to implement a policy of escalating problems or ethical lapses to the attention of the board, without fear of reprisal Principle 2: Board qualifications composition.

and

Summary Board members should be and remain qualified, individually and collectively, for their positions. They should understand their oversight and corporate governance role and be able to exercise sound, objective judgment about the affairs of the bank. Application in Bangladesh Initial and ongoing training of board members in their duties and responsibilities is very important, but in some banks it may be difficult to sustain that kind of training because of time constraints and reluctance of certain board members to attend. Principle 3: Board’s own practices.

structure

and

Summary The board should deﬁne appropriate governance structures and practices for its own work, and put in place the means for such practices to be followed and periodically

reviewed for eﬀectiveness.

ongoing

Application in Bangladesh Not diﬃculties are observed. Principle 4: Senior management. Summary Under the direction and oversight of the board, senior management should carry out and manage the bank’s activities in a manner consistent with the business strategy, risk appetite, remuneration and other policies approved by the board. Application in Bangladesh The principle no. 4, 5, 6 and 8 focus on senior management, governance of group structures, risk management function and risk communication respectively in which Bangladesh Bank do not ﬁnd any visible challenge to implement. Principle 5: Governance of group structures. Summary In a group structure, the board of the parent company has the overall responsibility for the group and for ensuring the establishment and operation of a clear governance framework appropriate to the structure, business and risks of the group and its entities.21 The board and senior management should know and understand the bank group’s organizational structure and the risks that it poses. Principle 6: Risk management function.

OCTOBER-DECEMBER-2017

ARTICLE Summary

senior management.

Principle 11:

Banks should have an effective independent risk management function, under the direction of a chief risk officer (CRO), with sufficient stature, independence, resources and access to the board.

Application in Bangladesh

Compensation.

The central bank does not ﬁnd any visible challenge to implement.

Summary

Principle 7:

Summary

Risk identiﬁcation, monitoring and controlling.

Summary Risks should be identified, monitored and controlled on an ongoing bank-wide and individual entity basis. The sophistication of the bank’s risk management and internal control infrastructure should keep pace with changes to the bank’s risk profile, to the external risk landscape and in industry practice. Application in Bangladesh There are challenges in accumulating a sufficient dataset to measure expected losses and unexpected losses in the credit portfolio, as well as in operational risk management and liquidity management. These practices are just getting started in many banks, and historical data are often not available with sufficient depth and quality. Principle 8: Risk communication. Summary An effective risk governance framework requires robust communication within the bank about risk, both across the organization and through reporting to the board and OCTOBER-DECEMBER-2017

Principle 9: Compliance.

Application in Bangladesh

The bank’s remuneration structure should support sound corporate governance and risk management. Application in Bangladesh The legal basis for multi-year remuneration payout schedules, claw back (the recovery of money already expensed) provisions for unsatisfactory outcomes, and vesting of deferred compensation have not been suﬃciently developed in Bangladesh to better align compensation with risk-taking. Principle 12:

An independent compliance function is a key component of the bank’s second line of defense. It is assumed that in some banks, there may not be an understanding of the diﬀerence in roles between compliance and internal audit.

Disclosure and transparency.

Principle 10:

Application in Bangladesh

Internal audit. Summary The internal audit function should provide independent assurance to the board and should support board and senior management in promoting an eﬀective governance process and the long-term soundness of the bank. Application in Bangladesh The “third line of defense” role of internal audit in reviewing the adequacy of risk management and compliance may not seem suﬃciently distinct.

Summary The governance of the bank should be adequately transparent to its shareholders, depositors, other relevant stakeholders and market participants. some of the matters such as compensation principles and amounts are kept highly conﬁdential to depositors and market participants. Principle 13: The role of supervisors. Summary Supervisors should provide guidance for and supervise corporate governance at banks, including through comprehensive evaluations and regular interaction with boards and senior management, should require improvement and

