Very Important Sandra
Very Important Sandra
Zaman, my daughter Subah Samara and my sisters and brothers. Thank you all for your love
and support.
i
Table of Contents
Dedication…………………………………………………………………………………….. i
Abbreviations………………………………………………………………………………....ix
List of Tables……………………………………………………………………………..…xiii
List of Figures…………………………………………………………………………….....xvi
Acknowledgement………………………………………………………………………....xviii
Abstract…………………………………………………………………………...................xxi
CHAPTER 1 ............................................................................................................................. 1
CHAPTER 2 ........................................................................................................................... 13
ii
2.2.1 Agency theory and Shareholder Perspective of Corporate Governance .............. 16
2.2.4 The Institutional Theory and the Code Adoption Process ................................... 29
CHAPTER 3 ........................................................................................................................... 63
iii
3.4.3 The Capital Market ............................................................................................... 82
CHAPTER 4 ........................................................................................................................... 94
4.3.3 The Code Provisions Relating to Financial Reporting, Auditing and Non-
Financial Disclosure Issues ................................................................................ 112
iv
5.3 Research Methods .................................................................................................. 129
5.4.3 Phase 3: Merging Quantitative and Qualitative Findings for Summary and
Conclusion .......................................................................................................... 164
6.2 The Overall Status Of Compliance With The Code .............................................. 167
6.4 The Level of Compliance in Each Provision of The Code .................................... 185
v
6.4.3 Compliance with Financial Reporting, Auditing and Non-Financial Disclosure
Issues .................................................................................................................. 200
6.4.4 Comparison of the Most Complied with and Least Complied with Code
provisions in Relation to Legal and Regulatory Requirements .......................... 207
7.3.2 Communication Gap between the Code and its Users ....................................... 273
7.3.5 Lack of Knowledge and Lack of Awareness amongst Companies .................... 280
vi
7.3.7 The Lack of Infrastructure .................................................................................. 281
7.4 The Appropriate Model of Corporate Governance For Bangladesh ...................... 282
vii
Appendices
Page
viii
Abbreviations
ADB Asian Development Bank
CA Chartered Accountant
ix
CSR Corporate Social Responsibility
FI Financial Institutions
FY Fiscal Year
ID Independent Director
x
IFAC International Federation of Accountants
MD Managing Director
xi
OECD Organisation for Economic Co-operation and Development
xii
List of Tables
Table 3.1 GDP and GNI at Constant Price. (Base:1995-96) ............................................... 71
Table 3.4 Market Capitalization and Annual Growth Rate of DSE ..................................... 86
Table 4.1 Composition of the Members of the Taskforce on Corporate Governance ......... 96
Table 4.2 Comparison among the Code Provisions on Board Issues ................................. 106
Table 4.3 Comparison among the Code Provisions on the Audit Committee.................... 107
Table 4.4 Comparison among the Code Provisions Regarding the Rights of Shareholders
111
Table 4 .5 Comparison among the Code Provisions Regarding Financial Disclosure Issues
113
Table 4 .6 Comparison among the Code Provisions Regarding Non-Financial Disclosure 114
Table 5.2 Industry Classes of Companies on the Dhaka Stock Exchange ......................... 139
Table 5.3 Descriptions of the Variables for the Empirical Framework ............................. 148
Table 6.1 Descriptive Statistics for the CGI of the Sample Companies ............................ 168
Table 6.2 Mean values of CGI across different industries ................................................. 172
xiii
Table 6.3 Correlation Coefficients for Dependent and Independent Variables in the
Regression Model ............................................................................................... 177
Table 6.5 Status of the CGI, Related to Board Provisions ................................................. 186
Table 6.6 Compliance with the Provisions Relating to Duties of Board ............................ 187
Table 6.7 Compliance with the Provisions Relating to Board Membership Criteria ......... 189
Table 6.8 Compliance with the Provisions Relating to Training of Board Members ........ 190
Table 6.9 Compliance with the Provisions Relating to Board Composition ...................... 192
Table 6.10 Descriptive Statistics of the Board Size of the Sample Companies .................. 192
Table 6 .11 Descriptive Statistics of the CGI on the Provision Relating to the Board Agenda
195
Table 6 .12 Compliance with the Provisions Relating to the Audit Committee .................... 196
Table 6 .13 Compliance with the Provisions Relating to the Directors’ Report and Company
Secretary.............................................................................................................. 197
Table 6.14 Compliance with the Provisions Related to the Role of Shareholders ................ 198
Table 6 .15 Compliance with the Provisions Relating to Financial Reporting, Auditing and
Non-Financial Disclosure Issues ......................................................................... 200
Table 6.16 Compliance with the Provisions Relating to Accounting Standards and Accounts
202
Table 6.17 Compliance with the Provisions Related to External Auditors........................... 203
Table 6.18 Compliance with the Provisions Related to Internal Auditors ............................ 204
Table 6.19 Compliance with the Provisions Relating to Disclosure ..................................... 205
xiv
Table 6 .20 List of the Least Complied with Code Provisions (with CGI below 0.50) .......... 209
Table 6.21 List of the Most Complied With Code Provisions (CGI 80% and above) .......... 210
Table 6.22 List of the Most Complied With Code Provisions (CGI 80% and above)
(continued..) ...................................................................................................... 211
Table 6.23 List of the Most Complied With Code Provisions (CGI 80% and above)
(continued..) ...................................................................................................... 212
Table 7 .1 Summary of the Problems Related to the Legal and Regulatory System of
Bangladesh .......................................................................................................... 236
Table 7.2 Summary of the Problems Relating to the Lack of Knowledge and Incompetence
in Bangladesh ...................................................................................................... 245
Table 7.3 Summary of the Problems Related to the Political Influence and Bureaucracy in
Bangladesh .......................................................................................................... 251
Table 7.4 Summary of the Problems Relating to Family Businesses in Bangladesh. ........ 259
Table 7.5 Causes behind the Lack of Pressure on Companies to Practice Good Governance
269
xv
List of Figures
Figure 1.1 Framework of the Thesis ................................................................................. 11
Figure 3.2 GDP Growth Rate at Current Market Price (Base:1995-96) ........................... 70
Figure 3.3 Influential Bodies of the Actors of Corporate Governance in Bangladesh ..... 79
Figure 3.4 Size of Different Industry Groups of the Capital Market of Bangladesh ........ 86
Figure 3.5 Key Landmarks of the Corporate Governance Framework in Bangladesh ..... 93
Figure 4.1 Organization of the Code of Corporate Governance for Bangladesh .............. 99
Figure 5.2 Relationship between the Code and the Interviewees.................................... 155
Figure 6.1 Histogram of the Level of Compliance of the Sample Companies ................ 169
Figure 6.2 Frequencies of the CGI of the Sample Companies ........................................ 170
Figure 6.3 Percentage of the Sample Companies Complying with the Provisions Relating
to Board Issues ............................................................................................... 186
Figure 7.2 Factors Influencing the Increasing Lack of Legal Professionals in Bangladesh
223
Figure 7.3 Factors Influencing the Inappropriate Legal Provisions in Bangladesh ....... 227
Figure 7.4 Causes Behind, and Consequences of the Lack of Implementation and
Monitoring of Legal Provisions in Bangladesh ............................................. 230
xvi
Figure 7.5 Factors Influencing the Quality of the Audit Report ..................................... 232
Figure 7.6 Causes Behind the Lack of Knowledge and Incompetence in Bangladesh ... 239
Figure 7.8 Political and Bureaucratic Influences on the Corporate Sector of Bangladesh.
249
Figure 7.10 Causes behind the Weak Shareholder Base in Bangladesh ........................... 260
Figure 7.11 Underlying Causes behind Ineffective AGMs in Bangladesh ....................... 264
Figure 7.12 Causes of Non-Compliance with the Code Provisions .................................. 273
xvii
Acknowledgement
Thanks to Almighty Allah for giving me the opportunity and ability to pursue this doctoral
study.
First of all, I would like to express my deepest gratitude to my supervisor, Professor Christine
Mallin, Professor of Corporate Governance and Finance, and Director of the Centre for
Corporate Governance Research, Birmingham Business School, for her brilliant guidance,
encouragement throughout the period of my research. In spite of her busy schedule she was
never short of time to review my work and allow me time whenever I needed. Without her
exceptional supervision, kindness and care this thesis would not have been possible.
My deepest gratitude is also to Kean Ow-Yong, my second supervisor, for his intelligent
insight and the constructive criticisms which helped me to diversify my thoughts and analyse
from a different perspective. His valuable advice and suggestions made an invaluable
contribution in my study.
I would like to extend my gratitude to Professor Victor Murinde for his valuable advice on
my research. I will always treasure the wonderful research facilities of the University of
Birmingham, and the support of the staff of the Accounting and Finance Department,
especially Karen Hanson, Gabrielle Kelly, MarleenVanstockem and also the entire Business
xviii
I would also like to thank all of my respondents and interviewees for spending their valuable
time, and unconditional support to complement my field work. A special thanks also goes to
Mr. Nazmul Ahad for his continuous support and information on Financial sector of
Bangladesh, and Mr Mahbubur Rahman for his excellent support in gaining access to the
studying for long hours throughout the study period in Birmingham. My thanks also go to my
sisters, brothers, friends, relatives and in-laws especially my parents-in-law for their
Finally, I am indebted to my parents who kept me in their prayers day and night, to my lovely
husband for his unconditional love and patience, and to my daughter Subah for understanding
me in my difficult times – without their relentless support and warmth this work couldn’t be
accomplished.
xix
Papers Presented
Presented work relating directly to the thesis:
the Code of Corporate Governance (with C. A. Mallin). Paper presented at the British
the Code of Corporate Governance (with C. A. Mallin). Paper presented at the the Global
Mallin). Paper accepted for presentation at the 35th European Accounting Association
Mallin). Paper reviewed by The International Centre for Financial Regulation (ICFR) and
xx
Abstract
COMPLIANCE WITH CODES OF CORPORATE GOVERNANCE IN
DEVELOPING ECONOMIES : THE CASE OF BANGLADESH
This thesis investigates the overall acceptance of the Code of Corporate Governance for
Bangladesh (hereafter “the Code”) by examining the level of compliance and the factors
the Code, the study identifies the Code provisions which are most and least complied with
and examines the perceptions of different stakeholder groups relating to the barriers of
corporate governance, the causes of non-compliance with the Code and the appropriate model
The study uses a questionnaire survey for the listed companies in Bangladesh and the semi-
structured interview method with the stakeholder groups. The shareholder and the stakeholder
The findings suggest that the level of compliance amongst the sample companies is at a
moderate level. Company age, size, industry type and type of company make a significant
difference in the level of compliance. However when the most and least complied with
provisions of the Code are compared with the regulatory provisions, the study indicates that
the companies are actually following the regulatory provisions and the Code is yet to be
dysfunctional in most, if not all, aspects. Although some initiatives have been taken in recent
years to improve corporate governance practices, according to the interviewees many of these
xxi
are inadequate. Whilst the legal system emerged as weak (particularly in terms of its
managers and its stakeholder groups, political and some other socio-economic factors are also
Bangladesh. Findings from the survey are further supported by the interviewees who opined
that in the absence of a functional corporate governance framework and the lack of awareness
about good governance among companies, companies are not yet ready to adopt a voluntary
code.
The findings also suggest that the polarization of the shareholder and stakeholder
governance is considered to be the one that best address the needs of the country.
Overall, the study argues that if meaningful compliance with the Code is to be ensured in
developing countries like Bangladesh, then such codes need to address the country specific
companies and making them well aware about the benefits of compliance.
xxii
CHAPTER 1
INTRODUCTION
1
Chapter 1
1.0 INTRODUCTION
1.1 INTRODUCTION
This research investigates the overall acceptance of the Code of Corporate Governance for
Bangladesh 2004, and identifies the existing challenges for ensuring better governance
standards. It also addresses the debate over the appropriateness of the Anglo-American model
perspective. This introductory chapter is organized as follows. In the next section, the
background of the study is discussed to indicate the motivation for this research. Following
this, in section 1.3 the research objectives are explained. In section 1.4 the scope of research
is identified. Finally this chapter concludes by outlining the framework of the overall study.
1.2 BACKGROUND
Over the last two decades, the economy of Bangladesh has made commendable progress 1.
Some companies which once started as small businesses have become large with an
international presence. Foreign direct investment has increased over time and in recent years
the country has been identified as one of the largest exporters in the world (ADB, 2009).
Whilst this progression is overwhelming, it is undeniable that despite the recent robust
growth rate, Bangladesh remains one of the poorest countries in the world. Scholars (e.g.
Azmat and Coghill, 2010; Salman, 2009;Sarker, 2011) believe the country is going to face a
1
see details in Chapter 3.
1
lot more hurdles to ensure that its economy continues to grow to make it a middle income
country2.
The challenges have become critical, because over the last decade the country has witnessed
some significant company scandals (e.g. Oriental Bank, Modern Food Ltd) along with two
massive capital market crashes (Sobhan and Werner, 2003). Whilst the impact of the first
stock market failure in 1996 took a long time to recover from, in 2011 it collapsed again. An
investigative committee was formed which found various irregularities including the
existence of omnibus accounts that allowed some market players to make exorbitant profits at
the expense of the investors. The alarming fact was that the accused individuals held enough
power to manipulate the investigation report and the punishment afterwards. If these things
continue, scholars like Belal and Owen (2007) opine that in the absence of transparency,
accountability and stakeholder pressure for good governance the days may not be far away
when the country might experience some more massive failures which will certainly
Therefore, policy makers and scholars of the country have raised concerns about protecting
the corporate sector which is one of key economic drivers for Bangladesh. On top of
everything else when the recent financial crisis is found to have made its impact on the export
earnings of the country3, scholars believe it will be very expensive for the country to overlook
its corporate governance standard. Hence, the policy makers and scholars (e.g. Ahmed, 2010;
2
Countries with nominal GDP level of US$1500 or less per head are considered to be a low income
country. In the case of Bangladesh the nominal GDP per head is only US$ 1,483 and 36% of its
population is living below the poverty line of US$ 1 per day (Source; World Bank Group, July 2011).
3
The estimation shows that although the impact of recession was not as severe as was estimated but
some adverse impacts were noted in certain areas like remittance and export earnings. The economy is
estimated to have grown at a rate of 5.74 per cent in 2008-09, slightly below the growth rate (6.19 per
cent) of 2007-08 (Bangladesh Bureau of Statistics, 2010)
2
Mahmud et al., 2008; Sobhan et al., 2003; Uddin and Choudhury, 2008) have called for an
urgent investigation to identify the standard the country is reflecting and to understand what,
raise productivity, raise employment and accelerate economic growth (Vaughn and Ryan,
2006); and that is why scholars like Rwegasira (2000) believe the pressure of globalization is
perhaps a blessing for developing countries - hence they should be more careful about their
governance standards to take advantage of the globalization of their financial markets. The
ability of Bangladesh to take these advantages will depend on how quickly and effectively it
can resolve the socio-economic issues, strengthen its capital market, establish ethical and
overall governance standards. Hence, like many other developing countries, understanding
corporate practices and improving its standard is considered as indispensable and high on the
Studies have empirically proved that disclosure of compliance with best practice
recommendations not only has a positive impact on the stock market (e.g. Fernández-
Rodríguez et al., 2004; Igor et al., 2006) or improves performance (Bauwhede, 2009; Mallin
and Ow-Yong, 2012), but also helps the country to remain abreast (e.g. Akkermans et al.,
2007). Findings of non-compliance further allow countries to trace the gap between the
3
standards and reality following an appropriate action for code improvement (e.g. MacNeil
Moreover, a very recent study (Claessens and Yurtoglu, 2012) on the corporate governance
against best practices is vital particularly for the developing countries, because it helps to
improve the governance standard, which in turn benefits companies through greater access to
financing, lower cost of capital, better performance and more favourable treatment of all
stakeholders; and all of these benefits are imperative for Bangladesh in attaining and
It is good to note that since the early 1990s Bangladesh has taken some major initiatives to
reform its corporate governance policies, capital market and financial system. Prioritizing the
recommendations, the first voluntary code, namely the Code of Corporate Governance for
Bangladesh (hereafter “the Code”) was developed in 2004. Later, in 2006, to institutionalize
the corporate practice of corporate governance in Bangladesh, the Securities and Exchange
“SEC Guidelines”) for the publicly listed companies of Bangladesh. Corporate governance
codes are generally voluntary sets of principles, standards or best practices that are proved to
be of value over time (Davies, 2008). However to date, there is no study investigating the
Bangladesh against some mandatory or regulatory provisions (for example Ahmed and Yusuf,
2005; Belal, 1999; 2001; 2002; Belal and Owen, 2007; Imam and Malik, 2007; Reaz, 2006;
4
Siddiqui, 2010; Sobhani et al., 2009; Uddin and Choudhury, 2008), whilst a few others
identified accounting and audit related issues (e.g. Imam et al., 2001, Uddin and Hopper,
2003), none has considered understanding the extent to which companies in Bangladesh
against the voluntary Code for Bangladesh. Most of these studies have explored different
understanding of the overall corporate governance issues covering the major industrial
sectors (if not all) is yet to be explored. For policy makers such broad industrial analysis
Moreover, in the recent years Bangladesh has taken some major initiatives in reforming its
corporate governance practices 4 . These initiatives are supposed to have an impact on the
overall governance structure, thus an understanding is also needed as to why these initiatives
could not safeguard the massive collapse of the capital market of Bangladesh in 2011.
explore the reasons behind governance failure in Bangladesh which will guide it towards
appropriate solutions.
Other than the reasons discussed above, the Code of Corporate Governance for Bangladesh
has also provided further motivation for this study to investigate its effectiveness in ensuring
improved governance standards in Bangladesh. For instance, the Code stated that if it is fully
implemented, the reputation for Bangladesh as a destination for investment and aid will be
For example, the Central Bank has made several policies for regulating Banks, the Securities and
4
Exchange Commission (SEC) has introduced Corporate Governance Guidelines (here after “the SEC
Guidelines”) as a listing regulation for its member companies and so on.
5
greatly enhanced and thus the economy will be rewarded with more investment and higher
quality investors (BEI, 2004, pg.6). Therefore it would be interesting to examine the extent to
which the companies in Bangladesh are complying with the Code provisions to obtain the
Secondly, researchers like Wanyama et al (2009) argued that the development of codes is the
right starting point for reforming corporate practices, but in developing countries which are
characterised by pervasive corruption, and a weak legal system, the mere development of a
code will not guarantee that de facto, practice will improve; it needs change in the overall
framework. A great deal of studies have also indicated that the development of codes should
understanding the possible scope for their improvement (e.g. Aboagye and Otieku, 2010;
Campbell et al., 2009; Dartey-Baah and Amponsah-Tawiah, 2011; Green et al., 2003;
Ibrahim, 2006; Kota and Tomar, 2010; Manosa et al., 2007; Ogbuozobe, 2009; Singh and
Newberry, 2008; Tsamenyi et al., 2007). Perhaps that is one reason why the literature on
corporate governance has been experiencing an increasing number of studies exploring the
governance practices in developing countries. Surprisingly in this rich vein of literature there
is a lack of research that investigates the challenges companies in Bangladesh are facing in
ensuring full compliance, or investigating the solutions for ensuring full compliance.
Moreover, the Code has not been reviewed since its development.
Last but not the least, the recent heated debate over the appropriateness of the Western model
of corporate governance in developing countries has further motivated this study to focus on
the Code. Finding a series of non-compliance issues across developing countries (Adu-
Amoah et al., 2008; Black et al., 2010; Ogbechie et al., 2009; Ogbuozobe, 2009; Rwegasira,
6
2000; Sejjaaka, 2007; Silveira and Saito, 2009; Wanyama et al., 2009), critics argue that the
theoretical propositions of the Anglo-American model are in conflict with the traditional
cultures, values, corporate and legal infrastructures of developing countries. Rather, they
believe the stakeholder model of governance which views companies from a much wider
are adopting the Anglo-American model out of institutional pressure and therefore non-
compliance seems to be an obvious consequence. Although Siddiqui (2010) reports that the
Code also reflects the Western model, but unlike other developing countries, no studies have
measured the extent to which it has been complied with in Bangladesh. Every country is
unique with its own socio-economic structure. Thus before making any comment on the
Code, studies should be carried out to understand the extent to which the Code has been
complied with. Moreover going back to the claim of the corporate governance scholars (e.g
Mallin, 2010; Shleifer and Vishny, 1997; Solomon, 2007; Turnbull, 1997a) that a code
should reflect country specific needs and address international expectations, the present study
argues that instead of debating the appropriate model for the country, it is better to focus on
the needs of the country and the international standards - which will systematically suggest if
the model suggested by the Code is appropriate for Bangladesh. Nevertheless, none of the
studies so far has combined all of these issues and explored possible solutions.
In light of the issues raised above, this research aims to systematically evaluate the overall
acceptance of the Code in Bangladesh. It also aims to develop some policy recommendations
to ensure governance guidelines guide the companies in the best possible way to ensure good
governance in Bangladesh. For the purpose of the study, the research statement above is
the Code.
attributes.
3. To identify and discuss the Code provisions which are the most, and the least,
complied with.
4. To investigate and discuss the major barriers to good corporate governance practices
in Bangladesh.
The study also intends to offer proposals for improving or reforming the Code both in the
analysis, and (iii) the measurement of compliance. First, the research will be conducted solely
in Bangladesh. As a result, the study population for both qualitative and quantitative phase of
the study will focus only on companies in Bangladesh, and thus there is no intention to
Second, the unit of analysis in this research is the companies listed with the SEC of
Bangladesh. Over the last few years, regulators have paid attention to the corporate
governance practices of the listed companies, thus it is expected that their regulatory attention
will have had a certain level of impact on the governance standards. However the listed
companies are a mixture of family-owned, state-owned, and foreign owned companies. Also,
8
they represent almost all of the industrial sectors of Bangladesh. Thus, the recommendations
Third, by following previous studies’ method, this research has measured by constructing a
corporate governance index (CGI). This CGI is used to calculate the degree of compliance for
each of the sample companies. In doing that, a survey that covers both publicly disclosed data
as well as the data which are not usually publicly disclosed was conducted. In addition, in-
depth interviews were also undertaken with a wide range of stakeholders consisting of board
practiced
For measuring compliance, the Code has been emphasized more than the SEC Guidelines for
two particular reasons: i) the Code is more comprehensive than the SEC Guidelines
(however, while emphasizing the Code the study does cover all of the provisions of the SEC
countries such as India, which are encouraging companies towards voluntary compliance, as
they argue that unless companies are voluntarily complying, compliance with provisions are
more likely to be a mock compliance. Hence the study explores the extent to which the
companies of Bangladesh are complying of their own accord with the Code which is a
voluntary requirement.
The study has been organised into eight chapters. A diagrammatic framework of this study is
presented in Figure 1.1 below. This figure shows how the rest of the seven chapters are
organized, their purpose linkage to the following chapters and to the conclusion of the thesis
as a whole. As the figure indicates, the introductory chapter (1) is followed by three
9
conceptual chapters (2-4). Chapter 2 briefly explores the theoretical background of corporate
governance and its models. It also briefly explores the historical development of codes of
corporate governance and trends of compliance in both developed and developing economies.
countries. The main focus of this chapter is to identify gaps in literature and to explain how
the findings of this study will contribute towards filling those gaps and also to develop the
approach, this chapter mainly explores the social, political, economic, legal, cultural and
Chapter 4 briefly discusses the Code of Corporate Governance for Bangladesh to have a
better insight into the Code. This chapter compares the Code contents with SEC regulations
of corporate governance to understand the difference between the level of compliance with
regulatory and voluntary code provisions. The Code contents are compared with the OECD
Principles (2004) to understand the extent to which they meet international recommendations
and to identify divergence (if any) to validate the claim of the Code that while following the
international standards the Code contents are conditioned according to domestic needs.
Finally, the Code contents are compared with neighbouring country Codes (India and
Pakistan) to facilitate understanding the ways in which others are addressing different
10
Figure 1.1 Framework of the Thesis
Chapter 5 discusses the research methodology. To address the research questions a mixed
methods approach based on pragmatic philosophy has been adopted to interpret the results. In
particular, a survey method has been adopted to answer the research questions (1-3) relating
the last three questions which needed to elicit stakeholders’ opinions to address corporate
governance challenges in Bangladesh and the appropriate solutions. The justifications for
11
using these research tools are provided in the relevant chapter together with detailed
Chapter 6 reports the results of the quantitative analysis covering the degree of compliance
with the Code. Using statistical tools and SPSS data analysis tool this chapter analyses the
extent to which listed companies in Bangladesh comply with the Code; identifies the contents
which have the most and least compliance; and the industries which have more or less
compliance. The compliance analysis in this chapter did not answer how far compliance on
paper reflects every day practice. For this purpose interviews have been undertaken to
explore the perceptions of a sample of corporate managers who are closely associated with
The results of the interviews with corporate managers and other stakeholders exploring
appropriate model and solutions for better governance are analysed in chapter 7. Finally,
Chapter 8 summarizes the empirical findings and draws conclusions. The dotted arrows in
Figure 1.1 indicate that research findings have been summarized and interpreted in the light
of the Bangladeshi context of corporate governance and issues emerging from Chapters 3 and
4. The chapter also discusses the limitations of the study and potential areas for future
research.
12
CHAPTER 2
13
Chapter 2
2.1 INTRODUCTION
The main purpose of this chapter is to provide the theoretical framework for this study and to
review the literature on code compliance for identifying the significance of the present study
within the prior literature. This chapter is organized in three sections. Section 2.2 discusses
different theoretical approaches, mainly agency theory, stakeholder theory and institutional
theory which have significant influence over the interpretation of research findings. Agency
theory is considered as the underlying theory of this research primarily because the corporate
agency theory. Moreover, this theory has a significant influence on the corporate governance
reform (Berle and Means, 1932; Roberts et al., 2005) and thus on the governance literature in
general. However to address the debate over the appropriate model of governance for
Bangladesh, stakeholder theory and institutional theory has also been used to construct the
theoretical framework in this study. Section 2.3 describes a brief history of codes, and prior
Bangladesh. Finally, in section 2.4 the discussion is summarized and important implications
Corporate governance has been viewed from different perspectives using different theoretical
lens. For instance, Sir Adrian Cadbury viewed corporate governance from a control
14
perspective and defines it “as a system by which companies are directed and controlled”
(Cadbury, 1992, p.15); whilst Shleifer and Vishny (1997, p.737) emphasized more on the
relationship perspectives and considered it as a means to “deal with the ways in which
Some other scholars (e.g. Letza et al., 2004a; Mallin, 2010; Morck et al., 2005; Solomon,
2007) rather preferred to view corporate governance from a wider perspective to incorporate
various stakeholder groups into the company’s objectives. They argued that it is not only for
stakeholder groups who have a long term relationship with the company and who have the
potential to impact firm performance. The OECD (2004) for example define corporate
governance as:
shareholders and other stakeholders. It also provides the structure through which
the objectives of the company are set, and the means of attaining those
Although most of these definitions emphasize on the structure of rights and responsibilities of
different stakeholders in a company(Aoki, 2000), they differ due to the diversity of corporate
practices around the world (Aguilera and Jackson, 2003; Chizema and Kim, 2010). In
addition, as Mallin (2010) suggested, many disciplines (like law, economics, finance etc.)
have influenced the development of corporate governance and thus theories that have fed into
it are quite varied. Thus being driven from different theoretical perspectives, corporate
governance has been defined in different ways and stylized in different formats for
identifying the purpose of the corporation, deciding who should have the control, identifying
15
the problems or finding an optimal solution (Letza et al., 2008; Letza et al., 2004a). However,
literature indicates that despite this wide diversity, most of the current perspectives on
corporate governance can be categorized into two contrasting paradigms: shareholder and
stakeholder (Friedman and Miles, 2002; Kakabadse and Kakabadse, 2001; Letza et al.,
2004a). Whilst from the camp of shareholding, corporate governance is seen as a mechanism
to deal with these issues by narrowing its vision to satisfy the needs of only shareholders, the
opposite camp advocates having much wider vision to satisfy the needs of stakeholders
The following sections briefly discuss these two theoretical perspectives of governance with
the aim to understand the way they have influenced the present study and other studies on
code compliance. The arguments in the following sections are greatly influenced by some
scholarly papers (especially the work of Letza et al., 2004a) which have critically reviewed
Agency theory is the most dominant theory of corporate governance (Dalton et al., 1998;
Ermongkonchai, 2010; Hendry, 2005; Krambia-Kapardis and Psaros, 2006; Roberts, 2004)
which argues that in the modern corporation, in which share ownership is widely held and
management roles are separated from ownership functions, managerial actions may depart
from those required to maximize shareholder returns (Berle and Means, 1932). Jensen and
Meckling (1976) introduce the ‘principal-agent’ framework and state that “agency theory
identifies the agency relationship5 where one party, the principal, delegates work to another
5
In the context of a corporation, in the agency relationship, the shareholder is indicated by the term
‘principal’ and the managers by ‘agent’ (Singh and Ahuja, 1983)
16
party, the agent” (Mallin, 2004, p.12); the agency relationship is thus seen as a contractual
link between the principals and the agents who are appointed by the principals and delegate
According to this dominant theory, universal agency problems arise because individuals are
opportunistic and individuals in an agency relationship have different goals and interests.
Thus it is very unlikely that agents will always act in the best interests of the principal
(Jensen and Meckling, 1976). Due to this constant temptation for agents to maximize their
own interests, the agency relationship is the potential for losses to occur to shareholders
(Fama, 1980; Fama and Jensen, 1983; Hendry, 2005; La Porta et al., 1998). Agency theory
thus suggests that managers/agents must be monitored and institutional arrangements must
provide some check and balances to make sure they do not abuse the power (Blair, 1995;
Hart, 1995; Mallin, 2010; Shleifer and Vishny, 1997). Agency cost arise from managers’
misuse of their position, and also from the costs of monitoring them to prevent abuse(Mallin,
2004, p.13 ).
The traditional shareholder perspective has its origin in agency theory and regards the
corporation as a legal instrument for shareholders to maximise their own interests in the form
of investment returns (Aguilera and Jackson, 2003; Gamble and Kelly, 2001; Letza et al.,
2008). It strongly emphasizes that shareholders are the primary stakeholders of a company,
and any act for social purposes beyond the shareholders’ interests will create scope for
managers to abuse their power and for government to intervene in corporate decisions and
thus there is a possibility that corporate resources will be allocated in an inefficient way
(Letza et al., 2004a). Hence, taking an extreme position against the stakeholder view, the
17
should be the only social responsibility of business, and any other social responsibilities
activities may be dangerous for the company (Friedman, 1962; Letza et al., 2004a).
corporate governance (Reed, 2002). Being predominant in the commonlaw countries (e.g. US,
UK, Canada, Australia, New Zealand), shareholding views of corporate governance are also
known as the Anglo-American model of governance (Aguilera and Jackson, 2003; Cohen and
Boyd, 2000; La Porta et al., 1998)6. Reed (2002, p.230) characterized this Anglo-American
model or the shareholder perspective of governance by: “1) a single tiered board structure
which gives almost exclusive primacy to shareholder interests; 2) a dominant role for
financial markets (both as the major source for investment funds and as a disciplinary
mechanism to address the agency problem); 3) a correspondingly weak role for banks and; 4)
little or no industrial policy involving firms cooperating with government agencies (and labor
bodies)”.
The Shareholding camp of governance argues that the best solution to the agency problem “is
to determine the most efficient contract governing the principal-agent relationship and an
optimal incentive scheme to align the behaviour of the managers with the interest of owners”
(Letza et al., 2004a, p.248). In addition, to secure shareholders’ interests and to ensure a
(shareholders’ general meeting, the board of directors and executive managers) is designed as
a checks and balances mechanism in the corporate structure (Jensen and Meckling, 1976;
Keasey et al., 1997; Letza et al., 2004a). The shareholder perspective of governance also
6
“The Anglo-American model is also labelled the outsider, common law, market-oriented,
shareholder-centred, or liberal model, and the Continental model the insider, civil law, blockholder,
bank-oriented, stakeholder-centred, coordinated, or “Rhineland” model” (Aguilera and Jackson, 2003,
p.447)
18
considers that hostile takeovers, mergers and acquisitions are some of the most effective
mechanisms through which the market can control under-performing corporations and thus
that there is a low degree of concentration of ownership and limited bank shareholdings
(Berle and Means, 1932; Krambia-Kapardis and Psaros, 2006; La Porta et al., 1999;
maintaining a competitive international market (Reed, 2002); accurate, reliable and timely
information flows to the capital market (Fama, 1980; Krambia-Kapardis and Psaros, 2006;
Long, 2004); the securities market is highly liquid and sophisticated; and last but not the least,
there is a well-developed legal infrastructure to protect against wealth transfer and insider
trading (Krambia-Kapardis and Psaros, 2006). Mallin (2010) further highlights the
importance of the legal system by stating that the propositions of agency theory is largely
applicable to the US and the UK, where the legal system provides good protection of
minority shareholders; and that may not be the situation in many other countries.
Agency theory has been a great interest to researchers of corporate governance (e.g. Arnold
and de Lange, 2004; Bezemer et al., 2012; Elston and Goldberg, 2003; Fama, 1980; Hendry,
2005; King and Wenb, 2011; Phan and Yoshikawa, 2000; Renders and Gaeremynck, 2012;
Warda and Filatotchev, 2010).The works of Berle and Means (1932), Jenson and Meckling
(1976), and, Fama and Jensen (1983) are some of the pioneers who brought the potential of
agency theory to light, and since then researchers have been using its assumptions, models,
and arguments to understand ownership structure, board practices, agency conflicts, corporate
governance reform, capital structure and debt (Manosa et al., 2007) and many more.In
19
developing countries several other authors including, Manosa et al., (2007), Imam and Malik
(2007), Mukherjee-Reed (2002), Farooque et al (2007a; 2007b) have used agency theory to
examine corporate governance structures, and issues and to predict possible solutions for
Despite its dominance, an increasing literature (e.g. Aguilera and Jackson, 2003; Burton,
2000; Davis et al., 1997; Henrekson and Jakobsson, 2012; Roberts, 2004) casts doubt on the
ability of agency theory to understand the corporate governance issues around the world. For
instance, Donaldson and Davis (1994), Jones (1995) and Daily et al. (2003b) disagreed with
the proposition of the self-interest nature of the agents and argued that managers are
trustworthy and should be fully empowered, whilst Charkham (1994), Sykes (1994) and
Moreland (1995) opined that the fundamental shortcomings of agency theory and the
shareholder perspective of governance is its excessive short term market orientation, whilst it
ignores certain long-term expenditures and capital-investment which are fundamental for the
long term sustainability of an organization. Thus, based on the agency theory another
theoretical model emerged which is known as ‘myopic market model’ that argues short-
sighted markets forces diligent managers to overemphasize the short-term return (e.g. current
share price) and or take decision against the threat of hostile takeover at the expense of
shareholders’ interest (Letza et al., 2004a). Hence, according to the myopic market model,
7
“Long term performance such as increasing shareholders’ loyalty and voice, reducing the
shareholders’ exit, encouraging relationship investing and empowering other groups (employees,
suppliers etc.) to have long term relationship with them” (Letza et al., 2004a, p.245).
20
Advocates of agency theory claim that CEO duality is more likely to create conflict of
interest and may have a negative impact on shareholders’ interest, however, scholars like
Donaldson and Davis (1994) refute such claims by arguing that vigilant boards favour CEO
duality because it “contributes to a unity of command at the top of a corporation that helps
ensure the existence, or the illusion, of strong leadership”; and CEO duality allows
companies to serve the shareholders even better. Considering these arguments, some recent
studies are suggesting that corporate governance practices which are based on agency theory
must be modified according to the context of the new economy (Chancharat et al., 2012; Lin
While these criticisms have their own theoretical grounds, it cannot be ignored that the theory
itself is sound, and thus a corporate governance model, like the Anglo-American model, has
have a certain weight in dealing with real life issues of good governance.
In sharp contrast to the traditional wisdom of the shareholder approach, the stakeholder
perspective of governance emerged in late 20th century (Gamble and Kelly, 2001; Letza et
al., 2004a). “Stakeholder theory views the corporation as a locus in relation to wider external
stakeholders’ interests rather than merely shareholders’ wealth” (Letza et al., 2004a, p.243).
In its basic form the theory states that the successful management of stakeholder relationship
is the key for firms’ success (Donaldson and Preston, 1995; Jansson, 2005; Letza et al., 2004a;
Sternberg, 1997). The concept ‘stakeholder’ first appeared in the management literature in
1963 and was indicated to generalize the notion of stockholder “to those groups without
whose support the organization would not exist” (Freeman and Reed, 1983). However,
nowadays the concept is more specific as it is clearly been referred to as those groups or
21
individuals who can affect, or are affected by, the achievement of the organization’s
objectives (Freeman, 1984; Sternberg, 1997); and thus it includes different interest groups
Stakeholder views of governance has been popularized after the publication of Freeman’s
scholars (e.g. Belal, 2004; Bonnafous-Boucher and Porcher, 2010; Chen and Roberts, 2010;
Donaldson and Preston, 1995; Ehrgott et al., 2011; Freeman, 2009; Jansson, 2005; Kaler,
2009; Letza et al., 2004a; Sternberg, 1997; Stieb, 2009; Tipuric, 2011; Tse, 2011; Turnbull,
1997a; Vitezic, 2010) who are either arguing in favour, or going against, this wider
perspective of governance; and the existing categorization of the two contrasting paradigms:
Jones and Wicks (1999) have summarized four major propositions of stakeholder theory,
“i) the firm has relationships with many constituent groups (stakeholders) that
affect and are affected by its decisions; ii) the theory is concerned with the nature
of these relationships in terms of both processes and outcomes for the firm and its
stakeholders; iii) the interests of all (legitimate) stakeholders have intrinsic value
and no set of interests is assumed to dominate the others; and finally, iv) the
theory focuses on managerial decision making” (Jones and Wicks, 1999, p.207).
Donaldson and Preston (1997) extend this understanding by identifying that the stakeholder
approach of governance can be categorized into two groups: normative and instrumental.
Whilst “the [normative approach] emphasizes ‘intrinsic value’ in stakeholder and views
In stylizing the governance model, the normative approach argues that corporations are
granted as social entities for general community needs (Sullivan and Conlon, 1997), thus
executives are representatives and guardians of all corporate stakeholders’ interest (Letza et
al., 2008; Letza et al., 2004a). Letza et al. in their paper stated that the most popular
studies(e.g. Greenwood, 2007; Jones et al., 2007; Kaptein, 2008; Plaza-Ubeda et al., 2010;
Rueda-Manzanares et al., 2008; Tangpong et al., 2010; Tipuric, 2011; Vazquez-Brust et al.,
making is indispensable for ensuring successful business strategy; and to do so, asGreenwood
p.315).
8
Being rooted in both normative and instrumental perspectives of stakeholder theory, the concept of
‘stakeholder engagement’ has also been termed as ‘stakeholder integration’ and ‘stakeholder
management’ by different scholars; but these terms are very similar concepts(Plaza-Ubeda et al.,
2010). For instance, almost in the similar manner ‘stakeholder engagement’, ‘stakeholder
management’ views firms “having moral motivation based on the legitimate consideration of
stakeholders in corporate decision making, and implies changes in corporate philosophy” (Plaza-
Ubeda et al., 2010, p.419), in order to integrate stakeholder groups in theory management process
(Post et al., 2002a); and ‘stakeholder integration’, as a strategic capability integration has been defined
as “the firm’s ability to establish positive collaborative relationships with a wide variety of
stakeholders”(Rueda-Manzanares et al., 2008). They all in fact stress the same message of involving a
wide group of stakeholders in organizational activities.
