JSERD: ISSN 1813-0348, Volume 10 Issue 3 June 2013

J. Socio. Res. Dev. 10(3):1507-1511, June 2013, website: www.gurpukur.com or www.gscience.net

CORPORATE GOVERNANCE PRACTICES IN BANGLADESH

MOHAMMAD IMRAN HOSSAIN1and MD. JAHIDUR RAHMAN2
ABSTRACT
Corporate Governance (CG) is a relatively newer term both in the public and academic debates. In the case
of Bangladesh it has not been flourished enough yet. Before the collapse of some renowned global
corporations policy makers did not draw proper attention to it. However, since 2000 the scenario started to
change. Bangladesh has implemented a number of changes in corporate laws and regulations. In this
backdrop the current study makes an effort to investigate and discuss the development of corporate
governance regulations, practices and their contribution in a Bangladesh perspective. It was revealed that
Bangladesh stands far behind and has implemented the wholesale adoption of Anglo-American shareholder
model of CG which is not entirely suitable considering the economic, legal and corporate environment of
the country. In the conclusion this paper advances that Bangladeshi firms’ governance mechanisms have to
be developed within the arena in which it is demanded.

Keywords: Corporate governance, Practice and performance and Ownership concentration.

INTRODUCTION
With the collapse of global corporations such as Enron, WorldCom, Global Crossing and Anderson,
Corporate Governance (CG) hit the news in year 2000. The complaints against these firms were based
upon a lack of business ethics, shady accountancy practices and weak regulations. Those unexpected
events of corporate collapse in developed economies were a wake-up call for themselves; because prior
to this, commentators had focused mainly on the failings of corporations in developing countries. After
that CG has come to encapsulate the blend of law and regulation for private-sector practices. As a result
of these initiatives, CG enabled companies attract financial and human capital to perform efficiently and
generate long-term economic value for shareholders, whilst respecting the interests of stakeholders and
society as a whole. Moreover, such successful implications of CG principles in developed economies
influenced the international financial agencies (IFAs) such as the World Bank and the IMF to include
corporate governance reforms as a development goal. Thereafter, significant changes have been taken
place in the firm related regulatory environment of many low income countries worldwide.CG is a
relatively new term both in the public and academic debates. Zingales (1978) defines the term as it
follows: “……..corporate governance is the complex set of constraints that shape the ex-post bargaining
over the quasi-rents generated by a firm………” He also points out that “…..ownership allocation,
capital structure, schemes of managerial incentives, mergers and takeovers, board of directors, pressure
from institutional investors, product market competition, labor market competition, organizational
structure etc., can all be thought of as institutions that affect the process through which quasi-rents are
distributed……”. Williamson (1985) suggests a similar definition.The research framework of CG has
introduced the agency conflict which is based on the concept of the separation of ownership from
control of the corporation. Alchian and Demsetz (1972) suggest that the contractual view of the firm
among the parties who provide capital, expertise, labor and other services to maximize their benefits is
at the root of the agency problem. Hart and Moore (1990) indicate that a conflict of interests between
dispersed shareholders or outsiders and professional managers or insiders has an adverse effect on
firms’ economic performance. Through their seminal work Shleifer and Vishny (1997)found that a
different type of agency problem may arise when majority shareholders or owners have full control of
the firm and take actions to benefit them at the cost of non-controlling minority shareholders. On the
other hand, according to La Porta et al. (2000) among various governance devices suggested to reduce
agency costs, ownership concentration is considered to be a key factor. Their investigations also find
that ownership concentration of a firm can determine the development of performance under the
                                                            
1
PhD Student, Graduate School of Asia Pacific Studies, Ritsumeikan Asia Pacific University, Japan, 2MBA Student, Graduate
School of Management, Ritsumeikan Asia Pacific University, Japan & Assistant Professor, School of Business, Ahsanullah
University of Science & Technology, Dhaka, Bangladesh.
 

