Corporatisation still at nascent stage despite a consensus on corporate governance; Business entities have enormous scope to benefit from professional management
By Rezvi Newaz
‘The world has enough for everyone’s need, but not enough for everyone’s greed.’ This is a quote from Mahatma Gandhi’s philosophy, often used by Dr AB Mirza Md. Azizul Islam, a former finance and planning adviser to the caretaker government, to depict a backward state of corporate culture. ‘Individuals, say as businessmen, may not be willing to disclose what s/he does for making profit. But introduction of corporate governance in business entities can ensure transparency, accountability and fairness in business practice and serve interests of stakeholders,’ he said detailing his idea of corporate culture.
Mirza Aziz, who once headed the Bangladesh Securities and Exchange Commission (BSEC), regretted the delay in ensuring demutualisation in stock market but expressed the hope that businesses would get rid of greed of any individual if and when corporate governance proper is there in running the affairs of companies and business organisations and corporate culture is part and parcel of business practices.
As a developing country with a nascent market economy, Bangladesh’s corporate world is mostly dominated by the first-generation businessmen and family-run companies. Of course, there are efforts to introduce corporate culture in business entities. However the central issue of it is good corporate governance. There are confusing perceptions about the state of corporate government or about the issue itself, among citizens, pressure groups, international agencies and even investors themselves.
In fact, Bangladesh lags behind neighbouring countries, especially India, let alone a global standard in corporate governance. One reason is that most companies are family-oriented. Motivation to disclose information and improve governance practices by companies is not there as well. Companies and individual businessmen receive hardly any appreciation or perceptively tangible benefits from corporate governance practices.
The current system does not provide sufficient legal, institutional and economic motivation for stakeholders to encourage and enforce corporate governance practices. Failure in most of the constituencies of corporate governance is widespread. Poor bankruptcy laws, no push from international investor community and limited or no disclosure regarding related party(ies) are also responsible for the situation.
Still, there is a silver lining of late – the management and boards have come to the conclusion that proper governance processes can protect corporate reputation, brand image and shareholder value. According to Pricewaterhouse Coopers’ recent Annual Global CEO Survey, 50% of retail industry CEOs believes, there is a strong relationship among all elements of GRC (governance, risk and compliance) and effective governance can be a value driver and a benefit versus a cost, to their companies.
The Board’s general approach is to act as a self-declared leader-with the ‘my company’ or ‘my governance’ attitude is the root cause of poor corporate governance practice, as identified by Farhad Ahmed, executive director of BSEC. Accordingly, the Board wants to stay above accountability and performs its duty in whatever way it likes. But under corporate governance, the Board is a corporate leader being accountable to the shareholders having fiduciary responsibilities to them. ‘The Board sometimes emphasises keeping the management under their control with policy and procedures instead of making the Board members accountable with any written policy and reporting framework,’ he said. ‘Thus the tiers of corporate responsibility and accountability do not work well, which is not a good sign for the corporate governance and sustainable development.’
Corporate governance as business as usual
To get an insight into how Bangladeshi corporate bosses perceive corporate culture we have talked to entrepreneurs of the first generation and even fourth generation. And irrespective of their age, each and every entrepreneur has agreed that practicing corporate culture is a must to ensure good business in Bangladesh today.
Latifur Rahman, Chairman of Transcom Group, thinks there is a growing recognition among Bangladeshi businesspeople that corporate culture is required if businesses are to be made sustainable. The need to adopt corporate style management will be inevitable as business enterprises become bigger in size and scale. ‘This would require bringing in professional management alongside the current entrepreneur/family management,’ said Mr. Rahman, an ‘Oslo Business for Peace’ prize winner of 2012, and expressed his conviction that Bangladeshi businesses have no other option but to comply with best business practices.
Hossain Khaled, president of Dhaka Chamber of Commerce and Industry (DCCI), is blessed with ‘feel good’ as he is currently leading one of the oldest business conglomerates in the country, Anwar Group of Industries, which, he says, follows the best corporate practices. Established way back in 1834 by late Lakku Mia, Anwar Group remained a family-owned business concern. But, thanks to the prudence of Mr Anwar Hossain, the chairman of the group, who happens to be father of Khaled, brought in professionals from outside of the family circle.