23
However, previous studies indicate that, the recommended process of stakeholder integration/
stakeholder management varies among researchers. For example, Gray(2002) and Van-
Buren-III (2001) have viewed the integration process from accountability and responsibility
some other researchers like Owen et al. (2000), and Deegan (2002) prefer stakeholder
engagement as a process for managing risk, managerial control etc. Some more recent works
rather viewed it from environmental disclosure (Belal, 1997; 2004; Choi et al., 2008; Choi
and Kwak, 2010a); knowledge transfer (Kamoche, 2006) or even from stakeholders’
Scholars like Letza et al., (2004a) state that ‘the abuse of executive power model’ also takes a
welfare. According to this model, as stated by Letza et al., the major governance problem
emerges when companies “allow excessive power to executive managers who may abuse
their power in pursuit of their own interests” (2004a, p. 245). It claims that good governance
can be established when the companies can protect themselves well from such abuse. Hence
this model recommends statutory changes in corporate governance, such as a “fixed four-year
term for chief executive officers, independent nomination of NEDs and more powers for
Overall, stakeholder perspective of governance argues that corporate governance issues can
and long term relationships are encouraged (Blair, 1995; Keasey et al., 1997). If implemented
24
properly, the advocates of the stakeholder model believe this wide approach of governance is
able to offer a certain competitive edge to companies. For instance, Kelly et al.
(1997)claimed that “companies which draw on the experience of all of their stakeholders will
be more effective and this social cohesion is a fundamental requirement for being
theory from a cybernetic perspective, and claimed that governance efficiency can be
He also claimed that “appropriate stakeholder governance could improve equity and self-
governance in the private sector, the quality of democracy in the public sector, and the
efficiency of both sectors” (Turnbull, 1997b, p.11). Hillman and Keim (2001) opine that
stakeholder relationships are distinctive to individual firms, thus making any kind of
imitation difficult for rivals. Choi and Wang (2009)further added to such claim and stated
that stakeholder engagement has influence over stakeholders’ satisfaction and thus improves
Nevertheless, stakeholder theory has cast some criticisms as well. Criticizing the stakeholder
model of governance, a large number of studies (for instance Antonacopoulou and Meric,
2005; Jansson, 2005; Lepineux, 2005; Plaza-Ubeda et al., 2010; Sternberg, 1997; Tse, 2011)
stated that unlike shareholder or agency theory, stakeholder theory is incomplete in terms of
governance. For instance, Sternberg (1997, p.5) claimed that, “an organization accountable to
everyone is actually accountable to no one”. Similar arguments were given by some other
researchers (like Jenson, 2000; Letza et al., 2004a; Orts and Strudler, 2009; Sundaram and
Inkpen, 2004) who argued that stakeholders’ interest varies from group to group and even
within members of a single group; which may often create conflict of interest. The theory
25
does not guide managers in handling these issues; neither has it provided any idea of how to
make the trade-offs among stakeholders. This situation gets further complicated when
managers are left without clear ideas for individualizing, addressing and prioritizing
Some earlier studies like Gioia(1995), Kochan and Rubenstein (2000), and Kaler
not show managers how they can make it operational, whilst some other work (Tipuric, 2011;
Tse, 2011; Waddock and Graves, 1997) extends such criticism by stating that stakeholder
theory leaves managers without identifying an adequate, consistent and reliable measure to
identify the effect of stakeholder management on firm performance; and researchers like
Phillips (1997) and others(De Bakker et al., 2005; Frederick, 1994; Griffin, 2000) argued that
the overall findings on this remained inconclusive which will take its toll in convincing a
Scholars (like Jenson, 2000; Kaler, 2006; Orts and Strudler, 2009) further argued that the
stakeholder framework places managers at the centre of the nexus contract, but sets no
criteria for controlling them. They argued what if the concept of ‘Management Trusteeship’
does not work at any certain point in the future (Jenson, 2000; Kaler, 2006; Orts and Strudler,
2009) or what if the managers become arrogant and unresponsive; if so then the free rein as
given by the theory will permit extravagance in respect of salaries perks and premises, and
the pursuit of empire-building acquisition that makes little business sense (Sternberg, 1997).
The theory has also been criticized because it does not specify who shall have the property
rights, or how to distribute the residual claims (Hansmann, 1996; Jansson, 2005; Letza et al.,
2004a).
26
Last but not the least, the theory does not specify what to do if the status of a stakeholder
changes. While there is no unified method for identifying who is a stakeholder, scholars
(Antonacopoulou and Meric, 2005; Jansson, 2005; Lepineux, 2005; Plaza-Ubeda et al., 2010;
Sternberg, 1997; Wood and Jones, 1995)opine, it would be challenging for a manager to
decide an optimal method for deciding whose interest should they prioritize and to what
extent; what to do if the stakeholders status changes, for example, what to do if suppliers
becomes competitors and thus their participation become a threat for company’s
competitiveness.
A new mode of thinking is emerging these days which strongly criticizes the polarized
approach of viewing corporate governance from two extreme positions. Critics (e.g. Cuervo,
2002; Fligstein and Freeland, 1995; Gamble and Kelly, 2001; Letza et al., 2008; Letza et al.,
2004a; Mueller, 1995; Vinten, 2001) are of a strong opinion that these polarized
whereas “reality itself does not have such a fixed nature” (Letza et al., 2004a, p.252), rather it
is continuously changing depending on the needs of the time. With reference to the claim of
Zingales et al. (2000), Letza et al., argued that the traditional mode of thinking “could be
valuable in a society where intensive assets are far more significant for the exploitation of
economies of scales, but business reality is not fixed and the nature of the firm is changing”
(2004a, p.254); therefore they believe, due to this changing nature, that at one time a
company may find it best to prioritize shareholders’ interest and at another time it may need
unrealistic and lacks efficacy to ensure a better governance standard. More recently, the study
of Aguilera and Cuervo-Cazurra (2009) and Argandona and Hoivik (2009) also placed
27
similar arguments and stated – any single model cannot work as the most appropriate one or
work as an effective system best for all firms at all times and ‘the one rule that fits all’ is
flawed.
This new mode of corporate governance stresses on the fact that corporate governance is
changeable, transformable, and dynamic enough to adopt innovation to better address the
uncertain needs of the corporate world. Filatotchev et al.(2006) added to these arguments and
suggested that corporate governance parameters may be linked to the firm’s strategic
thresholds in the firm’s life cycle; and firm’s life-cycle may go hand-in-hand with dramatic
shifts in its governance system. All of these arguments indicate that the model of corporate
governance should vary by country and sector and even for the same company over time
(Cuervo, 2002). Hence, without empirical evidence it is not logical to decide any particular
al., 2004a). Moving out from this conventional dichotomised and static theoretical approach,
these studies have invited future studies to identify an innovative approach of governance that
understands corporate reality, and considers today’s civilized society (Allen, 1992; 2001;
Some recent studies (e.g. Aguilera and Cuervo-Cazurra, 2009; Balgobin, 2008; Cuervo, 2002;
Okike, 2007; Reaz-M. and Hossain, 2007; Tse, 2011) indicated the possibility of constructing
a new model consisting of features (which meet country needs and global issues) extracted
from the existing models of governance. They argued that features of existing models have
their own merits and have been developed on the basis of the needs of a particular time and
history. They may not be purely applicable but can be conditioned according to need, and
understanding of these approaches will provide a better insight of the governance system
28
which may in turn help to develop a better way of solving the existing situation (Letza et al.,
2004a), and a combination of features of different models may offset the limitations of one
model believes, for a theoretical model to be workable, research should be carried on which
identifies a dynamic and pluralistic approach that better explains the “idiosyncratic workings
of local corporate governance, rather than try to force-fit reality into the abstracted templates”
One of the major limitations of existing studies of governance is its excessive dependence on
agency theory to outline the rationale of the governance model (Seal, 2006). While some
authors(e.g. Daily et al., 2003a) argue that social aspects of evolution of governance have
received scant attention in agency theory, some others (e.g. Enrione et al., 2006; Paredes,
2005; Siddiqui, 2010; Yoshikawa et al., 2007) opine that it is ineffective to explain major
researchers (e.g. Enrione et al., 2006; Greenwood et al., 2002; Mir and Rahaman, 2005;
Siddiqui, 2010) to explore alternative theoretical frameworks, and amongst them institutional
According to Chua and Rahman (2011) institutional theory explains “why so many
businesses have similar organizational structures and cultural elements even though they are
separate entities, and how organizations as institutions shape the behavior of individual
emphasizes the fact that many dynamics in the corporate environment may stem from cultural
29
norms, values and rituals. Thus the social and cultural environment should also be taken into
account in understanding corporate governance practices (Chua and Rahman, 2011; Scott,
1995). Consistent with such propositions, this chapter of the study explores these dynamics of
The concept of organization legitimacy lies at the heart of institutional theory and makes it
different from the early management theories (Scott, 1995). Suchman (1995)explains
legitimacy as the “the generalized perception or assumption that the actions of an entity are
desirable, proper, or appropriate [within a social system]” (1995, p.574). Whilst, Scott (1995)
developing organizational structures, policies; and the ways firms respond to such external,
macro pressures for receiving support and legitimacy. However, companies may also seek
legitimacy to ensure persistence, credibility and validity (DiMaggio and Powell, 1983; Meyer
The literature (e.g. Carroll and Hannan, 1989; Meyer and Rowan, 1977) indicates that
specific, this study views legitimacy as the social acceptance resulting from adherence to
Isomorphism is a central and multifaceted concept of institutional theory (Chua and Rahman,
2011; DiMaggio and Powell, 1983; Yoshikawa et al., 2007). Hawley (1968) defined
9
Such as the State, professionals and public opinion
30
isomorphism as a constraining process that forces one unit in a population to resemble other
units that face the same set of environmental conditions (Hawley, 1968).
(DiMaggio and Powell, 1983; Meyer and Rowan, 1977). According to Westphal et al.(1997)
and Carter opined that “organizations conforming to commonly used strategies, structures,
and practices appear rational and prudent to the social system and, therefore, are generally
desirable, proper and appropriate”. Chua and Rahman (2011) argued that isomorphism, or
compliance with expectations, is an integral part for organizational success. They also
highlighted on “the choices organizations have to make in response to, or in compliance with,
their institutional environment, which comprises: (1) powerful institutional constituents such
as influential stakeholder groups, and (2) the rules and requirements with which they must
comply to gain the desired rewards of support and legitimacy” (Chua and Rahman, 2011,
p.320). Thus, the theory is of particular help in the present study to explain why organizations
incur costs or allocate resources to increase their legitimacy to obtain favourable institutional
resources.
According to DiMaggio and Powell (1983) institutional isomorphic change occurs through
three different mechanisms - coercive, mimetic and normative isomorphism. They stated that
the “coercive isomorphism results from both formal and informal pressures exerted on
organizations by other organizations upon which they are dependent and by cultural
31
expectations in the society within which organizations function. Such pressures may be felt as
from standard responses to uncertainty”(DiMaggio and Powell, 1983, p.150), and this
uncertain environment is the case when organisational goals are not clearly defined or when
isomorphism on the other hand emerges from professionalism. DiMaggio and Powell
generated by university specialists; the growth and elaboration of professional networks; and
These three mechanisms are of great interest amongst researchers. In the case of Bangladesh
a few studies (e.g. Belal and Owen, 2007; Mir and Rahaman, 2005;Siddiqui, 2010) have also
country. For instance, Siddiqui (2010) investigated the development of corporate governance
standards in Bangladesh and reported that “the major actors of governance are exposed to
different levels of legitimacy and threat, and behave accordingly” (p. 270). The paper
concluded by claiming that “despite having a socio economic structure that does not support
the shareholder model, Bangladesh has adopted the shareholder model of corporate
governance” (Siddiqui, 2010, p.270). Siddiqui (2010) thus raised concerns arguing that on the
basis of agency-based notions of market efficiency, the model will not be entirely suitable for
Bangladesh. Similar findings emerge from the study of Mir and Rahman (2005) who
and report that isomorphic pressure forced the country to ‘carbon copy’ most of the IAS and
32
labelled them as ‘Bangladesh Accounting Standards’, which are less likely to ensure
efficiency for companies. While these findings provide an important beginning of the
extend the understanding through the examination of the Code implementation process at the
firm level. Drawing on the same institutional framework this study therefore explores
whether, after the introduction of the Code, firms are behaving similarly in the Code adoption
process and why. While the earlier two theories are adopted to address the research questions,
institutional theory is adopted to support the analysis and to have better understanding of the
recommendations, standards, or best practices, issued by a collective body, and relating to the
codes of best practice are designed to fill up the deficiencies in the legal system (Aguilera and
Cuervo-Cazurra, 2004). Alves and Mendes(2004)added to this definition and stated that code
recommend the adoption of organizational structures that are more transparent” (2004,
p.290). Codes of corporate governance are designed with an aim to enhance company
performance and thereby to restore investors’ confidence (Akkermans et al., 2007; Chizema,
33
Issuance of codes around the world have risen to prominence after the publication of the
Cadbury Report in1992 (e.g. Aguilera and Cuervo-Cazurra, 2004; Akkermans et al., 2007;
Enrione et al., 2006; Zattoni and Cuomo, 2008). Fernández-Rodríguez et al.(2004) reports
that the last decade of the 20th century witnessed the issuance of a large number of codes of
best practices, and at the beginning of 2005, some 50 countries had introduced one or more
corporate governance codes (Cromme, 2005). At the present time 10 , according to the
information of the European Corporate Governance Institute (ECGI, 2012) this number has
the World Bank and the Organization for Economic Cooperation and Development (OECD)
are also developing codes since 1996 (Aguilera and Cuervo-Cazurra, 2009; Awotundun et al.,
2011). Following that spirit the ‘OECD Principles of Corporate Governance’ were issued in
1999 (and amended in 2004), and eventually that has “become a widely accepted global
benchmark that is adaptable to varying social, legal and economic contexts in individual
countries” (Krambia-Kapardis and Psaros, 2006, p. 127). Since its inception it has worked as
a guide for much of the corporate governance reforms, especially in developing countries. In
fact, existing literature states that in the case of developed countries too, along with other
external factors11, these best practice recommendations set by international organizations are
one of the major reasons behind the similarities in code contents around the world (e.g.
10
At the beginning of 2012.
11
such as globalization, liberalization of market, demands of foreign investors.
34
At the same time, existing literature (e.g. Aguilera and Cuervo-Cazurra, 2004) also suggests
that domestic forces have significant influences over code development. However, unlike
external forces, the domestic pressures are causing divergence among code contents.
level of development are some of the major factors which cause the existing divergence
among code contents. Some comparative studies (e.g. Gregory and Simmelkjaer, 2002;
Hermes et al., 2006;Hermes et al., 2007) thus find that while having many similarities, the
European Codes are actually rather different as compared to the best practices. More recently
Wanyama et al. (2009) also reported the same and stated that
“Several nations, including the UK, have stressed the shareholder view and
adopted a voluntary approach to [compliance] with codes of best practice (e.g.,
Combined Code, 2006) while others, such as the US, have opted for the legal
approach to corporate governance rule enforcement (e.g., the Sarbanes-Oxley
Act, 2002 in the US). Much of mainland Europe and Japan have instead opted
for a broader [stakeholder]approach that reflects the social traditions prevailing
in each nation” (Wanyama et al., 2009, p.161)
Scholars (e.g. Aguilera and Cuervo-Cazurra, 2004; 2009; Doble, 1997; Erwin, 2011; Judge,
2012; Mallin, 2010; Rahman, 2010; Zingales, 2000) have strongly emphasized that codes
should be developed setting the best practice recommendations as a benchmark which should
However, code development is just a beginning, not the end. Researchers (like Aspelund and
Moen, 2012; Gamble and Kelly, 2001; Letza et al., 2008; Wanyama et al., 2009) have been
arguing for a long time that code development only cannot ensure better governance
standards; nor can even a best model serve as the best solution for ever. For a code to be
effective, it is vitally important that its implementation and level of compliance is monitored;
35
measured to identify gaps between standard and reality; and amended to accommodate
throughout the world. In fact, measuring compliance with standard practices has gained
momentum when the Mckinsey Report (2002) published that 80% of the institutional
investors were of the opinion that they would prefer to pay a premium for well-governed
companies. Since then, over the last three decades, a huge number of studies have emerged
on code compliance and the number is overwhelmingly increasing over time. Surprisingly, in
this rich stream, a systematic evaluation of the corporate governance standard in Bangladesh
is absent - and as explained in Chapter 1 also, that this gap in understanding has particularly
motivated this study to investigate the compliance status from Bangladeshi perspective. To
facilitate such analysis, the following sections of this chapter briefly discuss some of the
A rich vein of literature exists where the scholars stressed that corporate governance practices
are an integral part of the overall success of a company (Awotundun et al., 2011; Brockman
et al., 2010; Burton et al., 2004; Doble, 1997; Ehikioya, 2009; Erwin, 2011; Gebhardt and
Zoltannovotony-Farkas, 2011; Helliar and Dunne, 2004; Leventis et al., 2005; Mallin, 2000;
Murinde et al., 2004; Turnbull, 1997a). Perhaps that is the reason in the literature of corporate
developing countries. This section discusses some of those studies by focusing on their
36
2.3.1.1 Compliance with Codes: Review of Literature on Developed Countries
The studies measuring compliance are predominantly based on developed countries’ code.
Interestingly, most of these studies reflect optimistic findings (e.g. Akkermans et al., 2007;
Brenman and McCafferty, 1997; Conyon and Mallin, 1997; Dahya et al., 2002; Pass, 2006;
Werder et al., 2005). For instance, Conyon and Mallin (1997) is one of the pioneering studies
which investigated the extent UK listed companies implemented the recommendations of the
Cadbury Code of Best Practices. The study confirms that there has been a very high level of
compliance with the Code. Full compliance was reported in the case of both audit and
remuneration committees. According to the authors, the London Stock Exchange rule
requiring listed companies to disclose their level of compliance has worked as an important
factor behind this high compliance standard. Some latter studies (e.g. Dedman, 2002; Weir
and Laing, 2000) also claimed the same i.e. the Cadbury Code is well accepted by the sample
companies. A more recent study on companies on the UK’s Alternative Investment Market
(AIM)(Mallin and Ow-Yong, 2012) examined the relationship between the level of
and the company, and ownership characteristics. The study found clear evidence that
compliance in sample companies increases with company size, board size, the proportion of
independent NEDs, the presence of turnover revenue, and being formerly listed on the Main
Market.
The German Code also seems to have received a high level of acceptance. For instance,
Werder et al., (2005) investigated the overall acceptance of the German Code based on the
compliance declaration of 408 firms listed at the Frankfurt Stock Exchange. Using content
analysis technique the study reports that there is a high degree of acceptance of the Code
which has potential to increase over time. Some other studies on the German Code (Drobetz
37
et al., 2004; Rosen, 2007) also support such a claim and inspired companies for adherence.
Similarly, Bebenroth (2005) and Akkerman et al., (2007) examined the Dutch Code;
Brenman and McCafferty (1997) on the Irish Code; Del Brio et al.(2006) and Fernández-
Rodríguez (2004)the Spanish Code – and the findings of these studies show a high degree of
Consistent with the higher degree of compliance, developed countries codes seem to yield
positive impact on firm performance too. For instance, the most prominent example could be
La Porta et al. (1999) who analyzed the differences in governance standards in 27 countries
and claim that firms with better governance standards were likely to have higher valuation.
Gompers et al. (2003) is another popular study investigating the impact of compliance on
firm value. They used 24 distinct provisions relating shareholders’ rights for a sample of
around 1500 firms per year from the US market during 1990s. The study constructed a
‘Governance Index’ to proxy for the shareholders rights and the data was derived from
to each firm’s score in case of compliance with every provision. This particular method of
consistent with the findings of Millstein and MacAvoy (1998) their empirical findings
indicate that good-governed companies performs better than the poorly governed firms from
the market since the equity return of good-governed companies is much higher than the
poorly-governed companies. Some other studies on the US market (Brockman et al., 2010;
2008; Myring and Shortridge, 2010) also indicate that there has been a notable improvement
in corporate practices, and in many aspects compliance yields a positive impact on firm
38
performance; but reinforces the fact that it is the degree of compliance with the Codes, rather
than the mere disclosure of compliance, which has significant impact on firm value.
The effectiveness of European countries’ Codes has also been reported by some other studies.
Forinstance, Fernández-Rodríguez et al. (2004), Del Brio et al. (2006) and Reverte (2009)
have investigated the impact of the Spanish Code; Igor et al. (2006) and Rosen (2007) for
Germany; Alves and Mendes (2004) for Portugal; whilst, the Cadbury Code has been studied
by a number of studies (e.g. Apostolides, 2010; Dahya et al., 2002; Dedman, 2002; Doble,
1997; Mallin and Ow-Yong, 2010; Weir and Laing, 2000). These studies generally find a
Nevertheless, some studies have also emerged which cast doubt on the effectiveness of codes.
For instance, Bauer et al.(2004) investigated if good governance leads to higher common
stock returns and firm values in Europe and placed doubt on the Anglo-Saxon orientation of
the Code. Although the study found a positive relationship between corporate governance
standards and share price, but surprisingly contrary to other studies (e.g Gompers et al.,
2003), Bauer et al.(2004) found a negative relation between governance standards and
claim and defended the effectiveness of European codes by reporting that “greater
compliance with international best practices concerning board structure and functioning is
positively related with operating level performance”. Using theoretical support and a sample
corporate governance practices during the study period, “return on assets (ROA) increases in
the extent of compliance with international best practices concerning board structure and
39
functioning”12(2009, p.498). The study thus claimed that, the negative evidence as reported
by Bauer et al. (2004)was not because of the Anglo-Saxon orientation of Code or any other
reason, but due to the fact “that poorly governed companies[were] using the available
discretion over the timing of asset sales to cover up their inherently lower operating
However, there are a few studies (e.g. MacNeil and Li, 2006; Pass, 2006) which reports non-
compliance in developed countries. For instance, some studies (Doble, 1997; Mallin and Ow-
Yong, 1998;Parsa et al., 2007) have paid attention to small and medium firms (SME). Their
findings show generally less compliance than larger firms. Doble (1997) thus argued that
Codes are made for larger firms and less attention has been paid to the compliance of SMEs
which are causing non-compliance. Some recent studies (Plant et al., 2011; Spanos et al.,
2008) have found non-compliance in family-owned companies and claim that development of
code alone is not sufficient to ensure better governance, compliance processes in family
owned companies need more attention. Moreover, some scholars (Akkermans et al., 2007;
Bebenroth, 2005) have further argued that non-compliance is inevitable if the code itself
increases the possibility for camouflage and symbolic compliance if it is ambiguous and lacks
theoretical rationale.
Overall discussion on the studies on developed countries finds that most of the studies are
predominantly quantitative and report a high or significantly high degree of compliance with
the codes. Despite a few negative findings, most of the studies also indicate that Codes are
12
Moreover the study of Bauwhede (2009) also found a positive relation between the extent of
compliance with recommendations on disclosure (and some other areas like takeover defence) and
firm operating performance.
40
attention to Codes, measuring them, evaluating them and amending them according to
feedback. Special attention is being paid to identifying flaws and taking corrective actions by
amendment of Code contents. Perhaps these are the major reasons why the Codes of
The compliance status in developing economies is in sharp contrast with that of the
developed countries. While developed countries are showing high degree of compliance,
developing countries are far behind and most of the studies reflect non-compliance. Klapper
and Love (2004) is one of the earliest studies considering a group of emerging countries to
understand their governance practices and the impact on firm performance. Following the
same methodology of Gompers et al. (2003), the study has used data from 14 emerging
markets and finds that the level of compliance is a major issue for emerging markets. The
study also indicates that there is wide variation in firm-level governance among sample
companies and that the average firm level governance is lower in countries with weaker legal
Slightly different picture came out from studies on Latin-American countries. Four
papers,Rabelo and Vasconcelos (2002), Leal and Carvalhal-da-Silva (2005), Silveira and
Saito (2009), and Black et al. (2010)studied corporate governance practices in Brazil. Among
those, both Leal and Carvalhal-da-Silva (2005) and Silveira and Saito (2009) constructed a
broad corporate governance index from publicly available information and provided an
indepth analysis of the voluntary adoption of Code among the listed Brazilian companies.
The studies indicated that corporate governance practices were improving over time.
However, they found that the level of compliance is low and the pace of improvement is very
41
slow. Garay and González (2008) reported the same in the case of Venezuela. Although they
found a positive impact of compliance on firm-performance, but they had to raise concern
with their degree of compliance13. The study therefore suggested that if Venezuela wants to
sustain this positive impact on firm value, they needs to take immediate action to improve
Compliance standard seems to be nothing better in Africa. Quite a good number of studies
have emerged from this region. Such as Ogbuozobe (2009), Ogbechie (2009) and Olayiwola
(2010) studied Nigerian companies; Wanyama et al.(2009) and Sejjaaka (2007) concentrated
(2000) considered the overall African block for understanding their corporate governance
practices – but interestingly non-compliance is the general findings of all these studies. For
instance, using 22 listed companies of Ghana Stock Exchange Tsamenyi et al. (2007) finds
that the compliance in Ghana is generally low14. Whilst Ogbuozobe (2009) and more recently
companies and corporate governance recommendations. Ogbechie et al. (2009) further argued
that even the existing compliance standard is questionable because companies are complying
due to legitimation reasons. This criticism reflects institutional theory that suggests “that
when faced with externally imposed standards, organizations can sometimes respond by
developing alternative standards for the same practices” (Okhmatovskiy and David, 2012,
13
“The study constructed an index of corporate governance practices for listed firms in [Venezuela]
and found a very large variation in corporate governance practices among firms. At the firm level, the
highest score was 71.67 per cent and the minimum value was 16.67 per cent. The mean CGI value
was 40.34 per cent, which gives Venezuela a score below the emerging market average” (Garay and
González, 2008, p.207).
14
The average disclosure level is below 52%
42
p.1), or prefer compliance on paper that does not reflect in actual corporate practices. Hence,
Olayiwola (2010) opined, Nigeria to reap benefit of compliance with best practice
recommendations, some structural change is needed; or the economic reform process led by
IMF and the World bank needs to understand specific governance features of these countries.
Wanyama et al.(2009) added to such claim by stating that pervasive corruption and weak
Uganda and unless corrective measures are undertaken to reform the regulatory framework,
mere development of codes would not be able to improve corporate practice in this region.
Interestingly, non-compliance with codes of corporate governance has also been found from
the studies on South Asian developing countries. However, this similarity is not surprising,
because most of the developing countries share some commonalities in the socio-economic
related problems. Shah and Butt (2009) measured the extent that Pakistani companies comply
with Code provisions. Based on 114 sample listed companies, the authors analyzed the
impact of quality of governance on the expected cost of equity. The authors constructed their
own corporate governance index and measured quality of governance by assigning weight to
the components of the index. Using simple ordinary least squares method the study indicates
a positive association between the variables but, unfortunately the status of compliance is
found to be the same as other developing countries- low level of compliance. A similar
pattern has been found in Ibrahim’s (2006) study who also focused on Pakistani companies.
Evidence from India also reveals the same result in the case of the level of code adherence.
Even though authors like Agarwal (2001), Ahmed (2006), Swain (2009), Kaur and
Mishra(2010) and Bhasin (2010) have studied corporate governance practices in India from
43
different points in time, the findings are generally the same: ‘low level of compliance or to
certain cases non-compliance with Code of corporate governance’. For instance, one of the
most comprehensive researches on India (Hossain, 2008) investigated the financial reporting
and disclosure system of the banks in India. As of 2004, out of a total of 58 the author studied
38 banks comprising of both public and private sector banks listed on the Bombay Stock
Exchange (BSE), and the National Stock Exchange (NSE). Using content analysis he
observed variation in the disclosure patterns between public sector and private sector banks in
relation to total corporate governance disclosures and the mandatory and voluntary elements
of the index prepared for his study 15 . The author concluded that the overall levels of
disclosure were relatively low with only the best disclosers reaching at least 50% of the index;
and suggested that the variation might be due to the weak regulatory supervision or poor
internal compliance or control of compliance and public sector banks' compliance might be
weaker due to bureaucratic inefficiencies in monitoring. The findings are similar with other
studies on India (Ahmed, 2006; Kaur and Mishra, 2010; Shukla, 2009).
There are several other studies on developing countries. There are studies from Cyprus
(Krambia-Kapardis and Psaros, 2006), Jordan (Al-Najjar, 2010), Lebanon (Chahine and
Safieddine, 2011), and Malaysia (Haniffa, 1999) – and interestingly, almost all of these
studies reported significant concern on the level of compliance. However, evidence from
Kuwait (Mutawaa and Hewaidy, 2010), Poland (Campbell et al., 2009) and China (Lo et al.,
2011; Lu et al., 2009)and Bahrain (Hussain and Mallin, 2002; 2003) slightly differs from this
15
For total corporate governance disclosures private sector banks on average scored marginally higher
than public sector banks with the latter showing lower dispersion by range of disclosure score and
standard deviation. The study also found that performance by the individual sample banks on the
voluntary components of corporate governance disclosure showed a range of scores of one (1) (9.09%
of the eleven items in the index) to six (54.54%) with a mean score of 3.05 (27.75%); the standard
deviation of absolute scores across all banks was 1.33 (of percentage scores 12.13) (Hossain, 2008).
44
consistent pattern of non-compliance scenario of developing countries. The authors of these
papers are optimistic because they have found that the level of compliance is increasing over
time in the respective countries. For instance, based on 250 publicly available compliance
statements filed in 2005 by Polish companies listed on the Warsaw Stock Exchange (WSE),
Campbell et al. (2009) claimed that the Polish Code of Corporate Governance Best Practices
has a high level of acceptance by Polish companies. Again, based on the revised OECD
Principles (2004) and China’s regulatory framework, Lu et al. (2009) developed a corporate
governance index to measure overall corporate governance and disclosure practices of the
100 largest listed companies and found that Chinese companies are progressing in reforming
The plausible reasons behind these optimistic results may be with the fact that countries like
China and Kuwait are considered as rapidly moving emerging countries with stable economic
growth. Their capital markets are also well developed and strong enough to afford a Western
model of corporate governance. Moreover while studying the corporate governance of Poland,
Mallin and Jelic (2000) reported that since 1995, Poland has fundamental legislative changes
and privatization policies which actually contributed to a strong and healthy trend in Polish
economic growth – and these make them different from other developing countries reporting
significant non-compliance. Mallin and Jelic, (2000) further state that the fixed income
market in Poland is very dynamic with rapid growth to meet the demand of both domestic
and foreign investors; whereas most of the developing countries are in a battle to gain the
trust of investors due to their weak legal regulation, pervasive corruption and ineffective
regulatory systems. Nonetheless, even with these progressive infrastructural features, none of
these could achieve high level of compliance with OECD Principles so far.
45
However, the overall failure of developing countries in ensuring a high level of compliance
has triggered a number of studies to explore the underlying reasons. Findings indicate that
inadequate legal system and enforcement mechanism (e.g. Jun-Lin and Liu, 2009; Klapper
and Love, 2004; Okike, 2007; Rathinam and Raja, 2010; Vaithilingam and Nair, 2007; Yapa,
1999), deterioration of moral values and lack of culture of compliance (Ermongkonchai, 2010;
Halter et al., 2009; Kaur and Mishra, 2010; Lucey and Zhang, 2010; Ofori and Hinson, 2007;
Archibong et al., 2010; Imam and Malik, 2007; Kempf and Ruenzi, 2008; Krambia-Kapardis
and Psaros, 2006) are some of the prime factors for which developing countries are finding it
Kapardis and Psaros, 2006) argue that if successful implementation and its reflection in
everyday practice is one of the determinants of Codes’ success – then motivation for
compliance is more important then putting pressure for compliance. This motivation may
come from a proper understanding of the necessity for compliance, incentives and evidence
of the benefit of compliance for companies. Especially because complaince with codes is
regard. On one side Codes are demanding full compliance to yield their best; on the other
hand, due to lack of motivation companies are not ensuring full compliance - and thus the
However, the recent debate is increasingly overshadowing all these plausible factors
discussed above. A large number of studies (e.g. Adu-Amoah et al., 2008; Aspelund and
Moen, 2012; Belal, 2001; Judge et al., 2010; Marnet, 2007; Mir and Rahaman, 2005; Morck
46
et al., 2005; Mukherjee-Reed, 2002; Reed, 2002; Singh and Newberry, 2008; Uddin and
Choudhury, 2008) have emerged strongly arguing that the cause of non-compliance lies with
code themselves. They strongly opined that non-compliance is inevitable when codes of
corporate governance contain either controvertial or ambiguous provisions (e.g. Bathala and
Rao, 1995; Burton, 2000; Campbell et al., 2009; Dawson and Dunn, 2006) or are being
imposed on companies due to institutional legitimisation (Belal, 2001; Belal and Owen, 2007;
Burton, 2000; Mir and Rahaman, 2005; Reed, 2002). They stated that most of the developing
countries are going through corporate governance reform and taking the shape of Anglo-
American model of corporate governance (Reed, 2002; Siddiqui, 2010; West, 2006).
some advantages like increased corporate growth and profits; facilitation of overall
opportunities; faith, trust and reliability via proper discloser in reporting instruments; benefit
for society and ensure greater investor protection through its required
Singh and Newberry, 2008)have argued that it would be hard to realize these benefits in the
In explaining these incompatibilities, Reed (2002) finds that the basic areas of reform in the
shareholder rights), “reforms of the judicial system (to allow for more effective enforcement
of contracts) and changes to financial markets (to help induce investment and discipline
Some examples of the mechanisms of Anglo-American model are trade liberalization, sustained
16
economic growth and improved transparency in corporate dealings and so on (Mukherjee-Reed, 2002)
47
management and majority owners) as well as related macro-level reforms”(2002, p.240).
Consistent with other studies (like Ahmed, 2006; Hossain, 2008) Mukherjee-Reed (2002)
believes countries like India will face some major challenges (especially in the case of
judicial reform) in setting up the required environment for making the shareholder model a
success. However, La Porta et al. (1999) suggest another important factor about the universal
agency problems. The study suggests that the agency problem in developing countries is
different than that of the developed countries. For instance, as they claimed, instead of arising
in between agents and shareholders, in developing countries the agency problem exists
between majority and minority shareholders. Hence, the theory itself is not properly
Taking the case of Africa, Rwegasira (2000) reports the same –the Anglo-American model of
governance is more applicable to countries where company shares are generally owned by
dispersed owners which is just the opposite of the developing countries’ corporate features.
Paredes (2005) criticized from another dimension and claims that emerging economies lack
important ‘‘second-order institutions’’17 that enable markets to monitor, hence they will have
a hard time in ensuring full compliance with a Code designed according to a western
corporate structure. Whilst Wanyama et al.(2009) argued from a Ugandan perspective and
stated that corporate governance standards in developing countries may have similarities on
paper, but in reality it is quite different. They strongly argued that developing countries’
corporate “frameworks are not yet strong enough to support what might normally be
17
For example “experienced investment bankers, lawyers, security analysts, accountants and effective
judicial systems” (Siddiqui, 2010, p.255).
48
An important fact is hidden behind the convergence of codes in developing countries. Some
studies (Aguilera and Cuervo-Cazurra, 2004; Arslan, 2012; Enrione et al., 2006; Zattoni and
Cuomo, 2008) explain this worldwide adoption of (similar) corporate governance codes by
stated that “countries with poor investor protection are prompted more by legitimization
reasons”(2010, p.255). However, there are some other studies (e.g. Krambia-Kapardis and
Psaros, 2006; Lin and Chuang, 2011; Mukherjee-Reed, 2002; Reed, 2002; Solomon et al.,
2002) which paid particular attention in explaining why developing countries are following
infrastructure. These studies indicate that there are several possible contributing factors, e.g.
for some countries (e.g., India, Nigeria) their company law is based on British company law,
and thus traditionally embedded in the Anglo-American model that lead to further movement
in this direction (Reed, 2002); or it might be because of the global pressure (Mukherjee-Reed,
2002).
However, the most common reason for the relative uniformity of codes in developing
countries is with their need to attract foreign investment. As Reed (2002) and Krambia-
Kapardis and Psaros (2006) explained, developing countries are significantly dependent on
donor agencies, like the international financial institutions. Reed (2002) also stated that “as a
p.228).
49
Critics of the Western model in developing economies believe that the stakeholder model of
Since the stakeholder model of governance recognizes weak corporate control, and relies on
closer contact between shareholders and agents, it is expected that the close relationship will
More than a decade ago Shleifer and Vishny (1997) and Dyball and Valcarcel (1999) claimed
that corporate governance practices in developing countries has not been studied as in
developed countries. However, the discussion above indicates that in recent years an
increasing number of studies from developing countries have emerged. Unlike developed
countries, most of these studies have reported a poor level of compliance with Codes. This
has perhaps worked as a catalyst to encourage more research on understanding the underlying
reason behind such non-compliance and identifying optimal solutions for good governance.
The concept of good corporate governance is relatively new in Bangladesh; thus the area of
good governance in Bangladesh has not been studied as intensively as in other developing
countries. However, in recent years, several scholarly papers have emerged understanding
different dimension of corporate governance in the country. Most of the research has emerged
in the area of accounting and auditing practices (e.g. Habib and Islam, 2007; Imam et al.,
2001; Kabir et al., 2011; Mir and Rahaman, 2005; Siddiqui and Podder, 2002; Uddin and
Hopper, 2003). Siddiqui and Podder(2002) for instance, studied 14 banks of Bangladesh to
examine the effectiveness of audit and found that the banking companies were misstating
their profits in their financial statements and their audit firms are certifying these financial
statements as ‘true and fair’. Finding that only 3 out of 7 default companies’ auditors have
50
placed a modified statement, the authors raised concerns about the competence and
Dhaka Stock Exchange, Imam et al. (2001) found a lack of timeliness in most of the audit
reports. Habib and Islam (2007) viewed the auditing practices of Bangladesh from a different
angle. They studied the association between non-audit fees (NAF)18 and financial reporting
quality to understand the independence of auditors. The authors claim that unlike developed
countries the threat of litigation is completely non-existent in Bangladesh and by using 530
firm-year observations from 1996 to1999, they found that NAF is causing auditors to
sacrifice their independendence in Bangladesh. The findings of Karim and Moizer (1996)
perhaps link all these findings on audit practices of Bangladesh by indicating that the major
problem lies with the poor audit fee in Bangladesh. The authors claim that the fee is even
poorer compare to other developing countries. Infact, as the World Bank report (2003) finds,
the audit profession lacks proper institutional settings to to attract quality graduates and thus
in turn finds it difficult to produce quality auditors. Moreover the report also stated that the
education and training, and inadequate adherence to professional ethics are also considered to
have contributed to the weakness of the financial reporting regime in Bangladesh” (2003, p.
0).
Comparatively, the social reporting practices of Bangladesh have been examined more than
any other areas of governance practices. The study of Belal (1999) seems to be the earliest
one amongst those studies.Using a sample of 30 annual reports of companies for the year
18
The idea behind using NAF is that a high level of NAF may induce auditors to allow aggressive
reporting by management and such incentives may be provided by auditors’ long term desire to
attract and retain clients.