ARTICLE remedial action as necessary, and should share information on corporate governance with other supervisors. Application in Bangladesh Find hardly any challenge to implement, except in the case of state-owned commercial banks where Bangladesh Bank cannot alter the composition of the board and senior management, or in requiring corrective action. Obstacles to Corporate principles for Bangladesh

implement Governance Banks in

Corporate governance practices in Bangladesh are quite absent in most Bank companies. In fact, Bangladesh has lagged behind its neighbors and the global economy in corporate governance (Gillibrand, 2004). 1. One reason for the absence of Corporate Governance is that most companies in Bangladesh are family oriented. With family ownership, rational succession plans are difficult to implement as family members may not be qualified to assume managerial responsibilities. It is the most significant problem of corporate governance in Bangladesh. This kind of structure may hinder the good governance practices since the exposures of connected persons can serve their personal benefits. or they may not be interested in carrying on family business. 2. Moreover, motivation to disclose information and improve governance practices by companies is felt negatively. There is neither any value judgment nor any consequences

for corporate practices.

governance

still a weak link in the movement towards strengthening CG.

3. The third most problem of corporate governance is the lack of knowledge about monitoring new products, or insuﬃcient attention to their risk characteristics.

9. Lack of shareholders' activities on issues of performance, business strategy, future business plans, disclosures and processes, corporate governance cannot be ﬁrmly established.

4. Bankruptcy laws and processes are inadequate in terms of provisions and not strong in terms of enforcement in Bangladesh. 5. A market for corporate control can play an important monitoring role, as poorly managed companies can become merger/acquisition targets. In Bangladesh, there seems to be no market for corporate control, as merger/acquisition of either publicly-traded or privately-held companies is rare. 6. Independent directors do not act as an advocate for minority shareholders or as a source of innovative ideas as they are thought to be. 7. Bangladesh still follows the hybrid system of legal system inherited from the British administration. Therefore, weak regulatory system along with board interference with the management exists in CG in the country. 8. Capital market facilitates good governance through information production and monitoring. The capital market of Bangladesh consists of two stock exchanges: Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Bangladesh does not have depth in its equity market. the capital market of Bangladesh is

10. Shareholders, investor associations, institutional investors and the financial press can play significant role in ensuring better CG. Each of these potential pressure groups is weak in Bangladesh. 11. The auditors in Bangladesh are not considered independent or sufficiently qualified to assess the validity of the financial statements of corporate entities. 12. Board members and senior management, who may be appointed by the government, may not have full discretion to carry out their responsibilities properly. 13. Domination of the board by the chief executive officer is a common problem, but there is also “reverse domination” -individual board members interfering in specific decisions of senior management or even lower levels of management. There is also the problem of irreconcilable conflict between the board chairman (or individual board members) and the CEO that is not addressed adequately so far. It not only could deteriorate corporate governance of the bank but also could signpost unhealthy example to other banks. Given the above discussion and findings, it is fair to conclude OCTOBER-DECEMBER-2017

ARTICLE that corporate culture in banking sector of Bangladesh is still in a state of infancy, although CG practices are gradually improving. Effective corporate governance is critical to the proper functioning of the banking sector and the economy as a whole. Governance weaknesses at banks that play a significant role in the financial system can result in the transmission of problems across the banking sector and the economy as a whole. A number of problems involved in Corporate Governance practice in banking industry in Bangladesh that hinder the practice of good and sound corporate governance. These problems may be overcome on the basis of short term, medium-term & long-term initiatives.

OCTOBER-DECEMBER-2017

References

Moudud-Ul-Huq

State of Corporate Governance in Bangladesh- Analysis of Public Limited Companies- Financial, Non-Financial Institutions and State Owned Enterprises by Dr. A. K. Enamul Haque, Mohammad Behroz Jalil,Farha Naz.

CORPORATE GOVERNANCE IN BANKS: PROBLEMS AND REMEDIES* Monika Marcinkowska University of Lodz, Finance, Banking and Insurance Institute,

Corporate Governance-Its Problems & Prospects in Banking Industry in Bangladesh- Begum Ismat Ara Huq* and Mohammad Zahid Hossain Bhuiyan. Challenges to banks' good governance- SK Sur Chowdhury Practices of Corporate Governance in the Banking Sector of Bangladesh- Rezwan Mahmood1 & Md. Moshin Islam. Corporate Governance Practices in Bangladesh: A Comparative Analysis between Conventional Banks and Islamic Banks-S.

ul. Rewolucji 1905 r. nr 39, 90-214 Lodz, Poland Basel Committee on Banking Supervision-Corporate Governance principles for Banks, July 2015.

» About the Author

Basel Committee on Banking Supervision-Corporate Governance principles for Banks, July 2015.