‘As one generation passed the management responsibility on to the next one, it transferred the experience and wisdom achieved during its tenure of business operations. This knowledge is rightly used by each new generation to make their mark and take the Group to new heights,’ Hossain Khaled told. Overtime, he added, their business entity grew to become an industrial giant and succeeded in creating a national and international network. Anwar Group currently employs over 12,000 people, described as the backbone of all the success. ‘None of our family members are the owners, they are paid employees only. This tradition is the best example of practicing corporate culture,’ he said.
Another entrepreneur is Asif Ibrahim, Vice Chairman of Newage Group of Industries, who came up with another kind of thought in this regard. ‘Corporate culture is something that is still not widely understood by the Bangladeshi business houses,’ he said adding that as many second generation, foreign educated business entrepreneurs have joined the private corporate houses by this time and more are joining, the concept is increasingly gaining momentum. Modern management concepts highlight corporate culture as an essential tool for any company to grow and expand their businesses. Delegation of authority through several departments and introduction of report-based management are necessary in Bangladesh context.
Corporate culture: Still a lip service?
Despite increase in the share of industry in the gross domestic product, there are not many catalysts who can be considered role models in various industries for the young entrepreneurs. Companies, too, are yet to establish a proper structure which can provide each of them from the hassles of running them haphazardly or only by using individual talents and efforts at the same time, incentive to reveal information and improve governance is also missing to some extent. Weak legal framework is one problem in this regard while the society is in an interface between informal sector and formal businesses.
So, a major weakness in ensuring corporate governance is the virtual absence of any pressure group. Shareholders, investor associations, institutional investors and the financial press can play significant role in this regard. Also they are either not aware of their rights and responsibilities or not organised under a common platform to demand corporate governance. Under the circumstances, some business leaders, who are a bit frustrated at the slow pace of corporatisation, reckon corporate culture to be a lip service.
However, Latifur Rahman, who is also a former president of Metropolitan Chamber of Commerce and Industry (MCCI), does not agree with that. He thinks the challenge for companies in adopting corporate culture is not only employing professional managers but also empowering them with real and meaningful authority. This, he believes, is the ‘difficult inflection point’ as companies might hire professional managers but entrepreneurs could still be worried about handing over real authority to them. ‘To reap the fruits, professional managers have to be compensated competitively, empowered with real authority and be treated with respect and dignity.’
Asif Ibrahim, also an ex-president at DCCI, and Waii-ul-Maroof Matin, CEO of and Chittagong Stock Exchange, echoed the same sentiment about the state of corporate culture. They feel the businesses need to hold more seminars and workshops to make this concept popular amongst the private sector entities. Adequate training is also required.
Any standard definition
There is no single global corporate culture and the concept varies widely from one country to another – from Japan to America, Europe to the Middle East, said Waii-ul-Maroof Matin. His idea is that as the companies are in general going bigger and going public, ‘the best practices’ are expected to be targeted to ensure stakeholders’ interests. ‘Also things are changing very fast and of course for betterment,’ he said referring to the regulatory provision to use checklist to take stock of the corporate governance status of a company. ‘The entrepreneur families are also realising that good corporate governance adds life to their companies,’ he added.
In a global context
The World Bank, in a study, has drawn attention to the problems of the Comptroller and Auditor General’s (CAG) Office, internal audit, public accounts, parliamentary oversight, and public enterprises. It also contains a section on private sector accountants and auditors, which is of primary concern to corporate governance. The report found a number of flaws in the accounting process. The Asian Development Bank has financed a project on capacity building of BSEC and selected capital market institutions. In its project completion report, the ADB mentioned that Bangladesh is lagging behind in implementing good corporate practice in comparison to its neighbours, such as India and Sri Lanka.
The role of capital market
The capital market has a weak link with the movement for strengthening corporate governance. The stock market scandals in 1996 and 2009-10 have seriously damaged instead the investors’ confidence in the stock market. Moreover, there are no bonds practically that could enforce corporate governance principles. Financing by banks is still regarded the better instrument by most of the companies since domestic banks hardly cared about good accounting or other disclosure, whereas foreign banks are less interested in long term industrial financing. Just about 250 securities are traded in organised capital markets in Bangladesh and the total value of these securities is worth only a few billion US dollars.