 
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condition of market imperfection. La Porta et al. (1999) surveyed corporate ownership around the world
and find that many listed firms in countries other than the US and the UK have a controlling
shareholder owning more than 20% to 30% of firm’s outstanding shares. They suggest that heavily
concentrated shareholdings and a predominance of controlling ownership seem to be the norm of
corporate governance around the world. They also argue that a large shareholding may be an alternative
means of reducing agency costs. A concentrated ownership may impose two kinds of mutually
exclusive effects. As claimed by the existing literature, a controlling shareholder may (i) have more
incentive and power to monitor management, therefore reducing agency costs or (ii) abuse the power to
benefit themselves at the expense of minority shareholders. Shleifer and Vishny (1997) contend that in
particular, in the absence of adequate legal protection to minority shareholders, concentrated ownership
through large shareholdings, takeovers, and bank finance become complementary approaches to
governance (Jensen and Meckling, 1976). On the other hand, the presence of large shareholders may
influence firm’s value by resolving moral hazard and free-rider problems. Large shareholders can
utilize their outright controls over firms and their managements. Their presence in the firm can monitor
managers effectively because their high economic incentives and enough voting power can put pressure
on the management. Therefore, the presence of a large-block equity holder will have a positive effect on
firm value and their presence works as an effective device to monitor management (Grossman and Hart,
1980). Bangladesh has brought a number of changes in corporate laws and regulations over the years.
Through various reforms the Securities and Exchange Commission has brought a substantial change in
the nation’s arena of corporate governance (SEC, 2007). The SEC has issued a package of guidelines
aiming to enhance corporate governance in order to create an efficient and transparent market
facilitating environment for entrepreneurs. Having such a background, this paper makes an effort to
investigate the development of CG regulations, practices and their performances in a Bangladesh
perspective. It also attempts to identify the different dimensions that could predict the relationship
between firm’s performance and ownership structure after controlling for firm’s specific variables as
well as important industry effects. As an important objective, this article also attempts to make some
suggestions for CG in Bangladeshi companies while shadding light on renowned CG principles
practiced and followed in some other developed countries.

METHODOLOGY
This study makes an effort to examine the level of corporate governance implemented and practised in
a developing country like Bangladesh. The study is qualitative in nature. We use simple firm level data
to gather enough observations for the purpose of achieving the objectives of the study. The secondary
data used for this paper were collected from Dhaka Stock Exchange (DSE) in Bangladesh where all
firm level data are hand-collected from company annual reports or balance sheet accounts, profit and
loss accounts etc. for the respective years. Primary analysis of this data has been combined with desk
research of literature relating to corporate governance practices in Bangladeshi firms.
FINDINGS AND DISCUSSION

CG practices and performances in Bangladesh

Bangladesh has implemented the Anglo-American shareholder model of CG consistent with other
emerging economies. But it is not clear whether this wholesale adoption is entirely suitable considering
the economic, legal and corporate environment of Bangladesh. The corporate environment in
Bangladesh is characterized by concentrated ownership structure, bank financing, poor legal framework
and lack of monitoring. In an effort to understand the nature of CG model, this section now analyses the
environment within which the Bangladesh corporate sector operates. In line with literature concerning
the suitability of different CG models, a number of features are analyzed.
Shareholder involvement
After an investigation of the situation of CG practices in Bangladesh, Uddin and Choudhury (2008)
state that, Bangladeshi companies are not eager to hold annual general meetings (AGMs) even though