ARTICLE BANKING SECTOR IN BANGLADESH: REGULATIONS, COMPLIANCE AND GOOD GOVERNANCE Md.Mizanur Rahman QCS

bstract

suppliers, financiers, government and the community. The United Kingdom Cadbury Report (Cadbury, 1992, p.15) defined corporate governance as “the system by which companies are directed and controlled”. Its structure specifies the distribution of rights and responsibilities among company’s different participants, such as board, management, shareholders and other stakeholders. Corporate governance covers the concepts, theories and practices of boards and their directors and the

A well governed institution is expected to utilize its resources eﬃciently and contribute positively to the economic development of a nation. In recent time, ‘governance’ and ‘good governance’ are being increasingly used in economics. A dramatic change has been made in public administration and the paradigm shift towards good governance and sustainable developments. Day by day the intellectuals, bureaucrats and civil society members are accepting the spirit of the concept and Any shortfall or even a slight conceptualizing it in their own experience and instability in banking sector environment. In would wreck long term havoc Bangladesh, all the on the country’s development. internal and external factors of politics, administration and development are emphasizing on relationship between boards and the need for good governance. shareholders, top management, Good governance is almost regulators and auditors and imperative for the other stakeholders. socio-economic development of Bangladesh. Core Principles of Corporate Corporate/Good governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers,

governance

1) Fairness, ) Accountability, 3) Responsibility, 4) Transparency, 5) Board Composition, 6) Board Dynamics, 7) Eﬃcient board of directors, 8) Business roundable principles of corporate governance, 9) Diversity, 10) Sustainability, 11) Shareholders

succession, 12) Efficient management, 13) Engagement, 14) Shareholders voting, 15) Efficient board meeting Current Banking sectors scenario in Bangladesh Banking Sector is a sensitive sector. Grassroots people keep their money in Banks only for safety. But due to some financial scams like Bismillah Group, Hallmark, Sonali Bank, Basic Bank, Farmers Bank Ltd, National Bank Ltd, NRBC Bank Ltd, Oriental Bank etc. Banking sector is now in a vulnerable position. The main reasons of instability in banking sector in Bangladesh are 1) Political Influence, 2) Involvement of Bangladesh Bank Officials, 3) Management Influence, 4) Involvement of Bangladesh Bank Officials, 5) Borrower Selection Criteria, 6) Unhealthy competition, 7) Nepotism, 8) Lack of monitoring, 9) Insufficient Personal Guarantee, 10) Wrong Information Provided by Head Office, 11) Corruption, 12) Lack of Shareholder’s Activism, 13) Lack of Auditor Independence, 14) Inconsistency between Companies Act, Bangladesh Accounting Standard and Security Exchange Commission notifications. Necessity of good governance in Banking sector in Bangladesh: OCTOBER-DECEMBER-2017

ARTICLE Banking sector portraits the whole economy of a country due to its linkage with all other sectors. It plays a very significant role in developing countries like Bangladesh which is now transforming from agri based economy to industry based economy. Being the largest unit of financial sector, banks must operate at its best with utmost efficiency to contribute to the economic development of the country. Any shortfall or even a slight instability in this sector would wreck long term havoc on the country’s development. Presence of sound corporate governance and its proper practices is the key requirement for efficient and stable banking system. Country like Bangladesh where prudential regulations and supervision is inadequate to provide a safety net for the depositors and stakeholders of the banks, special attention on corporate governance is required on a priority basis. Authorized regulatory body in ensuring corporate governance in Bangladesh Registrar of Joint Stock Companies and Firms : The Registrar of joint stock companies (RJSC) is the single authority under the ministry of commerce. Its functions include oversight of the Companies Act 1994 which includes private companies, public companies, foreign companies and trade organizations. The Societies Registration Act 1860 is implied for Societies and the Partnership Act 1932 for partnership firms. The RJSC is empowered to call for information, explanation or to OCTOBER-DECEMBER-2017