51
1996, the study investigated the corporate social reporting practices in Bangladesh. Using
content analysis, this study indicated that company disclosure varies among companies and
especially the ethical disclosure was found to be mostlyignored by the companies. Although
the study provides a general understanding of the social disclosure practices for that
particular time, it is incomplete in drawing any conclusions regarding the overall compliance
standard. However, more concrete evidence emerged from a later study (Imam, 2000), which
also investigated corporate social reporting but reported that the level of disclosure is poor .
Eventually some more studies emerged in this area in Bangladesh, but the poor level of
disclosure remained almost constant in those studies. For instance, Belal (2001) paid attention
to the corporate social reporting practices of Bangladesh from a much broader aspect in the
socio-economic context of Bangladesh. Using a small sample from the listed companies19 this
study shows that although a number of sample companies are making social disclosures
which are voluntary in nature, the quality is very low, and the disclosures are purely
descriptive in nature and contain only ‘good’ news – thus they lose their credibility. Most
importantly, the study indicates that 51 percent of the sample companies did not disclose
some mandatory information20. The author concluded by stating that the changes made by the
country in the disclosure practices is appreciable, but the overall quantity and quality of
disclosures are still poor. Although this study is noteworthy for understanding disclosure
practices in a broader aspect, its limitation is with its sample. The study has considered only
30 annual reports which is only 15% of the total listed companies of that time. Furthermore,
19
quoted on the Dhaka Stock Exchange and Dhaka Metropolitan Chamber of Commerce and Industry
like information on foreign currency transaction which are mandatory by the Companies Act 1994
20
52
the study has focused only on the industrial sector of the country; thus the findings are only
The study of Belal (2004) is perhaps the most comprehensive research on corporate social
overall conclusion of this study implies that, in their pursuit of CSR, firms are fundamentally
tempted by their desire to tactically [favour] key stakeholders. The author argues that
companies of Bangladesh perhaps attain this often at the cost of financially weak social
stakeholders. Although the findings of this study are based on a strong theoretical argument
and are consistent with many other studies (Belal, 2002; Owen et al., 2001)it seems to have a
limitation in terms of the time when the study was conducted. The findings are relevant for
that particular time, but it’s almost a decade since the analysis was done.
Whilst the above studies focused on social disclosure, other studies on Bangladesh focused
on financial disclosures. Nevertheless, the compliance status seems to remain the same, i.e.
poor compliance. For instance, Akhtaruddin (2005) investigated the extent to which the
listed companies in Bangladesh comply with the mandatory disclosure rules of three
influential regulatory bodies22. By examining 94 annual reports published in the year 1999,
the study finds that companies in general do not comply with mandatory disclosure
requirements of the regulatory bodies. Islam et al.(2008)’s findings also reported the same
21
for the year 1999/2000
Companies Act 1994, SEC (Securities and Exchange Rules 1987) and the Institute of Chartered
22
53
concern 23 . Nevertheless, both of these studies are limited to non-financial manufacturing
companies whereas the financial sector still dominates the corporate sector of the country and
plays a major role for financing business activities. Ignoring the financial sector thus would
Akhtaruddin (2005) used purposive sampling which is more prone to have a biased result;
and also used annual reports as the only source of compliance disclosure. This excessive
dependency actually limits the acceptability of the findings further because accounting theory
states and accepts other mediums of disclosures too (e.g. media release, interim reporting,
letters to shareholders, letters to employees etc.) through which a company can ensure its
accountability to its shareholders and stakeholders; and thus “exclusive focus on annual
reports may lead to an incomplete picture of CSR practices” (Unerman, 2000, p.667)
While the previous studies are mostly descriptive in nature, there are two studies (Belal, 2004;
corporate disclosure practices of Bangladesh and viewing the practices from stakeholders’
perspectives. The study of Belal and Owen (2007) used interview method to examine the
Bangladesh and thus to identify the factors behind the present status of, and future prospects
for, social reporting in the country 24 . Whilst earlier studies (Belal, 2001; Imam, 2000)
reported that like many other developing countries, Bangladesh has also been pressurized to
adopt Western developed standards and codes, the study of Belal and Owen (2007)reported
23
The authors of this study cocluded by stating that companies prepare cash flow statements according
to IAS and non-compliance prevails among companies (Islam et al., 2008)
In doing so, the study has basically focused on the Global Reporting Initiatives (GRI), AA1000 and
24
SA8000
54
that the key impetus behind the social reporting process is also because of the pressure from
external/powerful forces (mostly international customers). The study argued that such an
stakeholdersis most likely to create passive compliance. The study concluded with raising
concernsabout the effectiveness of the prevailing mock compliance on the social disclosure
standards of Bangladesh.
One major limitation of the above studies is they are predominantly focused on one single
insignificant number of studies have emerged (Haque, 2007; Reaz, 2006; Reaz and Arun,
2006; Siddiqui and Podder, 2002; Sobhan and Werner, 2003)which have attempted to fill this
gap inthe literature by studying all the contextual frameworks and all the major mechanisms
of good governance. Nevertheless, the findings of those studies do not provide any optimistic
conclusion either. Reaz (2006) for instance, comprehensively examined corporate governance
comprising of a quetionnaire survey among 35 banks and 21 interviews with top bank
management officials, the study measured the state of governance against the OECD (1999)
governance framework. The research findings indicate the same: poor compliance status.
Reaz and Arun (2006) focused on the governance practices in banks of Bangladesh and found
that owners of banks hold large shares and were misusing the bank’s fund.They also report
that the owners are also dominating in the audit and disclosure practices of the banks. They
study concluded by stating that the major problem of bad governance relating to loan
(2002) claims that the situation is complicated in Bangladesh because the legal system itself
55
protects the criminals from being punished and halts the process of institutionalizing good
have made its scope limited to banks. The banking industry makes significant contribution in
the overall economy of the country, but does not represent all other industrial sectors of the
what is happening in other areas as well. Moreover, the above studies have measured
governance practices against OECD Principles (1999) which have been revised in the year
2004. Therefore once again applicability of the findings of these studies needs revision at the
present time.
In the recent past, the World Bank (2009) study has responded to this gap of understanding
and attempted to measure the extent companies of Bangladesh are complying with the SEC
governance guidelines. Using a small sample of 53 listed companies the study analyzed their
level of compliance through a self constructed governance index. However, the findings are
an exception compared to the previous studies. Instead of those pessimistic conditions, the
study suggests that the level of compliance has increased among listed companies. For
example, overall the sample companies shows 83% compliance with the SEC Corporate
Governance Guidelines26 and the company-specific corporate governance index ranges from
100% compliant companies to 8% compliance. This high level of compliance made the
25
“Even formal institutions do not matter as such unless they can induce changes
in the way social agents behave…if financial sectors are liberalized without
adequate prudential regulation, financial institutions are likely to be captured by
powerful political and/or business interest that operate the institutions to serve
their own interest rather than those of the creditors/ depositors” (Chowdhury,
2002, p.25-26)
SEC of Bangladesh introduced Corporate Governance Guidelines (SEC Guidelines) in the year
26
2006, as a listing requirement for the listed companies. The provisions are discussed in Chapter 4.
56
authors claim that “listed companies in Bangladesh have increased their level of
sophistication and Bangladesh is ready to take a step in expanding the Code coverage to the
other important governance areas” (World Bank, 2009, p.41). However, the study is limited
with its sample size. Moreover the data for the study was collected from annual reports for
the year 2006 (mostly) which was the launch year of the SEC Guidelines against which the
study measured compliance. Thus the data collection period raises question about whether the
findings actually reflect the response of companies against the SEC Guidelines.
A significant gap in the literature emerges from the above discussion on the corporate
against mandatory provisions, and some voluntary provisions in the case of social reporting,
untill now none of the studies has measured the extent to which companies of Bangladesh
are complying with the voluntary Code of Corporate Governance for Bangladesh (The Code,
2004). This Code is more comprehensive than the SEC Guidelines (World Bank, 2009)and,
as stated by the Code, the provisions of the Code are developed by incorporating the
international standards and local needs, which are theoretically ideal for ensuring good
companies towards for voluntary compliance arguing that regulators should provide the
fundamental framework for good governance but meaningfulgood governance can be ensured
in countries where the legal system is weak, when companies are stepping forward to ensure
compliance. That is why, as discussed in the earlier sections, both developed and developing
countries are increasingly paying attention to measure the level of compliance against
companies to be aware about their standard of corporate practices, allows policy makers to
take corrective decisions and most importantly allows the code to be revised and
57
accommodate the country specific needs. In such a vast literature, evidence from Bangladesh
is absent.
Understanding compliance standard against the voluntary Code is also important because of
the debate over the appropriateness of the Western model of governance in Bangladesh. A
recent study (Siddiqui, 2010) has considered investigating the corporate governance
environment of the country and using efficiency and institutional theoretical arguments, this
paper suggests that despite the infrastructural deficiencies, Bangladesh has adopted the
Anglo-American model of governance, which is ‘entirely not suitable’ for the country.
Reviewing the Bangladeshi corporate environment, Siddiqui (2010) also argued that the
(IFAs) such as the World Bank, the IMF and the Asian Development Bank (ADB) for
different development projects and the lack of self-regulation among the corporate
governance players in Bangladesh, has created scope for the IFAs to intervene in policy
making through private think tanks, and the reflection of the Anglo-American model of
The same arguments were canvassed in other areas of governance in Bangladesh too. For
instance, Mir and Rahaman (2005) investigated the IAS adoption process in Bangladesh.
With reference to DiMaggio and Powell’s (1983) arguments that conformity or isomorphism
is a function of external dependence, the paper argued that adoption of these Western
practices are questionable as it was not done out of efficiency reasons, rather it is the
excessive dependence of the government on the donor agencies that forced the country to
adopt donor agencies’ recommended standards. Thus very low compliance with those
58
standards has become inevitable for companies. Not only in these areas, scholars (e.g. Belal,
1999; Belal, 2001; 2004; Belal and Owen, 2007; Reaz-M. and Hossain, 2007) have also
worked on corporate social reporting system in Bangladesh and have concluded with the
same concern – the adoption of a standard based on the Western countries may not offer a
better future for a country like Bangladesh; and considering the presence of representatives of
banks and workers in companies in Bangladesh, Siddiqui (2010), Belal (2004; 2007) also
indicated that the stakeholder model of governance may be a better option to improve
Although, Siddiqui (2010) has worked on the impetus behind this Code adoption in
Bangladesh, he did not study the extent of compliance with the Code. By focusing on the
arguments of scholars(e.g. Branson, 2004; Clarke, 2007; Cohen and Boyd, 2000; Mallin,
2010; Monks and Minow, 2004; Tricker, 2000; Turnbull, 1997b; Wallace-P and Zinkin,
2005)of corporate governance that countries differ with their socio-economic challenges, the
present study argues that if other developing countries have found the Anglo-American
model inappropriate, nonetheless that does not provide enough grounds for Bangladesh to
accept or reject the model, unless it has its own evidence of non-compliance due to Code’s
inappropriateness.
Thus, it is important to look at the evidence to determine if the Code for Bangladesh, which
reflects the Anglo-American model but claims to have customized Code provisions according
to understand how far the Code has been accepted by the companies of Bangladesh. If non-
compliance is the case, then it is important to identify why and where companies are non-
compliant and how the Code should design its provisions to reach appropriateness according
59
to the corporate infrastructure of Bangladesh. Whilst critics of developing countries and even
from Bangladesh (e.g. Belal, 2004; Uddin and Choudhury, 2008) believe the stakeholder
model may better address the governance issues, it is imperative to identify the extent to
which the country is ready comply with the theoretical assumptions of the perceived best
model.
2.4 SUMMARY
This chapter has identified and discussed the theoretical framework of the study and
discussed previous literature to identify the research gap and the scope of contribution of the
present study. The overall discussion indicates that both of the agency theory and the
stakeholder theory have their own merits and criticisms in providing an understanding of
theories are adopted to construct the interview guidelines (as discussed in Chapter 5) and
chapter 7).
The discussion on the previous literature on code compliance helps in identifying the most
common method of measuring compliance, which is adopted in this study and discussed
further in detail in chapter 5. The overall discussion on the prior literature also suggests
developed countries are complying more than the developing countries with their particular
corporate governance codes. Some studies were quite extensive and identify reasons behind
60
the triangular debate 27 on the appropriateness of codes in developing economies is strong
enough to create confusion in deciding the best alternative for developing countries. The
situation is even more critical for Bangladesh because like many other developing countries
its future economic development is critically dependent on, among other things, the ability to
attract investment and increase capital funds. One of the major outcomes of such ability
would be to bring order in the capital market and an overall corporate structure which will be
effective enough to ensure a healthy growth of business and this is one of the major reasons
corporate governance features of developing countries is apparent, that is not enough for
rejecting this model in the case of Bangladesh. Whilst, earlier studies have criticized the
adoption of the Western model in the developing country structure finding evidence of non-
compliance, in the case of Bangladesh, no study has examined the evidence for non-
compliance with the Code of Corporate Governance Bangladesh (2004). Referring back to
the arguments of the scholars of corporate governance that codes should be measured
regularly and continually with an aim to identify where and how they does not match with
country specific needs, the present study argues that without evidence of such systematic
analysis, it would not be wise to reject a code only because other developing countries have
found similar codes as inappropriate. In addition, before accepting the stakeholder model, the
present study argues that a systematic evaluation of its feasibility in Bangladesh should also
27
i.e. shareholder model , stakeholder model or a new model of corporate governance.
61
problems in regards to stakeholder integration; issues relating to the lack of a yardstick for
judging corporate performance – to understand the extent the country is ready to adopt the
stakeholder paradigm; otherwise the consequence can be even more dangerous for the overall
economy.
It appears that most of the studies on code compliance have taken a static position in between
shareholder and stakeholder models of corporate governance as the most appropriate one.
However, the present study argues that for countries like Bangladesh which are already
overburdened with different socio-economic challenges, it may not be wise to wait passively
for an appropriate governance model and for structures to evolve and that switching to an
alternative model without proper investigation would not do any good either. Bangladesh
should think independently and feel free to decide which model best suits its existing needs.
Whilst a previous study (Siddiqui, 2010) has provided the platform by identifying an
isomorphic adoption of the Code that reflects the Western model, the present study intends to
find the evidence as to whether this perceived ‘inappropriate model’ is resulting in non-
led the scholars of Bangladesh (e.g. Belal, 2001; Belal, 2004; Mir and Rahaman, 2005; Uddin
and Choudhury, 2008) to claim that the stakeholder framework is the best possible alternative,
thorough investigation, the present study intends to investigate if Bangladesh is ready for
such major reformation. By addressing all of these unsolved issues the present study intends
to fill the gap in the literature on compliance in Bangladesh and aims to provide an answer to
the contentious debate on the appropriate model of governance for developing countries,
62
CHAPTER 3
63
Chapter 3
3.1 INTRODUCTION
Previous studies indicated that corporate governance practices are significantly influenced by
political, legal and other socio-economic factors and different actors (Chahine and Safieddine,
2011; Dartey-Baah and Amponsah-Tawiah, 2011; Demirguc-Kunt and Ross, 1996; La Porta et
al., 1997; Mallin, 2010; Silveira and Saito, 2009). Hence, this chapter provides an understanding
factors will also be helpful in understanding the empirical findings. Using a stakeholder
perspective, this chapter outlines the way that the corporate governance system has been
developing in Bangladesh and also identifies the actors and key institutions who have had an
Bangladesh is a unitary and sovereign republic known as the People’s Republic of Bangladesh. It
is located in the South-Asian region. On its south, there is the Bay of Bengal, the largest bay in
the world . One of the first trading ventures along the Bay of Bengal was the British East India
Company. In 1634, the Mughal emperor provided extended facilities to the English traders to the
region of Bengal, and in 1717 completely waived customs duties for the trade (Chaudhury, 1978).
64
However, even at present time many of the business of Bangladesh like the Chittagong28 Ship
Breaking Yard, which is world's second largest ship breaking yard, are based on this bay.
In 2012, the total population of Bangladesh is 161 million (approx.)29, making it one of the most
densely populated countries in the world. Around 75% of the total population reside in the rural
areas of Bangladesh. However, most of the business activities and corporate facilities (i.e.
communication infrastructure, commercial banking etc.) are concentrated on the major cities of
the country.
The educational system in Bangladesh is three-tiered: primary, secondary and tertiary30. There
are 73 universities in Bangladesh. Out of these, 21 universities are in the public sector, while the
other 52 are in the private sector. Although English is widely used both in writing and speaking
in institutions, 98% of the total population speaks in Bengali (Bangladesh Bureau of Statistics,
2008). However, in most cases the official papers, disclosures and other corporate information
are published both in Bengali and English these days. The education system in Bangladesh is
being managed and administered by two Ministries31 of government in association with a number
of autonomous bodies. Although the literacy rate is improving over time, it is still very low (see
Figure 3.1). However, the Government of Bangladesh emphasizes education as a top priority,
28
Chittagong is the second largest city of Bangladesh.
29
Source: World Bank. www.worldbank.org, accessed on 6 March 2012.
30
“Primary (from grades 1 to 5), Secondary (from grades 6 to 10), Higher Secondary (from grades 11 to
12) and tertiary. The five years of lower secondary education concludes with a Secondary School
Certificate (SSC) Examination. Students who pass this examination proceed to two years of Higher
Secondary or intermediate training, which culminate in a Higher Secondary Certificate (HSC)
Examination” www.wikipedia.org. accessed on 6 March 2012
31
Ministry of Education (MOE) and Ministry of Primary and Mass Education (MOPME)
65
whilst the donor agencies like the World Bank and Asian Development Bank (ADB) are also
supporting the country to improve its literacy rate to support its sustainable economic
development.
Culturally, Bangladesh is called a hierarchical society where people are respected because of
their age and position; family values are highly recognized. However, one prevalent culture of
the corporate sector is corruption (Mir and Rahaman, 2005). Studies indicate that “the main
reasons for such corruption are very low levels of income earned by government officers and the
existence of large foreign assisted development contracts” (Belal, 2001, p.277). In recent times,
as one of the most corrupt countries in the world. Whilst banks suffer from a loan default culture
(Reaz, 2006; Reaz and Arun, 2006), bribery has become a common phenomenon in almost every
sector (Islam, 2010; Transparency International, 2010). Belal (2004, p.87) opines that “in every
sphere of public life, whilst corrupt politicians and public officials act as an obstacle towards
running transparent and fair business, corporations also sometimes resort to unethical activities
66
for the short-term benefits of the owners”. The newspapers of the country frequently emphasize
this issue and urge the adoption of good governance to combat endemic corruption. Although the
The corporate governance structure of Bangladesh has evolved with the long history of the
country’s political evolution. Basically the governance system of Bangladesh took its first step
during the British colonial rule and since then kept on reforming. For almost 200 years (1757-
1947) Bangladesh was under British rule. The corporate governance infrastructure during that
period was characterized by poor industrialization with highly concentrated ownership and an
authoritarian management system. In addition to the legal system, the British rule led to some
practices which are dominant in the corporate culture even today. For instance, the prolonged
halting the development strong capital market (Farooque et al., 2007a). In August 1947, India
was granted independence within the British Commonwealth and was divided into the dominions
of India and Pakistan. Pakistan was further divided into East and West Pakistan. West Pakistan
comprised the area which is known as Pakistan today and East Pakistan was the area of today’s
Bangladesh. Strict state control was the salient feature of the period during the Pakistani rule
Bangladesh emerged from its war of independence in 1971 with extreme poverty, overpopulation,
and a ravaged corporate and socio-economic infrastructure. The government had to struggle with
a persistent shortage of foreign exchange reserve, inefficient public sector and poor governance.
67
In the next three decades following independence, it was not even possible for the government to
build capital market institutions or comfortably carry out institutional reform due to the chronic
shortage of natural resources and human capital (Ahluwalia and Mahmud, 2004; Devarajan, 2005;
World Bank, 2009). Hence, it was not surprising to find that the international community had its
doubt over the potential of the country and refer it as a ‘test case of development’ (Faaland and
Parkinson, 1976).
After independence, the government had the challenge of developing and diversifying its
structure which could be termed as the ‘Governance system of Bangladesh’ started taking shape
after its independence and in the last two decades in particular (e.g. Mir and Rahaman, 2005;
Salman, 2009;Siddiqui, 2010). In order to overcome the economic disaster, the Government
(since 1972) made some industrial reformation policies and also reviewed business and corporate
level strategies. The major policies were related to: i) privatization of poorly governed public
enterprises ii) encouraging public enterprises and foreign investors, while progressively
discouraging the growth of the public sector iii) improving the import regime, and introducing
investment and export incentives, (iv) improving the efficiency of public sector industrial
enterprises through financial restructuring and v) improvements in pricing policies (Palit, 2006).
Whilst the effort of government initiatives (along with the support of different national and
international associations) has been successful in changing the pessimistic opinion on the
possibilities for Bangladesh, and made it one of the fastest growing economies, constant political
instability seems to have posed a challenge to the country throughout its development.
Manipulation of political power, erratic policy reform, undue influence over company decisions
and an unpredictable business environment are some of the major consequences which seem to
68
be repeatedly cited by the studies on Bangladesh (Imam, 2010; Islam, 2010; Mahmud et al., 2008;
Mollah, 2010; Salman, 2009). They further criticized that transparency; accountability and
disclosure are some of the areas where less attention has been paid by the governments of
Bangladesh, even when they take decisions to improve the situation, those decisions are often
Historically, public enterprises were the mainstay of the Bangladesh economy (Sarker, 2011). In
the years following independence, the government followed a socialistic economic pattern where
most of the industrial units were nationalized32. Moreover, some major restrictions were imposed
on both domestic and foreign private investments by prohibiting foreign direct investment, large-
scale industrial ownership or even international joint ventures within the private sector (Ahmed,
2000; Bhaskar and Khan, 1995). However, due to corruption, political intervention, bureaucracy,
lack of management efficiency, over-staffing etc. these public sector units turned into loss-
making concerns (Belal, 2004; Farooque et al., 2007a). As a result of these failures and the
world-wide trend towards privatization, the successive governments in Bangladesh pursued the
However, some earlier studies (Belal, 2004; Bhaskar and Khan, 1995; Hossain and Ming-Yu,
2002) indicate that the industrial sector in Bangladesh remained highly unproductive and
32
To restore the war ravaged economy, the government took over the management of around 305 SOESs;
therefore the government ownership which was 34% in 1969-70 reached over 90% in 1972(Ahmed, 2000;
World Bank, 1994).
33
In 1977, the government “initiated liberal economic policies leading to some small companies being
returned to their owners” (Uddin and Hopper, 2003, p. 741)and since that time mostly till 1991 with the
influence of donor agencies the successive government adopted recommendations for promoting
privatization and withdrawing restriction on foreign investment(Mir and Rahaman, 2005; Uddin and
Hopper, 2003).
69
inefficient. Thus, in recent years, more emphasis has been placed on export oriented industrial
development led by the private sector. To attract local and foreign investment successive
governments have been taking some major initiatives such as adopting rapid industrialization as a
key strategy for achieving faster economic development (Belal and Owen, 2007); strengthening
the Stock Exchange and then establishing a Securities and Exchange Commission (SEC) for
developing private sector capital and controlling it; offering several incentives (such as fiscal
incentives, the establishment of special industrial zones aimed at foreign investors and the
provision of very cheap labor) for encouraging more investment and so on (Belal, 2004; Khan-M
and Belal, 1999; Sarker, 2011). The result is well evident in the recent economic performance.
From 1994 until 2010, Bangladesh's average quarterly GDP growth was 5.47%. In the Financial
Year 2010-11 the GDP reached up to 6.07% (see Figure 3.2 and Table 3.1).
70
Table 3.1 GDP and GNI at Constant Price. (Base:1995-96)
The ADB reported that if this pace continues , the GDP of Bangladesh will rise further and reach
up to 7% in Financial Year 2011-12 (ADB, 2009). One major stimulus behind the recent
economic growth is the increasing contribution of the industrial sector. Belal and Owen (2007)
reported that private sector led export oriented industrial development is reflected in the increase
of export earnings from $1994 million in 1991-92 to $ 8655 million in 2004-05, recent data
indicates it has reached $23.86 Billion (see Table 3.2) in 2011. Thus, in 2010, the World Trade
Organization has declared Bangladesh as the third largest garments exporter in the world34.
34
For further details, see www.wto.org
71
Moreover, the low labor cost and government undertakings to pursue market economic policies
in the country have attracted huge foreign investment since 1980 35. Corporate governance issues
thus have become prominent in Bangladesh in recent times as its domestic economy integrates
with the global economy, and firms are under pressure to maintain international competitiveness.
Some progress have also been made in some other areas of economic indicators including
Bangladesh with other developing countries, Table 3.2 highlights some of these key indicators.
Nevertheless, studies (Bhaskar and Khan, 1995; Rahman et al., 2008; Salman, 2009; Sarker,
2011) indicate that a sustained and balanced economic growth can still be achieved by effectively
utilizing the FDI; taking initiatives to attract more investment; raising domestic-savings,
generating employment and ensuring higher standard technology. The studies stress that the
country should pay attention to the infrastructural weaknesses, political and socio-economic
Whilst this improvement is overwhelming, studies have criticized the quality of this growth
(Bayes, 2001; 2010; Hossain et al., 1994; Rahman et al., 2008). They argued that the GDP
growth rate is still pale compared to the growth rate of most of its neighbouring countries (see
Table 3.2). Moreover, the critics argued that economic growth that reduces poverty faster,
produces less inequality and absorbs surplus labor to an acceptable level is considered to be a
35
A report recently published by The United Nations Conference on Trade and Development shows that
although “FDI to South Asia declined due to recession, inflows to Bangladesh increased by nearly 30% to
$913 million” http://www.unctad.org
72
Table 3.2 Some Socio-Economic Indicators
Although, the country has reduced its level of poverty, its effectiveness could be much higher
than realized; and the benefit of economic growth has bypassed the major portion of the
population (Bayes, 2001; 2010;Sarker, 2011). Furthermore, the critics stress that the country
would need a much higher GDP (approx.8.89% per year) which sustain for a long period of time
to take its unemployment rate to a desirable level. In order to do so, as they argue, Bangladesh
73
should have guided its employment structure towards the manufacturing sector more instead of
its existing transformation from the agricultural sector to the service sector.
Stock Companies and Firms (RJSC), Bangladesh Bank, the SEC, the Stock Exchanges and the
ICAB. In addition there are some other key institutions which are actively involved in developing
corporate governance regulations in the country. This section of the study briefly discusses these
regulators and institutions which are developing the corporate governance framework for
Bangladesh.
RJSC is responsible for registering companies under the Companies Act 1994. It is administered
by the Ministry of Commerce. The Companies Act 1994 empowers the Company Registrar in
relation to company formation, filing of statutory returns and authority to call for information and
explanation. However, lack of computerization has been identified as one of the major drawbacks
of the RJSC in Bangladesh. Even today, company records are kept manually which hinders the
timely presentation of information which should be available for inspection by members and
Bangladesh Bank (BB), is the Central Bank of Bangladesh, and was created in 1972 under the
Bangladesh Bank Order. BB is the primary regulator of banks and non-banking financial
Along with the power to regulate commercial banks and banking institutions, BB has been
entrusted with all the traditional central banking functions including the sole responsibility of
74
issuing currency, keeping the reserves, formulating and managing the monetary policy and
regulating the credit system of Bangladesh. BB operates with the overriding aim to stabilize the
domestic and external monetary value of Bangladesh. Recently, BB has reformed many of its
policies for improving governance standards in the financial market; such as i) provisions
regarding independent director in the Bank Company Act 1991 ii) provision regarding the audit
The Stock Exchanges are important players in shaping corporate governance framework in
Bangladesh. The country has two stock exchanges: Dhaka Stock Exchange (DSE); and
Chittagong Stock Exchange (CSE). DSE is registered as a Public Limited Company and its
activities are regulated by its Articles of Association, along with the Securities and Exchange
Ordinance 1969, Companies Act 1994 and Securities & Exchange Commission Act 1993. As a
legal entity the CSE is a not-for-profit public limited company. All of CSE’s members (129 in
2010) are corporate bodies. It has a separate secretariat independent of the policymaking board.
The board comprises brokers and non-broker directors in equal proportion to ensure transparency.
There is an independent secretariat headed by a full time CEO. CSE activities are primarily
For ensuring transparency and rapid transactions, in 1998, being financed by the ADB,DSE
introduced an automated trading system similar to the Western countries, and in 2004, launched
the Central Depository System for electronic settlement of share trading. Currently both of the
stock exchanges use computerized automated trading systems. Each Stock Exchange establishes
listed companies in compliance with legal regulatory provisions, but need to have their operating
75
Security Exchange Commission (SEC) of Bangladesh is the primary government regulator in the
Bangladesh corporate governance scenario (Siddiqui, 2010). Funded by donor agencies, the SEC,
was established in 1993 as an autonomous body. The Chairman and members of the SEC are
appointed by the Government and it is attached to the Ministry of Finance. Soon after its
establishment, the SEC went through some turmoil. Between July and mid-November 1996, both
Dhaka and Chittagong Stock Exchanges experienced an unprecedented boom. During this period,
investments in the capital market. Then the bubble burst and the index went down from 3648
points to 486 points (Siddiqui, 2010). Analysts indicate the crash was primarily caused by weak
regulations, failure of a number of regulatory institutions along with the SEC; and poor
fraudulent activities. Following the scam, the SEC received huge criticism for its passive reaction
to such market scandals and for not using their regulatory power to take strict actions against
such market misbehaviour/malpractices (Ahmad, 2007; Akhtaruddin, 2005; Bepari and Mollik,
This incident kept investors away from the stock market for years. Later the Government
undertook different initiatives to revive investors’ confidence37. In 1999, with the funding and
technical assistance of ADB, SEC was further strengthened by restructuring its operating
36
“According to the official record the average daily turnover increased by over 1000%. There were about
192 securities listed with both the stock exchanges at that time; price index at Dhaka Stock Exchange
increased by 281% and at Chittagong Stock Exchange increased by 258%” (Afroz, 2006).
37
For instance, “The SEC went through a number of major changes: it was entrusted as the final rule-
making authority for capital markets; its organogram was revised to incorporate two new members;
considerable staff was recruited; and a new investors’ education programme was introduced” (Siddiqui,
2010, p. 267).
76
activities. Under the project, several training, workshops were organized to make the members
efficient enough to develop a healthy capital market, and sound corporate governance practices
(Siddiqui, 2010). In 2006, following the recommendation of donor agencies the SEC has issued
Guidelines”) on a “comply or explain” basis (Details of these provisions are discussed in Chapter
4 of this study). Publicly listed companies are supposed to comply with the provisions or explain
accountancy body in Bangladesh that certifies chartered accountants (CA)38. ICAB regulates the
accountancy profession and oversees professional ethics and codes of conduct of its members,
provides specialized training and professional expertise, holds the right to take disciplinary action
against its members for violation of regulation. Studies (e.g. Karim and Moizer, 1996; Mir and
Rahaman, 2005; Siddiqui, 2010) indicate so far that the Institute has failed to discipline its
members even when SEC fined some audit firms on charges of concealment. Such failures have
perceived to be inviting the donor agencies to intervene in its activities and regulating the audit
environment. In 1999, being funded by World Bank, ICAB took initiatives to develop audit
(IAS) and International Standards on Auditing (ISA), it developed the Bangladesh Accounting
Standards (BAS) and Bangladesh Standards for Auditing (BSA) respectively (World Bank,
2009). The Financial Reporting Standards prescribed by the ICAB are known as Bangladesh
Financial Reporting Standards (BFRS) which is originally based on IAS. However, in more
38
ICAB was created under the Bangladesh Chartered Accountants Order in 1973.
77
recent times39, the ICAB has adopted the updated BFRS. The new BFRS is now modelled on
IAS and International Financial Reporting Standards (IFRS) issued by the International
professional body under the Ministry of Commerce of Bangladesh and offers professional
qualification in Cost and Management Accountancy, with a focus on accounting for business.
Other than these established regulatory bodies and institutions, Bangladesh Enterprise Institute
(BEI) a donor-funded private think-tank has emerged which is actively involved in shaping the
non-political research centre. Its Board of Governors includes business personalities, political
members and bureaucrats. BEI provides training to directors of companies, conducts dialogue
with policy-makers and different stakeholder groups. Being initiated by donor agencies, in 2004
BEI has made a remarkable step in corporate governance by developing the voluntary Code of
Corporate Governance for Bangladesh (2004)41, which is the only voluntary code for Bangladesh
and more comprehensive than the corporate governance guidelines which were introduced by the
SEC of Bangladesh (SEC Guidelines). The details of these corporate governance provisions are
39
In July, 2012
40
The SEC of Bangladesh requires companies to comply with the BFRS, however they are not mandatory
or enforceable through the ICAB laws.
41
The international donors that assisted in organizing the Taskforce on Corporate Governance and
supported the development of the Code for Bangladesh: namely, the Department for International
Development (DFID), the Commonwealth Secretariat and the Global Corporate Governance Forum
(GCGF).
78
provided in Chapter 4 of this study. In addition, the country has also some credit rating agencies
since 2002 which aims to contribute towards qualitative development of the money and capital
The discussion above suggests that in Bangladesh actors of corporate governance are directly or
indirectly influenced by two prime bodies – the government and the international donor agencies
(namely, World Bank and DFID). As indicated in Figure 3.3, the Government of Bangladesh
exerts its influence through the Ministry of Finance, BB, and SEC; whilst donor agencies are
intervening through two sources: regulatory bodies and private think-tanks. These direct
influences over the actors are indicated in the Figure with the arrow lines whilst the dotted line
79
3.4 THE CORPORATE STRUCTURE OF BANGLADESH
To understand the nature of corporate governance in Bangladesh, this section analyses the basic
Bangladesh is a common law country. The legal system of Bangladesh has not grown overnight;
rather the present legal and judicial system has its foundation mainly to 200 years of British rule
(Panday and Mollah, 2011). In describing the evolution of the judicial system in Bangladesh
Panday and Mollah (2011, p.6) stated that it has “passed through various stages and the process
of evolution has been partly indigenous and partly foreign and the legal system of the present day
emanates from a mixed system which has structure, legal principles and concepts modelled on
both Indo-Mughal and English law”. However the legal system of Bangladesh is different to the
absolute form of English law from the perspectives of socio-cultural values and religious
guidelines. The companies are governed by the Companies Act 1994 which is based on the
British Companies Act 1844. All domestic companies of Bangladesh are incorporated under this
Act. It governs the relationship between shareholders and a company, audit system, transparency,
disclosure procedure and the jurisdiction of the courts in relation to companies (BEI, 2004).
In addition, there are some other principle laws influencing the corporate governance system of
Bangladesh. For instance, the Securities and Exchange Ordinance 1969 deals with investors’
protection, capital issues, registration and regulation of the Stock Exchange, capital market
regulation and issues in relation to securities; the Securities and Exchange Commission Act
1993 provides for the establishment of the Securities and Exchange Commission; the Bangladesh
Bank Order 1972 for regulating the Central Bank of Bangladesh; the Financial Institutions Act
80
1993 establishes the provisions for Non Banking Financial Institutions42; Income Tax Ordinance
1984 contains provision for disclosure, audit, penalties for contravention of fiscal and revenue
matters; Bankruptcy Act 1997 deals with the insolvency issues; Factories Act 1965, Industrial
Relations Ordinance 1969, Employment of Labor (Standing Orders) Act 1965 etc. deals with the
A recent study on the judicial system of Bangladesh (Panday and Mollah, 2011) reports that the
country has a well-organized court system in which is the replica of the system introduced by
British rulers. However, finding that the executive branch of Government exerts an influence
over the judiciary, the paper concluded with questioning the independence of the judiciary
A few researches have been conducted in analyzing the ownership structure in relation to
corporate governance taking the case of Bangladesh (e.g. Farooque et al., 2007a; 2007b; Imam
and Malik, 2007)which find that family control and the prevalence of kinship in the ownership
structure is one of the predominant features of Bangladesh. Farooque et al. (2007a) claim that the
ownership structure has evolved as a dominant mechanism of governance because under the
Companies Act 1994, a maximum of 50% of the total issued share capital can be retained by
sponsor directors while going public; and Imam and Malik (2007) find that on an average 32% of
42
"‘Financial Institution’ means such non-banking financial institutions, which- i) provide loans and
advances for industries, commerce, agriculture or building construction; ii) carry out the business of
underwriting, receiving, investing and reinvesting shares, stocks, bonds, debentures issued by the
Government or any statutory organization or stocks or securities or other marketable securities; or iii)
carry out instalment transactions including the lease of machinery and equipment; or iv) finance venture
capital; and shall include merchant banks, investment companies, mutual associations, mutual companies,
leasing companies or building societies”(Financial Institutions Act 1993, 27, 2 (b) ).
81
the shares of the listed companies are held by the top three shareholders, whilst Farooque, et. al.,
(2007a; 2007b) and Siddiqui (2010)find that in most of the companies the Chairman also acts as
a CEO (except for Financial Institutions) or has the CEO and the Chairman are from controlling
family members. These controlling board members exercise extensive influence on the board
decision making process and customize the governance mechanism according to their own
needs(ADB, 2009). Even at the present time, the majority of companies in Bangladesh are
closely held small and medium-sized firms where corporate boards are solely owner driven
(Siddiqui, 2010).
In general corporate boards in Bangladesh are one-tired without the use of any supervisory board
(Rashid et al., 2010). In fact the Bangladesh Bank, the Code of Corporate Governance for
Bangladesh, and the SEC Guidelines for Corporate Governance all of these corporate governance
regulations suggest that the corporate board in Bangladesh should be one-tired where the
directors should be elected by shareholders (Siddiqui, 2010). In studying the board structure of
Bangladesh Rashid et al., (2010)also reported that both executive and non-executive directors in
Bangladesh perform duties together in one organizational layer and CEO duality exists in some
After the liberation war in 1971, stock trading was suspended for five years which restarted in
1976 with nine listed companies with a total paid up capital of Taka 0.138 billion (Khan, 1992).
Bepari and Mollik (2008), studied the stock market growth pattern of Bangladesh for the time
period from 1990-91 to 2006-07. Using market capitalization and number of listed companies for
understanding the growth pattern of stock market of Bangladesh they found that market
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capitalization 43 ratio increased from 1.4 % in 1990-91 to 10.2 % in 2005-06 with a sudden
increase to 29.0 % in 2006-07. It is assumed that, the monetary policy taken by Bangladesh Bank
during 2005 to control pressures of inflation and to facilitate stability in the foreign exchange
market has a contribution to this sudden growth (Barua and Rahman, 2008). Total market
capitalization reached to Tk. 1366.53 billion in 2006-07 from Tk. 11.485 billion in 1990-91.
Furthermore, this growth has accelerated in recent time. The year 2009 is considered as another
milestone (after the stock market crash in 1996) in the history of Bangladesh's capital market as
both institutional and individual investors injected huge funds into the market which helped the
This growth pattern of capital market was also accompanied by some evidence of defaulters.
Companies like Oriental Bank, Modern Food Products Limited and SABINCO were accused by
the regulators to have some gross deficiencies in their daily business which turned into massive
governance failures. For instance, at the end of 2002 a series of allegations was raised against the
Oriental Bank including perpetuating poor lending practice, loan sanction without risk analysis,
and non-existence of credit analysis of the borrower. Later, in June 2006 the Bangladesh Bank
(BB) dissolved Oriental Bank's board of directors and took over its full control and appointed a
BB executive director as the bank's administrator (Rahman, 2008). The governance failure in
Modern Food Products Limited was related to the inability of the regulatory authorities to fully
verify and confirm disclosures provided in the prospectus (Sobhan et al., 2003)44. Later the SEC
withheld the approval and asked the company to pay back the pre-IPO money to the investors.