 
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this is a mandatory requirement. They also report that when AGMs are held, these are characterized by
domination by a small group of people, poor attendance and discussion of trivial matters. Their findings
were supported by a CG survey conducted by the Bangladesh Enterprise Institute (BEI). The BEI
findings indicate that the perception of AGMs amongst the non-banking listed companies surveyed
seems to be a combination of a necessary evil and a statutory requirement. Generally, shareholder
demands concentrate either on higher dividends or trivial concerns like better quality food and gifts at
the AGM and transportation allowances. The main incentive for attendance is the meal served at an
attractive hotel and surprisingly, trading activity increases prior to AGMs to reflect that interest. In
reality, there are a very limited number of people going to AGMs who actually understand the financial
statements being presented and consequently have little to contribute in terms of relevant inputs. Reaz
and Arun (2006), after investigating the practices of CG in the banking sector, also have similar
conclusions regarding shareholder involvement in the Bangladesh corporate sector.
The capital market
Having two stock exchanges namely the Dhaka Stock Exchange (DSE) and the Chittagong Stock
Exchange (CSE), the capital market in Bangladesh is still in preliminary stage. Comparing with other
South Asian countries, the capital market in Bangladesh has not flourished enough although the Dhaka
Stock Exchange was established in the early1950s.A survey conducted by the Bangladesh Enterprise
Institute (BEI, 2003) reports that the capital market in Bangladesh does not seem to offer adequate
incentives for companies to go public where bank financing is readily available as a result of excess
liquidity and extensive competition in the banking sector. Due to the fact that new private bank licenses
had been issued mostly on a political basis, banks therefore, are reluctant to enforce additional
requirements or strict conditions in lending. This phenomenon is supported by another survey result
conducted by the BEI which revealed that equity or capital requirement had been the prime motivator
for only 10% of the public companies interviewed the remaining companies had cited reasons like tax
advantages and legal compulsion, for going public. As a consequence, companies still prefer debt
financing to enlisting with stock exchanges.
The second-order institutions
Comparing with other South Asian countries Bangladesh has a surprisingly small number of auditors.
One probable reason is that the auditing as a profession, due to low payment, does not attract best
quality students. Another reason is that the job of an auditor does not really separate from that of an
MBA. Although the Company Act of 1994 requires that all public limited companies must have their
annual reports audited by professional chartered accountants (members of the Institute of Chartered
Accountants of Bangladesh), the reality is far from satisfaction. In one hand, corporations and
shareholders are not willing to pay high fees for an audit as auditors are not perceived as independent,
and do not provide quality audits. On the other hand, the low fee structure, in turn, does not provide an
incentive to provide quality personnel and audits. Also, Bangladesh lacks the presence of any second-
tier accountancy bodies to cater to the needs of the corporate world. This means that a vast majority of
accountants working in the corporate sector do not possess any strong accounting qualifications. In
addition to this, the other second-order institutions, such as the judiciary suffer from lack of skills and
proper training, especially in dealing with corporate cases.
Legal structure
With respect to the legal structure, the newly revised Company Act of 1994 defines the structure and
formation of the firms. The composition of the board of directors, appointment of the CEO and
remuneration of the audit committee are also controlled by the same act. A World Bank study found
that in Bangladesh the financial sector is regulated by the Banking Companies Act of 1994 and the
Insurance Act of 1973. However, the main problem identified by the World Bank study is the lack of
legal enforcement of those acts. Problems arise when responsibility for enforcement is shared among
the Registrar of Joint Stock Companies, the Securities and Exchange Commission, the professional
accountancy bodies and the judiciary. Therefore, the involvement of several bodies in corporate
accountability complicates enforcement and reduces overall effectiveness.