produce such books or papers, as the registrar deems necessary. Stock Exchanges: There are two self-regulated stock exchanges in Bangladesh – Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) operating under Securities and Exchange Commission which is (under the Securities and Exchange Commission Act 1993) responsible for assuring the proper issuance of securities, protection of the rights of the investors and the development and regulation of capital market. The Chairman and Members of the Commission are appointed by the government and have overall responsibility to administer securities legislation. The Commission is a statutory body and attached to the Ministry of Finance. The Securities and Exchange Ordinance, 1969 regulates the issuance of securities. Securities and Exchange Commission by the order dated the 9th January, 2006 No. SEC/CMRRCD/2006-158/Admin/ 02-06: Whereas, the Securities and Exchange Commission (herein after referred to as the ‘Commission’) deems it ﬁt that the consent already accorded by the Commission, or deemed to have been accorded by it, or to be accorded by it in future, to the issue of capital by the companies listed with any stock exchange in Bangladesh, should be subject to certain further conditions, on ‘comply or explain’ basis, in order to improve corporate governance in the interest of investors and the capital market; Now, therefore, in exercise of the

power conferred by section 2CC of the Securities and Exchange Ordinance, 1969 (XVII of 1969), the Commission hereby imposes following further conditions to the consent already accorded by it or deemed to have been accorded by it, or to be accorded by it in future to the issue of capital by the companies listed with any stock exchange in Bangladesh. Provided, however, that these conditions are imposed on ‘comply or explain’ basis. The companies listed with any stock exchange in Bangladesh should comply with these conditions or shall explain the reasons for non-compliance in accordance with the condition No. Bangladesh Bank: Bangladesh Bank as the central bank is the single authority that controls and monitors all the Banks and ﬁnancial institution. In order to establish ﬁnancial stability Bangladesh Bank circulates guidelines from time to time. Bangladesh Securities & Exchange Commission (BSEC: Bangladesh Securities & Exchange Commission (BSEC) is the single authority having super power to control and monitor the transaction of the listed public limited company. In order to keep stability in the capital market and to protect the interest of the grassroots shareholders Bangladesh Securities & Exchange Commission (BSEC) issues guidelines that need to be followed by its listed company’s strictly. Approaches taken by Bangladesh Bank to establish

ARTICLE corporate governance Bangladesh Bank has been pursuing the best corporate governance framework for the banking system. The first principle suggested by the Basel Committee on Banking Supervision through corporate governance focuses on the board's overall responsibilities. However, the concept of “risk appetite” is still not very well developed in this regard, and board members may have difficulty being actively involved in its preparation, approval, and communication throughout the bank. Also, in some banks that have a more traditional, hierarchical structure, it may be difficult to implement a policy of escalating problems or ethical lapses to the attention of the board, without fear of reprisal. The second principle is about the board's qualifications and compositions. Initial and ongoing training of board members in their duties and responsibilities is very important, but in some banks it may be difficult to sustain that kind of training because of time constraints and reluctance of certain board members to attend. Approaches taken by Bangladesh Securities & Exchange Commission (BSEC) to establish Corporate governance In order to establish good governance Bangladesh Securities & Exchange Commission (BSEC) has established Corporate governance guideline and all the listed public limited companies are suggested to follow the guidelines. A short overview of

the corporate guideline are:

governance

A) Board of Directors: Board of director will be appointed on behalf of its shareholders. B) Board’s Size The number of the board members of the company should not be less than 5 (five) and more than 20 (twenty). C) Independent non-shareholder Directors officer (CEO): C-1) At least one fifth (1/5) of the total number of the company’s board of directors should be independent non-shareholder directors; C2) The independent non-shareholder directors should be appointed by the elected directors. D) Chairman of the Board and Chief Executive The positions of the Chairman of the Board and the Chief Executive Officer of the companies should be filled by different individuals. The Chairman of the company should be elected from among the directors of the company. The Board of Directors should clearly define respective roles and responsibilities of the Chairman and the Chief Executive Officer. E) The Directors’ Report to Shareholders The directors of the companies should include following additional statements in the Directors’ Report prepared under section 184 of the Companies Act, 1994: E-1) The financial statements prepared by the management of the issuer company present fairly

its state) of affairs, the result of its operations, cash flows and changes in equity; E-2) Proper books of account of the issuer company have been maintained; E-3) Appropriate accounting policies have been consistently applied in preparation of the financial statements and that the accounting estimates are based on reasonable and prudent judgment; E-4) International Accounting Standards, as applicable in Bangladesh, have been followed in preparation of the financial statements and any departure there from has been adequately disclosed; E-5) The system of internal control is sound in design and has been effectively implemented and monitored; E-6) There are no significant doubts upon the issuer company’s ability to continue as a going concern. If the issuer company is not considered to be a going concern, the fact along with reasons thereof should be disclosed; E-7) Significant deviations from last year in operating results of the issuer company should be highlighted and reasons thereof should be explained; E-8) Key operating and financial data of at least immediately preceding three years should be summarized; E-9) If the issuer company has not declared dividend (cash or stock) for the year, the reasons thereof should be given; E-10)