43
“Market capitalization ratio equals the value of listed shares divided by GDP. Analysts frequently use
the ratio as a measure of stock market size”( Bepari and Mollik, 2008).
“Modern Food Products Limited is a herbal food producer which invited public subscription for BDT 30
44
million with SEC approval. It was not noticed by any regulatory authority until a non-bank financial
83
Nonetheless, in 2011, the capital market further collapsed and the country saw the biggest share
market turmoil ever, and the impact was severe on the small investors ( Ahsan, 2011; Byron and
Rahman, 2011b). Following this capital market crash, the Government formed a committee to
investigate the reason behind the crash. The committee found evidence of manipulation in both
primary and secondary markets like the earlier scam in 1996 but this time to a greater extent.
Parliament, businessmen and stock exchange officials were found to be involved in manipulating
the market. However, the committee held the SEC responsible for this crisis, because as a
regulator it was SEC’s responsibility to examine these kinds of wrong doing, non-transparency
and immoral activities (Byron, 2011c; Byron and Rahman, 2011a; 2011b). SEC has promised to
take action against the defaulters. It has opened a unit in 2011 which is dedicated to monitoring
corporate governance and has suspended some regulatory members involved in the scam.
In order to help investors to know the qualities of securities before making investment decision,
the SEC classifies its listed companies based on their governance practices and level of dividends
paid to shareholders. It groups the companies according to ‘A’ ‘B’ ‘G’ ‘N’ or ‘Z’ categories. “‘A
Companies’ are the companies which regularly hold their annual meetings of shareholders and
have declared dividend at the rate of at least 10 percent in the previous year; ‘B companies’ are
the companies which have also regularly hold their annual meeting but have declared dividends
of less than 10 percent; Companies which neither hold annual meeting nor declare dividends are
called ‘Z companies’”(World Bank, 2009, p1). The N category is for all other companies which
institution came up with a claim of default on a loan of over BDT 10 million due from the company”
(Sobhan et al., 2003, p.37)
84
are not new as a company but newly enlisted, and ‘G’ represents Greenfield companies, i.e., the
companies which are not only newly listed but also newly launched in the market. However, the
DSE list shows that there are no G companies listed on the DSE or CSE at present.
Table 3.3 indicates that in 2010 a total of 436 securities were listed on the DSE comprising 229
companies, 35 mutual funds, 8 debentures and 164 treasury bonds. Table 3.4 indicates both the
number of listing entities and market capitalization show an upward trend until 2011. Thus the
stock market analysts of Bangladesh have urged for establishing governance and to increase the
85
Table 3.4 Market Capitalization and Annual Growth Rate of DSE
For the purpose of analysis of this study all the industrial sectors have been classified into two
major groups – financial institutions (FIs) and non-financial institutions (NFIs). FIs are classified
further into two groups- banking, non-banking financial institutions (NBFIs). Figure 3.4 suggests
that among the listed companies, NFI represents 31% and the NBFIs are the second highest (15%)
position.
Figure 3.4 Size of Different Industry Groups of the Capital Market of Bangladesh
86
The banking sector of Bangladesh is characterized by the presence of a large number of
commercial banks (Siddiqui, 2010; Sobhan et al., 2003). In the absence of a strong capital market,
banks and NBFIs have been the major financer of commercial activities in Bangladesh. As
indicated in Table 3.5, this sector is composed of four nationalized commercial banks, twenty-
nine private domestic banks, nine foreign banks, and four government-owned specialized banks
(see Table 3.5). As of 2010, out of these 46 banks, 30 are listed on DSE. The Table also suggest
that amongst these 30 listed banks, 29 are private local banks and 1 belongs to the nationalized
commercial banks. Although the foreign banks remain active primarily in international
transactions relating to foreign trade, none of them are listed. While comparing the growth of the
number of banking sector, Siddiqui (2010) states that the recent deregulation in the banking
sector has encouraged a significant growth in the number of private banks in Bangladesh and this
87
The banks play an important role in the economic development of the country. In the year 2007-
2008 the GDP of FIs was Tk. 55, 960 million, of which banks contributed 75% of it. However
studies (e.g. Habib-Uz-Zaman, 2010; Haque, 2007; Reaz, 2006;Siddiqui and Podder, 2002)
indicate a loan default culture is the major challenge for the banking sector of Bangladesh 45. In
addition, lack of information, moral hazard, political influence, and lack of legal action against
defaulters; most importantly Government’s practice of debt forgiveness has been identified as
some of the major reasons for non-payment of debt in Bangladesh (Siddiqui, 2010).
Nevertheless, in recent years, Bangladesh Bank has already taken a number of steps particularly
to promote good governance in the banking sector. For example, it has introduced Lending Risk
Analysis (LRA) and established the Credit Information Bureau (CIB) which centralizes
decisions by the banks. Apart from these, some other major reforms are on their way to be
implemented to ensure bank performance competitiveness. Since 2001, banks have been
required to comply with the International Accounting Standard 30 (IAS-30) (Hossain and Baser,
2011)46
45
“The total default loan rate of all banks was 33.49% (of total loans) in 1997, 40.65% in 1998, 41.11% in
1999 and 34.92% in 2000. Recently, the non-performing loan came down to 17% in 2004 (Siddiqui, 2010,
p. 259). According to Bangladesh Bureau of Statistics (2010): “A lack of accountability created incentives
for borrowers to default willingly, which led to a culture of loan default as big borrowers treated bank
loans as a windfall. As a result during the 1980s and early 1990s, the nationalized banks had to be
recapitalized by the government a number of times to keep them operationally solvent. Because the
nationalized banks are not subject to competitive pressure or hard-budget constraints, they keep the loan
rate of interest high, intending to recover some of the losses caused by the huge "privileged" loans. The
indifferent attitude of depositors (and the government) has kept otherwise insolvent banks liquid, but at
the cost of financial efficiency” www.bbs.gov.bd (accessed 25 June, 2011).
46
IAS 30 is the disclosures requirements for banks and similar financial institutions.
88
The NBFIs are governed by the Financial Act 1993. NBFIs are primarily classified in two groups
– insurance and leasing. As of 2010, there are 44 insurance companies and 21 leasing companies
listed on DSE. Many of the leasing companies of Bangladesh have diversified into other
business operations. For instance: providing loans and advances, underwriting or acquisition
business or the investment and re-investment in shares, stocks, bonds, debentures or debenture
All companies registered in Bangladesh are statutorily required 47 to be audited every year by a
chartered accountant. At present four local audit firms are affiliates of Big4 auditors (see Table
3.6) although none of these international Big4 has an office in Bangladesh. Studies indicate the
audit market in Bangladesh is small and intensely competitive (e.g. Habib and Islam, 2007; Imam
et al., 2001; Kabir et al., 2011; Karim and Moizer, 1996; Siddiqui and Podder, 2002). The
demand for audit work has grown quickly in Bangladesh due to privatization and the emergence
of Ready Made Garments (RMG) sector since 1975. Moreover the huge number of NGOs which
also require to be audited provided the momentum for the increasing demand of audit services in
Bangladesh. However, Karim and Moizer (1996) and more recently Kabir et al. (2011) opines
that companies enjoy strong bargaining power over the appointment of an auditor, thus audit
firms are seen as being subservient to the wishes of company management; whereas Habib and
Islam (2007) indicate one of the biggest challenges of audit environment is its poor audit fees
which is even lower than many of its neighbouring countries. In absence of strong legal system,
For instancethe Companies Act 1994, the Income Tax Act 1922, The Insurance Act 1938, the Securities
47
and Exchange Rules 1987 – requires companies of Bangladesh to be audited by chartered accountants
(Karim and Moizer, 1996).
89
the audit firms of Bangladesh are thus more exposed to the threat of lack of ethics (Kabir et al.,
2011).
Minority shareholders’ rights are largely ignored in Bangladesh and they do not have sufficient
rights over related party transactions, the choice of board members or disclosure of control (BEI,
2003; Farooque et al., 2007; The World Bank, 2009). Besides, the predominance of family
ownership structure rarely allows the NEDs (if any) to safeguard the interests of minority
shareholders (Asian Development Bank, 2000). While researchers (i.e. Fama and Jenson, 1983;
Grossman and Hart. 1980; Sheilfer and Vishney, 1997) are aware of this kind of phenomenon
because they opine that ignorance of shareholders’ rights leads to conflict between dominant and
minority shareholders, Oman et al (2003) raise concerns finding that the key potential conflict of
However, the basic rights of the shareholders are protected by law in Bangladesh. They can elect
and remove directors and can demand a variety of information and have a right to participate in
shareholders meetings either in person or by proxy(Sobhan et al., 2003; World Bank, 2009).
Most importantly, companies need to ask for shareholders’ approval before making any changes
to the company’s articles, dividends and in some major transactions. Nevertheless, these rights
90
are not practiced by them, partly because of their lack of awareness and concern about their
rights.
In addition to these problems, World Bank (2009) reports some other deficiencies in shareholders’
3.5 SUMMARY
This chapter has outlined the corporate governance framework in Bangladesh from a stakeholder
market, and some other infrastructural factors and key players influencing the development of the
existing framework. From the overall discussion, Figure 3.5 highlights the key landmarks and
suggests that the existing framework of governance has been developing through the influences
However in many instances the Government’s initiatives were not successful, and scholars like
Siddiqui (2010) argue that such failure has created scope for international lending agencies to
intervene (through Government, Bangladesh Bank and recently through private think-tanks,
standard.
Although the economy has made impressive growth, its quality has been questioned. The
discussion above suggests that Bangladesh needs sustainable economic growth and to promote
agenda for the survival of the country. Issues such as kinship, corruption, weak infrastructure,
91
political instability amongst others challenge its sustainable economic growth. Most importantly
the discussion above supports previous studies (e.g. Mir and Rahaman, 2005; Siddiqui, 2010) and
indicates that although the legal and regulatory bodies are theoretically independent, due to their
To facilitate understanding, Figure 3.5 indicates the key landmarks of the corporate governance
framework in Bangladesh. It suggests that some major initiatives have been taken to reform the
corporate governance structure since the last two decades. However, a further collapse of the
capital market in 2011 certainly raised concerns and indicates some flaws still remain in the
existing policies and infrastructural setting. These issues were considered while developing the
interview guideline (as discussed in chapter 5) to investigate on the remaining challenges, reflect
on the quality of existing reform initiatives and effectiveness of the key players of corporate
framework of Bangladesh. Whilst chapter 2 has identified the theoretical assumptions for the
effectiveness of shareholder and stakeholder model of governance, the findings of this chapter
by its political and socio-economic factors; suggesting that these factors should be considered for
successful implementation of any good governance initiatives. Thus the overall findings of this
chapter have been largely used in Chapter 7 and 8 for analyzing and understanding the corporate
environment in Bangladesh in general and its ability to comply with an international standard of
92
Figure 3.5 Key Landmarks of the Corporate Governance Framework in Bangladesh
93
CHAPTER 4
94
Chapter 4
4.1 INTRODUCTION
The Code of Corporate Governance for Bangladesh (hereafter “the Code”) is the focus
point of the present study. The research is about understanding the level of acceptance of
the Code and its appropriateness for the Bangladeshi corporate structure. Whilst the
earlier chapter outlined the corporate framework in Bangladesh, this chapter discusses the
basic features and contents of the Code. The discussion begins by identifying the
formulators and basic features of the Code which is then followed by a comparative
analysis to identify the extent to which the Code varies with international standards, local
The Code is the only voluntary code of corporate governance in Bangladesh which was
organization in 2004. To prepare the Code, the BEI and the donor agencies 48 jointly
assisted the Taskforce in drafting the Code. This Working Group was chaired by the
48
Donor agencies, namely, “the Department for International Development (DFID), the
Commonwealth Secretariat and the Global Corporate Governance Forum (GCGF)” (BEI,
2004, p.3)
95
President of BEI (a former Foreign Secretary and Ambassador, and past Executive
Table 4.1 indicates that the formulators of the Code have been selected from diverse
sectors of Bangladesh and not limited only to corporate sectors. Although questions have
been raised about the composition of the taskforce on Corporate Governance for
including members from the Bangladesh government and bureaucrats (Siddiqui, 2010),
the above data suggests that only 14% of the taskforce are being represented by the
government bodies. FIs represent the maximum number (23%) followed by the corporate
96
sector which represents 20% of the total members 49 . One important aspect of the
(11%) were also been included from academia, whilst communication and media which
only 9% whilst legal entities are far more less than this (only 3%). 11% of the total
members are dignitaries in society who are well-known individuals in their respective
In addition, within the professional bodies which represent 6% of the total composition of
the Taskforce are included members from the Foreign Investors’ Chamber of Commerce
and the Institute of Chartered Secretaries and Managers of Bangladesh. By and large, the
composition of the formulators indicates that attempt has been taken by the Taskforce to
incorporate knowledge and expertise from different segments of the country which is
The Code states that its primary function “is to improve the general quality of corporate
provisions are formulated by combining the indigenous needs of Bangladesh and the
49
Taskforce members from FIs and corporate sectors represent companies from SOEs, public, private
MNC, and service companies.
97
governance50. It states that the combination has been done to define corporate governance
practices for Bangladesh by combining the local purposes and international standards,
and thus, according to the Code, on full compliance, companies in Bangladesh will have
To achieve these objectives, the Code documented the recommended principles and
describes guidelines to implement it. However, since development, the Code has not been
revised and no panel was formed for discussing the applicability of the Code in
Bangladeshi context.
The Code content is extensive and covers a wide range of recommendations. Hence, for
ease of analysis, following the organization of the Code, its entire contents have been
divided into three groups – Group1: Code of Corporate Governance; Group 2: Basic
50
“Other international Codes and Principles of Corporate Governance which have been consulted
are: the Combined Code (2003) of UK, the OECD Corporate Governance Principles, the
Commonwealth Association for Corporate Governance Guidelines, the King Report (South
Africa), the Sri Lanka Central Bank Code, the CII Code of Desirable Corporate Governance
India, the Pakistan Code of Corporate Governance, the Myners Report (UK), the Malaysian Code
of Corporate Governance; and a variety of institutional investors code from United States” (BEI,
2004, p.7)
98
checklist for implementation; and finally Group 3: the NGO (Non-Government
As shown in Figure 4.1, Group 1 includes the ‘code of corporate governance’ which is
the most significant section of the Code as it contains almost all of the recommended
provisions. The recommendations included here are further divided into four sections- 1)
Board Issues –recommends different provisions for the Board of Directors; 2) Role of
recommends provisions relating to financial reporting disclosure and audit issues; and
99
finally, 4) some sector specific provisions – namely FIs, State Owned Enterprises (SOEs)
and other entities. Code provisions included in sections 1 to 3 (‘General Code Provisions’
see Figure 4.1) are generally applicable for all types of companies, whilst the provisions
Group 2 of the Code outlines the basic checklist for implementation. For facilitating the
directors, employees, shareholders, financial institutions and so on. Then in Group 3, the
However, the present study is concerned with the provisions which are generally
applicable for all companies (i.e. the provisions included in section 1, 2 and 3 of Group 1,
see Figure 4.1). The sector specific code provisions (‘section 4 of Group 1 in Figure 4.1)
and NGO principles have been excluded from the comparison because the nature of the
against the provisions which are generally applicable for all types of companies.
The Code has some salient features that make it different from many other codes of
corporate governance in the world. For instance, the Code not only describes the
Principles but also recommends the process through which better governance practices
can be progressively implemented. Each section of the Code is thus organized into both
Principles and Guidelines. The Principles explain the underlying value of corporate
governance practices, whilst the Guidelines suggest specific methods for application.
100
The Basic Checklist for Implementation (as identified in Group 2 in Figure 4.1) is
another important feature of the Code. The Code has summarized the general Code
Provisions and the sector specific Code Provisions into a checklist format which makes it
convenient to understand at a glance where the company needs to comply in the initial
stage or to understand which Code provisions are regarded as essential for complying
The sector-specific code provisions as identified by the Code (Group 1.4 of Figure 2.4 of
this study) are another important initiative in the Code. Moreover, it has provided an
example for the Shareholders’ Handbook which they believe will help companies to
ensure shareholders’ rights; and also an example for the annual reports which can serve
as a checklist of disclosure.
This section of the study intends to extend the understanding of the Code by placing its
contents in a comparative matrix. To do so, focus has been placed on three main areas-
the extent the Code meets international recommendations (thus it has been compared
against the OECD Principles of Corporate Governance 2004); the extent it varies with the
find an answer to the earlier arguments that Bangladesh is lagging behind its neighbors in
corporate governance initiatives, the Code contents have been compared against the
provisions of the Indian and Pakistani51 Codes with the aim of identifying countries with
51
Among other South Asian countries, India and Pakistan have been chosen because they have many
similarities from socio-economic, cultural and political perspectives (see chapter 3).
101
similar socio-economic conditions and how they have designed their code contents and
As an international benchmark for good governance the OECD Principles 2004 require
objective judgment; boards must declare who they consider to be independent and
The role of chief executive and chairman should be separated in order to strengthen
increase accountability.
Codes of conduct or codes of behavior should be developed for the board in order
to make the objectives of the board clear and operational; this is particularly
company.
Restrictions on the number of board positions that can be held by individual board
52
The first Code for India was issued in 1998, but very recently they have issued their second voluntary
code named ‘Corporate Governance Voluntary Guidelines- 2009 52 ’ (hereafter the Indian Code. Unlike
India, Pakistan has no voluntary guidelines on corporate governance; rather they have a mandatory
guideline named ‘Code of Corporate Governance52’ (hereafter the Pakistani Code), which was issued in
2002 after the necessary revision on the first draft and this has been considered for comparison.
102
effectively to their responsibilities; number of board meetings attended by each
should include the self-assessment by the board of their performance as well as the
performance of the CEO/Chairman; this should also be a part of the disclosure issue.
In order to support the roles and responsibilities of the chairman or the lead director,
Companies must engage in board training to meet the needs of the individual
keep them updated with the new developments in the broader corporate world; both
Board members including the NEDs must get and have access to relevant
Table 4.2 indicates that in the case of Bangladeshi regulations, the Code is more
responsive to the international requirements than the SEC Guidelines. Out of 8 OECD
recommended board related provisions, the BEI code has addressed all, but the SEC
corporate governance system the Code recommends that boards should be accountable to
its shareholders and stakeholders; however it should always ensure that the actions are
103
The Code and the SEC Guidelines both have identified the appropriate size of the
board 53 and recommend to include different competence (as required) and to ensure
effective board decisions and better transparency, emphasizes the need of including
NEDs in the board. However, As the table 4.2 indicates the Code gives more emphasis to
NEDs over independent directors 54 claiming that, the country is not ready to offer
Independent Director, the Indian Code has included some additional provisions (for
example, their appointment, attributes, tenure and so on). All of the Codes included in the
table also recommend separation between the roles of CEO and Chairman.
Although the SEC Guidelines do not specify much on the duties of the board, the Code,
in the light of the OECD Principles, has recommended some key responsibilities for
board. It suggests that the board should determine business plans, monitor and evaluate
strategies, set performance criteria and so on. Moreover to establish ethical standards of
53
Companies Act 1994 requires that the board should be comprised of at least 3 members and the
SEC Guidelines suggest that board should be limited from 5 to 20. Although the Code does not
specify any number but referring internationally to successful companies it states 7 to 15 is an
ideal size to ensure that the size of the board is large enough to include directors with diverse
expertise and experience, but not too large to preclude involvement by all directors.
54
As per the SEC Guidelines on Corporate Governance, clause 1.2 (i) “"independent director"
means a director who does not hold any share in the company or who holds less than one percent
(1%) shares of the total paid-up shares of the company, who is not connected with the company's
promoters or directors or shareholder who holds one percent (1%) or more than one percent (1%)
shares of the total paid-up shares of the company on the basis of family relationship; who does
not have any other relationship, whether pecuniary or otherwise, with the company or its
subsidiary/associated companies, who is not a member, director or officer of any stock exchange,
and who is not a shareholder, director or officer of any member of stock exchange or an
intermediary of the capital market” www.dsebd.org
And according to the Code of Corporate Governance for Bangladesh, “Non-executive directors
are simply directors that do not currently hold a position with the organisation for which they
serve on the board. Independent or outside directors are those who do not have employment,
familial, financial, or other ties to the company.” (BEI, 2004, p.13)
104
the company, the Code also suggest a Code of Conduct not only for the Directors but also
for the Managers and Employees separately. To ensure that the board members are able
to give sufficient time to add value to the company the Code has set a restriction on the
board members to hold directorships in no more than six boards 55 , and to attend a
minimum percentage of board meetings in order that their ability to contribute to the
However, neither the Code nor the SEC Guidelines include enough provision relating to
independent directors’ qualifications as has been done in case of the Indian Code. The
Indian Code requires the board to put in policies for specifying attributes of independent
financial statements. It also suggests that the independent directors should provide a
annually (p.12). Moreover it has set of separate provision for the tenure and freedom of
independent directors to ensure that they can be reasonably perceived as independent and
directors especially NEDs are also more detailed in case of India. However in detailing
other provisions relating to board practices, the Code for Bangladesh is very similar to
the Indian and Pakistani Code; and in some cases it is more comprehensive than the
Pakistani Code.
55
“An institution or institutional investor (government, provident fund, etc.) can be represented on
numerous boards, far in excess of 6. However, a single individual (as nominee of the institution)
should not hold more than 6 directorships, so that they have sufficient time to devote to their
individual duties as director”(BEI, 2004, p.12).
105
Table 4.2 Comparison among the Code Provisions on Board Issues
106
Table 4.3 indicates that none of the corporate governance guidelines varies much from the
recommendations of the OECD Principles (2004) in developing provisions for the audit
committee. The Code and SEC Guidelines, both are almost identical in defining the
composition of the committee and the qualification of the Chairman of the audit committee,
and both have given strong emphasis on developing an independent audit-committee to have
an oversight into the internal audit functions and to ensure true and fair reflection of the
financial statements. The SEC Guidelines make it mandatory for all of its listed companies
Code emphasizes more on the companies with annual turnover equals to or more than BDT
300 million to have an audit committee. As the table indicates, other than the SEC
Guidelines, all other codes have specified detailed provisions relating to the major tasks,
107
Table 4.3 Comparison among the Code Provisions on the Audit Committee
108
4.3.2 The Code Provision Relating to Shareholders’ Participation
shareholders, the Code has developed some recommendations relating cumulative voting
as a possible alternative voting method. The Code proposes to change the hand count of
voting system to a ballot procedure to ensure free and fair voting. Moreover, the Code
agenda and offering the opportunity to include related agenda items by the shareholders
before the meeting. However, none of the regulations of Bangladesh clearly demonstrates
the nomination and election procedure or the remuneration policy disclosure to create an
opportunity for the shareholders to participate in the key governance decisions, whereas
the Pakistani Code is more comprehensive in this regard. Although cumulative voting
56
would not guarantee that a minority group could elect a director, the Code argues that it
will allow for an organised group of shareholders to do so. Hence, in addition to this, the
Code has emphasized raising awareness among shareholders’ about their rights and
responsibilities.
Table 4.4 shows that while each of the corporate governance guidelines have emphasized
any other information of the company that may directly or indirectly affect the interest of
shareholders, the Code for Bangladesh goes further and recommends a ‘Shareholders
56
Cumulative voting system is “a method of stock voting that permits shareholders to cast all
votes for one candidate. A voting system that gives minority shareholders more power, by
allowing them to cast all of their board of director votes for a single candidate, as opposed to
regular or statutory voting, in which shareholders must vote for a different candidate for each
available seat, or distribute their votes between a number of candidates” (www.corp-gov.org).
109
Handbook’. It argues that a lack of concern among shareholders’ about their rights is a
Table 4.3 also suggests that the Code for Bangladesh is more detailed than the SEC
Guidelines and the Pakistani Code to some extent in protecting minority shareholders’
rights. The Indian Code argues that it does not need additional provisions as the minority
shareholders’ rights are already protected by its laws. However the Indian Code
recommends attaching an impact assessment statement with every single agenda in order
analysis and offers comments which should be suitably recorded. This is expected to help
110
Table 4.4 Comparison among the Code Provisions Regarding the Rights of Shareholders
111
4.3.3 The Code Provisions Relating to Financial Reporting, Auditing and Non-
Financial Disclosure Issues
Disclosure, transparency and financial reporting are one of the major challenges for ensuring
good governance in Bangladesh (BEI, 2004). The Code argues that improving the quality of
disclosure and audit practice in Bangladesh must be carried on as a joint undertaking of the
regulators, the ICAB and organizations themselves; and has developed its provisions
accordingly.
Table 4.5 indicates some of the major provisions relating to financial disclosure. The table
indicates that following the OECD Principles, the Code and the SEC Guidelines both
Standards (IFRS) (as have been adopted by the ICAB, and named as BFRS; discussed in
chapter 3 ). The Pakistani Code also expects the same from its listed companies. All of these
Codes recommend provisions for better transparency and better disclosure. For instance, the
Code and SEC Guidelines and the Pakistani Code echo the OECD Principles and suggest that
companies should, in a timely way, disclose its financial statements, information about
contingent liabilities, material events, related party transactions, ownership structure etc.
However the Code has down laid some additional provisions requiring that these guidelines
must be verified and signed by the CEO, CFO, and audit committee chairman.
The Indian Code has no specific recommendations on financial disclosure, maybe because they
have provisions in detail in their mandatory guidelines and in other regulatory provisions57.
57
For example the ‘Report of the Kumar Mangalam Birla Committee on Corporate Governance’ develops code
provisions in 2000 which are mandatory for the listed companies. This code on corporate governance outlines the
accounting standards, and financial disclosure provisions in detail which are still valid for the companies of India
112
Table 4.5 Comparison among the Code Provisions Regarding Financial Disclosure Issues
113
Although the disclosure, accounting and auditing provisions are quite detailed in the Code and the SEC
Guidelines, none has addressed the audit review process. Earlier studies (e.g. Imam, 2000; Mir and
Rahaman, 2005;World Bank, 2009)have identified that in the absence of a formal audit review process,
companies are skeptical of audit quality. Moreover none of the guidelines set a proper guideline for
ensuring a secure environment for whistleblowers, which could be an important source of information for
bad governance especially for countries like Bangladesh where people have less faith in audited reports
and external auditors. On the other hand the Indian Code has separate provisions requiring companies to
ensure the institution of a mechanism for employees to report concerns about unethical behavior, actual or
suspected fraud, or violation of the company's Code of Conduct or ethics policy. It also suggests that
companies safeguard the whistleblowers against victimization, and allow direct access to the Chairperson
Table 4.6 which highlights some of the non-financial disclosure provisions indicates that non-financial
disclosure issues have been almost similarly addressed by all the Codes discussed in the table. However,
as the table indicates, whilst, OECD Principles has emphasized on developing policies on business ethics
and disclosing the level of compliance with it and the Indian Code recommends the same, the Code for
Bangladesh emphasizes on CSR related disclosure, and the SEC Guidelines and Pakistani Code have no
specific requirement in this regard. Unlike financial disclosures, the SEC guidelines are also lagging
behind in meeting the requirements of OECD Principles (for instance it did not address remuneration
issues, nor disclosure of ethical standards) as has been done by the Code of Bangladesh. One interesting
thing to note in the table is that, none of the codes has addressed the provisions relating to the disclosure
of the qualification and selection process of board members. Whilst almost all of the codes include
provisions relating the qualification of BOD especially the NEDs, but none stresses on disclosing it or
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Table 4.6 Comparison among the Code Provisions Regarding Non-Financial Disclosure
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4.4 SUMMARY
The overall discussion on the Code of Corporate Governance for Bangladesh indicates that
the Code is comprehensive and addresses a wide range of corporate practices. There are some
general provisions which all companies are supposed to comply with in addition to other
national legislation. FIs, and SOEs play a major role in the economy of Bangladesh, hence
the Code has developed some additional provisions for these sectors too which the industries
are supposed to comply with in addition the general Code provisions and other
national/regulatory requirements.
The analysis above also indicates some distinctive features of the Code. For instance, the
principles/provisions of the Code are supported by guidelines which are supposed to help
companies to implement the principles. Moreover the ‘The Basic Checklist for Measuring
Compliance’ summarizes all the general Code provisions and the sector specific provisions
into a checklist which makes it convenient to understand and monitor the Code
The comparative analysis indicates that the Code is compatible with international standards in
general and the OECD Principles (2004) in particular. In fact the provisions of the Code and
the SEC Guidelines both reflect the recommendations of the OECD Principles, albeit the
Code does it more comprehensively than the SEC Guidelines. Analysis of the provisions of
both of these guidelines supports the claim of Siddiqui (2010)that the Code and the SEC
Guidelines, both are suggesting that companies adopt Anglo-American model or shareholder
perspective of governance. Although the Code suggests that the board should be accountable
to its shareholders and stakeholders, its provisions are actually prioritizing only shareholders.
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The Code and the SEC Guidelines are also similar in terms of identifying the financial
disclosure requirements setting audit committee related provisions, and recommending board
provisions. However, other than these similarities both of these guidelines of Bangladesh do
differ from each other. The Code is much more detailed in setting up provisions than the SEC
Guidelines. Whilst the SEC Guidelines emphasize independent directors, the Code argues
that the country does not have a sufficient resource pool of people to be independent
directors, hence it has prioritized NEDs58. The Code has set some provisions for protecting
the minority shareholders’ rights but the SEC Guidelines is almost silent on this aspect. It
may be because there are other regulations in the SEC which are theoretically supposed to
protect minority shareholders’ rights. Moreover, the Code suggests a voluntary mechanism of
these guidelines have some mechanisms for controlling non-compliant companies nor some
incentive mechanisms which could encourage companies to improve their compliance status
in future.
The comparison of the Code provisions against the codes of other developing countries
suggests that the provisions have many similarities, especially with the Pakistani Code.
However, the Indian Code, which has been developed to support the existing mandatory
58
As per the SEC Guidelines on Corporate Governance, clause 1.2 (i) “"independent director" means
a director who does not hold any share in the company or who holds less than one percent (1%) shares
of the total paid-up shares of the company, who is not connected with the company's promoters or
directors or shareholder who holds one percent (1%) or more than one percent (1%) shares of the total
paid-up shares of the company on the basis of family relationship; who does not have any other
relationship, whether pecuniary or otherwise, with the company or its subsidiary/associated
companies, who is not a member, director or officer of any stock exchange, and who is not a
shareholder, director or officer of any member of stock exchange or an intermediary of the capital
market” www.dsebd.org
And according to the Code of Corporate Governance for Bangladesh, “Non-executive directors are
simply directors that do not currently hold a position with the organisation for which they serve on the
board. Independent or outside directors are those who do not have employment, familial, financial, or
other ties to the company.” (BEI, 2004, p.13)
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requirements and to address the recent need for governance in India, has addressed some
areas (like remuneration, independent directors, and whistleblowers) where the Bangladesh
Code is lagging behind. Corporate governance is in an evolving era (Mallin, 2010) which
offers new challenges, demands new policies. Thus once developed codes must be reviewed
regularly to pinpoint the scopes for improvement and making it effective enough to face
today’s issues and tomorrow’s challenges and from this perspective, the Code and the SEC
Guidelines both need to be revised, as has been done in case of India. Thus this comparative
analysis has helped developing recommendations for the Bangladesh (as discussed in chapter
8)
Nevertheless, it is undeniable that as an initial step for developing good governance, the
relatively detailed provisions of the Code are laudable and has met international standards.
However, it cannot be denied that achieving compatibility with international standard is part
of the spirit of code development, the rest depends on the extent its provisions meet local
needs and solve governance issues; and for the Code of Bangladesh it is yet to be measured.
Discussion in this chapter thus has been broadly used in chapter 6 to address the research
questions relating to the level of compliance with the Code and appropriateness of the model
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CHAPTER 5
RESEARCH METHODOLOGY
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Chapter 5
5.1 INTRODUCTION
This chapter addresses the methodology used in this study and the methods of collecting the
primary research data. Section 5.2 identifies the methodological assumption about the
philosophical standpoints of this study. Both qualitative and quantitative research methods of
questionnaire survey and semi-structured interview employed in the study are clarified in
section 5.3. Section 5.4 discusses the data analysis technique. Finally section 5.5 concludes
the chapter.
phenomena from which particular understandings of these phenomena can be gained and
and dictates to the researchers what should be studied, how it should be studied and how
research should be interpreted”(Bryman and Bell, 2007, p.25). Therefore, a researcher must
identify his/ her philosophical view of the world, because such “a choice deeply reflects not
only the nature and exigencies of the work to be provided but also the researchers’ view of
There are many studies which presents a wide range of research paradigms. However, Pansiri
(2009) stated that the task of a researcher is to decide which to select from this wide range as
the most appropriate one for his/her research project. However, before deciding, the
researcher must have a clear understanding of these various approaches, because, once
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chosen, “the research paradigm acts as a ‘set of lenses’ for the researcher – it allows the
researcher to view fieldwork within a particular set of established assumptions, thus merging
the abstract usefulness of the paradigm with the practical application of conducting rigorous
There are four major research paradigms of social research: positivism, realism,
Table 5.1. The table indicates that every approach has its own area of interest, scope of
applicability, and each of these paradigms views the world in a specific way that dictates how
to deal with research questions and data analysis. The table also indicates that these various
paradigms actually differ based on methodological issues (Burrell and Morgan, 1979;
Laughlin, 1995; Tashakkori and Teddlie, 1998), methods, and nature of knowledge (Pansiri,
2006).
reality and that the end product of such research can be law-like generalization”(Saunders et
al., 2009, p.113). In sharp contrast, as the table 5.1 indicates, the interpretivist paradigm
argues that “the social world of business and management is far too complex to lend itself to
theorising by definite ‘laws’ in the same way as the physical sciences”(Saunders et al., 2009,
world is different for everybody and advocates that “it is necessary for the researcher to
Realism is another philosophic position and stands in between these two extreme
philosophies. It believes that “the natural and social sciences can and should apply the same
kinds of approach to the collection of data and to explain, and a commitment to the view that
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there is an external reality to which scientists direct their attention” (Bryman, 2008, p.14). In
other words, as Saunders et al.(2009, p.114) stated, “what the senses show us as reality is the
Guba and Lincoln (1998; 2004)stated that, each element from positivism to interpretivism
determines the level of extremeness in understand the reality. For instance, while positivism
views that the world is real, objective and understandable and findings are true, the other
extreme position, the interpretivism philosophical stance believes there can be no objective
truth. Interpretivism argues that “realities are apprehendable in the form of multiple,
intangible mental constructions, socially and experimentally based, local and specific in
nature” (Guba and Lincoln, 1998, p.206). Therefore while, positivists uses hypothesis and
conduct experimental studies to identify the real facts, interpretivists believe in being
interactively linked and use methods like observations, and interviews and participants’
experiences.
While, each of these three paradigms (positivism, realism and interpretivism) offers its own
logic and benefits and specific lenses to view research, each has its own limitations too.
Moreover, the debate on ontology and epistemology is often framed in terms of a choice
between either of the positivist and interpretivist research philosophy. Critics (Bryman and
Bell, 2011; Creswell, 2009; Saunders et al., 2009) argue that in reality the researcher might
find choosing between one philosophy from the other is somewhat impracticle. They believe
being rigid on one single paradigm might limit the researcher to explore some areas which
could enhance the understanding of the research area. Hence, they advocate a new intellectual
arena to view the world which could relieve the researcher from the limitations of being rigid
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Table 5.1 Comparison of Four Research Philosophies
123
Researchers (like Creswell, 2009; Pansiri, 2006; Saunders et al., 2009) argue that a social
science researcher should not set a boundary for themselves within one philosophical stance.
Instead, to view the social world, different kind of available inquiry should be adopted
sequentially depending on the demand of their research purpose. (Carson et al., 2001). They
also emphasize that instead of being rigid to one particular research paradigm, or defending
one research philosophy researchers should expand their visualizations and devise the
research process that addresses their research objective (Neuman and Benz, 1998); and all
these calls have been answered by a distinctive ‘Pragmatism’ philosophy (as shown in the last
Pragmatism holds the view that “the most important determinant of the epistemology,
ontology and axiology [that one] adopts is the research question(s)- any one
[positivist/interpretivist] may be more appropriate than the other for answering particular
questions” (Saunders et al., 2009, p.109). Hence in prioritizing research problems it adopts all
available approaches that answer research problems. Creswell(2009, p.11)opines that “truth is
what works at time. It is not based in a duality between reality independent of the mind or
within the mind. Thus, in mixed methods research, investigators use both quantitative and
qualitative data because they work to provide the best understanding of a research problem”.
(Ryan et al., 2002), where the researchers examine the effect of a variable on some outcome
However, over the last 40 years especially, the financial disciplines have provided a new
intellectual arena to view the world in interpretivist philosophical aspects (Ryan et al., 2002).
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The first three research questions of the study (see page 8) demand an objective observation
of the social and material world; whereas the last three research questions need subjective
interpretation assuming that the world would be different to everybody. These are the
situations where the research demands a mixed method to be adopted. Supporting the claims
p.11)also emphasized on the importance of using mixed methods in such cases and suggested
that it is more appropriate for the researcher to pay attention “on the research problems and
then using pluralistic approaches to derive knowledge about the problem” (p.11) and mixed
methods are best employed under pragmatism (e.g. Creswell, 2009; Pansiri, 2005; Saunders
et al., 2009; Tashakkori and Teddlie, 1998). Therefore, considering the need of the research
questions, the present study aligns itself with the pragmatic position to see the social world.
The rest of the discussion in this section unfolds further as to why and how different
philosophic standpoints have been mixed to address the research questions of the present
study.
“Ontology is concerned with the nature of reality” (Saunders et al., 2009, p.110). Thus,
ontologically, rejecting the nominalist assumption that the social world is unreal and has no
real structure (Burrell and Morgan, 1979), the study holds a realistic proposition and assumes
that the business world in Bangladesh is real, and corporate governance as an aspect of the
corporate environment of Bangladesh is operating in the real world, and it deals with the
regulators, regulations companies and people who have an existence and independent of the
human mind. Following the arguments of Guba and Lincoln (1998) and Pansiri(2009) this
study also assumes that the corporate world can be comprehensible only imperfectly or
probabilistically. Since the corporate environment is comprised of many different social and
environmental factors, no single finding can be stated as true. Moreover, the people who are
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the major players of this corporate environment are unpredictable, therefore research findings
using social and other related theories, can only predict the reality of the world.
The study also holds the belief that the level of compliance that a company reflects, the
problems that a company faces in establishing good governance or the issues which cause
non-compliance with standards of practice are the consequences of actions by different social
actors, and reflects the reality of a company which is the consequence of a process of
“Epistemological issues concern the question of what is (or should be) regarded as acceptable
fact places its arguments in contrast to the positivist and anti-positivist views of research. As
grounds that no theory can satisfy its demand…; and rejects anti-positivism, because virtually
any theory would satisfy them. As such, the pragmatist proposes to reorient the assessment of
theories around a third criteria: the theory’s capacity to solve human problems”. Thus the
human problem-solving. Holding this epistemological position, the first three research
questions of this study need the reality to be represented by objects or observable phenomena
that are considered to be real and have a separate existence to that of the researcher and need
to collect data that are far less open to bias to ensure objectivity.
On the other hand, the last three research questions of this study demand the researcher to be
more concerned with the feelings and attitudes of the participant towards their reality. This
assumes that the issues related to non-compliance are better understood by investigating the
social phenomena.
