For a healthy banking industry
Overcoming the challenges of corporate governance in Bangladesh's banks
Corporate governance (CG) has now become a prime concern for policymakers around the globe. Confidence in the corporate sector was shattered by governance scandals in companies like Enron, Tyco and WorldCom triggering some of the largest bankruptcies in history. In the wake of such accounting scandals, particularly by company leadership, a great deal of attention was given to checks and balances, incentives for managers, and communications between management and investors.
The understanding and practices of CG in Bangladesh are still far from adequate compared to global standards. However, it is being increasingly discussed in various forums among entrepreneurs, corporate managers, regulators and academics with a view to provide better and effective protection to all stakeholders.
According to corporate governance pioneer Sir Adrian Cadbury, CG "is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as closely as possible the interests of individuals, corporations and society" ("Financial Aspects of Corporate Governance", December 1992).
The OECD defines CG as "a set of relationships between a company's management, its board, its shareholders, and other stakeholders. It provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."
CG seeks to enhance the value and acceptability to shareholders, employees, potential investors, customers, lenders, governments and society at large through (i) fairness: defined as treating people with equality and avoidance of bias towards one or more entities as compared to the other(s); (ii) accountability: being responsible and answerable for one's decisions and actions; (iii) transparency: openness and willingness to disclose financial performance figures truthfully and accurately; and (iv) ethics: concept of defining right and wrong behaviour; trying to reach a trade-off perusing economic objectives and its social obligations.
CG in banks is important because "banks have an overwhelmingly dominant position in a developing economy. Banks are typically the most important source of finance and the main depository for the economy's savings."
First, banks deal with public money. As per regulation, sponsors have to come up with Tk 400 crore to apply for a banking license but at times, it may take in deposits exceeding Tk 4,000 crore. Second, there's the high ratio of debt to equity. Deposits are basically debt against a meagre equity. To protect that debt, governance is imperative. Third, banks are responsible for protecting the interests of shareholders. Banks are entrusted with the shareholders' money, hence ensuring good governance is of utmost importance. And fourth is the interconnectedness of the financial system. Every bank has a part to play in the economic system of the country. In the absence of depositors' trust, it can experience a "run on the deposits", which may quickly spread like a pandemic to other banks, threatening the entire economic system.
Challenges in Bangladesh's banking industry
First, corporate ownership structures in the country are dominated by family members. In Bangladeshi society, individuals are placed in positions of power largely because of their family background rather than their capabilities. Such practices hinder the level of fairness, accountability and transparency. The recent changes in the Banking Company Act are likely to make the situation even worse.
Second, education and experience of the directors paint a bleak picture. Many members of the Board do not have appropriate education or relevant experience. And as such, comprehending and ensuring good governance becomes difficult.
Third, the "profit at any cost" mentality is problematic. The main objective of sponsors and management is profit, which sometimes jeopardises the practice of good governance. Rewards against specific business campaigns "breed a culture of greed". Employment of sales agents in banks makes things worse.
Fourth, poor audit reports hamper good corporate governance. Audited financial reports are rarely reliable and free from the control of the owners. Despite irregularities (non-compliance with the applicable International Accounting Standards) in financial statements, auditors go ahead with issuing audit reports. Even the internal audit function cannot operate independently. The Internal Audit Charter dated May 9, 2016 of the Bank of International Settlements recommends that "Head of Internal Audit (HoIA) should be accountable to the Audit Committee of the Board." In Bangladesh, this function reports to the managing director, thereby seriously compromising the independence of this function.
Fifth, there is inconsistency in the regulatory system. Inconsistency amongst Companies Act, Bangladesh Accounting Standard and Bangladesh Security Exchange Commission requirements also makes things complicated.
Sixth, the ineffective role of independent directors (IDs) is another challenge. IDs are required to be academicians or ex-senior bankers but there is a dearth of qualified people. IDs, if selected by sponsors, do not act as an advocate for minority shareholders or a source of innovative ideas. Sometimes they work for sponsors' interests.
Seventh, there is a lack of activism on the part of shareholders. General shareholders do not delve into issues of performance, strategy, future plans and disclosures that could give them a greater voice in the policy decisions. Some shareholders only create chaos in the annual general meetings for personal benefits.
Eighth, weak pressure groups are not doing their part. Shareholders, investors' associations, institutional investors and the financial press can play a significant role in ensuring better CG but these potential pressure groups are not playing their due role.
Ninth is the borrower-dominated market. Corporate clients are few in number compared to the number of banks in Bangladesh, causing unhealthy competition for extending loans. This has led to over-financing in some cases, placing public money at stake.
And finally, there is no market for corporate control in Bangladesh. Corporate control plays an important monitoring function in CG, as poorly managed companies become takeover targets. Most companies in the country are closely held, which is counterproductive to good CG.
What next?
The problems mentioned above are related to the composition of the Board, role of shareholders, role of auditors and position of capital market for corporate control. To ensure good CG, taking the following steps is necessary: (i) preparing and implementing a complete code of corporate governance comprising international best practices; (ii) strengthening disclosure requirements; (iii) ensuring the fiduciary duties of directors and monitoring the companies by improving the capacity of the board of directors; and (iv) strengthening capacity of private and public sector institutions, building institutional capacity including the quality of financial reporting.
But if individuals at the top do not do their part, ensuring sound corporate governance will not be possible.
Rais Uddin Ahmad is Company Secretary, Head of Regulatory Affairs and CAMLCO, BRAC Bank Ltd.