signiﬁcant

plans

and

OCTOBER-DECEMBER-2017

ARTICLE decisions, such as corporate restructuring, business expansion and discontinuance of operations, should be outlined along with future prospects, risks and Uncertainties surrounding the company; E-11) The number of Board meetings held during the year and attendance by each director should be disclosed; F) Chief Financial Officer (CFO), Head Of Internal Audit And Company Secretary: F-1) Appointment The company should appoint a Chief Financial Officer (CFO), a Head of Internal Audit and a Company Secretary. The Board of Directors should clearly define respective roles, responsibilities and duties of the CFO, the Head of Internal Audit and the Company Secretary. G) Requirement to Attend Board Meetings The CFO and the Company Secretary of the companies should attend meetings of the Board of Directors, Provided that the CFO and/or the Company Secretary should not attend such part of a meeting of the Board of Directors which involves consideration of an agenda item relating to the CFO and/or the Company Secretary. H) Audit Committee The company should have an Audit Committee as a sub-committee of the Board of Directors. The Audit Committee should assist the Board of Directors in handling the issues which might be overlooked and should ensure a good monitoring system within the business. The OCTOBER-DECEMBER-2017

aims of the establishment of an Audit Committee should be to create eﬃciency in the operations and to add value to the organization. The Audit Committee should be responsible to the Board of Directors according to the duties and responsibilities assigned by the Board of Directors. The duties of the Audit Committee should be clearly set forth in writing.

should select 1 (one) member of the Audit Committee to be Chairman of the Audit Committee; H-2-2) The Chairman of the audit committee should have a professional qualiﬁcation and must have knowledge, understanding or experience in accounting or ﬁnance. H-3) Reporting of the Audit Committee

Audit

H-4) Reporting to the Board of Directors

H-1-1) The audit committee should be composed of at least 3 (three) members;

H-4-1) The Audit Committee should report on its activities to the Board of Directors;

H-1) Constitution Committee

H-1-2) The Board of Directors should appoint members of the Audit Committee who should be directors of the company and should include at least one independent non-shareholder director; H-1-3) When the term of service of the committee members expires or there is any circumstance causing any committee member to be unable to hold oﬃce until expiration of the term of service, thus making the number of the committee members to be lower than the prescribed number of 3 (three) persons, the Board of Directors should appoint the new committee member(s) to ﬁll up the vacancy(ies) immediately or not later than 1 (one) month from the date of vacancy(ies) in the Committee to ensure continuity of the performance of work of the Audit Committee. H-2) Chairman of the Audit Committee H-2-1) The Board of Directors

H-4-2) The Audit Committee should immediately report to the Board of Directors on the following findings, if any:H-4-2-1) Report on conflicts of interests; H-4-2-2) Suspected or presumed fraud or irregularity or material defect in the internal control system; H-4-2-3) Suspected infringement of laws, including securities related laws, rules and regulations; H-4-2-4) Any other matter which should be disclosed to the Board of Directors immediately. I. Reporting to the Authorities If the Audit Committee has reported to the Board of Directors about anything which has material impact on the financial condition and results of operation and has discussed with the Board of Directors and the management that any rectification is necessary, upon completion of the period of time mutually fixed, if the Audit

ARTICLE Committee finds that such rectification has been unreasonably ignored, the Audit Committee or it’s members should report such finding to the Commission. I-1) Reporting to the Shareholders and General Investors Report on activities carried out by the audit committee, including any report made to the board of directors under condition. I-1-1) above during the year, should be signed by the Chairman of the Audit Committee and disclosed in the annual report of the issuer company. J) External/Statutory Auditors The company should not engage its external/statutory auditors to perform the following services of the company: J-1) Appraisal or valuation services or fairness opinions; J-2) Financial information systems design and implementation; J-3) Bookkeeping or other services related to the accounting records or financial statements; J-4) Broker-dealer services; J-5) Actuarial services; J-6) Internal audit services; J-7) Any other service that the Audit Committee determines. J-8) Reporting the Compliance in The Director’s Report . Approaches taken by The Registrar of joint stock companies (RJSC) 1)