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The methodological aspect is generally influenced by the ontological and epistemological
perspectives of a research. Hence, in line with the pragmatist paradigm discussed above and
the research objectives a mixed methodological approach has been adopted for this study.
and in the search for a methodological identity a number of researchers (like Creswell, 2009;
Pansiri, 2009; Tashakkori and Teddlie, 1998) emphasize the fact that mixed methods are best
employed under pragmatism. The research objectives suggest that quantification is necessary
to understand the level of compliance among companies, industries and among Code
provisions, it would not reflect the issues relating to compliance or the appropriateness of the
Code in the context of Bangladesh. Rather, a qualitative approach would be preferred to have
a better insight on those issues. Therefore, a mixed method study has been designed for this
Researchers using pragmatism need to consider designing mixed method research. While
Creswell (2009) has identified four factors (timing, weight, mixing, and theorizing)
influencing the design of the procedure of mixed method study, Pansiri(2005) has further
assisted by suggesting a matrix (as illustrated in Figure 5.1) that shows the different
approaches available for a researcher for research inquiry. The “Concurrent” quadrant of
Figure 5.1 indicates that “both qualitative and quantitative data collection techniques are used
at the same time and analysis of both types of data is done simultaneously, while sequential
implies that the researcher conducts either the qualitative phase of a study then a separate
quantitative phase or vice-versa with a view to use the later technique to assist in explaining
and interpreting the findings of the former ”(Pansiri, 2005, pp. 201-202).
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Figure 5.1 Mixed Method Design Matrix
In the case of the present study, considering the time limitation and cost, both quantitative
and qualitative data for this study needed to be collected concurrently during the field work in
Bangladesh. With regards to the weight or priority factor, the overall aim of the study
suggests that equal weight should be given to both qualitative and quantitative information.
However, quantitative data will be analyzed first, because that is expected to support the
analysis of qualitative data in relation to the causes of non-compliance with the Code.
Otherwise both quantitative and qualitative data analysis is supposed to play the supportive
128
role for each other where applicable; and that is why data mixing will occur at the data
interpretation phase. Finally, the study use theories as an orienting lens that has shaped the
types of questions asked, identifying the participants in the study, and how data are collected.
Considering all these four important factors and the research objectives the study will follow
the first quadrant of Figure 5.1 ‘QUAN+ QUAL’ which is a concurrent design where equal
In light of the methodological standpoints discussed above, this research adopts a mixed
methods approach to answer the research questions. It adopts a quantitative survey to collect
primary data to answer the first three research question relating to the level of compliance
with the Code. Whilst the survey analysis provides a quantitative explanation of the
compliance level and its pattern, the last three research questions demand a further insight
into the compliance issues in terms of background information, possible explanations of the
empirical relationships, and so on. Hence, in relation to the qualitative research, in-depth
semi-structured interviews were carried out with various stakeholders in the corporate sector.
The questionnaire survey and semi-structured interviews were both conducted at a concurrent
time in Bangladesh at the end of year 2010. However, by combining the merits of both
quantitative and qualitative methods, the present study also takes a stand with the advocates
of mixed methods who claim that a mixed methods strategy offers: (i) more comprehensive
understanding from multiple perspectives and lenses; (ii) more insightful understanding from
fresh and creative perspectives; (iii) greater validity; and (iv) greater value consciousness and
greater diversity of values (Creswell, 2009; Greene et al., 2005; Tashakkori and Teddlie,
1998).
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5.3.1 Questionnaire
person is asked to respond (Collis and Hussey, 2003; deVaus, 2009 ). Creswell (2009)
attitudes or opinions of the population, whilst Gill and Johnson (2002) state that survey
research using questionnaire provides a stronger population validity and reliability. This
method is considered to be inexpensive compared with other methods. This technique helps
to ensure the anonymity of the respondents which allows them to feel free to express their
opinion (Falgi, 2009). Perhaps that is the reason that survey research using a questionnaire
Zaman, 2010; Hussain and Mallin, 2002; Jackling and Johl, 2009) and also in the other areas
of business and management research. (Saunders et al., 2009). Since this study needs to
collect some data which are not usually publicly disclosed and are sensitive in nature (for
The first three research questions of the present study deals with the level of compliance with
the Code which are sensitive in nature. Thus it would not be surprising for Bangladesh to end
up with a very low or almost no response rate from the respondents on research queries
regarding their compliance status or corporate governance practices where their identity is
2007;Reaz, 2006) on Bangladesh have experienced the same. Hence, along with the reason of
facilitating descriptive and explanatory analysis, anonymity is another major driving factor
behind choosing this research instrument for addressing the first three research questions of
the study: identifying the level of compliance, identifying the most and least complied with
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code provisions and identifying the factors influencing the level of compliance in
Bangladesh.
is completed by the interviewer on the basis of each respondent’s answers (Saunders et al.,
from the right person, considering the anonymity issue and the numbers of questions the
respondents need to answer, the self-administered questionnaire has been adopted. The Code
is quite comprehensive, and thus there are far too many questions for a respondent to reply to
within a short time. Even if they did, the responses might be less reliable as they would do it
in a rush. The pilot study also reflected that the respondents preferred to complete the
questionnaire was considered for data collection. However, to avoid the possibility of data
distortion, questions were asked using clear and simple language. Last but not least, self-
administered questionnaire is relatively less time consuming and compare to the interviewer-
One of the limitations of the self-administered questionnaire is, even if the questionnaire is
sent addressed to a particular person from whom the researcher wants to get the response, it is
hard to ensure that particular person will be the respondent (Bryman and Bell, 2011;
Saunders et al., 2009) thus the reliability of the response becomes a question. However, this
limitation has been minimized in two ways: i) in the case of the internet-mediated
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questionnaire, as most users respond to their own e-mail at their personal computers59; ii)
most of the questionnaires were hand collected from the respondents. Saunders et al, (2009)
stated that this method of data collection offers an opportunity to check about the respondents
at collection.
The purpose of the survey is to collect data to answer the research questions relating to
compliance with the Code. Therefore the questions for the questionnaire were constructed
according to the provisions of the Code. As discussed in Chapter 4, the Code for Bangladesh
is quite comprehensive and includes detailed provisions60. Whilst some of its provisions are
based on objective facts, like having an audit committee, preparing a board agenda etc.; some
others are more subjective. For instance, one of the provisions asks companies to serve the
legitimate interest of shareholders, whilst another one asks the credit assessment and loan
approval process to be separated from personal conflict and political influence. Scholars like
Klapper and Love (2004), Owusu-Ansah (1998), Leal and Carvalhal-da-Silva (2005) argued
that the problem with this kind of subjective provision is that the researchers cannot cross
verify the response of the respondents, hence they excluded these kind of subjective
provisions from their Corporate Governance Index (CGI) with further arguments that the
target sample may rely on past performance to form their opinion and according to Leal et al
(2005) the subjective type of provisions have the potential to lead to biased responses
59
Once the respondents agreed to respond on the questionnaire, their personal e-mail address were
collected to send the soft copy of the questionnaire. See further details on the data collection process
in section 5.3.1.4.
Initially every single provision of the Code was considered while constructing the questionnaire. In
60
order to avoid confusion and ambiguity, the provisions have been rephrased in most of the cases to
convert them into questions while keeping the meaning of the provision intact. This resulted into total
79 questions.
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especially from the companies with poor governance, seeking to present themselves in a
position of good governance. Hence, following the earlier researchers the present study also
excludes those subjective provisions and concentrates only on the objective ones which are
based on objective facts and can be cross verified from companies’ other published
documents.
Wallace (1988) indicates that bias can even arise in this method of component selection if the
questions selected are not sufficiently comprehensive. The problem also arises with such a
information needs. Therefore, researchers like Hossain (2008) and Wallace (1988) have
limited their scope of selecting components for a questionnaire within the focus of their
research and have developed criteria that fits with their research objective. Following this
method, this study has also identified only those provisions that are:
This process of selecting items from the Code provisions allowed the study to incorporate all
the provisions required by the SEC Guidelines (which the sample companies are supposed to
implement as their listing requirement), many of the mandatory provisions of the Companies
Act 1994. The selection of items for the questionnaire thus makes the difference between this
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study and many of the previous studies which have limited exposure only to one particular
During the pilot study, the questionnaire had 79 provisions which are divided into three sub-
sections: board issues (34 questions); shareholders’ rights (12 questions); and financial
reporting (33 questions) and designed with binary ‘Yes’/‘No’ answers. Code provisions have
been rephrased in most of the cases to convert them into questions while keeping the meaning
of the provision intact. The purpose of rephrasing is to make the provisions easier for
However the feedback from the pilot study (conducted via email) with 26 companies,
reflected that the questionnaires is too lengthy thus increasing the risk of low response, and
the same has been argued by several scholars that lengthy questionnaires are most likely to
discourage respondents to respond (e.g. Blumberg et al., 2008; Bryman and Bell, 2011;
Saunders et al., 2009). So far, studies on compliance have experienced a comparatively low
response rate due to the sensitivity of the information, thus the length of the questionnaire
further scrutinized to identify the questions where the answers are generally available in
annual reports. These questions were excluded from the questionnaire and used as a separate
instrument to collect data from the secondary sources. In this way, out of the 79 provisions,
49 were included in the self-administered questionnaire, and the rest 30 provisions were
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To ensure respondents’ awareness about the present study, the questionnaire had a cover
letter explaining the purpose, process, and possible outcome of the study along with the
information regarding the rights of the respondents (questionnaire is attached in Appendix I).
As mentioned in the previous section, to increase the response rate, 30 provisions of the Code
were excluded from the self-administered questionnaire and collected from secondary sources.
In addition, to test the hypotheses the study also needed some additional information like
company age, profitability, industry type, and so on. Most of these data were collected from
Selection of annual reports as a major secondary source of data is consistent with other prior
studies (e.g. Singh and Ahuja, 1983). Moreover the feedback from the pilot study also
revealed that some of the required data are generally available in company’s annual reports
and more or less companies had their full or partial annual reports on their websites, as this is
one of the requirements of the SEC and Companies Act 1994. The annual reports of the
sample companies’ for the year 2010 were downloaded from company websites or from the
In addition, companies’ official websites were also used to collect required information.
However, one of the sample companies did not have annual report on their company website,
nor did they reply to the repeated mails. In that case, following the strategy of previous
studies e.g. Akkerman (2007), the present study considered non-compliance with those
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Other than these, in order to cross-verify the responses of the respondents the present study
also reviewed the compliance statement that the listed companies are required to submit to
Data for this study was collected between November 2010 to January 2011. The
questionnaires were sent by post to all the listed companies in accordance with the company
list obtained from the DSE website (total 229). Questionnaires (which were also accompanied
secretaries. They were mailed to company secretaries because the nature of the study
demanded that the respondents be either board members or someone from senior
management who has the knowledge of the board practices of his/her company. However, it
is less likely that the board members will have time to respond to academic queries due to
their professional engagement or unavailability. On the other hand, the company secretaries
are expected to respond to the questionnaires as in Bangladesh, after 2006, all the listed
companies are required to appoint a company secretary who has been assigned (by SEC)
certain responsibilities to deal with the corporate governance issues of companies and to be
closely involved in the production of annual reports of the company (Belal, 2004). Hence,
they were chosen as the first point of contact. Nonetheless, two weeks after the questionnaires
were sent, not even a single response came from those 229 questionnaires, nor even from
However, during the pilot study the researcher faced a problem in identifying contact
numbers or e-mail addresses of the Directors or Company Secretaries. In almost all the cases,
companies only disclosed their general non-personalized e-mail or postal address. Even
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though as a supplementary effort, follow up phone calls and emails were sent to all the
Some possible reasons might have been work at behind the non-response to this academic
query. The subject matter of this research is sensitive and in Bangladesh, even today, the
compliance with best practices is comparatively new. This might have caused companies to
resist in responding to such queries, unlike developed countries, Bangladesh is not open to
any sort of academic queries. Unless some strong network is used, it is hard to get access to
the right person to answer the questionnaire. Moreover, the length of the questionnaire was an
issue (even after a huge reduction in questions post pilot study), as was expressed by a few
Bangladesh, they remain very busy for their account closing and AGM preparation during
that time. In many instances during telephonic conversation, the respondents said they have
gone through the questionnaire and they need time to response. Finally, the postal service is
inadequate and unreliable in Bangladesh. Considering the overall system and quality of
services in Bangladesh, there is a high possibility that many of the questionnaires might not
have been delivered to the receivers. Since companies generally do not disclose the contact
numbers of directors or company secretaries, it was not even possible to contact them
randomly to know if they have received the questionnaires. However, low response rate is not
unique for the present study, rather, more or less the study on corporate governance around
the world have experienced the same. Especially the studies (e.g. Akhtaruddin, 2005; Haque,
2007;Reaz, 2006) on the corporate governance issues on Bangladesh had gone through a
similar situation which ultimately led them to modify their initial sample frame.
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Realizing the consequence of the first attempt at data collection, the snow-ball technique was
adopted for collecting data. Using personal and professional network it was possible to
contact with 21 board members, who then introduced the researchers to their friends from
other listed companies. Although the process was lengthy, but it helped the researchers to get
access in the board level in different companies and obtain data from the board level which
would not be possible in other sampling techniques. While introducing the researchers to
their friends the respondents emphasized on the data anonymity from their personal
experience, which further helped the researcher to reduce response bias. In each case, the
questionnaires were hand delivered and a soft copy was sent to them in their personal e-mail
address. However, repetitive phone calls (at least 3 times in each case) were also needed later
as a reminder for completing the questionnaire. When phoned, the respondents used to
request for an extension of one or two weeks more to complete the questionnaire. However,
once finished, they allowed the researcher to come and hand-collect the questionnaire from
their offices. Only in one instance, respondent preferred to send the questionnaire back via
the post, and he delivered it to the researcher’s place through their office staff61.
5.3.2 Sample
The target population of the study is the companies listed on the Dhaka Stock Exchange
(DSE)62, the largest stock exchange in Bangladesh at the end of 2010. The year 2010 was
chosen because it was the last year for which annual reports of the listed companies were
61
As explained before, although the data collection process was very time consuming, but it helped in
different ways. For instance, these reminder phone calls and personal visits allowed the respondents’
to clarify their confusion regarding the Code provision, and gain confidence about anonymity. While
handing over the questionnaire in many instances the respondents repeatedly requested for anonymity.
Their cautiousness before and after response indicated that they more or less responded in a way to
reflect the practical situation, instead of showing as an ideal case of good governance.
62
See details of the classification of the listed companies in Chapter 3, section 3.4.3.
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filed and uploaded on the SEC website at the time of conducting the empirical work of the
study at the end of 2010 and beginning of 2011. During that period, a total of 229 companies
(including both Financial and Non-Financial Institutions) were listed at DSE63.Out of 229
companies 71 companies responded to the survey (response rate 31%). Table 5.2 details the
A complete list of the firms was collected from the Dhaka Stock Exchange (DSE) on October 2010,
63
and the list excludes mutual funds, treasury bonds, debentures and corporate bonds.
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Earlier studies (e.g. Haque 2007) indicated that understanding the compliance status in FIs is
important as these institutions tend to dominate the market behaviour of the stock exchange
of the country and are monitored by the Central Bank of Bangladesh; thus their governance
standard is most likely to reflect a difference compared to the NFIs. It is good to find in the
Table 5.2 that 48% of the sample is from the listed Financial Institutions (FIs) including
Banking and Non-Banking Financial Institutions (NBFIs) and 24% is represented by banks
whilst 14% belongs to leasing companies – thus it will help this study to develop ideas on
Chapter 3 of this study has discussed that the DSE has classified its listed companies into five
categories. From the sample, expect 2 companies all belong to category ‘A’– meaning 69
companies of the sample regularly hold their AGM and have declared dividend at the rate of
at least 10% in the previous year. The remaining two are in category ‘Z’ – suggesting they
neither hold AGM, nor declared dividend in the previous year. Both of these companies are
from NBFI.
Non-Financial Institutions (NFIs) NFI is the largest industrial sector of Bangladesh, and as
the table 5.2 indicates, 52% of the sample is represented by the NFIs, which is comprised of
companies from almost all of the industrial sectors (amongst NFIs) listed in DSE, includes
family companies, companies in all different sizes (large, medium and small), MNCs, J/Vs.
This is again a good representation in the sample because such a combination is helpful to
draw a comparative analysis among different industrial categories (as have been done in
chapter 6).
Earlier studies (like Haque, 2007) reported that the pharmaceuticals and chemical industry
make a significant contribution to the capital market and Table 5.2 indicates that amongst
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NFIs this particular industry is represented more in the sample size (11%). Overall the sample
includes a good representation of the dominating and different industrial categories to drawn
Data
Most studies on code compliance (i.e. Akkermans et al., 2007; Garay and González, 2008;
Klapper and Love, 2004; Leal and Carvalhal-da-Silva, 2005; Mallin and Ow-Yong, 2012;
Mutawaa and Hewaidy, 2010) have gathered compliance related information using a
corporate governance index (CGI). In the same spirit, this study has also used its own CGI to
rank the sample companies on the basis of their level of compliance with the Code. A total of
79 dichotomous variables (see Appendix III) were used to construct the CGI for this study.
Independent Variables
The study selected independent variables based on the existing literature (e.g. Akkermans et
al., 2007; Hodgdon et al., 2009; Klapper and Love, 2004; Lo et al., 2011; Mutawaa and
Hewaidy, 2010; Owusu-Ansah, 1998; Wallace and Naser, 1995; Wang et al., 2008), which
suggest that several company attributes have significant influence the extent to which a
company complies with Code provisions. This section discusses six popular company
attributes, namely company age, profitability, size, industry type, company type, and the type
of external auditors used in companies. These attributes helped in formulating the hypotheses
(and constructing the independent variables) to analyze the pattern of compliance with the
64
i.e. the Code of Corporate Governance for Bangladesh (2004).
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Company Age
Prior studies (such as Akhtaruddin, 2005; Mutawaa and Hewaidy, 2010; Owusu-Ansah, 1998)
assumed that the degree of compliance may vary with the company’s age (in years). Owusu-
Ansah(1998) identifies three underlying reasons behind such assumptions. First, older
and comply with certain requirements which may not be that comfortable for younger
companies. Second, compliance is expensive and thus younger companies may find it
difficult to bear an additional cost. Finally, younger companies may lack a track record to
However, the evidence shows a mixed result. Whilst Owusu-Ansah(1998) found that
company age has a statistically significant positive impact on mandatory disclosures in Hong-
Kong and New Zealand, Hossain (2008) found just the opposite in India. In the case of
Bangladesh, Akhtaruddin (2005) applied the age factor to understand its impact on the level
of compliance with mandatory provisions and concluded that age is not a statistically
significant factor for disclosure in Bangladesh. Yet, he suggested further investigation of this
factor as his data collection period was not enough to measure compliance against the
mandatory listing provisions. Hence, this study intended to re-examine the impact of age on
H1: Company age is significantly associated with the level of compliance with the Code
Profitability
Profitability is one of the most common factors which is considered by a number of studies
(e.g. Hossain, 2008; Inchausti, 1997; Karim and Moizer, 1996;Owusu-Ansah, 1998). They
argue that management tends to disclose more when they have ‘good news’ due to better
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performance (Inchausti, 1997) and profit provides an incentive for better compliance.
However the findings of prior studies reveal a mixed scenario. While some report a positive
association (i.e. Owusu-Ansah, 1998), others (Glaum and Street, 2003; Street and Gray, 2002)
find no association. An interesting finding is observed from the study of Wallace and Naser
(1995) who report that these two variables are actually negatively related. However,
Akhtaruddin (2005) supports the hypothesis and reports that companies having higher
profitability comply more than companies with lower profitability. Hence, the present study
intends to explore if the influence remains the same in case of voluntary disclosures too.
Return on Assets (ROA) is the most common ratio for measuring profitability. Hence, this
study has also considered ROA for understanding the relation between profitability and the
level of compliance with the Code. The following hypothesis is thus proposed:
H2: Company profitability, as measured by ROA, is positively associated with the extent of
Company Size
Economic theory and a large number of empirical papers (e.g. Akkermans et al., 2007; Garay
and González, 2008; Hossain, 2008; Klapper and Love, 2004; Krambia-Kapardis and Psaros,
2006; Lang and Lundholm, 1993; MacAulay et al., 2009; Mallin and Ow-Yong, 2012;
Owusu-Ansah, 1998)suggest that company size is most likely be positively related to the
level of compliance. In identifying the reasons behind this, Ownshu-Ansah (1998) states that
large companies, especially those which operate over wider geographic areas, tend to comply
more in the case of mandatory disclosure provisions because the central management of such
companies might require an internal information system for their strategic decision making
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(Owusu-Ansah, 1998). Whilst referring to agency theory, Jensen and Meckling(1976) states
that the agency cost is likely to be greater in large companies who are expected to disclose
more, but referring back to the benefit-cost theory, Mallin and Ow-Yong (2012) also argue
that large companies have more resources and expertise to exhibit a greater level of voluntary
disclosure. Even in the case of Bangladesh, with regard to mandatory disclosure. Akhtaruddin
(2005) found that larger firms are complying more with mandatory provisions. Hence the
present study intends to see if the compliance pattern remains the same in the case of
voluntary provisions.
Previous studies have measured company size using different measurements including sales,
total assets, number of employees, market capitalization. However the most common variable
used was total assets. Hence the present study considered total assets to test the following
hypothesis:
H3: Company size, as measured by total assets of the company, is positively associated with the
Type of Industry
Mutawaa and Hewaidy (2010, p.37) stated that “the economic sector in which the company is
operating may affect management interest toward better compliance”. However, the findings
of prior studies are inconclusive. While some report a significant association between
compliance and the type of industry (Wallace and Naser, 1995; Wallace et al., 1994), others
because some of the industrial sectors (e.g. Ready Made Garments) are highly exposed to the
international market, whilst some are given priority as a growth sector (e.g. Power Grid) by
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the Government of Bangladesh. These industries are expected to have better compliance than
others. Moreover, recently the Central Bank has changed its policies for regulating the
financial sector and has taken several steps for improving corporate governance practices in
the banking industry, which are supposed to bring favourable impact on the governance
better other industries, which do not have these additional regulations or attention. Hence, the
H4: The type of industry is significantly associated with the extent of compliance with the
Code provisions.
Type of Company
The extent of compliance may also be influenced on the basis of the origin and control of a
company. It is argued that companies affiliated with multinational corporations (MNCs) are
likely to have better compliance because of economic reasons. Since MNCs invest in
transplantation of foreign technology that often occurs through MNCs enables companies to
corporate governance is at an initial stage, it is expected that the companies which are
domestically owned and controlled will comply differently with governance standards than
the companies which are controlled by MNCs or joint ventures (J/V) or franchise where the
parent company has a certain level of influence over the company management. Hence the
variable “type of company”, is divided into three groups – ‘Local’, ‘MNC’ and ‘J/Vs and
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H5: The type of company is significantly associated with the level of compliance with the
Code
Type of Auditors
Previous studies on developing countries have used ‘type of auditors used by the company’ as
a predictor for level of compliance. For instance, Mutawaa and Hewaidy (2010) classified
auditing firms into two groups: large and small firms. As they stated, “in the light of the
recent events, the large audit [firms] are the four largest [international] accounting and
professional services firms, normally referred to as the Big 4, while small audit firms [or non
Big4] audit firms refers to those which operate domestically” (Mutawaa and Hewaidy, 2010,
p.37). Bangladesh has four large audit firms which are affiliated with the international Big4
audit firms. Kabir et al., (2011) examined the association between these Big 4 affiliated
auditors and accruals quality in Bangladesh. Using the sample of 382 firm-year observations
covering fiscal years 2000-2003, they found that due to the lack of demand for quality audit,
Big4 affiliates do not have a positive impact on accruals quality of their clients in the
intensively competitive audit market of Bangladesh. However, the data for the study are in
fact quite old (2000-2003). After their data collection time, SEC has taken initiatives to
improve audit quality in recent years which are supposed to make a difference to the audit
practices in Bangladesh.
Earlier studies which considered examining the impact of type of auditors on the compliance
pattern surprisingly reflect a mixed scenario. Whilst Street and Gray (2002) who examined the
financial statements and footnotes of a worldwide sample of companies referring to the use of
International Accounting Standards (IAS), and Glaum and Street (2003) who examined
compliance with both IAS and United States Generally Accepted Accounting Principles (US
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GAAP) for companies listed in German and reported a significant positive association
between type of auditor and IAS disclosure requirements; Wallace and Naser (1995) reported
a negative association in the case of mandatory disclosure in the corporate annual reports of
firms listed on the stock exchange of Hong Kong. Some other studies (Cooke, 1989;
Mutawaa and Hewaidy, 2010; Owusu-Ansah, 1998) claim that audit quality is not a
significant predictor for understanding the level of disclosure with mandatory provisions.
In the case of Bangladesh, considering the recent initiatives of the SEC and the pressure of
globalization for quality audit, it is assumed that corporate governance standards will be higher
in firms using large audit firms or the audit firms which are affiliated with Big 4 audit firms. To
support this analysis, following previous studies (e.g Mutawaa and Hewaidy, 2010)the
Companies being audited by accounting firms associated with one of the Big 4.
H6: The type of auditor (Big 4 affiliate) used by the company is significantly associated with the
Table 5.3 provides a brief description of these six variables used in Chapter 6 for examining
against the dependent variable (CGI) of each sample company to evaluate the extent to which
The questionnaire survey and secondary sources elicited both numeric and categorical data.
However, three variables are a continuous nature (like company age, profitability and size),
and the other three independent variables (industry type, company type, and auditor type) are
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categorical with a domination of dichotomous or binary variable. Hence these variables were
turned into quantitative variables by taking one of the categories as a baseline (against which
all other categories are compared) and defining dummy variables for the other categories65.
65
For industry type, having the majority in the sample, the NFI is considered to be the baseline and
against which two other dummy variables are created – Bank and NBFI. For the variable company
type, companies that are not locally owned (i.e.) foreign company provides the baseline, because prior
studies indicated that foreign companies have better governance than local companies. Hence, one
dummy variable is created for local firms to compare against foreign firms. Finally for auditor type,
companies are categorized in two groups, one is being audited by firms affiliated with one of the Big4
audit firms and the other ones whose audit firms are not affiliated with the Big4.
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Once the dataset was prepared, the data were transferred into a SPSS file to facilitate data
analysis.
After dealing with the existing status of compliance with the Code, the last three research
questions (see page 8) of the present study aim to understand in depth, the problems of
governance that are challenging the companies in Bangladesh to ensure good governance, the
causes of non-compliance with the Code and also the appropriateness of the Code in the
existing infrastructure of the country. Considering the qualitative nature of the research
questions, consistent with the methodological choice and philosophic assumptions, a semi-
structured interview method has been adopted to address these three research questions.
three, a semi structured interview method has been chosen because that allows the researcher
governance issues in Bangladesh, the research questions needed to allow stakeholders to talk
about the different problems they are facing in real life, which would not be possible with a
where the interviewees have the opportunity to talk spontaneously (Belal, 2004).
Whilst interviewees’ talking freely is a positive side for the study, the issue is that the concept
of corporate governance is relatively new in Bangladesh and sensitive in nature. Thus with an
informal and unstructured conversation, it was very likely that the interviewees would fail to
concentrate on some core issues while exploring all other possible aspects of governance
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relating to the research questions. A semi-structured interview method lies in between both
these methods and thus can help to capture the benefits of both. The semi-structured
interview method has “a series of interview questions that are in the general form of an
interview schedule but is able to vary the sequence of questions….and in addition the
interviewer also has some latitude to ask further questions in response to what are seen as
Moreover, the nature of the study demanded consideration of the perceptions from different
stakeholder groups indicating the interview questions set in the interview guidelines may
need to be modified or omitted depending on the type of interviewees and depth of their
ideal case for such a situation which needs a clear direction and enough flexibility. Hence, a
developed (as has been discussed in Chapters 4 and 5). The questions in the guideline were
set mainly to explore the problems of governance in Bangladesh, the possible causes of non-
compliance with the Code, issues relating to the appropriateness of the model of governance
suggested by the Code and possible solutions to overcome these issues to ensure better
governance. The questions were designed by combining some possible answers and an
invitation to express some other areas which the interviewees might think have not been
covered by the interview guideline. The language of the questions was kept simple to avoid
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One of the major challenges of interview method is, the interviewees may not allow enough
time to discuss all the required areas. Hence, to facilitate prioritizing questions depending on
the type of interviewees and also to guide the interviewees through a sequence, the questions
were divided into four sections: a) questions relating to the corporate governance issues of
Bangladesh; b) the Code and its challenges; c) the recent worldwide financial crisis; and
finally d) other areas, if interviewees are interested to talk on any other related issues.
The interview guideline is designed in a way so that it guides interviewees to go beyond the
concentrate on the needs of the specific country, before they make up their mind on any
in Appendix II.
Considering the nature of the study, the last three research questions required exploring the
perceptions of different stakeholder groups. The discussion in Chapter 2 indicated that there
may be the secondary for others. However, considering the theoretical definition of
stakeholders (as discussed in chapter 2) and the nature of the three research questions (which
are related to the compliance issues of the Code or its appropriateness) the study decided to
identify the groups of stakeholders who have direct influence over the Code in particular and
companies in general. Following this strategy, ten stakeholder groups were identified, and
these are: companies (including board members, managers, and employees), legal and
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rating agencies, consumers, exporters, donor agencies and the BEI (as they are the
Initial contact for interview was made through a personal network as was used in the case of
questionnaire survey. Other than that personal network, a professional network has also been
used to cover all of these ten stakeholder groups. Within the timeframe for data collection, it
was possible to communicate 45 potential respondents. In each case, a letter was sent to the
respondents through e-mails requesting interviews. For ethical considerations, the interview
guideline was also sent with a cover page containing the general information of the research,
its process and the voluntary nature of their participation. In total, 32 respondents agreed for
the interview.
Table 5.4 provides the detail of these interviewees, whilst Figure 5.2 illustrates the
relationship between the Code and these nine stakeholder groups. Both listed and non-listed
companies were selected as they are the target users of the Code, and they are the prime
stakeholders who are being affected by the Code and source of information for identifying the
issues related to compliance and the quality of the Code. Theoretically, the Code and
As the table 5.4 indicates, a total of 15 respondents represented the views of the companies
operating in Bangladesh (amongst this 15, 12 represent listed companies and 3 represents the
Legal and regulatory bodies are one of the major stakeholders for the Code as they frame the
corporate governance rules in Bangladesh with which companies have to comply. The policy
makers or code formulators need to ensure that the Code provisions are in accordance with
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the fundamental legal and regulatory requirements. Moreover the regulators are also the
Hence, the study included the perception of the members from this stakeholder group. In
total, 7 respondents are there representing the three major legal and regulatory bodies: legal,
ICAB and ICMAB; and the Stock Exchanges. The interviewee from the legal bodies dealing
with the Companies Act 1994 was a corporate lawyer and a legal practitioner.
Employees and Government and policy makers were also included because for any country
they are considered as prime stakeholder groups. Whilst employees’ perceptions are
important as they are the users of the Code and also source of information for Code revision,
prior literature (e.g. Siddiqui, 2010) indicated that the Government and policy makers of
Bangladesh are closely associated with the corporate sector of Bangladesh. As the table 5.4
indicates, 2 interviewees represent employee category, whilst the other 2 represent the
Government bodies and policy makers of Bangladesh. The interviewee representing the
Government is a former Minister of Bangladesh, and the other represented one of the state
owned companies of Bangladesh who was expected to discuss the issues with SOEs and
Academicians were also considered as a stakeholder for two reasons: one, they were involved
in the Code development process (see details in Chapter 4), and two, they are closely related
in the development of future managers, regulators and other professionals for the country.
The interviewee representing academia is a research scholar and holds a top position in a
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Table 5.4 List of the Interviewees
154
Figure 5.2 Relationship between the Code and the Interviewees
Other than these, the researcher was also able to interview one interviewee from the Credit
Rating Agencies of Bangladesh (CRAB) and one from the Consumers’ Association of
Bangladesh (CAB). Whilst the necessity of CRAB is easily understandable, earlier studies
like the study of Belal (2004) has incorporated the perceptions of consumers arguing that the
consumers’ rights are being neglected by companies. And in the recent past, the CAB has
taken some initiatives to raise awareness about consumers’ right. Hence the study intended to
The exporters’ group is also considered to be one of the important stakeholders not only
because they are also the target users of the Code, but being extremely exposed to the
international market, the exporters’ group is also being considered as a source of information
155
regarding the issues and benefits of ensuring compliance with an international standard of
governance. Thus, their opinion is considered to be important for identifying the challenges
and bringing the practical solutions for the companies of Bangladesh. Moreover, their opinion
amendment in future. The interviewee representing the exporters’ group was a CEO of the
countries including the UK and the USA. This interviewee is also a member of Bangladesh
Donor agencies of Bangladesh, especially the World Bank and IMF are sponsors of the Code
development process and considered as one of the pressure groups for good governance in
appropriateness of the Code in Bangladesh and their recommendations for the Code
revisions. The interviewee representing the donor agencies of Bangladesh work for the IMF
and also works with different the World Bank projects in establishing the good corporate
governance of Bangladesh. Finally, the researcher was able to interview one of the top
executives of the BEI (the formulator of the Code) who was very closely associated with the
Code development and is still working on the corporate governance issues of Bangladesh.
During the data analysis phase, some of the claims raised by the interviewees needed further
conducted with seven discussants. Instead of communicating with the same interviewees, the
study considered the opinion of those stakeholder groups on whom allegations were made by
the interviewees. For instance, interviewees claimed that shareholders are reluctant to
participate in the annual general meeting, hence shareholders groups were considered as
156
discussants for the follow up session to reflect on this accusation. These discussants were
communicated over the phones, mails and video conferencing. These follow up discussants
were mainly taken from shareholder groups, academia, and corporate managers.
Interview Procedure
According to the preference of the interviewees, all the interviews were carried out at their
offices in Bangladesh. The duration of the interviews varied from forty five minutes to more
than two hours depending on the willingness of the interviewees. All the face to face
Unlike the questionnaire survey, the interview experience was comfortable in all the cases.
Although interviewees were initially hesitating to accept the request of interviewing, once
being confident about the anonymity issue, they were comfortable enough to discuss matters
openly. Since the interviewees were selected keeping in mind that they have a certain amount
of knowledge to contribute in the research topic, a little clarification and probing questions
might have also helped them to focus in depth. Furthermore, the interview questions were not
company specific, rather it was general. Once being convinced that the interviewees do not
have to talk about their own companies or any specific companies, they were found to be
All the interviews started with a brief introduction of the research emphasising its objectives,
process, and possible outcomes. The semi-structured interview guideline was followed to
66
In few cases the researcher needed to wait for couple of hours due to the busy schedule of the respondents.
Moreover the huge traffic issue of Dhaka city was hectic for the researcher to attend the interview sessions on
time. A further challenge was to get the appointment of the interested interviewees. As in many instances the
respondents expressed their willingness for interviews but could not manage to take out time within the time
boundary of the researcher.
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ensure the interview protocol, where questions were asked in an open-ended fashion
following a conversational style (Bryman and Bell, 2011). However, depending on the
questions were asked. In few cases, the questions of the interview guidelines were asked in
different order depending on the time barriers of the interviewees. With the permission of the
interviewees, all the interviews except three were voice-recorded. And in the case of those
three cases, interview discussions were hand written, and later verified by the interviewees.
All the interviews ended with a thank you note and a promise of anonymity that neither
interviewees nor their respective organizations would be identified in the subsequent writing
up of the interview data. However they allowed the use of their industry names.
One of the major limitations of interview method is, it may cause the problems of bias, poor
recall and poor or inaccurate articulation (Belal, 2004). Moreover the interviewees’ opinions
have also potential to be biased and influenced by the perception the interviewer. While it is
difficult to avoid these limitations of the interview method, some precautions were taken to
minimize these risks. For instance, developing the interview guideline, and following the
protocols of sensitive interview method in all the interview sessions are considered to lessen
the risk of bias. Moreover, Belal (2004) argued that the potential intrusive nature of
Despite all these limitations, the interview method is considered a popular research method
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5.4 DATA ANALYSIS
While identifying the methodological framework for the present study, it was indicated that
the present study intends to take the concurrent triangulation strategy, where the researcher
collects both quantitative and qualitative data concurrently and then compares the two
2009). Following the strategy, data has been collected using different methods (questionnaire
survey and semi-structured interview) and analysed using different techniques. However the
findings from both qualitative and quantitative analyses have been combined for better
understanding.
Figure 5.3 describes the process through which data has been used for addressing the research
questions.
As indicated in Figure 5.3, in the first phase the data collected from the questionnaire survey
has been analysed. Although equal weight is given to both qualitative and quantitative data,
the quantitative data has been analysed first as this was expected to help in better
159
understanding the problems of governance and causes of non-compliance amongst the
companies of Bangladesh. In phase two, the qualitative data has been analysed. However,
every single method of data analysis has its own weaknesses and response biases. Scholars
like Creswell (2009)thus advocate for data integration, as they think it offsets the weaknesses
inherent within one method with the strength of other. Hence, for the present study, while
findings from both qualitative and quantitative phases were integrated as and when necessary
for supportive information, in phase three, they have been merged for drawing an overall
recommendations for better corporate governance standard. However, the following sections
of this chapter describe how in each phase the data has been analysed to address the research
questions.
Quantitative data has been analysed (in Chapter 6) particularly to address three research
questions of the study: 1) the overall level of compliance with the Code amongst the sample
companies, 2) the most and least complied with the Code provisions and 3) to identify
whether the level of compliance varies depending on different company attributes. Statistical
Package for the Social Sciences (SPSS) has been used for all the statistical analysis through
compliance amongst sample companies. There are two approaches available for measuring
the level of compliance: weighted and un-weighted approach. A weighted approach allows
distinctions to be made for the relative importance of code provisions to the users, whilst an
un-weighted approach assumes that all of the items of codes are equally important (e.g.
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Akhtaruddin, 2005; Cooke, 1989;Wallace et al., 1988). However, previous studies (for
instance Cooke, 1989; Hossain, 2008; Mallin and Ow-Yong, 2012; Wallace et al., 1994)have
preferred to use the un-weighted approach arguing that all information is equally important to
average users, and there is no rule of thumb in assigning weight to any particular information.
Moreover, peoples’ need of information changes over time. Hence, the un-weighted approach
has been adopted in this study where an item of the Code scores one if complied with, and
zero if not.
Where,
Following prior studies (like Mutawaa and Hewaidy, 2010; Samaha and Stapleton, 2008) a
compliance framework is developed for defining the level of compliance attained by the
sample companies. In the framework, a distinction is made between four levels of company
compliance with the Code provisions. Studies like Mutawaa and Hewaidy (2010) have
considered companies to be highly compliant if the compliance score is 80% or more, to have
moderate compliance between 79% and 60%, low compliance between 59% and 40% and
below 40% reflects a substantial gap between company compliance with the particular
provisions and what might be expected. Hence to facilitate comparison of the corporate
161
governance standard with other developing countries, this study has considered the same
Since the questionnaire survey data are nominal and numeric in nature, descriptive statistics
(e.g. mean value, percentage, ratio) are used to measure extent to which companies are
complying with the Code provisions. Descriptive statistics will facilitate the comparison of
the level of compliance across different industries. Earlier studies(e.g. Bajo et al., 2009;
Jackling and Johl, 2009; Khan-M and Belal, 1999; Mallin and Ow-Yong, 2012; Mutawaa and
Hewaidy, 2010; Samaha and Stapleton, 2008) have also used mean values for understanding
the level of compliance with code provisions. The mean differences across companies’
compliance were calculated using the non-parametric test Kruskal-Wallis (K-W), as the test
Although the K-W test identified whether the mean compliance varies across different
industries or other company attributes, it was not sufficient to identify exactly where the
differences exist. Hence in the case where K-W test identified that the mean compliance
score is different, another non-parametric Mann-Whitney (M-W) test68 was adopted which
did help to identify exactly where the level of compliance varies across different company
attributes or between the subsections of the Code provisions. However, while mean
difference is used to understand the compliance differences across industry and other
company attributes, some relevant findings from the semi-structured interview analysis has
been used to explain why the differences might exist or understanding why particular
67
K-W test is a non-parametric test (counterpart of the independent one-way ANOVA) that identifies
if the mean difference between two or several groups are the same (Field, 2009).