 
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Ownership structure
Corporations in Bangladesh are characterized by family ownership or controlled by large shareholders
like corporate group or government. In most of the cases, managements of firms are just nothing but the
extensions of the dominant owners. They are closely held small and medium-sized firms where
corporate boards are owner driven. Consequently, in Bangladesh most of the companies have executive
directors, CEO and chairman from the controlling family. Farooque et al. (2008) reported that, on an
average, the top five stockholders hold more than 50% of a firm’s outstanding stocks. After analyzing
the ownership patterns of 219 companies from 12 different sectors listed on the Dhaka Stock Exchange
Imam and Malik (2007) report that, on average 32.33% of the shares are held by the top three
shareholders. But the percentages are even higher for real estate, fuel and power, engineering, textile
and pharmaceutical sectors.
Table 1. Sector-wise distribution of average percentage of shareholding by different types of ownership.
Manufacturing Banks NBFI Other Financial Non- Foreign Local Total
Types of ownership
(%) (%) (%) (%) (%) financial (%) (%) (%) %
Largest 31.5 10.1 15.7 28.3 13.0 31.2 56.3 23.3 26.1
Top5 57.0 28.9 37.1 51.8 33.1 56.6 80.2 47.2 50.0
Top 10 65.4 41.8 51.6 63.1 46.8 65.2 86.5 57.6 60.1
Public 29.4 29.7 29.1 35.0 29.4 29.8 12.6 31.3 29.7
Insiders 17.6 - 0.2 27.2 0.1 18.4 5.1 14.0 13.3
Sponsors 48.2 55.1 50.7 46.9 52.8 48.1 68.7 47.6 49.4
Family 32.6 11.4 14.7 40.9 13.1 33.2 6.2 29.6 27.6
Financial Cos. 21.2 11.1 21.3 11.9 16.3 20.5 20.2 19.2 19.3
Foreign 9.5 8.9 7.1 6.3 7.5 9.3 65.7 3.4 8.8
Govt. 5.6 2.4 - - 1.2 5.2 0.4 4.4 4.1
Total 93 1.9 20 8 39 101 12 128 140
Source: The Security and Exchange Commission, Bangladesh

Haque et al. (2006) find that firms do not come to the stock market to meet their capital requirements
because owners of most of the firms in Bangladesh possess a fear of losing control over the firm.
Although a small number of those companies are listed in the stock market, the controlling family or the
sponsors of those companies try to confirm that they have direct control over the company. It was
revealed that the average shareholdings of top five and top ten shareholders are 50 percent and 60
percent respectively while the largest or top1shareholder owns around a quarter of the firms’ total
equity. Considering the sector-wise ownership distribution in Bangladesh, concentration in
manufacturing sector is relatively higher than the banks and insurance companies. It was also revealed
that the non-financial sector has comparatively higher family ownership of about 33 percent than the
financial sector (about 13 percent). The lower family shareholding in financial sector including banking
companies is primarily resulted from the regulatory initiatives to restrict family or individual
ownership. However, in addition to direct control, the controlling family has an indirect control over the
activities of the firms through the sponsors who own around half of the firms’ equity in all industrial
categories. The higher sponsor shareholdings (at least 55 percent) in both banks and insurance
companies are particularly indicating the fact that the regulatory initiatives to control ownership
concentration do not seem to bring any positive outcome in Bangladesh. According to the discussions,
concentration of ownership to a small group has sufficient incentives to contribute to corporate value in
Bangladeshi firms because this kind of ownership affects firm value and vice versa. The result suggests
that large shareholders have a position of decision authority in the firm. It is observed that among the top
rated listed or non-listed banking companies in Bangladesh, a good number of them are family-owned.
The bi-directional relationship between large shareholder’s ownership concentration and firm value
supports the indispensability of the role of the founder-family or the Top-1 shareholder in Bangladesh. In
this connection, for the dominant presence of a large shareholder, quasi external governance mechanisms
(such as institutional investors, audit quality, debt ratio) appear to have their proper roles in influencing
 
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firm value, phenomena that draw the attention of policy makers. However, it is also well documented that
no other internal governance mechanisms (such as board salary, non-executive directors and CEO related
variables) effectively contribute to firm value.
CONCLUSION
It could be argued that in Bangladeshi firms’ governance mechanisms have to be developed within the
arena in which it is demanded. In Bangladesh most listed firms are family owned or controlled by other
substantial shareholders where managements are effectively extensions of those large owners.
Therefore, the demand for corporate governance mechanisms in Bangladesh is somewhat different from
those in Western economies; hence, the nation needs a unique model that supports substantial
ownership of founder-families or other large shareholders. This is because these founder-family
dominated firms perform well in the face of governance challenges similar to the ones facing other
Asian countries. Therefore, mere replication or whole sale adoption of the Anglo-Saxon governance
model may not be suitable for emerging markets like Bangladesh due to fundamental governance and
institutional differences between Western and Bangladesh economy.
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