BSEC is empowered to

call for information, 2) BSEC can seek explanation or to produce such books or papers, as the registrar deems necessary. Findings/ Recommendations The following recommendations can be taken to ensure corporate governance in Banking sector in Bangladesh Reduction completion:

unhealthy

There is no doubt that the main earnings of a Bank comes from loans and advances. As a result in order to fill up the annual target set up by the head office bank starts to lend loans indiscriminately. As a result the rate of classified loan is increasing day by day. So, in order to establish good governance banks should give up the tendency of unhealthy completion among themselves. Borrower Selection Criteria: Some banks are unable to select the right individuals or organizations for lending. If the selection of borrower becomes faulty then the whole lending process will fail. The persons or organizations should be selected as the borrowers who are financially as well as mentally fit for the borrowing. If the banks select the fraud people whose intentions is not to repay the loan then the bank will face higher classified loans thus their banking operations be collapsed. So in case of selection of right borrower, the bank should be knowledgeable or aware of the information of the borrower that is proper KYC (Know Your Customer).

Political pressure: Though the officials informed that there is no political influence in the lending decision making process, there is a suspect of having acute political pressure in this issue. Politically biased decisions lead the loans towards being default and the banking sector towards a vulnerable position. The fraud borrowers are very cunning and they make webs for the people who are associated in lending as well as auditing and reporting process. Politically exposed persons make pressure on the banking sector for themselves as well as for their small fry. For example, in Basic Bank evidence were found that the investment department sent proposal to Head Office as negative but the higher authority made that positive and approved the loan in favour of the client. Investment department and branch manager assumed that the client could be detrimental for the bank and made the proposal negative. But due to having link with high officials and belongingness to a political party, the client became successful to turn the table on him. So, political influence or pressure has an important impact on the banking sector of the Bangladesh. Management Influence: Sometimes management has influence on the lending process. The management influence in the credit decision making process and the consequences is higher classified and default loans. The higher management such as Chairman, board of directors, Managing Director, and other high officials have an important command on the OCTOBER-DECEMBER-2017

ARTICLE lending process. They sometimes show nepotism to their near and dear ones. Sometimes they order and instruct the branch managers to prepare lucrative proposal on behalf of their chosen clients though their loan availing ability is not much lucrative for the bank. Sometimes the management approve loans at a special rate; even with shortage of documents; and not having enough collateral as security. Involvement of Bangladesh Bank Officials: In an informal discussion with some high officials of different commercial banks as well as with some Bangladesh Bank officials, it has been revealed that some dishonest officials of Bangladesh Bank are also associated in the forgery. Corrupted and dishonest officials take bribe and help to conceal sensitive information of client by not properly analysis the data given by different commercial banks. Sometimes they intentionally overlook fault done by commercial banks during auditing. Unaware of Bangladesh Bank Circulars: Bangladesh Bank provides circular to the commercial banks time to time for their smooth operation and own safety and security. All commercial banks must have to follow those circulars. But sometimes officials are unaware of those circulars. This may lead the bank towards operational as well as reputational risks. Wrong Information Provided by Head Office: Bangladesh Bank is the central bank and guardian of all commercial banks in OCTOBER-DECEMBER-2017

Bangladesh. So the commercial banks have to submit different information to Bangladesh Bank through different statements. Based on those information provided by different banks, the central bank takes different decisions and makes policy. Branch offices of each bank provide statements to their respective Head Office. Those statements are finally submitted to Bangladesh Bank. Sometimes branches or even Head Offices temper the actual information. Insufficient Personal Guarantee: Personal guarantee is a popular term in the banking sector. For taking loan from banks guarantee is a must whether it is personal guarantee or collateral. If the loan amount is lower, then the personal guarantee can be taken as the mode of security. But if the amount is higher, then personal guarantee is insufficient and further collateral required. In case of recovery of default loans, personal guarantee is becoming risky. Lack of Proper Information about Importer and Exporter: Hallmark and Bismillah Group financial scam took place because the bank had not enough and proper information about the importer and exporter. In case of Hallmark, the arrangement of LC was arranged among the different wings of the Hallmark itself. They did not transfer or produce the goods but they submitted the papers to the bank for the payment and the bank made payment of the LC without verification. The Bismillah Group opened its wing in abroad and made the same type of fraud with the bank. So it