68
M-W test is a non-parametric test equivalent of the independent t-test and used to test difference
between two conditions (Field, 2009).
162
To investigate the influence of company attributes over the level of compliance, the study has
69
used inferential statistics e.g. univariate and multivariate regression. This kind of
investigation using regression has been used by other scholars (like Akhtaruddin, 2005;
Bhuiyan and Biswas, 2007; Cooke, 1989; Hossain, 2008; Kha et al., 2009; Owusu-Ansah,
Whilst the univariate analysis includes the Spearman’s correlation coefficients70 to identify
the statistical relationship between the dependent (CGI) and independent variables (six
company attributes, see Table 5.3), the ordinary least square (OLS) regression is used to
estimate parameters in the multivariate analysis. The OLS regression framework will
incorporate a corporate governance index (CGI) as the dependent variable and other firm-
Transcripts of interviews were prepared for all the interviews which were later used in
thematic analysis 71 . According to thematic analysis procedure, three major themes were
developed for analysing the data: the problems of governance, particular causes of non-
compliance with the Code and the appropriate model of corporate governance in Bangladesh.
Under each theme, different codes and sub-codes were developed according to the discussion
69
The inferential statistics measure relationships between features, and create models to make
predictions (Lewin, 2005) and regression analysis is feasible empirical statistical technique to control
the variables in social science that may affect the phenomenon being studied (Ethridge, 2004)
Spearman’s correlation coefficient is used in this study because the data of the present study is not
70
normally distributed. When data violates the parametric assumptions, instead of Pearson correlation
coefficient, Spearman’s should be used to identify the correlation between variables (Field, 2009;
Acton et.al, 2009).
71
Thematic analysis is a process for encoding qualitative information. The encoding requires explicit
‘codes’. This may be a list of themes, a complex model of themes (Miles and Hubberman, 1994). A
theme is a pattern found in the information that at the minimum describes or organizes possible
observations (Boyatzis, 1998).
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of the interviewees. Finally, the analysis was carried out following these sub-codes and codes
The findings from phase one, i.e. the findings of the quantitative analysis helped in different
areas of interview analysis. Sometimes the survey findings supported the claims of the
interviewees, and in other cases it clarified the reasons behind them. However, it is important
to note that although the interviewees were selected from wider stakeholder groups, their
opinions did not vary from each other. Rather, while analysing the data, it was realized that
their opinions were complementing each other. Although in some cases interviewees were
found to disagree with the claim made by another but they did not entirely reject their claims,
rather they extended the understanding of the real situation. The overall findings from the
5.4.3 Phase 3: Merging Quantitative and Qualitative Findings for Summary and
Conclusion
As discussed in the earlier two phases, both quantitative and qualitative data facilitated each
understanding of the corporate governance situation, its challenges and ways to improve
governance standards, both the data are merged further in Chapter 8, where the findings are
summarized and used as necessary to develop conclusions on each situation. However, before
drawing any conclusion on the interviewees’ opinion, the study reviewed other related
documents, articles and newspapers. Although newspaper articles are not valued as a peer
reviewed research works, in some cases where scholarly works or company documents were
not available, those newspapers’ published documents (published online) were considered.
However, the use of newspapers is very limited in this study and used only as a tool for cross-
This chapter outlines the philosophical assumptions and methodological choice adopted by
the study. It uses a mixed methods approach combining both quantitative and qualitative
triangulation approach has been adopted in data analysis. The results of the survey are
presented in Chapter 6 whilst Chapter 7 reports the findings of the semi-structured interviews.
The overall findings are further merged in Chapter 8 to provide an understanding of the
overall situation and to draw recommendations for improving the corporate governance
standards in Bangladesh.
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CHAPTER 6
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Chapter 6
6.1 INTRODUCTION
This chapter details the results obtained from the questionnaire survey to address the
1. the overall level of compliance of the Bangladeshi listed companies with the Code.
3. identifying the Code provisions which are most, and least, complied with.
The rest of the chapter is divided into four sections. Section 6.2 details the findings related to
the total compliance score of the listed companies of Bangladesh. Section 6.3 identifies if the
extent of compliance level varies with different company characteristics. Section 6.4 deals
with the analysis of the level of compliance with each provision of the Code with an aim to
identify the most and least complied areas of the Code. Finally, section 6.5 summarizes the
overall findings and draws conclusions in the light of the findings of the survey.
identify the extent to which the listed companies of Bangladesh are complying with the Code.
Following previous studies’ compliance framework (like Mutawaa and Hewaidy, 2010;
Samaha and Stapleton, 2008) the sample companies are considered to be highly compliant if
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the compliance score is 80% or more, moderate compliance between 60% and 79%, low
compliance between 40% and 59%and below 40% reflects a substantial gap between
Table 6.1 presents the descriptive statistics of the percentage of the compliance level or in
other words the corporate governance index (CGI)72 of the 71 listed companies. The mean
value is 53.45 (67% of the required provisions), indicating that on an average the sample
companies have a moderate level of compliance with the Code. A normal distribution curve
is also shown in Figure 6.1 to illustrate that the distribution is slightly skewed to the left
(skewness is -0.518).Table 6.1 also shows that the standard deviation is 7.22, indicating that
the CGI of some firms are not close to the average governance index. The range 32 implies
that the distribution is likely to have resulted from a widespread difference in governance
qualities (e.g. maximum score is 67 (84%), whilst the minimum is 35 (44%)) among the
sample companies.
Table 6.1 Descriptive Statistics for the CGI of the Sample Companies
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As mentioned in Chapter 5, Corporate Governance index (CGI) refers to the degree or level of
compliance by each of the sample companies. The CGI for each company is calculated by dividing
the number of items actually complied by the required items (i.e. 79 provisions that should be
complied with the Code).
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Figure 6.1 Histogram of the Level of Compliance of the Sample Companies
Even so, Figure 6.2 which presents a distribution of the sample companies according to their
CGI suggests that 73% of the sample companies appear to have a CGI between and 60%
to79% thus being close to the mean score. This result is comparable to what was found in
similar studies for Kuwait (Mutawaa and Hewaidy, 2010) and India (Hossain, 2008).
Given the results presented above some interesting facts emerge about the status of
compliance among the sample companies. The majority of the companies’ CGI (73%) is
within the range of 60% to 79% indicating that the majority of the sample companies are
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Figure 6.2 Frequencies of the CGI of the Sample Companies
However 21% of the companies are poorly compliant with the Code as their compliance
score ranges from 40%to 59%, whilst 6% of the sample companies are highly compliant with
the Code, as indicated by their level of compliance (80% and above). Overall, for 94% of the
sample companies in all industrial sectors, there was found to be a 50% compliance level.
Therefore, this suggests that the majority of the listed companies are at least complying with
Moreover, none of the companies have been reported as having a zero level of compliance,
therefore none of the companies can be categorized as being absolutely non-compliant; whilst
equally none can be claimed as being fully compliant with the Code provisions. These
findings re-emphasize that the Bangladeshi listed companies moderately comply with the
voluntary Code. However, the findings also reinforce the usefulness of understanding which
industries have high compliance and which are falling behind; and of understanding which
provisions are mostly complied with and which are not. The following sections of this study
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6.3 THE LEVEL OF COMPLIANCE BY DIFFERENT COMPANY
ATTRIBUTES
This section addresses whether the level of compliance varies with different company
characteristics. The analysis begins by analysing the extent to which the level of compliance
varies across different industry type. Then the results of the correlation and multiple
regression models are presented to understand the extent to which six different company
Table 6.2 shows the mean distribution of the CGI among different industries. To support M-
W test, the companies were divided into three major categories- namely Banking, Non-
Banking Financial Institutions (NBFIs) and Non-Financial Institutions (NFIs); and the
findings are reported in Panel-A. While this Table helps to understand the compliance level
within these three broad categories is falling behind in ensuring compliance and which is
doing well. Hence Panel-B further divided these three broad categories into nine categories in
total, and Panel-C reports the p-value for the K-W (Kruskal–Wallis) and M-W (Mann–
Whitney) tests to understand the differences of the mean compliance score among different
industries.
Panel-A of Table 6.2 suggests that the financial sector tend to exhibit relatively higher
governance quality compared with NFIs. The mean score of Banks is 57.52 (72%), which is
the highest amongst all followed by the NBFI with a mean of 55.0 (69%) and lastly the NFIs
with a mean of 50.86 (63%). The Banking industry seems to be continuing in ranking the
highest in ensuring compliance with governance standards, because a similar kind of study by
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Haque (2007) also reported that the banks in Bangladesh are the most compliant industry. He
measured the compliance score against the international standards of governance and
reported that the mean score of Banks is 61.38%, and in that manner the findings of this study
suggest that the level of compliance might be improving over the years.
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However, the comparatively higher quality governance of Banks is not unique to Bangladesh.
For example Hossain (2008) reported that the same is the case in India, whilst Krambia-
Kapardis and Psaros(2006) claimed that the banks and insurance companies are more
The higher ranking of the Financial Institutions (FIs) might be because these institutions are
under more regulation than the NFIs. Earlier studies (like Bhuiyan and Biswas, 2007; Haque,
2007; Reaz, 2006; Reaz and Arun, 2006; Siddiqui, 2010) which found a poor governance
standard and indicated that the recent activities of the Central Bank and the legal and
regulatory changes which are made over the last few years in the banking sector had the
potential to improve governance standard in the banking industry; and the mean values of the
Panel-B of Table 6.2 provides a breakdown of the degree of compliance with the Code by
nine major industries as classified by the SEC of Bangladesh. It reports that the leasing
companies are complying slightly better than the insurance companies with mean values
55.50 and 54.28 respectively. The range values in Panel A and B indicate that although the
Banks are on an average complying better than the NBFIs and NFIs, there are companies in
Banks which are scoring lowest among the three and on the contrary there are companies in
the Insurance sector which are complying better than the Banking industries. Moreover,
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there are companies in NFIs (particularly in Food and Allied industry, compliance score 67)
which are complying better than companies in any other industries. In total Banks, NBFIs and
NFIs are moderately compliant (CGI between 60% to 79%) with the Code of Corporate
The highest score among NFIs is obtained by Fuel and Power industry (mean =52.80; Panel-
B), which perhaps reflects the claim of the government of Bangladesh that it has given top
priority to the development of the power sector considering its importance in the overall
development of the country. The government has set the goal of providing electricity to all
citizens by 2021 (Board of Investment, 2010). Moreover the local companies in this sector
are competing with the MNCs which might also have an impact on their level of compliance.
The second and third highest score among the NFIs is obtained by the Miscellaneous and
Food and Allied companies, with a mean value of 52.75 and 52.00 respectively followed by
Pharmaceuticals and Chemicals companies (mean=51.37). The sample of all these industries
includes both MNCs and local conglomerates which are exposed to the international market.
That might be the reason they have reflected a comparatively better compliance status.
In contrast, the Textile companies in the sample which are comprised of local medium sized
companies have scored the lowest, with a mean value of 44.20 and the range of the
compliance score is 35 (44%) to 54 (68%). The study of Sobhani et.al (2009) also found the
Textile industry of Bangladesh to be the lowest scorer when compliance was measured on the
Corporate Social and Environmental Disclosure issues, where the sample textile companies
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Panel-C, the p-value of K-W indicates that the mean score differences amongst the various
different industries is significant and the p-value of M-W suggests that the difference is
The Spearman’s correlation matrix for the dependent variable and the independent variables
is presented in Table 6.3. Other than indicating the correlation coefficient between the CGI
and its explanatory variables and correlation amongst the explanatory variables, a correlation
matrix also suggest if there is any potential risk of collinearity in the regression model.
The correlation matrix shows the correlation between CGI and company size is positive at the
1% significance level. Furthermore, the correlation between CGI and type of industry
suggests that the CGI is positively related to the Bank variable and on the contrary,
negatively related to the NBFIs, and in both the cases the correlation is significant at the 1%
level.
Table 6.3 also suggests that the correlation between CGI and type of auditor (not affiliated
with Big4 auditor) is significantly negative (at the 5% significance level). Other than these
variables, the correlation coefficients between CGI and the other explanatory variables (age,
Multicollinearity between explanatory variables needs to be tested before using the regression
model, to ensure that the regression model is free from bias. Multicollinearity is considered as
a problem if the variance inflation factor (VIF) value exceeds10 (Field, 2009; Jackling and
Johl, 2009; Mutawaa and Hewaidy, 2010). The correlation coefficient values in Table 6.3
indicated that there might be some multicollinearity risk between some variables. However,
the VIF values in Table 6.3 (the last row) gave assurance that the regression model is free
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from the risk of bias because all the VIF values are less than 10 for all of the independent
variables. Hence it provides strong evidence that multicollinearity is not a problem for the
regression model.
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Table 6.3 Correlation Coefficients for Dependent and Independent Variables in the Regression Model
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6.3.3 Analysis of the Regression Model
As mentioned in Chapter 5, in the regression model, the total compliance index, a continuous
variable, is used as the dependent variable and denoted as CGI in the model. The dependent
variable is tested against six independent (predictor) variables- age, profitability, size,
industry type, company type, and finally type of auditor. However, among these variables
‘industry type’, ‘company type, and ‘type of auditors’ were categorical data, hence they were
recoded into different dummy variables against one basic category in each case. The other
three predictors, age, size and profitability (ROA) were measured in continuous scale; but
following prior research (like Akhtaruddin, 2005; Mutawaa and Hewaidy, 2010), the normal
logarithm of this variable is taken to bring the distribution of these variables closer to
normality.
β6 aud_type + e
Where,
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Regression analysis was run using ordinary least squares (OLS) estimates and the results are
reported in Table 6.4. The overall estimation indicates that among the six control variables,
four (age, size, industry type (only NBFI compared to NFI) and type of company have a
statistically significant effect on the extent to which companies are complying with the Code.
Panel-A of Table 6.4 indicates the explanatory power of the OLS model. As suggested by the
adjusted R2, the explanatory power of the regression model of the study is 46.9% (p <.001).
The R2 is 0.530, indicating that the model is capable of explaining a 53% variability in the
level of compliance of the sample companies. However the difference between R 2 and the
adjusted R2 is small, about 6% (0.530-0.469 = 0.061). This shrinkage means that if the model
were derived from the population rather than a sample it would account for approximately
6% less variance in the level of compliance score of the companies. The Durbin Watson (D-
W) test provided assurance about the lack of autocorrelation among the independent
variables. As a very conservative rule of thumb, if the value is less than 1 or greater than 3 it
is considered that there is definitely a cause for concern, or there is autocorrelation issue
(Bowerman and O'Connel, 1990; Field, 2009), however in this study the value is well below
The significance of R2 can be further tested using an F-ratio (Field, 2009). Panel B of Table
6.4 contains the analysis of variance (ANOVA) which tests whether the model is significantly
better at predicting the outcome variable than using the mean. The F statistic (F=8.734) of
this table indicates that the model employed to explain the variation in the level of
compliance is significant at the conventional (p< 0.001) level, and better at predicting the
outcome than simply using the average (mean). Hence we can be confident that the results of
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Table 6.4 Multivariate Analysis
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However, as indicated by the result of Panel C of Table 6.4, some variables are more
significant in explaining the level of compliance. The following section discusses the
Company age denoted by ‘log Age’ is found to be positively related with the CGI. The
findings indicate that if other things remain the same then with a one year increase in the age
of the company, the level of compliance increases by 4.809 units (p <0.05). The findings thus
support hypothesis 1 that the level of compliance with the Code provision is significantly
associated with the age of company. Moreover, the findings suggest that the age of company
The findings of this study thus vary with the findings of Akhtaruddin (2005) who also
reported no association between these two variables, the present study claims the opposite
and indicates that older companies are likely to be more compliant with the voluntary Code
provisions. The difference between these two findings on Bangladesh might be because at the
time when Akhtaruddin collected his data, it was just the initial year(s) of the implementation
of the mandatory provisions he considered, hence he himself mentioned that this may not be a
good enough time to understand the impact of company age on the compliance level.
Whereas using the recent data, the findings of the present study report that there is now a
positive association between the two variables and that the older companies are complying
more than the younger ones. However, Owusu-Ansah(1998) also has similar findings, i.e. a
positive association between these two variables in Zimbabwe. The most likely reason
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behind the better governance standard in older companies is, as have been argued in previous
studies(e.g. Akhtaruddin, 2005; Owusu-Ansah, 1998), the older companies are more
experienced and capable to take additional initiatives to improve their image and thus are
more likely to be willing to improve their governance standard as a marketing tool for
Profitability
Although the companies with higher profitability, which was measured by the ROA, are
expected to comply more than the companies with lower profitability, the findings do not
with the extent of compliance with the Code provisions (p> 0.05). This finding is not
consistent with Akhtaruddin (2005) who found that in Bangladesh companies with higher
profitability are disclosing more. The differences between the findings might be because
Akhtaruddin(2005) used a much larger sample (174) than this study, and measured the
mandatory provisions regarding disclosure; whereas, this study deals with much wider areas
covered by the voluntary provisions. Nonetheless, the finding of ‘no association’ between the
level of compliance and profitability is not unique for this study as there are other studies too,
such as the study of Wallace et al. (1994) who worked on Spanish companies, Street and
Gray (2002) worked on compliance with international accounting standards, and in a recent
study by Mutawaa and Hewaidy (2010) investigated Kuwaiti companies and reported that
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Company Size
The regression model supports Hypothesis 3 that company size as measured by the log of
total assets is positively associated with the level of compliance with the Code provisions.
The findings indicate that if other things remain the same then with 1.00 BDT (Bangladesh
Taka) increase in the total assets of the company, the level of compliance increases by 2.461
points (p <0.01).The positive sign on the coefficient suggests that companies with greater
total assets tend to comply more with the Code than do companies with fewer total assets.
Thus the finding is consistent with the studies on Bangladesh including Akhtaruddin (2005)
where level of disclosure was measured against mandatory provisions and Habib-Uz-Zaman
(2010) who measured compliance with CSR reporting information of Bangladeshi listed
commercial banks. The finding is also consistent with many other studies on developed and
developing countries (Ahmed and Nicholls, 1994; Hossain, 2008; Mallin and Ow-Yong,
Industry Type
Table 6.4 (Panel C) indicates that the type of industry is statistically significant only in the
case of NBFIs. The findings indicate that all other things being equal, the compliance score
will be less by 9.79 points (p< 0.01) than would have been the case for NFIs. The findings
indicate that except for the NBFIs, the industry classification has a negligible effect on the
level of compliance of the sample companies. Similar findings have also been reported by
It was hypothesized that the type of company will be significantly associated with the level of
compliance with the Code, where it was expected that the MNCs which are controlled by the
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parent company and J/Vs and Franchises where the parent company has a certain level of
influence over the corporate management will have a better governance standard than the
local companies. Panel C of Table 6.4 suggests that in both cases the local companies are
complying less with the Code. The findings indicate that the compliance score will be more
for MNCs by 8.24 points than would be the case for local companies and for the J/Vs and
Franchises where the level of compliance score increases by 14.496 when compared with the
However, as mentioned earlier, the findings are not unexpected because the foreign owned
companies are controlled by their parent companies which are in most of the cases exposed to
the international market and are required to comply with international standards of corporate
governance.
Type of Auditors
The findings also do not support the hypothesis that the type of auditor (Big 4 affiliated) is
positively associated with the level of compliance. Although the findings suggest that the
compliance score decreases 1.02 points when the auditors are not affiliated with any one of
the Big4 audit firms, it is statistically insignificant. Hence it cannot be claimed that the
Bangladeshi companies audited by the audit firms affiliated with one of the Big4 audit firms
have better compliance than those companies audited by other types of audit firms. A similar
finding is reported by a recent study (Kabir et al., 2011) which examined the association
between Big 4 affiliated auditors and accruals quality in Bangladesh and found no positive
impact. They (Kabir et al., 2011) believe that the reason for this is due to low demand for
quality audit among the companies of Bangladesh and a weak monitoring systems. However
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the case of Bangladesh is not unique for Bangladesh, as other studies (Mutawaa and
Overall the findings of the regression model suggest that among the six variables –age, size,
industry type (only NBFIs compare to NFIs) and type of company, account for the unique
variance in the outcome variable CGI. The other two predictor variables are found to have no
This section addresses the third research question that aims to identify which provisions of
the Code are most complied with and those which are least complied with. To support this
analysis, at first the level of compliance on each of the provisions included in questionnaire
has been analyzed, followed by an analysis of the most and least complied with provisions to
companies.
There were 34 questions under board issues (out of this 34 questions, 25 were included in
questionnaire and 9 were collected from company annual reports). Board related questions
are categorized into 6 groups and these are: duties of the board; board membership criteria
and nomination of new board member; training; board composition; board agenda; audit
committee.
Table 6.5 reveals that the level of compliance (CGI) with all of the provisions related to
board is at the moderate level (mean 20.88, 61% of the required items). The range values
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indicate that there are companies who score as low as 13 (38%), whist there are also
companies who are almost fully compliant with the Code at 31 (91%).
Figure 6.3 Percentage of the Sample Companies Complying with the Provisions
Relating to Board Issues
3% 4%
44%
49%
Nonetheless, Figure 6.3 suggests that the percentages at these two extreme cases are very
low, i.e. only 3% of sample companies fall at the lower end, indicating their compliance score
is below 40% and only 4% were found as highly compliant. However the maximum number
of companies (49%) is within the range of 79% to 60% compliance; and the rest (44%) are
The findings of Table 6.6 suggest that almost the entire sample of companies are highly
compliant with the first four questions (1-4) and the last two (10 and 11). On the contrary,
only a small number are compliant with question numbers 5, 8 and 9 (percentage of
compliance is 11, 10 and 34 respectively). This suggests that among the 71 companies’
boards 63 do not collectively participate in the appointment of the senior management, and
similarly only a few boards evaluate the performance of their individual members, and only
34% of the sample companies have a succession plan in place for MD/CEO or senior
management.
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Some of the respondents clarified the reasons behind non-compliance in the questionnaire.
developed countries. Moreover, the Companies Act 1994 does not identify who is to be
considered as ‘senior management’. Thus the term varies from company to company, in
Bangladesh; hence the board legally or voluntarily is not supposed to participate in the
board is not legally supposed to look after the appointment of those other than directors.
The sample companies also have moderate level of compliance with question number 7. 59%
compliance with that provision indicates that 41% of the sample companies’ boards do not
evaluate the performance of its MD/CEO. Chapter 3 of this study discussed that in
owned' background, where CEO/MD is the sole decision maker about everything. Later, as
some studies (e.g. Farooque et al., 2007a; 2007b) stated, when these companies became
public limited, many things have changed but that culture of single-point decision making
remained in many cases, though now days CEO/MDs are assisted and advised by functional
heads (i.e. CFO, Sales director, Marketing director etc). However, CEOs are mainly
responsible for making strategic decisions associated with profitability, growth etc. Therefore,
transparency, fairness and social responsibility in decision making as well as would ensure
Table 6.7 suggests that the sample companies are poorly compliant with all the three
provisions relating to board membership criteria. It indicates that in 59% of the sample
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companies’ boards, there are directors who have directorships in more than 6 boards; for 41%
of the sample companies, directors are not made ineligible for re-election if they fail to attend
at least 50% of the board meetings; and in 80% of the sample companies, the board neither
has a nomination committee nor any particular method for nominating new directors to
Table 6.7 Compliance with the Provisions Relating to Board Membership Criteria
Scholars (like Berghe and Levrau, 2004; Mallin, 2005b; Nicholson and Kiel, 2004) have been
arguing for a long time that in order to ensure good governance, training as a method of on-
going development is essential. Mallin (2005b, p.729)“it is essential that directors are
individuals of probity, equipped to do the job that they are appointed to do by virtue of their
experience, skills and knowledge, and – an area that may often be overlooked – that they
undertake appropriate training and development to keep them up to date with all relevant
However, Table 6.8 suggests that the level of compliance is very poor in all of the three Code
provisions relating to board members’ training. The highest compliance score is 36%,
indicating that only 36% of the sample companies’ boards provide opportunities for the
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training of individual directors. Training incurs certain costs and needs certain facilities;
development and training (Mallin, 2005b), However, the findings indicate only 21% of the
Table 6.8 Compliance with the Provisions Relating to Training of Board Members
A significant gap between the standard and reality also exists in the case of corporate
governance training of new directors. Only 9% of the companies reported that they require
However, six of the respondents came forward to explain the reason behind their non-
compliance. In summary, it seems that there are two plausible reasons behind this. Firstly,
this provision is not included in the SEC’s listing regulation, and secondly, there is no such
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Chapter 3 of thesis indicates that there are a few private institutes like BEI which offers directors
training and training on corporate governance, but may be the problem is with a lack of
communication between companies and the institutes; or may be as the respondents indicated, these
few are not enough to support training needs.
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Provisions Related to Board Composition.
Table 6.9 identifies the four provisions related to Board composition. Question 18 and 19
shown in the Table were included in the questionnaire and question (i) and (ii) were answered
The most important fact to note from Table 6.9 is that unlike other provisions discussed
above, 100% of the sample companies are complying with the provision related to the annual
rotation of the directors. However, this outstanding level of compliance is not surprising as
this is what the companies are supposed to comply with according to the Companies Act
1994 provision75.
Although in Chapter 3, the study has identified that the corporate sector of Bangladesh is
mostly comprised of family owned businesses for which separation of the roles of chairman
and CEO is challenging but the findings indicate that the second highest compliance score
(95%) is obtained by question number (i) suggesting that except for a few cases, the roles of
chairman and CEO is separated. Nonetheless, the size of the board seems to be an issue.
Table 6.9, question (ii) suggests that the level of compliance is at a moderate level according
to the corporate governance framework. Although the Code does not identify any particular
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It is important to note that the study could not investigate the provisions related to non-executive
directors, as most of the annual reports of the sample companies did not identify their directors’
classification as executive or non-executive. According to the SEC’s listing regulation, the companies
duly identify whether or not they have independent directors, but they didn’t do the same in the case
of their non-executive directors. Hence, it was not possible for the study to investigate the extent of
compliance related to the non-executive directors. For instance, only 8% of the sample companies
had clearly defined their directors’ profile.
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Companies Act, 1994; Section 91 (2) “Notwithstanding anything contained in the articles of a
company other than a private company not less than one third of the whole number of directors shall
be persons whose period of office is liable to determination at any time by retirement of directors
rotation”.
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range of standard board size, but referring to international best practices the Code
recommends that companies’ boards are to be limited from “7-15”; however according to the
data available in the annual reports, 25% of the companies’ board size does not comply with
Table 6.10 Descriptive Statistics of the Board Size of the Sample Companies
Table 6.10 deals with the descriptive statistics related to the board size of the sample
companies. It suggests that on average, board size is 11 ranging from a minimum of 4 and to
a maximum 23. The data is slightly higher than the findings of Rashid et.al (2010) who
worked with a larger sample (N=274) than this study and report that the average board size in
Bangladesh is 7, and the study by Haque (2007) reports that on average the board size is 9.
However, there is another interesting fact to notice from Table 6.10. Whilst in terms of total
compliance score (see Table 6.2) Financial Institutions were found to be more compliant than
the NFIs, Table 6.10 shows that they are having comparatively larger boards than those of the
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NFIs. Whilst the average size for NFIs is 8, for the Banking and NBFIs it is 13. Moreover,
most of the non-compliant companies (i.e. whose board size is not within 7-15) fall under
A further reflect on the board size in Banks (as indicated in Table 6.10, minimum 6 and
Maximum 23) suggests that the banks whose board size is less than 10 is either a subsidiary
of a large organization or local conglomerate (e.g. BRAC); on the other hand, the banks with
larger board size (15 and above) are local commercial banks which are family dominated.
The plausible reason behind their larger board size might be related to the Bangladesh Bank’s
regulation on the paid-up capital and reserve required for banking institution76. So the bank
owners if not supported by a large institute need to include additional investors to contribute
in meeting the paid up capital requirement. In case of NBFIs as well, the study of Islam et. al
(2010) where they raised concerns about the governance practices in NBFIs finding that an
shareholders who generally belong to a single family and are actively involved in
management and thus ended up with large board size. Although there is one company in the
NFIs whose board is below 7, that is the case only in one company, and the rest comply. The
findings are quite similar to those of Haque (2007) who reported that on average the NFIs are
having a smaller board (6) in relation to the Insurance companies (25) and Banks (12).
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Bank Company Act, 1991 Section 13 and 14 address the paid up capital and reserve requirement. .
According to the regulation, all banks are required to semi-annually calculate and maintain minimum
capital adequacy ratios, i.e. absolute capital for Bangladeshi banks is BDT 4000 million and foreign
banks are required to deposit BDT 4000 million in cash or unencumbered approved securities with
Bangladesh Bank which represents paid up capital and reserves.
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The Companies Act 1994 requires that vacancies on the board should be filled at the AGM77,
which is also recommended by the Code (Question 19); nonetheless, it is surprising to see
that 30% of the companies are not complying with the Code provision, which is also a legal
requirement. The most likely reason behind such non-compliance might be with the
As one of the respondents explained, they are non-compliant because in the case of the
occurrence of a casual vacancy, instead of waiting for the AGM, they immediately appoint
the director and formalize it at the AGM. However, it is important to note that neither the
Code nor the Companies Act 1994 specifies the course of action in the case of casual
The first provision in Table 6.11 deals with the provision which demands companies to
circulate the board meeting agenda sufficiently in advance of the meeting, the compliance
In contrast, the next question of Table 6.11, the rate of non-compliance is much higher than
the first question. According to the Code, the agenda is supposed to be signed ‘solely’ by the
Chairman of the board. However the compliance score indicates that 72% of the sample
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Companies Act 1994, Section 91 (b) “the directors of the company shall be elected by the members
from among their number in general meeting; and(c) any casual vacancy occurring among the
directors may be filled in by the other directors but the person the appointed shall be a person
qualified to be elected a director under clause (b) and shall be subject to retirement at the same time as
if he had become a director on the day on which the director in whose place he is appointed was last
appointed a director”.
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Table 6.11 Descriptive Statistics of the CGI on the Provision Relating to the Board
Agenda
The plausible reason behind such contrasting levels can again be related to the fact that
neither the Companies Act 1994 nor the SEC Guidelines or any other kind of regulation
demands that companies comply with this provision. However there is no such regulation
regarding who should and should not approve the agenda. Moreover, a few respondents
argued with the phrasing of this provision; pointing at the word ‘solely’, they argued that ‘the
agenda is signed by the MD, or by both MD and Chairman; but never by the Chairman
‘solely’.
Table 6.12 suggests that except for the provision related to the qualification of the audit
committee chairman (question ii of Table 6.12), the sample companies are highly compliant
with the provisions relating to the audit committee - 97% companies have an audit
committee; the Chairman of the board is not a member of the committee in 87% of the
companies; 83% of the companies’ audit committees are meeting quarterly to monitor
internal and external audits and preparing reports on all meetings for the board to ensure
accountability; whilst 90% of the sample companies’ audit committees are comprised of at
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Table 6.12 Compliance with the Provisions Relating to the Audit Committee
In contrast, only 52% of the companies are complying with the provision which states that the
Chairman of the audit committee should have a professional qualification and recent and
relevant financial experience, although the same has been demanded by the SEC Guidelines.
It is unfortunate to note that two companies were found (both in banking industry) where they
reported that they comply with such provision but their annual report states that the Chairman
of the audit committee comes from another background apart from accountancy or finance
Table 6.13 indicates that the sample companies are highly compliant with these two
provisions. 81% of the sample companies prepare a Directors’ Report and 97% of them have
a Company Secretary. However, it is also necessary to emphasize that the companies which
did not upload their annual report on the company website or have not included any
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information related to the Directors’ Report or to the Company Secretary within the time of
Table 6.13 Compliance with the Provisions Relating to the Directors’ Report and
Company Secretary
Among the 12 provisions relating to shareholders’ rights, Table 6.14 suggests that the sample
companies are highly compliant (80% and above) with five provisions (Q 2,3,5,6 and 8). The
highest compliance (97%) is achieved with regards to recording and verifying the outcome
and proceedings of the annual general meeting. The second highest score is 96%, and is in
relation to two provisions: shareholders’ voting rights and the opportunity of shareholders to
ask questions of the board during the AGM. This suggests that 96% of the companies allow
Table 6.14 also suggests that high compliance is also reported with the provision related to
the venue of AGM (compliance =93%). And finally the sample companies are highly
compliant with the provision which demands that they ensure that the shareholders receive
notice of the AGM, through a standard means of communication at least 21 days before the
meeting (compliance = 87%, as indicated in Q2 of Table 6.14). All these high levels of
compliance suggest that at least from the companies’ point of view, the shareholders are
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given the opportunity to participate in the AGM, to question the board, and can exercise their
Table 6.14 Compliance with the Provisions Related to the Role of Shareholders
The sample companies are moderately compliant (compliance score ranging from 60% -79%)
with three other provisions (Q 4, 9, and 10, in Table 6.14), indicating that 21% of the sample
companies do not facilitate alternative voting processes of the shareholders beyond that
established by law; and 25% of them do not ensure that their shareholders receive
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information about company resolutions, decisions and operations in a manner that can be
understood by a layperson. Two of the respondents clarified in a note in the questionnaire that
although they publish their annual reports both in English and Bengali, they believe they
should be considered as non-compliant because the Code did not identify what language
would be enough for the shareholders’ understanding who are ‘illiterate’78. Moreover, they
also requested clarification of some of their confusions. For instance they were confused with
the word ‘layperson’ as have been used by the Code. Finally, 28% of the companies do not
comply with the provision related to board member nomination before the AGM.
However, 100% non-compliance is also been found with the provision that demands from
shareholders? Now this is not surprising because only 2 amongst 71 companies said that they
provide a Shareholders Handbook which informs shareholders about their rights and
handbook is not a legal requirement and considering the level of literacy of general
A substantial gap also exists in two other provisions. The compliance score 0.28 in the case
of Question 7 indicates that the majority of the companies do not provide an opportunity to
their shareholders to nominate items for the AGM agenda prior to the AGM meeting, and
many of the respondents stated their reason behind such noncompliance. According to them
companies legally cannot provide opportunities to their shareholders, as the agenda is decided
by the Companies Act 1994. Perhaps for the same reason companies are also showing very
78
Chapter 3 (section 3.2.1) has identified that although the literacy rate is improving over the years in
Bangladesh, it still shows a concern. However, to reflect further on this issue, the education system
and its quality has been highlighted in Chapter 7 (section 7.2).
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poor compliance (compliance = 38%) with the provision which recommends companies to
allow their shareholders to nominate audit firms prior to the notice of AGM79.
The mean score (24.92, 75% of the required items) of in Panel-A of Table 6.15 suggests that
the sample companies have moderate level of compliance (at the higher end of the moderate
level) with the 33 provisions relating to financial reporting, auditing and non-financial
disclosure. However Panel-B of the Table shows that irrespective of the industries, in
comparison with the provisions relating to board and to shareholders’ rights, the sample
companies are more compliant with these provisions. It also indicates that Banks are slightly
more compliant with a mean value of 25.94 (78%), than the NBFIs and NFIs.
To support the analysis, following the categories of the Code, these 33 provisions are divided
into four groups: accounting standards, external auditor, internal auditor and disclosure. The
following sections analyse the level of compliance with each of the provisions in each group.
Table 6.15 Compliance with the Provisions Relating to Financial Reporting, Auditing
and Non-Financial Disclosure Issues
79
Discussion in Chapter 7 (section 7.3.4) also reflects on such kind of provisions and indicates that
there are some provisions in the Code which are hard to comply due to their inadequacy,
inappropriateness or contradiction with the legal provisions.
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Provisions Relating to Accounting Standard
Table 6.16 suggests that all the sample companies are in 100% compliance with the two
provisions related to accounting standards, indicating that all of the sample companies do
ensure that the accounting standards are implemented within the timeframe set by the
accounting regulator (ICAB) of Bangladesh, and all of them have employed qualified
These findings are supported by a recent study (Siddiqui, 2011) which indicates that due to
as a part of ICAB's attempts to comply with the IFAC quality control requirements, a quality
assurance department has been established by ICAB which regularly visits different audit
firms across the country to ensure that their audits are of the standards set by the IFAC. 100%
ICAB(Siddiqui, 2011).
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Table 6.16 Compliance with the Provisions Relating to Accounting Standards and
Accounts
100% compliance in case of question 1 in Table 6.17 indicates that all of the sample
companies believe their external auditors are independent. However, the Code has identified
some other provisions (indicated in Table 6.17, Q 2-7) which according to the Code will help
the companies to ensure independence of their external auditors. For instance, Q2 of Table
6.17 states that the external auditors should be appointed by the shareholders, and 99% of the
companies’ state that they do comply. In Bangladesh, the external auditors are selected by the
directors and they are appointed at the AGM with the vote of shareholders. The sample
companies are also highly compliant with the external audit fee provision. Table 6.17
indicates that, in case of Q6, the compliance score indicates that 96% of the companies do
disclose their audit and non-audit fees. However, a moderate level of compliance is achieved
in case of Q4, Q5 and Q7 (as indicated in Table 6.17) with compliance score 63%, 62% and
77% respectively; and that is why the independence of the external auditors seems to be at
risk. If the external auditors are not rotated every three years in the case of 37% of the sample
activities, and 23% do not restrict the shareholding of statutory auditors to a maximum of 1%
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of the shares in their companies, then the claim of external auditors’ independence may
logically be questioned.
The level of compliance with the provisions relating to internal auditors also reflects a mixed
scenario. Table 6.18 suggests that the sample companies are 100% compliant with the
provision asking companies to have an internal audit function; whilst only 21% of the sample
companies fail to ensure compliance with the provision related to the independence of their
Nonetheless, 46% compliance score, in case of Q3 (as indicated in Table 6.18) suggests that
the sample companies are poorly complying with the provision which recommends
companies to delegate some authority to their internal audit department to propose initiatives
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and changes directly to the board. There is almost no compliance (compliance =10%)
reported with the provision 3(i) of Table 6.18 which recommends that the financial
statements prepared by the internal audit department are to be signed by the Chairman of the
audit committee. The reason might be because the SEC Guidelines demand that companies
have an internal audit department, but do not go further in articulating provisions related to
the work of an internal audit department as has been done in the Code.
Table 6.19 suggests that the sample companies are highly compliant with most of the
disclosure provisions (14 out of 20; compliance score 80% or more); whilst they are having a
moderate level of compliance with two provisions which require that the companies should
disclose their contingent liability (compliance = 77%), and related party transactions.