Dr Mohammad Musa, a professor at School of Business and Economics, United International University, explained why the capital market has not yet played a strong role in the betterment of companies and also in the economy. ‘The set of rules and regulations governing corporate behaviour determines how corporations are governed. Therefore, investor protection and corporate governance are linked,’ he said. ‘In places where corporate governance is weak, outside investors are vulnerable to insider expropriation. In places where corporate governance is strong, outside investors are fully protected. Insiders cannot expropriate them (outside investors).’
If the capital market of a country is not fully developed, investors are deprived of opportunities to invest in securities that offer better return for acceptable risk. Corporations, too, are deprived of external funds at cheaper cost to finance new projects. Therefore, investor protection, corporate governance and capital market development must go hand in hand. ‘Good corporate governance leads to better investor protection and better investor protection helps capital markets to develop better,’ the expert pointed out.
Challenges and Way-outs
To make corporate governance popular the biggest challenge is to change the mindset of the owners, said Hossain Khaled citing the example of BATA. ‘Customers are using BATA shoes all over the world without knowing who are running the business. If BATA can make money globally complying with laws of the land, why then is a Hall-Mark story in Bangladesh?’ he asked.
Farhad Ahmed of BSEC feels that the corporate bosses should be made responsible for the failure of big companies. He emphasises avoiding ‘one man show’ in a company. ‘Other than quick profit, the owners should think about long term profit.’ If Standard Chartered or HSBC can make profit with a limited number of branches why all state-owned banks are losing concern is not understandable to him. ‘We need more of ‘SQUARE’ – like success stories, not a ‘Hall-Mark’ scandal,’ the official said.
CSE’s CEO Waii-ul-Maroof Matin underlined the need for education and training for the board members to raise their capacity and efficiency to manage efficiently. Board members are required to understand the whole gamut of business. While they must not interfere in day-to-day affairs, it is important they have full knowledge of the business process and financial control,’ he said. He observed that while the entrepreneurs are held responsible for corporate governance, ‘we often forget that the minority shareholders have their responsibilities too’. And the independent directors appointed by the families need to be ready to shoulder more responsibility.
Asif Ibrahim thinks the main challenge is in the mindset of the private companies, majority of which are still being run by the owners. There is still a lack of trust amongst them to delegate their authorities to professional executives.
Underlining the importance of adopting corporate management culture, senior business leader Latifur Rahman said it would have to be done by the business enterprises themselves. ‘Outside agencies or bodies cannot have any role in this process,’ he opined.
As the primary regulator, BSEC would be more visible, its ED Farhad Ahmed said adding that they are now looking after listed companies and that soon under an amended law non-listed companies would be brought under the coverage.
Conclusion
The need for strengthening corporate governance is now a demand of time in line with the global reality for a sound and transparent corporate world system. Given the globalisation of business and improvement in monitoring of corporate entities, investors are willing to invest in companies where there is demonstrated good governance practice.
Therefore, the guidelines to improve general quality of corporate governance practices are a timely initiative by the policymakers. In an emerging market like Bangladesh, the BSEC can provide conditions to have independent directors on the board and audit committee. The independent directors must work with integrity and should keep board decisions confidential.
Corporate governance provides an effective means of good corporate behavioural process, which ensures accountability of those who matter most in the process and maximises the value for the shareholders in a fully transparent manner.
Unfortunately, some companies listed with the stock market pay inadequate attention to the ‘rules of businesses’ and full disclosure of information, demonstrating a lack of corporate norms and responsibility. On the other hand, there were hardly any rewards for the companies that instituted corporate governance practices, neither were there any penalties for failing to do so.
Dhaka Stock Exchange is going to incorporate corporate governance principles into the list to ensure a competitive atmosphere in the capital market. BSEC has notified certain further conditions for the public sector companies listed with any stock exchange, to improve corporate governance in the interest of investors.
However, the government cannot legislate the personal integrity of key players and no amount of legislation can substitute trust, faith and confidence necessary for good corporate governance practice. As the lead regulatory body overseeing corporate accounting and reporting, the BSEC has a critical role to ensure that public company boards are properly structured and organised and have the resources to accomplish the objectives of adding value to shareholders, minimise risk of key shareholders and hold management responsible for corporate results.