is necessary for the banks to have complete and proper information regarding the importer as well as the exporter before doing any type of dealings with them. Incomplete Sanction Advice: Sometimes the credit department sends proposal with incomplete information of the borrower to the Head Office and based on that HO also issue incomplete sanction advice in favour of the client. Monitoring and Supervising Borrower: A bank’s main earnings come from loans and advances. So the selection of clients should be done more cautiously by the bank. If the clients’ businesses are profitable then they can repay the loan amount to the bank and the bank can also make profit. So it is the responsibility of the bank not only to disburse loan to the clients but also to monitor and supervise how they use the amount and doing their business. This will also prevent fund diversion. Fund Diversion: Fund diversion is one of the major problems in Bangladeshi banking sector which becomes more crucial nowadays. The main differences between Islamic and conventional banking system is the mode of disbursement of money. Conventional banks disburse the money directly to the clients account and the clients can do anything with the money they want. They took loan from bank for doing business but if they spend money in any unproductive sector such as

ARTICLE investment in share market, buycars, purchase of land, and spending mony without any goal then the fund becomes diverted. Fund diversion makes the clients unable to make enough return to repay the loan thus the loan fall ultimately. So, strong monitoring and supervision is a must to prevent fund diversion. On the other hand, Islamic banks buy goods for the clients rather disburse money to the clients directly. So, a little chance of fund diversion exists here. But monitoring and supervising is also needed there. Corrupted Bank Officials: Corruption of the bankers are quiet responsible for the financial fraud or scams. They make relation with the clients and associated with these fraudulent activities. As they know the banking rules and regulations very well and they find the way to do fraud by showing their thumbs to the bank. Insufficient Audit: Proper auditing is the main tool that can eradicate all the fraud and scams from the banks. But the audit process cannot be made properly for various reasons. People who are auditing may remain under management pressure or they may be corrupted as well. In some banks, only one audit takes place in a year whereas minimum two audits are mandatory as per rules. More over internal audit should be conducted on the regular basis.

Fake Mortgage: Mortgaged property which is used to secure the loan in case of default should be evaluated properly. Sometimes the clients make arrangements of the fake property by making linkage with land officials, legal advisor of the banks and sometimes with the bank officials. Audit team is also responsible because they sometimes overlook such activities intentionally or unintentionally. Hallmark made this type of fraud with Sonali Bank. They mortgaged land as collateral but the land does not exist or the owner is not the Hallmark Group. Lack of Proper Documentation: Proper documentation is a pre-requisite of every transaction with the clients. If there is any shortage in documentation then the problem might raise during the time of recovery. If the bank becomes unable to show proper documents then it will not get any legal protection while recovering default loans. One instance can be shown that Basic Bank provided loan against fixed deposit which is 100% secured but in the meantime the client withdrawn the fixed deposit from the bank without settling the loan. CONCLUSIONS: If the above mentioned suggestions are implemented, Corporate Governance lion Governance a bright future in the context of banking industry in Bangladesh. Therefore, it is concluded that

the suggestions and recommendations as put forward need to be implemented as early as possible. The implementation does not depend only on the banking authority, but the role of government and other agencies e.g. BSEC, RJSC as well as Stock Exchanges also. REFERENCES 1) Banking Reform Commission (1999): The Report of the Banking Reform Commission. Formed by the Government of Bangladesh. 2) Financial Express, “Hallmark-Sonali Bank Loan Scam”, Published on Monday, January 14, 2013. 3) Daily Prothom Alo, “5 State Owner has Highest Classiﬁed Loan”, Published on Monday, September 16, 2013. 4) The New Nation, “The Role of Banks towards Development of Bangladesh”, Published on November 30, 2012. 5) Financial Express, “Sonali Bank vs Hall Mark Group:An Analysis”, Published on Sunday, January 6, 2013. 6) Bushman, RM & Smith, AJ 2003, „Transparency, Financial Accounting Information, and Corporate Governance‟, FRBNY Economic Policy Review, Vol. 9, No. 1, pp. 65-87. » About the Author

Qualiﬁed Chartered Secretary

OCTOBER-DECEMBER-2017