However the non-compliance may be related to the fact of not uploading the annual reports
online. Companies are supposed to disclose it in their annual report which must be available
to shareholders, but there is no such law that they need to make these information available
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Table 6.19 Compliance with the Provisions Relating to Disclosure
Companies are found to be poorly compliant with two other provisions (Question number 7
and 16 in Table 6.19) that demand companies to disclose their statement of corporate social
responsibility and credit rating. Furthermore the sample companies show a significant gap
with regards to the provision related to the publication of the report on end use of funds
raised from the public when using shares and debentures, having very poor compliance.
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The findings on the disclosure issues are consistent with the findings of other studies (like
Belal, 1999; Belal, 2001; Belal and Owen, 2007; Bhuiyan and Biswas, 2007; Habib-Uz-
Zaman, 2010; Imam, 2000; Sobhani et al., 2009) which found that the companies of
Bangladesh are moderately compliant with disclosure provisions of some other regulatory
and international best practice recommendations. However, Sobhani et al (2009) studied the
recent disclosure pattern of Bangladesh and stated that the level of disclosure has made
In summary the findings on compliance with financial reporting and disclosure issues
i) Compare to the other two areas of the Code (i.e. the board and shareholders’ right
ii) Although the banks reported better compliance standard with the financial
reporting provisions, but unlike the earlier to cases, the mean difference across
compliance pattern is almost similar across FIs, NBFIs and NFIs. This perhaps
reassures the fact that the regulatory pressure has a significant influence over the
iii) ensuring independence to the external auditor and internal audit department is a
concern. Although the findings suggest that the sample companies are highly
compliant with provisions relating to external and internal audit, but the problem
arises when the Code demands independence of these internal and external
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iv) the findings relating to financial and non-financial disclosures suggest that
6.4.4 Comparison of the Most Complied with and Least Complied with Code
provisions in Relation to Legal and Regulatory Requirements
In almost all the cases the findings indicated that voluntary provisions (i.e. those provisions
of the Code which are not found in SEC Guidelines) remained mostly noncomplied with.
Hence, the following section attempts to cross-verify these possibilities by comparing the
most complied with provisions and least complied with provisions with the related regulatory
requirements to understand whether the compliance decision amongst the sample companies
Table 6.20 shows that among the total 79 provisions of the Code which were included in the
questionnaire for evaluating the overall level of compliance, 18 (23% of 79 provisions) were
poorly complied with, or in other words have received a compliance score below 50%. It is
interesting that in the case of all the 18 provisions, none match with either the SEC
Guidelines or the Companies Act 1994. Whilst chapter 4 has indicated that Indian Code has
on the provision relating to nomination committee, the Table 6.20 indicates neither the SEC
Guidelines nor the Company Act, 1994 does the same – perhaps that is the reason the similar
provision of the Code (as indicated in Table 6.20, Q5) remained non-complied. Whereas,
Table 6.21 which includes the 40 provisions of the Code which received a compliance score
80% and above matches either with SEC Guidelines or the Companies Act 1994. Thus, the
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level of compliance seems to be higher when the Code provision matches with both legal and
regulatory requirements.
Whilst at different points of the analysis the findings indicated that the companies’
compliance decision is most likely to be influenced by the legal and regulatory requirements,
the findings of this section indicate that some of the Code provisions which are entirely
voluntary, i.e. not required by any legal or regulatory requirements remained non-complied
with, and on the contrary the high compliance has been achieved on those provisions of the
Code which are also a legal or regulatory requirement. It is most likely that the sample
companies are not responding to the Code itself, rather that they are responding to the
provisions which are mandatory for them. Thus the findings indicate that although there
might be some other causes of non-compliance with the Code provisions, it seems that the
provisions are generally not complied with if they are not a legal requirement.
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Table 6.20 List of the Least Complied with Code Provisions (with CGI below 0.50)
209
Table 6.21 List of the Most Complied With Code Provisions (CGI 80% and above)
210
Table 6.22 List of the Most Complied With Code Provisions (CGI 80% and above) (continued..)
211
Table 6.23 List of the Most Complied With Code Provisions (CGI 80% and above) (continued..)
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6.5 SUMMARY
This chapter aimed to identify the extent to which sample companies are complying with the
Code of Corporate Governance for Bangladesh (“the Code”). In particular it addressed three
1. To identify the overall level of compliance of the Bangladeshi listed companies with
the Code.
attributes.
3. To identify the Code provisions which are most, and least, complied with.
The findings suggest that in general the level of compliance with the Code amongst the
sample companies is 67% of the Code requirements, indicating that the sample companies are
The descriptive statistics in section 6.2, indicated that the level of compliance varies across
three major categories of industries, and the Financial Institutions in general and the Banking
industries in particular were found to be more compliant than the NFIs, a finding which
complements prior studies on Bangladesh. For example Siddiqui and Podder (2002), Reaz
(2006), Reaz and Arun (2006) claimed that the recent initiatives of the Bangladesh Bank and
SEC to regulate the financial sectors of Bangladesh has the potential to have a positive
impact on their governance standard. However level of compliance did not vary much across
industries in case of financial reporting related issues. Furthermore, when the compliance
scores were more systematically regressed by different control variables, the findings did not
support the claim that the Banks are a better performer, in terms of compliance with the
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Overall, compliance was found to be comparatively higher in those industries (i.e. FIs, Fuel
and Power industry and Food and Allied industry) which either have additional regulatory
requirements, are exposed to foreign markets, are in competition with foreign companies, or
are targets of the governments’ special attention for development, indicating that compliance
among companies tends to be higher with the increasing regulatory requirements and pressure
from stakeholders, namely the government. This was further supported by the regression
model which suggested that companies are more compliant if they are MNC or J/V or
The result of the multivariate analysis suggests that age, size by total assets, industry type
(only in the case of NBFI when compared to NFI) and the type of company have a
statistically significant association with the level of compliance with the Code. As indicated
by the t-statistics, all other variables are either positively or negatively associated with the
The findings relating to the most and least complied with areas of the Code suggest that the
overall compliance is at moderate level on each of the three categories of the Code provisions
(the board issues, the shareholder issues and the issues related to financial reporting, auditing
and non-financial disclosures). However, even among that moderate level, the sample
companies are comparatively less compliant in the board related provisions; especially with
board performance etc. The findings also indicated that the plausible cause of non-
compliance is due to the provisions’ ambiguity, inadequacy and contradiction with the
national legislation.
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The compliance status on shareholders’ rights suggests that the shareholders are assured of
their major rights, for instance the voting right, the right of information and are given enough
opportunity to allow them to participate in the AGM, but companies are found to be non-
compliant with taking some additional steps beyond the legal requirements to empower their
shareholders. For example, the Shareholders’ Handbook, additional voting facilities and some
shareholders’ interest. The plausible reasons behind this non-compliance seem to be related
with three major issues: i) inadequacy of the provision, especially if it creates confusion
amongst users; ii) inappropriateness of the provision, especially if it contradicts with legal or
other regulatory provisions and does not fit with country’s existing support facilities, and iii)
The sample companies are more compliant with the provisions relating to financial reporting,
auditing and non-financial disclosures. Although the level of compliance is at moderate level
but unlike the other two areas of the Code, it is at the higher end of the compliance
framework, i.e. near to 80% compliance. However this was expected because over the last
decade the Central Bank of Bangladesh, ICAB and SEC has taken a number of steps to
regulate the financial reporting and accounting standard of companies. Some earlier studies
(Haque, 2007; Reaz, 2006; Siddiqui, 2010; 2011) were thus optimistic enough and stated that
these initiatives of the regulatory bodies have the potential to bring changes in the reporting
standard of Bangladesh; the findings of the present study thus complement their prediction.
However, the findings also indicated that the independence of the corporate governance
monitors of the sample companies, i.e. the internal and external auditors are at stake.
Although companies stated that they do ensure independence of external auditors, they were
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found to be generally less compliant with those provisions (e.g. rotating external auditors,
allowing the internal auditor to propose change) which according to the Code, could help the
companies in ensuring internal and external auditors’ independence. The sample companies
Findings relating to compliance with the Code provisions indicated that the sample
companies are more responsive to the regulatory provisions, section 6.3.4 compares the most
and least complied Code provisions to the SEC Guidelines and the Companies Act 1994
provisions, and finds that the sample companies are highly compliant with those provisions
that matches with other legal and regulatory requirements. Moreover the findings also
indicated that the compliance tends to be higher with the increase of legal and regulatory
pressures, hence the discussion concludes by arguing that the compliance decision of
Before concluding it is noteworthy to mention that many of the sample companies did not
identify their directors’ classification in their annual report as a NED, thus the present study
could not work on the provisions relating to NEDs. However, by doing so, the sample
companies are not in default of the Companies Act 1994, as it does not have any definition of
NED, neither did the SEC Guidelines. The SEC Guidelines required that at least one fifth
(1/5) of the total number of the company's board of directors, subject to a minimum of one,
should be independent directors and the companies are accordingly complying it, or else
In conclusion, despite the fact that the sample companies have a moderate level of
compliance with the Code, the overall findings do not provide enough evidence to support the
claim that the Code has been widely accepted by the companies of Bangladesh. Whilst there
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might be other causes for compliance like the existence of foreign companies, and pressure
from stakeholder groups for compliance, the decision of compliance with any provision in
Bangladesh is most likely to be strongly influenced by the impact of legal and regulatory
Whilst the overall findings of this chapter answer the research questions relating the level of
compliance, it also indicates some questions which remained unanswered here. For instance,
the question arises, if the Code is customized according to the country specific needs then
why are the sample companies not complying with the voluntary provisions? If the Code
reflects an international standard of governance then why are at least the companies which
are exposed to the foreign market, and are considerably aware of the need to comply with an
international standard of governance, not showing a high level of compliance with the Code
for Bangladesh? Finally, and most importantly, if regulatory pressures have a significant
influence over the companies’ compliance decision, then why are they lacking in creating
enough pressure among companies to reach an acceptable level of standard practices? These
questions are addressed in the next chapter which aims to extend the understanding of the
level of acceptance of the Code amongst the listed companies of Bangladesh, and develop
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CHAPTER 7
RESULTS: SEMI-STRUCTURED
INTERVIEWS
218
Chapter 7
7.1 INTRODUCTION
After discussing the results from the questionnaire survey in Chapter 6, this chapter addresses
the rest of the research questions of the study. In particular, using the data obtained from the
semi-structured interviews, this chapter addresses the following three research questions:
What are the causes of non-compliance with the provisions of the Code?
As identified in chapter 5, following the study of Kaler (2002; 2009), Solomon (2007) and
others, ten groups of stakeholders were identified for interviewing. These groups are
representing the claimants on, or those who have direct influence on the corporate
members, company secretaries and managers), legal and regulatory bodies, Government and
exporters, donor agencies and the BEI (as they are the formulators of the Code).
The chapter is divided into four sections: section 7.2 discusses the barriers related to
corporate governance in Bangladesh. Section 7.3 identifies the plausible causes of non-
compliance with the provisions of the Code; whilst Section 7.4 deals with the findings related
to the appropriateness of the model of corporate governance suggested by the Code. Finally,
the last section 7.5, summarizes the overall findings and draws conclusions.
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7.2 THE BARRIERS TO GOOD CORPORATE GOVERNANCE IN
BANGLADESH
From the analysis of the stakeholders’ perceptions five major problems emerged that a
company in Bangladesh faces in establishing good governance (see Figure 7.1) - the weak
legal and regulatory system (94%); the incompetence and the lack of general knowledge
(91%); political system and bureaucracy (88%); domination of family businesses (81%); and
finally the lack of pressure on companies (78%). All these problems are discussed in detail in
Stakeholders’ opinions indicate a big gap between the ideal standard and reality in the legal
and regulatory system in Bangladesh. There was almost a general agreement among
interviewees (94%, see Figure 7.1) that the weak legal and regulatory system is the top most
220
challenge for companies in Bangladesh. A few interviewees, mostly from corporate sectors,
were more critical in criticizing the existing conditions and stated that instead of ensuring
good governance, the legal and regulatory bodies are working as an ‘indirect catalyst’ for bad
Previous studies on Bangladesh (e.g. Akhtaruddin, 2005; Siddiqui, 2010;Sobhani et al., 2009)
also claimed the same. For instance, Mollah (2010) studied the role of the judiciary in
ensuring legal accountability of government officials and its impact on governance in the
context of Bangladesh and claimed that justice in Bangladesh is not blind and not fair for all.
Perhaps that is the reason that 47% of the interviewees of the present study strongly argued
that the typical agency problems and other existing problems of Bangladesh would not be
able to impact the corporate environment to that extent that it is doing now, if the legal
The detailed discussion of the interviewees helped to extend such understanding by finding
that there are four major causes behind the inefficiency of the legal and regulatory system of
Bangladesh, and these are: the increasing lack of legal professionals; inadequate legal
provisions; the lack of implementation and monitoring; and finally the institutionalized
corruption.
80
Quotations are verbatim from interviewees and therefore have not been corrected for grammatical
inconsistencies.
221
Increasing Lack of Legal Professionals
Bangladesh has lawyers who are nationally and internationally recognized. They are
renowned for their professional knowledge and expertise. However, the interviewees,
especially from the regulatory bodies opined that there is an increasing lack of this kind of
professional.
As indicated in Figure 7.2, interviewees believe that three major reasons are causing the
dearth of legal professionals in Bangladesh - the ineffective educational system, the lack of
competent academics for legal education, and finally the lack of awareness among legal
general education system which fails to produce quality students to enrol in law schools.
However, the interviewees from legal bodies strongly argued that the legal education system
has deficiencies too. In the absence of any law for publishing books, the institutions are
lacking quality law books which often are short of references from Bangladeshi legal
structure.
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Hence, as Figure 7.2 indicates, interviewees believe these substandard law books are failing
to provide adequate knowledge among students, and this deficiency continues throughout
In order to verify this claim, this study has reviewed the Laws of Bangladesh and found that
there is actually no legal provision relating to publishing books81. In addition, a short review
81
Although The Printing Presses and Publications (Declaration and Registration) Act 1973, includes a provision
(Part III: XXIII) that “no minor can be printer, publisher or editor, but that is applicable only in the case of
Newspapers”.
223
of the syllabus82 for the LLB honours course for the session 2004-2005 of the Department of
Law, University of Dhaka83 reveals that most of the text books are old, published in the year
1974, 1982, 198484. Moreover, instead of focusing on local laws, many books were found
emphasizing Indian laws. However, it was not possible to properly cross verify the claim that
students are publishing law books. Some authors were found to be the Justice, whilst some
are university professors. However, a recent study (Imam, 2010)also claimed the same and
indicates the possibility of ‘ghost written books’ which cannot be ignored either when the
Furthermore, the lack of awareness among the legal professionals to learn new knowledge,
new technology or new changes of the legal environment is also believed to be responsible
for the existing gap. Figure 7.2 indicates that these three major factors have created a vicious
circle and jointly contribute to the existing gap. The circle indicates that the substandard law
books and lack of competent teachers leads to inadequate knowledge among students, many
of whom become teachers for the legal institutions. So very naturally these teachers who are
unqualified fail to ensure adequate knowledge for the industry and fail to write quality books.
And thus according to the interviewee, this vicious circle is continuously contributing to the
To further understand, the researcher reviewed the requirements to obtain a license for
practicing law in Bangladesh. The findings suggest that like any other common law country
82 This was found to be the last updated syllabus in the departments’ website and is downloadable
http://www.univdhaka.edu/DownLoads/Academic_Program/law_llb.pdf (Accessed on June 28, 2011).
83 University of Dhaka has been chosen because this is the top ranking public University with the highest
number of enrolment of students every year,
84
There is a possibility that the courses are updated, but the website needs updating.
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the graduates need to obtain a licence and the graduates need to pass several examinations
and tests to become an advocate85. However, if the books which are the major contributor of
knowledge are dated and substandard, and there is a lack of awareness amongst legal
professionals, then it might be obvious that even a ‘tough system’ of getting a license will fall
short in ensuring competent graduates. On top of all, the viva voce that graduates in
Bangladesh need to face before getting the certificate also has potential to create scope for
unethical or politically influenced examiners to favor their expected candidates, and thus
Interviewees believe incompetent legal professionals are failing to identify the need for legal
provisions to control the existing corporate environment and even failing to implement the
existing provisions effectively; and that is how the incompetence of legal professionals
becomes a major barrier for ensuring good governance. Fairly typical comments were as
follows:
“If they (lawyers) do not know how to utilize the law and apply it on
criminals then, how can you expect justice from them? In many occasion I
have found our lawyers even confused in interpreting legal
provisions.”(Regulators-D2)
85
After graduation in law from specified universities or after becoming a barrister, “a person is
eligible to appear in the examination held by the Bar Council for enrolment of advocates provided he
has completed six months pupilage in the chamber of an advocate who has practised as an advocate
for not less than seven years and who fulfils in turn other requirements. After passing such a written
examination the candidate will have to pass the viva voce examination and also to complete a Bar
Vocational Course conducted by the Legal Education and Training Institute set up by the Bar Council
for enrolment as an advocate to practise in the subordinate courts of Bangladesh. After completion of
two years' practice as an advocate in any subordinate court a person is eligible to be enrolled as an
advocate of the High Court Division of the Supreme Court of Bangladesh, unless exemption is
granted to him from the requirement of such a practice by the Bangladesh Bar Council and by
fulfilment of other requirements. Such a candidate has to appear and pass in the written as well as viva
voce examination conducted for such enrolment by the Bar Council” (www.banglapedia.org)
225
Inadequate Legal and Regulatory Provisions
In Bangladesh, the companies are basically governed by the Companies Act 1994 (based on
the Companies Act 1913, as revised in 1994). However, for 64% of the interviewees, the
legal provisions are inadequate and ineffective even after reforms. One of the interviewees
from the regulatory bodies was involved in the review committee of the amendment process
i. the lack of initiatives from the legal authority of the legal committee for the
amendment/review process.
ii. the amendments made by competent junior lawyers were rejected because of a
iii. acceptance of some recommendations which are controversial. For example one
“…the Act has given the right that unless an accountant resigns or the
company holds an extraordinary meeting, the company cannot remove the
accountant…I cannot tell you the number of companies that are right today
since 1995 being held hostage by the accountants. I had great difficulty in
removing one accountant who had completely misaudited 10 years of
accounts” (Regulators-D1)
Since there is little amendment, there are many provisions in the Companies Act 1994 which
have become inappropriate in today’s context. With reference to the punishment mechanism,
the interviewees argued that a simple punishment mechanism for gross mistake lacks strength
to create pressure on companies to comply with legal provisions. One of the interviewees
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less than 5 pound) for gross mistake for companies whose monthly turnover
may be million dollar or more”(Company-B3)
Interviewees also criticized the SEC Guidelines. As identified in Chapter 4, the SEC
opined that the provision has been ‘thrown to the market’ without any clear definition of the
companies are using the loopholes and appointing ‘anybody’ who will not challenge
Figure 7.3 identifies that the legal provisions are considered to be inadequate as the political
parties who have a nexus with industrialists, influence any legal amendment process for their
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own benefit. Even if the nexus is, or was not, responsible for the inadequate provisions, the
interviewee fears that they will not allow the amending of anything that threatens their
indirectly encouraging bad governance, and its ineffectiveness discourages people from
appealing for justice, and thus the overall legal system in Bangladesh is perceived to be weak
50% of the interviewees believe that the lack of implementation and monitoring is another
challenging factor for the country, and argued that even within the existing drawbacks of the
legal system, comparatively better governance could be established if the provisions were
properly implemented and compliance was duly monitored. Typical comments from the
"A law imposition without follow-up without enforcement does not mean
anything actually. You will find many companies with worst governance
scenario but in their annual reports they state they are complying with
governance provision. No one even bother to check their status".
(Company-B5)
The recent study by Belal and Roberts (2010) also had similar findings on the corporate
social reporting related laws of Bangladesh. The authors stated that “Bangladesh has a good
number of rules and regulations which are meant to control the social and environmental
behaviour of the companies operating in Bangladesh. However, in reality they are routinely
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flouted due to lack of enforcement by the relevant agencies”(Belal and Roberts, 2010, p.313).
The same is also echoed in the interview results of this study. As indicated in Figure 7.4, the
interviewees of this study opined that there are three main reasons why the legal provisions
i) The domination of the nexus as has been identified earlier, which halt and manipulate
the legal implementation process at any level. Interviewees claimed that even the competent
professionals often find it difficult to implement justice due to the undue influences of the
nexus especially the political parties. However, the question arises, why do the legal
professionals allow anybody to manipulate them? The answer might be related to some prior
studies on the legal system of Bangladesh. For instance Panday and Mollah(2011), and Islam
(2010) observed that commitment to the political parties often makes the legal professionals
compromise with their ethics. Perhaps that is the reason why the political parties and the legal
professionals have both been accused by the interviewees of the study for manipulating the
legal implementation process and amending legal decisions. Even the interviewee who was a
that the legal implementation process will not be able to work properly unless it is
ii) Lack of professionally trained legal practitioners (as has been identified earlier) who
iii) Finally, the weak regulators who often lack knowledge, lack a competence workforce
and lack enough legal power to dominate over the nexus and powerful companies. However,
considering the impact of weak regulators on the overall governance standard, the
interviewees were critical in discussing the issues relating to the regulators of Bangladesh. 45%
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of the interviewees claimed that the regulators of the corporate sector have failed to a)
improvement in the regulatory environment and d) most importantly, have failed to stop or
Figure 7.4 Causes Behind, and Consequences of the Lack of Implementation and
Monitoring of Legal Provisions in Bangladesh
Whilst 41% of the interviewees strongly criticized the extent to which listed companies are
complying with the SEC Guidelines, they opined that in the absence of proper monitoring by
the regulators many of the companies are submitting false reports of compliance. For instance,
several interviewees stated that although on paper the ownership is separated from
management but actually ‘the business is still run by the same old family members’.
Nonetheless, until now no evidence of SEC’s prosecution against such falsification exists.
Weak regulators have also been held responsible for the existing volatile capital market and
the poor audit practices in Bangladesh. When the question was asked of the SEC and DSE
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(Dhaka Stock Exchange) members, ‘what limits them to perform their roles’, they opined that
the SEC should have been properly equipped with qualified and adequate staff, chartered
accountants and an adequate budget, and enough legal power to ensure a healthy capital
market, but unfortunately it is lacking in all of these. On top of all this, the influence of
political power is often stopping them from taking any kind of regulatory action.
However the interviewees from the corporate sectors and stakeholder groups consider that
along with these issues, the lack of ethics of the DSE, and SEC members are also responsible
for the weak capital market of Bangladesh. They opined that, besides the influences of power
holders, some of the employees of the SEC are also responsible for compromising their ethics
The ICAB, as a primary regulator of the audit practice in Bangladesh, was accused for the
poor state of the existing accounting and audit quality. There was almost a general agreement
among interviewees that the annual reports of most of the companies are nothing but a
The discussion of the interviewees from ICAB86 revealed some major issues relating to the
audit environment in Bangladesh, and the findings are presented in Figure 7.5.
Figure 7.5 suggests that the audit quality in Bangladesh is challenged by three major factors:
low audit fees; misuse of power by some members of the ICAB; and the lack of monitoring
86
ICAB has the legal responsibility to monitor audit quality in Bangladesh.
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of the ICAB. Whilst earlier studies (Habib and Islam, 2007; Imam et al., 2001;Kabir et al.,
2011) indicated that the audit fees are extremely poor in Bangladesh, the interviewees of the
present study identified its impact on the governance standards. According to them the low
audit fees are creating fierce competition among audit firms which often forces them to
compromise their ethics and independence. Often, for survival, audit firms need to be
engaged with many companies, at the cost of the audit quality. Moreover, as an interviewee
from ICAB highlights, due to low audit fees, the Institute finds it hard to attract talented
Members of the ICAB also report, as the Figure 7.5 indicates that the quality auditor is
further challenged by the ineffective education system of the ICAB. Whereas even in
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developed countries, there is an increasing number of studies (e.g. Crawford et al., 2011a;
Crawford et al., 2011b; Helliar et al., 2002; Helliar et al., 2000; Lucas, 1997) stressing on
strategizing the audit education system, enhancing the learning process and most importantly
emphasizing the need of involving students in real audit problems, the interviewees of the
study opined that the audit education system so far has not been able to orient the audit
student about strategies to deal with the ‘tricky’ audit mechanism of Bangladesh, Thus their
theoretical knowledge is failing to help the apprentice to understand how to behave in the
audit environment of Bangladesh. Moreover they also opined that once they have graduated,
the incompetence of the auditors is further claimed to be further exaggerated due to lack of
While reviewing the country’s training facilities, the study found that there are some
institutes including ICMA which organizes training programs for auditors such as the
the interviewees argued, most of these facilities are available only for the members of the
institutes. Furthermore, the interviewees also opined that sometimes the power-holders of the
ICAB often misuse/abuse their power to manipulate audit practices, whilst a few of them
opined that the ICAB or ICMAB could do much better if they have some kind of monitor
over their performance. Thus, as indicated in Figure 7.5, the interviewers believe, due to lack
of quality audit bad governance in corporate sector remains ignored, overlooked and
Overall, the interviewees raised concerns, as they believe the absence of timely legal action
and strong law enforcement agencies is encouraging the wrong-doers to continue their bad
practices. For instance, one interviewee from the regulatory bodies opined:
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“Why would a company bother to comply with provisions when things can be
achieved more easily by bypassing laws and in illegal manner? Why would
they bother to be ethical? Is there any evidence that the justice was there
against those big companies who are known for smuggling, manipulating and
cheating?” (Regulators-D2)
Institutionalized Corruption
It has already been discussed how the interviewees feel the involvement with politics makes
legal professionals corrupt. However, that is not the only way corruption occurs among legal
professionals. It emerges from the opinion of 28% of the interviewees that the ‘inbuilt
culture’ of corruption among some legal professionals sometimes makes it frustrating for
companies to deal with the judiciary and law enforcement agencies. One interviewee from
By referring to the term as an ‘inbuilt culture of corruption’ the interviewees indicated that
corruption has become institutionalised not only in legal profession, but also among general
people. However, interviewees clarified from where the culture has been inherited. They
believe, people are not born as corrupt but rather the system of a country sometimes makes
them bound to follow corruption, so is the case of Bangladesh. They believe that the poor pay
structure of the government officials contributes significantly in building up such culture. The
salary scale of the government officials, and the legal professionals, regulatory bodies of
Bangladesh is alarmingly poor. Hence, the interviewees believe that this forces a person to
accept bribes, and do unlawful activities for an extra income to support their family.
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One of the interviewees from academia also argued that the length of legal action sometimes
depends on the amount of bribes provided to the lawyers and to the officer of the lawyer’s
office. It is interesting to note that the interviewees believe that this bribe has infused the
corruption and today it has become an inherited culture among the citizens of the country in
general. Hence the interviewees claimed corruption is endemic and directly or indirectly all
the stakeholders are contributing to the systemic corruption in Bangladesh. For instance,
when it was asked, ‘what happens when the pay rises for these officials?’ The interviewees
claimed, ‘it does not change the scenario as generally people have become habituated in
doing unethical activities’. Interviewees also argued that people are somehow encouraging
Accordingly, law implications are amended to favour particular groups; the companies which
are known for bad governance survive because, according to the interviewees they are
protected by law enforcement agencies via political patronage; and most importantly, the
interviewees raised concerns that the corruption in general is making it difficult to establish
Table 7.1 summarizes the causes behind, and consequences of the weak legal and regulatory
system in Bangladesh.
91% of the interviewees opined that it is not only the legal profession, rather any kind of
initiative to improve governance standards is primarily resisted due to the lack of knowledge
and competence amongst top executive, middle level managers and general workforce.
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“It is not to say that the entire population is incompetent. No, there are of
competent people for whom the economy of Bangladesh has got a
respectable structure. However the number of such competent people is
few compare to the need” (Company-B1)
Table 7.1 Summary of the Problems Related to the Legal and Regulatory System of
Bangladesh
Their further discussion indicates that the lack of knowledge and competence is primarily due
to the deficiencies of the general education system of Bangladesh. As seen in Figure 7.6,
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inadequate course curriculum in educational institutions, an ineffective learning process, lack
of motivated and competent faculty members, lack of resources, commercial mentality of the
educational institutes, lack of quality control over the educational institutes, and national
politics and are the seven major issues that are perceived to have a significant impact on the
Criticizing existing university course-curricula, the interviewees stated that although the
modules are compatible with international standards, they lack enough reference from the
Bangladesh perspective and the needs of the country. For instance, one of the interviewees
“It is not that we expect the new-comers to know everything, but they
should at least have the basic ideas and some practical knowledge of
working in Bangladeshi environment”(Company-C3)
While talking about his own experience, one interviewee also said:
Bangladesh is actually insignificant. During the follow-up sessions the discussants revealed a
triangular influence behind the failure to develop an effective course-curriculum. Figure 7.7
shows the triangular influence, with the main reasons being the students’ interest inn courses
that have market demand, a lack of awareness amongst corporate bodies of how to
Five university course materials (only for Business Studies, as the interviewees indicated on the
87
business graduates specifically) were reviewed. The five universities include both public and private
universities.
237
communicate their needs, and a lack of interest amongst universities to understand the market
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Figure 7.6 Causes Behind the Lack of Knowledge and Incompetence in Bangladesh
239
Figure 7.7 Triangular Influences on the Standard of Course Curricula at Universities
in Bangladesh
This triangular-influence indicates that the students lack proper mentoring in choosing a
course that fits with their capabilities and potential, thus they are misguided by the ‘so called
market need’ i.e. whatever they, and their friends think is marketable in the corporate world.
On the other hand, instead of designing course curricula according to the national and
international market, many of the universities are ‘selling’ the course that they are already
prepared with and persuade the student to take those. Moreover, as they indicated, there is no
urge from the universities or corporate bodies to develop a network to understand each
other’s need and develop a course curriculum that not only fits the domestic needs but also
ii) 12% of the interviewees opined that even with the existing curricula at the university level,
students were supposed to have fundamental knowledge to work in the corporate world, but
the learning process has some deficiencies too. While showing respect for the national
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language the interviewees argued that the method of communication in the educational
Moreover, the learning process lacks practical orientation to the business problems which
could make the students responsive enough to handle different practical situation.
Alam (2009) and Choudhury (2011) raised similar concerns reporting that there is a set of
questions known as a ‘question bank’ or ‘Test papers’. These test papers are commercially
published and sold; and the school teachers also take ‘extra classes’ in solving those ‘Test
paper’ questions. The questions from it are repeated often within one or the next year. So if
one learns the question sets for a few years he/she is certain to pass and even possibly achieve
top marks. One interviewee focused on the problem from the evaluation point of view too. As
he said, it is not possible for a single teacher to mark‘1000 scripts (per course),within a short
time’. Hence often they grade the scripts by just scanning it.
11% of the interviewees believe that the lack of competent academics is also hampering the
quality of education. They argued that the academics are the ones who need to update
scholars. However, the interviewee from academia stated that, compared to other professions
in Bangladesh, the teachers are poorly paid and lack support from institutes or the
As a consequence, as the interviewee said, the teachers are to some extent bound to
amount. Thus the students of public universities in many cases are deprived, as the teachers
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have less time for them. However, it does not mean that private university students are
gaining much from these competent teachers because, as the interviewee said, in private
universities the part-time teachers are obligated to follow the pre-set rules of the universities
which do not always contribute to knowledge production, and give more emphasis to profit
generation. Moreover these teachers are more liberal on grading the students as in most of the
cases the repeating or assigning of a course to a particular teacher (in the case of guest i.e.
part time teachers) depends on the students’ evaluation, and the teachers who are more liberal
on grading and ‘more relaxed on teaching’ are usually popular among students.
for the low quality education in Bangladesh. In explaining commercial mentality’, the
interviewees said that the mushrooming growth of universities occurred in the country since
the introduction of the Private Universities Act in 1992. This opened up new opportunities for
private entrepreneurs, philanthropists and retired bureaucrats to step into this ‘business’.
Consequently, private schools and universities have shot up rapidly without even considering
the capacity building, adequate teaching staff, infrastructure and other facilities that a
university will need. And obviously the quality of education has been compromised for the
sake of business. One interviewee from the regulatory body has shed light on this
"I have been interviewing some graduates these days that are graduated
from universities. Those graduates, are having their MBA degrees with
impressive grades but they know nothing....... fact is students don’t have to
worry if the semester fees are paid duly …certificate is then almost
guranteed. So the reality is the qualification of students depends on
whether the parents have timely deposited the tuition fees”(Regulator-D3)
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The interviewees argued that many of the educational institutes are suffering from a lack of
resources like well-equipped classrooms with teaching aids, laboratories, well maintained
cafeteria, auditorium, libraries with recent journals books, and other publications, IT support
However, national politics seems to have a significant impact on the quality of education in
Bangladesh. The interviewees opined that a significant number of faculty members are
involved in national politics and this is being manifested in grouping, lobbying, and even
leading political moves like meetings and processions. To do that they need the support from
the students, and unfortunately they trade it with undue favour to students in admissions,
grading, research and granting scholarships. Hence, Dove (1983) argued that if obtaining
undue privilege through politics starts from the teachers, then it is illogical to blame students
for doing the same thing. Moreover, the interviewees also reported that being involved in
politics many teachers are not able to take classes regularly. Even when they take classes they
are not well prepared, so at the end, students are being ‘cheated’ out of their education.
atmosphere of study. Bangladesh has a long history of student politics. Many political moves
including the Non-Cooperation Movement in 1969 and the War of Independence in1971were
strengthened by students involved in national politics. The interviewees argue that realizing
the power of students, the government and the opposition parties use them as trump card by
halting classes, and creating chaos on the campus. Hence, the interviewees feel that unless the
students are detached from politics the entire scenario would not change much.
Finally, the interviewees stated that there is inadequate monitoring over the quality of the
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‘mushrooming growth’ of schools and universities in the country, but as usual there is lack of
control on its quality. The interviewees claimed that neither the government nor the public is
concerned enough about this quality issue in the educational institutions. On behalf of the
supervises and monitors all private universities, but pointing to the existing standard of
The interviewees also believe that the culture of ‘not learning’ is also responsible for the
existing gap of knowledge. According to them, the people of Bangladesh are basically happy
with what they have, and in general, they have lack of interest in learning new things.
Moreover, there is a perceived notion that knowledge is gained only from academic books
and syllabus, ‘online facilities are only for social networking’. So, the interviewees believe
that the gap between ‘world knowledge pool’ and the knowledge among the people of
86% of the interviewees opined that lack of knowledge, lack of skill and the flawed education
system are the primary causes behind the existing lack of a competent workforce. In addition,
25% of the interviewees argued that the existing incompetence could be reduced through
training, but the country lacks enough infrastructures to support training facilities. Training
interviewees opined that instead of capacity building, the existing culture perceives training
as a formality, reward, and retreat from work. Two particular comments are noteworthy:
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outside the country that is not always effective…because their
concentration is more on tourist spots”(Company-B2)
“…I know about some incidents where people were sent to overseas
training because their managers could not manage their deserved
promotion or expected pay rise. Therefore they chose expensive training
to compensate Trainees, most of the time, do not expect to learn anything
from training and same is true for their bosses. It has merely become a
formality” (Company-B5)
Table 7.2 summarizes the way the lack of knowledge and incompetence poses challenges to
Table 7.2 Summary of the Problems Relating to the Lack of Knowledge and
Incompetence in Bangladesh
Confrontational politics, some corrupted politicians, and politicized bureaucrats have created
of this study. Figure 7.8 explains the ways in which the interviewees perceive that politics,
government and bureaucracy are instigating corruption and infusing bad governance in the
corporate sector.
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Figure 7.8 indicates that the manipulation of the legal system and the disruption of the
education environment which have been discussed in earlier sections, are just two impacts
among many. It emerges from the discussion of the interviewees that the confrontational
politics has a negative impact on the investment climate of the country. According to them,
the political parties are always in disagreement with each other; instead of leading the country
for development, most of them are in a war of proving each other wrong. As a consequence,
massive strikes and internal and external conspiracy have become a regular phenomenon.
Ultimately the impact is severe on the corporate sector. The companies find it an enormous
struggle to meet their deadlines for transactions. Given all this, and despite the huge potential
of the country, institutional investors hesitate to invest in the country due to this instability. A
recent study on Bangladesh Huque (2011) also claimed that the corruption and adversarial
relationships between the two major political parties have become one of the major barriers in
the way of an effective system of accountability, whilst Azmat and Coghill (2010) argued
that institutional investors’ pressure for good governance could make a significant difference
in Bangladesh, but unfortunately the unstable political clout is making it more challenging.
Discussion in the earlier sections highlighted the way political parties are manipulating the
corporate environment for their benefit. However, this nexus gets a new dimension when the
interviewees from the government bodies refused to accept the claim that the nexus was
formed solely for the benefit of political parties. They argued that these corporate houses
bribe the political parties for the greed for power, for bypassing laws, or to get undue
advantages and especially for their business growth. Hence the interviewees from
government bodies strongly opined that it is illogical to blame only the political members
while both are responsible for this ‘selfish nexus’. During the follow up discussion, admitting
246
the counter claim of the political members the interviewee from the government bodies also
claimed that
“Yes, I am with this statement but only partially. There are both -politics
in the business and business in the politics. Sometimes businesses grow
with support from politicians and sometimes politicians grow with support
from business”.(Followup discussant)
Many newspaper articles (The Daily Star, 2010a; 2010b) are publicly debating the argument
that the political parties and the companies are depending on each other, while one needs
funds to run political activities, the other needs undue privileges to run the company, and a
nexus is formed out of this selfish greed from each side. This is reflected from one of the
“It is the utter greediness and the corporate economic interest that play a
significant role in the whole manipulation of the corporate governance
policies. The political interference argument is the front line cause. The
underlying cause, in my view, is the selfish economic greed and interest of
the corporations that drive them to the power house”. (Government-F2)
that “the Parliament has never been fully effective in the sense that there has never been an
majority, or boycotted by the opposition who did not participate in the proceedings”. 52% of
the interviewees added to such claim and argued that for almost a decade or more, Parliament
has mostly been comprised of members who are ‘a businessman first then a politician’.
Further clarification from the interviewees indicates that their objection is not of politicians
for being in politics, instead the allegation is of those politicians only who are prioritizing
their business over political or national interests. For instance, one of the interviewees from
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“The history of Bangladesh is enriched with the evidence of the
contribution of politicians...Bangladesh is historically bonded with those
political leaders who sacrificed their life, family and everything to develop
a prosperous Bangladesh. Many of those politicians had their business too,
but they used to do business to support their group, support the
community….it is our bad lack. Those politicians are becoming a history
and overshadowed with the emerging groups who have already destroyed
the image and are joining to political groups to hold power and do
business.”(Regulator-D2)
The interviewees further argued that whilst the Government of Bangladesh deserve
appreciation for some initiatives to reform the corporate structure, they are working as a
barrier by protecting some business defaulters. For instance, taking the case of the share
market scandal in 1996, interviewees strongly argued that the names of the defaulters were
not disclosed because they were sheltered by Government. A comment is worthy to quote
here.
“The corporate criminals who brought the innocent people on street have
been identified by the newspapers, media, general public…but we didn’t
see such transparency in our Government. The Government keeps its
mouth shut when they know they are involved in the story…and will make
sure others also do the same” (Company-B3)
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Figure 7.8 Political and Bureaucratic Influences on the Corporate Sector of Bangladesh.
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As Figure 7.8 indicates, political parties have also been held responsible for nepotism. The
interviewees claim that some companies suffer when the Government unduly appoints its
These representatives are argued to often lack the competence to ensure competitiveness for
The interviewees further argued that the red-tape bureaucracy is another challenge for
establishing good governance in Bangladesh. Similar claims were found in the studies of
Chowdhury (2003) and Jamil(2007) who argued that the bureaucratic ills are embedded in the
attitudes among the bureaucrats of Bangladesh, and the corruption is strongly infused in the
However, some interviewees stated that the lack of resources and the economic constraints
also sometimes stop the Government from taking some major initiatives for improving
corporate governance standards. For instance, as one of the interviewees from academia
argued, the poor pay structure of the government officials is one reason for bad governance,
but even if the government wanted it cannot ensure a reasonably fair salary package for them,
it is not their unwillingness, but the inability of the economy to afford the cost.
Overall, as the Figure 7.8 indicates, the interviewees believe, the undue influence of political
parties and bureaucrats are directly or indirectly encouraging corruption and encouraging bad
governance.
The findings relating to politics and bureaucracy in Bangladesh are summarized in Table 7.3.
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Table 7.3 Summary of the Problems Related to the Political Influence and Bureaucracy
in Bangladesh
growing as corporate entities, whilst others are still owner-driven and encapsulated with
stereotypical mentality to manage a business. Perhaps that is the reason the interviewees of
this study have a mixed feeling about the corporate governance structure of family firms in
Bangladesh.
81% of the interviewees argued that there are some family-owned companies in Bangladesh
which deserve appreciation for effectively competing in the global market, but for most of
them establishing good governance is a big challenge. Whilst earlier research on Bangladesh
(Farooque et al., 2007a; 2007b; Imam and Malik, 2007; Siddiqui, 2010; Uddin and
Choudhury, 2008) concluded with a deep concern that the existing corporate features of the
family governed firms are likely to create opportunities for expropriating wealth from
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minority shareholders, and the findings of this research suggest that their concerns are rather
the reality.
The findings indicate that there are four major problems associated with family businesses-
CEO duality, the rubber stamping board, management without authority and finally nepotism
a. CEO duality
Interviewees argue that listed companies which are supposed to separate their ownership
from management, they are complying on paper only. One interviewee from the listed
companies reported,
“…will find many companies where CEO, Chairman are the same person,
it is a ‘one man show’, but their compliance statement will say they are
separated. Even where it is separated, but from the back stage decision is
made by the founder or one single man” (Company-B3)
78% of the interviewees opined that there are agency conflicts between the owners and the
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Figure 7.9 Problems Relating to Family Businesses
253
Ownership is not yet separated because of the wrong perception and stereotype mindset of
family business and two others from regulatory bodies argued that the incompetence of
managers has failed to gain the trust of owners to ‘hand over his/her business’. A feeling of
inheritance and a feeling of possessiveness are resisting themselves from being separated
The interviewee who is playing the roles of both Chairman and CEO reported that,
However, it was interesting to find that although interviewees agreed that CEO duality is one
of the reasons for bad governance in many of the family businesses, a significant number of
interviewees also opined that at this moment, restricting CEO duality may not ensure better
believed that entrepreneurs will hesitate to split the roles, and thus any pressure for
significant number of interviewees also argued that in the absence of competent and ethical
professionals, compliance with provisions against CEO duality may pose a risk on companies’
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survival. Hence, they argued that entrepreneurs must be supported by competent
Many of the interviewees have strongly criticized the effectiveness of the boards of family
owned companies. According to them, the lack of independence has made the board of family
businesses nothing but a rubber stamp. They claimed that in many family owned companies,
the board composition neither complies with the Companies Act 199488 nor with the SEC
Guidelines89. In most of the cases, the boards are comprised of mostly family members. The
power is concentrated within family members. In total, the interviewees claim that the boards’
decisions are actually the decisions of the family or families made at their ‘dinner time’
which are placed on the board just for legal formalities. In the absence of adequate provision,
the ‘purposeful appointment’ of independent directors has also failed to ensure a check and
balance mechanism especially in the case of board decisions. One comment of an interviewee
88
According to Section 90(1) of the Companies Act 1994, “every public limited company, and every
private company that is a subsidiary of a public limited company, must have at least three directors
representing the shareholders”
89
According to Section 1.2 of the SEC order “all companies should encourage effective representation
of independent non-shareholder directors on their Boards of Directors so that the Board as a group
includes core competencies considered relevant in the context of each company. For this purpose, the
companies should comply with the following:-
i. At least one fifth (1/5) of the total number of the company’s board of directors should be
independent non-shareholder directors;
ii. The independent non-shareholder directors should be appointed by the elected directors”.
255
companies did. Overnight they have changed their composition. They
board has got new NEDs too…and who are they?...they are the wives of
the directors, friends, relative…I mean anybody who will not dare to
argue with board decision, or I should rather say family
decision!!”(Company-A5)
The minority shareholders, according to the interviewees are neither aware of what is going
on in the companies, nor are they strong enough to challenge the companies for unethical
Whilst earlier sections indicated that the owners out of their possessive mentality or lack of
trust of managers, reject the idea of delegating responsibilities to managers, the interviewees
further argued that, it is like a vicious cycle, i.e. the competent managers are also not able to
work effectively as they lack enough authority to work, and take independent decisions which
could show their competence. For instance, the opinions in favor of owners emerged as
follows:
“..when out of trust the authority and power was totally delegated to
CEOs in many instances those companies have failed. It may work abroad
but from the Bangladesh perspective this is what happening. The reason is
that, the CEO’s are failing to take right decisions, since they don’t have
stake he is making mistakes in many decisions, there are lapses in many of
his decisions...although they are paid highly and are experienced too.
Then why do you ask me to delegate power to him? ” (Regulator-D3)
While scholars like Wong et al. (2010) Young et al (2008) report that the managers tend to
increase the agency costs by favoring the unfavorable ventures of the family members, the
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interviewees also added to this claim that lack of authority is discouraging competent people
from working in family companies which are causing the owners or the directors to be
d. Nepotism
The analysis of the interviewees’ opinions reveals that all the problems relating to these
companies are directly or indirectly linked to kinship. Whilst one interviewee from the
regulatory bodies reported that due to nepotism, large board sizes have become a burden for
the entire corporate community, interviewees from the corporate bodies stated that it is
nepotism that makes family members believe that directorship of the business is an inherited
Interestingly, the same complaint has also been echoed from the opinion of the interviewee
who is the founder of a family business. He stated that as a founder he has to accommodate
his six brothers as directors regardless of their qualification. However he does not find the
same level of sincerity among his brothers for the company. 34% of the interviewees further
argued, since these directors did not realize the trouble of transforming a small firm into a
company they do not calculate enough before taking any risks as at the end of the day they
consider the founder is responsible for all risks and liabilities. In his words,
“..Yes, at one point I realized I am tired. I cannot fire them, nor can make
them accountable for their decisions. They are callous in making decisions
because they know at the end of the day their brother is there to protect
them……when it is time for profit sharing, they are very aware, but when
you ask them about responsibilities, you will get an answer like ‘go and
ask the chairman, I am just the director’’ (Company-C3)
The interviewees opined that nepotism also creates agency costs. For instance one
interviewee reported that while accommodating the family members, the family firms are
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actually missing the opportunity to hire competent professionals. Whilst, some others claimed,
kinship is a major barrier for evaluating the performance of board members. For instance one
“It is useless to ask the director to evaluate the performance of his dad
who is the CEO of the company. So what do you expect from that
evaluation?”(Donor-K1)
In order to facilitate a quick review, Table 7.4 summarizes the way family businesses are
perceived to be creating barriers for good governance in Bangladesh. Whilst previous studies
on Bangladesh (as discussed in Chapter 3) indicated that the domination of family businesses
is an issue for the corporate sector because the controlling board members exercise extensive
influence on the board decision making process, and manipulate regulations for their personal
interest, the overall findings of the present study suggest that the problem remains even after
the introduction of the Code and the SEC Guidelines. The study extends the previous
understanding by identifying that mere separation of the roles of the CEO and the Chairman
may not protect firms from the undue influence of family members, neither the inclusion of
NEDs in the board will work as a solution to establish better accountability in family
businesses. For ensuring better governance, the findings suggest primarily that entrepreneurs
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Table 7.4 Summary of the Problems Relating to Family Businesses in Bangladesh.
78% of the interviewees alleged that in absence of an effective legal system, good
governance could be promulgated if the companies in Bangladesh had enough pressure from
other sources for better governance standards. For instance, one interviewee stated,
“Even within the existing limitations our RMG sector is complying with
almost every single provision set by their international buyers, why? Because
they know otherwise their foreign partners will not deal with them”
(Company-B1)
Their discussion reveals there could be five sources which the interviewees think could bring
significant changes in the present governance scenario of Bangladesh, and these are: the
(namely employees, government, consumers, suppliers and so on), threat of takeover, and
different other internal and external pressure groups (namely donor agencies, think-tanks,
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a. Weak Minority Shareholders
As presented in Figure 7.10, the interviewees believe there are three major reasons for which
the minority shareholders are weak enough to create pressure on companies to practices good
governance, and these are: lack of education, lack of awareness about their rights and
There was a consensus amongst the interviewees that the minority shareholders are mostly
illiterate and unaware of their rights and responsibilities. Fairly typical comments about them
were as follows,
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Interviewees from the regulatory bodies further argued that the major problem with the
educated shareholder groups is with their lack of vision. 48% of the interviewees from
corporate and legal bodies stated that in the capital market an interest group prevails among
the shareholders, who for their own benefit, spread rumours about share prices, and
surprisingly, both educated and uneducated shareholders are depending on that buzz for their
investment decisions. Company governance standards play almost no role in their decision
“We do not calculate what will happen if the existing management changes,
we do not consider the past performance of X, Y Z who is going to be the
Director and waiting for my vote, we consider what is floating around in the
market...people are buying this share, then let’s go and buy that
too...”(Regulator-D7)
50% of the interviewees strongly criticized the quality of the AGM as a check and balance
mechanism for shareholders. According to their claims, in the absence of pressure from
powerful shareholders and legal monitoring, AGMs have become a mere formality. While
reviewing the Companies Act 1994, it was found that the penalty provision for not
taka (equivalent to ₤80 GBP approx.). Hence the interviewees criticized that this amount fails
to outweigh the cost of organizing an AGM. The interviewees invariably responded that the
shareholders are reluctant to attend the AGM because they do not find it worth in terms of
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Companies Act 1994, Part (iv) 82. “Penalty for default in complying with section 81--If default is
made in holding a meeting of the company in accordance with sub- section (1) of section 81, or in
complying with any directions of the Court under sub-section (2) thereof, the company and every
officer of the company who is in default, shall be punishable with fine which may extend to ten
thousand taka and in case of a continuing default, with a further fine which may extend to two
hundred fifty taka for every day after the first day during which such default continues”.
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their time and energy. However, there is still a group of shareholders who participate, and
whom the companies need for their ‘dummy AGM’ and they participate for the presents
“My participation is not worth [it]; it’s expensive in terms of time and effort.
I am not able to change anything; Companies will do whatever they have
decided anyway” (Follow-up Discussant-2)
48% of the interviewees have indicated another problem in the given scenario. According to
them, there are some shareholders who are knowledgeable and expert enough to challenge the
management, but even they do not participate due to the havoc created by rowdy groups who
are hired by the companies to create chaos in the AGM and indirectly to support the decisions
of the companies’ boards. Some comments will help to understand the situation better:
The emerging features of these hooligans are quite interesting. According to the interviewees
these hooligans are not the local terrors, not even those who are patronized by political parties,
rather they are the people who purchase a minimum amount of shares of many different
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companies and are basically unemployed, and they are hired by the companies to create chaos
during AGM.
be hampered due to three major reasons: the weak shareholders who are not able to
environment and hires ‘muscle man’ groups to discourage shareholders to practice check and
balance mechanism, i.e. asking questions or going voting against companies’ decision; ; and
finally lack of strong legal provisions to stop this manipulation and companies’ unethical
activities. As a consequence, as the interviewees believe, most of the AGMs end with almost
Nevertheless, one interviewee seems to be positive about the future, as he thinks the
knowledgeable people are there who are participating in AGMs and raising their voice,
although the number of these people is few, but he is hopeful that if these experts are
encouraged then it will inspire others to join in and will ensure a successful AGM.
With reference to the major stakeholder groups like shareholders, government, employees,
customers, and suppliers, 34% of the interviewees argued that the stakeholder base in
Bangladesh has failed to create pressure on companies for good governance. While
discussing employees, two different kinds of opinion emerged. One group believes the
employees are not able to create pressure as they are incompetent, not aware of the facts and
most importantly, they do not bother about company’s governance issues. One comment is
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“…the mind-set of our employees. They take their job as their duties not as
responsibilities. A feeling of ownership is absent which could make their
work more effective….they are not concerned about what is going wrong
within the company, other than the board level corruption, there are other
sources of bad practices which occurs at the mid- level, lower
level…employees, they see it but overlooks…they don’t care” (Company-B2)
One counter argument of another group of interviewees was that even among this wide range
of incompetent workforce there are talented people, but the culture is not there to allow them
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Interviewees from both the non-financial and financial sectors agreed that the financer of a
company (usually FIs) could be a major source of pressure for good governance, but they are
failing to act as such as either they do not have access to the board or are not comfortable to
A number of interviewees consider that the consumer base of the country could also create
regardless of the level of education, income or social class, most of the consumers are not
aware of their rights and responsibilities, and prefer to remain silent even when they are
cheated with their purchased product. For instance one interviewee from the legal bodies
"... we have Consumer Protection Act, where you have a power; a position to
gain information you can gather information. But my question is what are
you going to do with it? Do we use it productively?” (Regulator-D1)
However, the most interesting fact about consumers’ behaviour emerged from the opinion of
the member of the Consumers’ Association of Bangladesh (CAB). He argued that the
Consumer Rights Protection Act, 2009 gives power to the District Consumer Courts which
have been established in each locality of Bangladesh, to deal with consumers’ disputes. On
hearing a complaint, the Courts have the authority to issue orders to the defaulting companies.
However although so far no complaints have been lodged by consumers, there is a lot of
evidence in the media that in hospitals the consumers (patients) are being affected by the bad
quality products of a number of companies. So far the CAB, along with the District Courts,
filed a complaint against the unethical practices of many companies and has revealed that
some companies’ products are unhygienic, unhealthy and in many cases it was reported they
are poisonous too. The companies were fined and closed for a certain period; the television
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and other electronic media also publicized it with the aim of raising awareness among
consumers and other stakeholders. However, the interviewee claimed that consumers’
reaction was found to be irrational as instead of avoiding the company products, they were
still buying them, and after the punishment period the companies continued to successfully
An interviewee from academia identified some plausible factors behind this irrational
consumers’ behaviour pattern. Firstly, the majority of the consumers are desperately poor, not
more than 5-7% will fall under higher or upper middle income groups, hence, expecting
quality awareness from the rest is irrational. Secondly, although there is a growing middle
class in Bangladesh with money to spend, they are still price sensitive not quality sensitive.
Hence they are less reactive to any kind of disclosure of unethical practices in companies.
Thirdly the publicity of wrong doing becomes a ‘blessing’ because a large pool of customers
who earlier could not afford the products, are able to purchase them after such negative
Lastly the consumers have become accustomed to being cheated with their everyday products
which might have desensitized their urge to react in the case of bad practices. Hence they
leave all their concerns to religion that ‘GOD will save us’, and purchase at a price they are
“…if they start reacting then they have to react with the toothpaste in the
morning, foods they take from in breakfast to supper, pollution on the road,
drinks, cloths…what not? People are already struggling with a lot of issues,
issues with their survival…so perhaps that is why they are not reacting to
one more corruption of companies”(Academics-G1)
Suppliers and the community are two other stakeholder groups which the interviewees
consider as a potential source of pressure for companies but which have failed in the case of
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Bangladesh. They argue that like any other stakeholder group these two have also been
weakened by lack of knowledge, lack of awareness, lack of concern about the impact of
According to 18% of the interviewees, shareholders’ interests could be better protected by the
pressure of capital markets and the threat of takeovers but unfortunately the corporate sectors
are free from any kind of threat of takeovers. Thus one of them commented as follows:
" ….the companies which are at ‘Z’ category, or the one which has been
acknowledged as poorly performed company would not do that bad if they
were under pressure from capital market, if they would know that they will be
taken over any time if they fail to reach a standard…but this practice is
absolutely, absolutely absent…because as I said there is no other threat,
there is no market threat" (Regulator-D1)
Unfortunately, the cross checking of this claim indicates that the Companies Act 1994 does
not have any provisions regarding the takeover of a company for under-performance or any
other reason. Although Part V of the Act deals with the provisions related to winding up, the
interviewees argued that the process is lengthy, and lacks strength to exert pressure on
“There are just too many companies compare to our economy compare to
business opportunity…, it is very easy to form a company and it’s almost
impossible, almost impossible to wind them up. If you do not allow
companies to fail people will never appreciate the value of a company”
c. Weak Watchdogs
Other than the auditors, the interviewees’ opinion revealed that some organizations like BEI,
Credit Rating Agencies (CRAB), Consumers’ Association of Bangladesh (CAB) and the
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media could play the role of watchdog for corporate governance. Separate interview sessions
In answering the question about ‘what problems they face in promoting corporate
governance’, the BEI reported that they found it an enormous struggle to bring the directors
into training on corporate governance. However it was much easier when the training was in
affiliation with the regulatory bodies. Hence they believe lack of legal power is limiting them
to work on governance issues. Furthermore, they argued that lack of funding is their major
challenge for continuing the corporate governance related projects. Similar view was
reflected in the recent study on the corporate social reporting in Bangladesh (Belal and
Roberts, 2010) where the authors claim that the pressure groups in Bangladesh are not well
funded or organized to work as a catalyst for improving corporate social reporting standard.
A similar kind of complaint emerged from the CRAB and CAB. Both believe more legal or
regulatory power would help them to perform better. In the case of CAB, they argued that the
watchdogs of Bangladesh are actually toothless because of two major issues. One is lack of
legal power and the other is lack of funds which forces them to concentrate on survival
Unlike other groups, the watchdog role of the media was, broadly speaking, appreciated by
the interviewees. They opined that at the present time the privatization of news and electronic
media has brought some changes in corporate behaviour. However 12% of the interviewees
opined that the media is being often pressurized and bribed to hide “reality” from the general
public.
All these facts and figures related to the failure of all these five pressure groups in
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The overall discussion on the barriers to good corporate governance practice in Bangladesh
reveals that the country has five major challenges to face in ensuring good governance.
Whilst the legal and regulatory system is considered as fundamental for good governance,
there was a general agreement amongst interviewees that the legal and regulatory system is
the most significant barrier in Bangladesh – it is weak, inadequate and to some ineffective as
directors, managers and the general workforce was identified as the second major challenge.
While discussing in detail the causes and consequences of the existing dearth of professionals
and knowledgeable people, the interviewees argued that the standard of governance in
Bangladesh could be improved faster if people were competent and knowledgeable enough to
understand the benefit of good governance. Whilst Chapter 3 that identified politics is
historically related to the socio-economic sphere of life, the findings here suggest that politics,
Government and bureaucracy from the third major barrier to good governance of the country.
discussing the way the politics of Bangladesh is corrupting different spheres of the corporate
Problems related to family businesses were found to be the fourth major barrier and the
interviewees indicated that many of the typical family governance issues like agency conflict
between owner and minority shareholders, lack of monitoring over board performance, and
domination by family members do exist in the corporate structure of the Bangladesh. Finally,
governance is the fifth major issue for Bangladesh. Whilst the shareholders, were alleged to
be mostly illiterate, unaware about their rights and responsibilities, AGMs were claimed to a
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formality only. Employees were accused of either being incompetent or lacking power to
exercise good governance. The watchdogs (other than the legal and regulatory bodies and
regulatory power. Thus, the overall discussion on the barriers to good governance suggests
relation to corporate governance, this section addresses the next research question which
intends to identify the causes of non-compliance with the provisions of the Code of Corporate
Governance for Bangladesh (“the Code”). It was interesting to find that the interviewees
agreed that the Code has not been well accepted by the companies in Bangladesh. They
opined that the listed companies are following the SEC Guidelines. This perhaps supports the
findings in Chapter 6 which indicated that the listed companies are most likely to be
complying only with the SEC Guidelines for aligning their corporate governance standards.
In response to the question, ‘why didn’t they ensure compliance according to the only
voluntary Code of Bangladesh?’ the interviewees’ stated that whilst the barriers as discussed
in the earlier section pose strong challenges for companies in ensuring better governance
standards, there are seven particular reasons behind the non-compliance with the Code. As
indicated in Figure 7.12, these causes are: the lack of legal power, the communication gap,
the lack of compliance culture, the inadequate provisions, the lack of knowledge, the lack of
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motivation to comply and finally the lack of infrastructure. The following section details all
In section 7.2, the interviewee from BEI claimed that that the lack of legal/regulatory power
is one of their major challenges for ensuring better governance standards in Bangladesh. In
total, 96% of the interviewees in general (as indicated in Figure 7.12) supported such claim
and agreed that the Code has not been accepted by the companies primarily because it lacks
the legal power of enforcement. Their core argument is that the country is not yet ready to
adopt any code unless it is imposed on them as a legal or regulatory requirement. Fairly
“We are still having the first generation business, the literacy rate is still not
up to a standard, and corporate culture is yet to develop…so it is not the
right time to expect from Bangladesh to voluntarily comply with code
provisions” (Company-B3)
The interviewee from the BEI also agreed with such claims and reported that their corporate
governance initiatives would be much easier to implement if they had some legal power to
control corporate practices. Similar findings emerge from some recent studies on Bangladesh
(Mollah, 2010; Panday and Mollah, 2011) where the authors also found that the judicial
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Figure 7.12 Causes of Non-Compliance with the Code Provisions
75% of the interviewees believe a communication gap between the Code and its targeted
users is another major reason behind non-compliance. They argued that the Code
process. Moreover, considering the voluntary nature of the Code, the interviewees further
argued that the BEI should have conducted regular and continuous awareness building
programs which could educate companies about the importance and benefits of the Code.
Perhaps that is the reason it was not surprising to experience some interviewees who opined
that there is no Code in Bangladesh except for the SEC Guidelines. Some comments are
"… A new code? But, I know about the SEC Code only"- (Company-C3)
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“…No, I don’t think there is any code in Bangladesh on corporate
governance. I deal with companies’ bad practices with their products and
services; I deal with the exiting corporate legal provisions. According to
me there is no such code for Bangladesh” (Consumer-I1)
An interviewee from the regulatory bodies thus criticized the awareness building programs of
“Before introducing the Code in the market, BEI should have considered
that the Code is supposed to be voluntarily complied, that means
companies have to be self-motivated for compliance not
pressurised”(Regulator-D1)
However, fairly typical comments from the interviewees who attended trainings organized by
A better explanation of what went wrong regarding the communication was found from the
opinion of one interviewee who was involved in the taskforce for the Code development.
According to the interviewee, BEI did organize some seminars, workshops and training, but
they did not continue it for long for better implementation or any follow up process to
understand the extent to which the Code has been appreciated or adopted by the companies.
Hence according to the interviewee, it is not logical to expect compliance with a Code which
“Did they (BEI) try to understand what happened to the Code they
developed? why companies are not complying? Nope. So it’s not fair for
anybody to throw out a code in the market and to expect something to
happen”(Regulator-D1)
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The question arises as to why the BEI did not continue communicating the Code to its
expected users. The plausible reason is perhaps related to the opinion of the interviewee from
the BEI who reported that they have willingness to proceed further for ensuring faster
implementation of the Code and better compliance, but they were limited with their funding.
Since BEI is a donor-funded organization, it could not proceed further due to lack of funding.
Due to this lack of communication, people are either completely ignorant about the existence
of the Code, or have wrong perceptions about it. For instance, two of the interviewees from
the listed companies claimed that they did not pay much attention to the Code because the
entrepreneurs had not been involved in the Code formulation process. According to their
perception, the Code was formulated by some academics, bureaucrats and some corporate
people who hardly have any connection with real business issues. Whereas, Chapter 4 of this
study identified that the taskforce for the Code formulation was a good mixture of different
stakeholders, where 43% were professionals from corporate sector and only 11% were
academics, and 11% were bureaucrats who have a direct link with the corporate sector of
Bangladesh. Moreover the rest, 46%, was comprised of different stakeholder groups who are
expected to have added value by considering the stakeholders’ needs while developing the
Code provisions.
The influence of culture on compliance seems to have captured the attention of a huge
number of studies (like Archambault and Archambault, 2003; Doupnik and Salter, 1995;
Haxhi and Ees, 2010; Mir et al., 2009; Zarzeski, 1996). However, 43% of the interviewees of
the present study indicate that lack of culture to comply with the provisions is also a reason
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The overall discussion revealed there are certain aspects of the culture which influence
people’s compliance decision. For instance, a few interviewees argued that in general, people
in Bangladesh are not clear about the ethics and have a culture of violating rules which might
have influenced their decision of non-compliance with the Code. Fairly typical comments as
follows:
“In general, we are not abided by any kind of law. We feel proud if we can
break the law. That is in our culture you know. It’s not only culture it is in
our gene….. It is not in our culture to follow a code automatically and I
should rather say, follow good things regularly in every business
transactions”(Company-B2)
The culture of resistance has been emphasized by 28% of the interviewees. According to
them culturally the people do not always welcome new things or new changes. This low
degree of tolerance to any kind of change is believed to have made them resistant to
Moreover, some attitudinal issues emerged from the opinion of the interviewees which seems
to have an influence over the compliance decision of companies. For instance, some
interviewees were arguing that they did not emphasize the Code because BEI did not invite
them to participate in their training, whilst a few opined they are successful in ensuring
profits so they do not need to know how to ensure better practice, which perhaps further
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7.3.4 Inadequate/ Ineffective Code Contents
Code contents are vital for ensuring compliance (Erwin, 2011), whereas 39% of the
interviewees opined, non-complianceis inevitable with some of the provisions of the Code
due to inadequacy or ineffectiveness. For instance, interviewees from the corporate, legal and
regulatory sectors strongly criticized the existing provisions relating to NEDs. Referring to
their experience with the appointment of independent directors is compliance with the SEC
Guidelines, the interviewees suggested that the Code should have articulated some specific
provisions relating to the qualifications, the selection and appointment process of NEDs, and
most importantly some provisions to ensure that the NEDs can independently exercise their
“It’s not that Bangladesh does not have competent people who can
successfully perform the roles of a NED. But the problems is companies
need to appoint the right person, companies need to allow them to have
their independent opinion”(Company-C1)
Whilst, an interviewee from the regulatory bodies argued:
However, a good number of interviewees both from the corporate and regulatory bodies also
argued that the concept of the NED is ineffective in ensuring good governance because
according to the provision, the NEDs’ remuneration is very less compared to their assigned
responsibilities. Hence they argued, instead of focusing on NEDs, the Code should have
emphasized more the qualifications, competence and evaluation of the executive directors
who have the power and authority and a stake in the business. Fairly typical comments were:
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“Why focusing on NEDs now? You need to ensure the competency of the
executive directors first. They have interest in business, so if you can
change their mind-set to do business properly many of your problems will
be solved”(Company-A2)
Thus they believe if the existing provisions are imposed on companies, non-compliance or
mock compliance will be the obvious consequence. It was interesting to find that their claims
echo the empirical findings of Rashid et al. (2010) who examined the influence of corporate
performance in Bangladesh and found that the idea of the introduction of independent
directors may have benefits for greater transparency, but the non-consideration of the
may not result in economic value added to the firm. Moreover studies of neighbouring
countries (like Aggarwal, 2010; Olatunji and Stephen, 2011) also have similar findings and
urged for a reformulation of the provisions according to the country context. Perhaps that is
the reason (as discussed in Chapter 4 of the present study) the revised version of the
voluntary Code in India has detailed its provisions relating to independent directors.
Furthermore, the interviewees also argued that the provision relating to the separation of the
roles of Chairman and CEO is inappropriate for Bangladesh. Their argument is that
Bangladesh is mostly dominated by family businesses where the first generation is still
running the business and many of these family businesses have become conglomerates,
showing growth, and paying dividends. At this point if the Code demands the management to
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consequence. Hence the interviewees stated that to make it work the policy makers need to
educate these companies about the benefits of the Code, and convince them before
introducing the provision. As one interviewee from such a family run conglomerate company
explained,
Hence, the interviewees stated it would not be surprising if the companies disagree with
compliance with that provision especially when there are empirical findings (Kota and Tomar,
2010) on neighbouring countries that the CEO duality structure contributes positively and
Criticism has also been raised against the Code provision relating to the evaluation of the
performance of the CEO and the board members. They argue that in a country where the
companies are mostly family businesses and boards are comprised of family members, it is
not useful to evaluate board members’ performance as the truth is difficult to reveal.
Moreover, a few interviewees also argued that the Code should have also articulated some
The discussion indicates that the criticisms about inadequacy and ineffectiveness are mostly
related to the board related provisions. It is interesting to find that whilst the interviewees’
opinions indicate that the inadequate provisions relating to board provisions will encourage
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non-compliance, the findings in Chapter 6 complemented this claim by finding that the
sample companies are mostly non-compliant in the case of board related provisions.
Whilst the earlier section indicated that the lack of knowledge amongst people in Bangladesh
is one of the major barriers of good governance in Bangladesh, 36% of the interviewees
believe, due to this inadequate knowledge the Code has not been accepted yet. One of the
interviewees from the regulatory bodies stated that if the companies were well aware of the
then they would not wait for any sort of legal pressure to comply, rather they would be self-
resist compliance due to wrong or negative perceptions towards corporate governance. Hence
they argued that the lack of knowledge and lack of awareness amongst companies are also
Earlier studies (like Berente et al., 2010; Sacconi and Faillo, 2010) suggest that compliance
32% of the interviewees believe the entrepreneurs or the professionals lack self-motivation to
bear the cost of changing the governance standard. One interviewee from the IMF, who was
one of the major problems they faced in convincing directors of the need for better
governance, is their lack of motivation to follow any guideline for better governance. In
detailing the reasons behind this, the interviewee explained, there is no official business case
for good governance in Bangladesh; some companies are doing well, having a better
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governance standard and on the other hand some have failed and become bankrupt, but so far
there is no scholarly work in identifying why and how their governance standard is
responsible for their performance. Whereas, as the interviewees argued, these kinds of
business cases/studies could serve as a more effective tool than the cases of other countries to
However a few others argued that the institutes which have organized corporate governance
training are also responsible for the existing lack of motivation among companies to comply
with the Code. According to them, if trainees do not implement their learning into their
business practices, then it can be considered as a failure of the training institutes which could
25% of the interviewees believed the lack of infrastructure is also a reason for non-
compliance with the Code. They argued that disclosure of information is often difficult due to
lack of technological support. Moreover, the interviewees argued that the Code suggests that
companies to make the shareholders handbook available to all the shareholders, this may not
be feasible for companies in Bangladesh, because the information technology or even postal
Referring back to the provision of the Code recommends directors be trained in corporate
governance issues, the interviewees opined that this provision is more likely to be non-
complied with because Bangladesh does not have enough training facilities to support such a
provision. The compliance status in Chapter 6 also supports the claim and reports that almost
all of the sample companies are non-compliant with this provision of the Code.
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The analysis of the cause of non-compliance with the Code for Bangladesh indicates that
there are seven particular reasons for non-compliance with the Code. As identified in section
7.3.2, there was a general agreement amongst interviewees that the Code has not been
accepted by the companies of Bangladesh primarily because of its voluntary nature. However,
section 7.3.3 to section 7.3.7 indicated that the interviewees also believed the voluntary Code
compliance could be created; if the Code could ensure none of its provisions are inadequate
or ineffective; if the users of the Code were educated enough to understand the benefit of
compliance and had self-motivation for compliance; and finally if the country could provide
Chapter 4 of this study has identified that the Code and the SEC Guidelines both reflect the
perceptions regarding the robustness of the shareholder model of governance in the context of
Bangladesh is analysed. Then in section 7.4.2, the feasibility of adopting the alternative one,
discussed. As in Chapter 2 it was identified that the critics of the shareholder model believe
(like Belal, 2004; Kaler, 2002;Rwegasira, 2000) that the stakeholder model would be more
appropriate for countries like Bangladesh. Finally, the perceptions relating to the optimal
solutions for Bangladesh were analysed in pursuit of identifying the best model of
governance.
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Both shareholder and stakeholder perspectives of governance have defined, in their own ways,
the purpose of the corporation, the major governance problems, the causes of non compliance
with standards, and their most appropriate solutions (see Gamble and Kelly, 2001; Letza et al.,
2008; Letza et al., 2004b; Letza et al., 2004a; Sundaram and Inkpen, 2004). Hence, in order
to address the research objectives discussed above, the interviewees were first guided through
those theoretical assumptions. Later, they were asked to express their further opinions (if any)
governance: the principal-agent and the myopic market model. The principal-agent model is
fundamentally based on the assumption that the social purpose of corporations is to maximise
wealth for its shareholders (Danielson et al., 2008; Jensen and Meckling, 1976; Letza et al.,
2008; Smith, 2003) and considers that the major problem of corporate governance is with the
universal agency problem. However, section 7.1.4 of this chapter has identified that
Bangladesh is overburdened with problems like a weak legal and regulatory system,
According to the theory, the agency problems arise when the agent does not share the
principal’s objectives (Fama and Jensen, 1983; Jensen and Meckling, 1976), however the
findings of the present study indicate that the agency problems arise in Bangladesh due to the
information asymmetry between the owners (large/insider shareholders) and the minority
(outside) shareholders. They believe that it is mostly evident in family businesses where the
executive managers do not hold enough power unless they are from the controlling family.
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Theoretically two types of problems occur from the agency relationship (Berle and Means,
1932; Letza et al., 2008).Firstly, because the agents’ activities cannot be verified properly,
that provides opportunities for the agent to work in their own interest. Although the
interviewees agreed that this kind of agency problem prevails in Bangladesh, but stated that
the manipulation is done by the board members, not by the agent. Since, the boards of family-
run companies are mostly comprised of family members, they believe that the performance
Secondly, theoretically the problem with the typical agency relationship arises when the
principal and the agent prefer different actions because of their different attitudes toward risk
(Danielson et al., 2008); but 68% of the interviewees argued that this is not the case in
Bangladesh as in most of the family businesses, the power is still centralized within family
members, and in many cases the decisions are still made by one person. Jensen and Meckling
(1976) argued that due to these two particular agency problems, agents’ activities should be
monitored and that is what creates agency costs(Letza et al., 2004a; Mallin, 2010; Sundaram
and Inkpen, 2004). Whilst the interviewees opined that the agency costs in Bangladesh arise
from some other sources, for instance, the failure of NEDs or independent directors increases
agency costsby favoring the unfavorable ventures of the family members, whilst nepotism
According to the theory, agency problems can be better addressed by making an efficient
contract and optimal incentive system to align the behaviour of the managers so that they
work in the best interest of the owners (Blair, 1995; Jensen and Meckling, 1976; Sundaram
and Inkpen, 2004). It also recommends the introduction of a voluntary code and appointment
of NEDs(Letza et al., 2008; Letza et al., 2004b;Letza et al., 2004a) who will work as a
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control mechanism against the self-interest of agents. However, interviewees in general
rejected the acceptance of these recommendations as optimal solutions for dealing with the
agency problems of Bangladesh. 98% of the interviewees opined that removal of restriction is
not an option for Bangladesh and believe that culturally the people of Bangladesh are not
keen to abide by norms unless it is required by legal or regulatory bodies. 64% of them
further added to this argument by claiming that the country does not need any additional
restrictions, rather it should focus on what it already has for market and corporate control and
existing provisions. One comment from the corporate lawyer is noteworthy here,
The majority of the interviewees were against a voluntary Code as a mechanism for
improving corporate practices. As discussed in the earlier section, the interviewees in general
preferred a legally enforceable code for Bangladesh, whilst some of them extended this
Bangladesh, and once the country adopts the culture of good governance, restrictions can be
relaxed gradually towards being completely voluntary. However, they strongly opined that
the extent of any compulsory or voluntary mechanisms will depend on the countries
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adaptability, culture and the strength of legal system. The interviewee from the CRAB
"At this moment we are in a very early stage. Strong restriction and
control is necessary first, but once the culture of governance starts taking
place the rules can be incrementally relaxed, but regulators need to keep
an eye all the time to understand to what extent they can loosen up
restriction or offer voluntarism”.
And the regulators offered the same solution and opined the same,
By emphasising the extent of compliance with the Code and the SEC Guidelines, some
interviewees argued that companies are, at least to a certain extent, complying with the SEC
provisions because it is their listing regulation, and also because the SEC has some evidences
of delisting some companies for not complying or explaining the reason of non-compliance
with SEC regulations91; whilst, they argued that none of the companies have adopted the
91
The Dhaka Stock Exchange website indicates some evidence of the delisting order of SEC. For
instance on October 5, 2010, SEC issued SEC’s Directive No. SEC/SRMIC/94-198/623 regarding
delisting of the securities of 4 listed companies and place them in the OTC market for trading
(www.dsebd.org)
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Regarding the NEDs, the study has already identified that the interviewees believe the
concept of NEDs is already not working in Bangladesh. The lack of competent NEDs, the
lack of authority and the purposeful selection process of the NEDs have placed the NEDs’
independence at stake; even an attractive incentive system will increase such dependency of
the NEDs. Instead, 24% of the interviewees believe that if good governance is to be
Unlike the principal-agent theory, the assumptions and solutions of the myopic market model
were accepted by a good number of interviewees. This model argues that the Anglo-
performance while ignoring the long term value and competitiveness and sustainability (Blair,
1995). 56% of the interviewees shared the similar view that the traditional corporate
long-term value and the competitiveness of the corporation. However they argued that it is
not the financial market that often forces managers to behave in a way divergent from the
maximization of the long-term wealth for shareholders, rather it is due to the shareholders
themselves and also the stakeholders who lack adequate knowledge and lack the
understanding of the impact of short-term returns, and thus creates a direct and indirect
The interviewees also agreed with the proposed solution of this model that promoting an
environment to encourage long-term horizon would be a good solution for addressing these
issues. However they opined that creating a culture for long-term performance will take time,
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as the shareholders, managers and almost the entire range of stakeholder groups are short-
“It would be too optimistic to expect that our shareholder will be loyal
enough to emphasis long term return, at least I can’t see it within next
10/20 years. It is not to say that, it will never happen, it will… but you
need to allow them some time to make them understand the benefit of long
term vision, to encourage the voice of shareholders who knows when to
raise voice”.(Company-B2)
Table 7.6 summarizes the perceived notion of the interviewees about the appropriateness of
interviewees agreed that agency problems do exist in Bangladesh and the companies are
short-term oriented too, they argued that these problems appeared in some other forms
different to what the theory says. Moreover they indicated that the optimal solution for
Bangladesh is the one which addresses the needs of the country. Nonetheless, the
interviewees were not denying the merits of any of the models of shareholder perspectives,
but their discussion indicated that the reality in Bangladesh is quite different than the
theoretical assumptions.
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Table 7.6 Perceptions Relating to the Shareholder Perspectives of Governance in Bangladesh
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7.4.2 Perceptions Relating to the Appropriateness of Stakeholder Perspective of
Corporate Governance in Bangladesh
The most fundamental challenge emerged against the central proposition of stakeholder
perspectives of governance is the view that the purpose of a company is to maximise the
interest of its wider stakeholders (Blair, 1995; Freeman, 1984; Keasey et al., 1997). 88% of
the interviewees strongly opined that the propositions of the stakeholder model are attractive
and something which are ‘good to adopt’, but the country is not yet ready to adopt such a
‘wide perspective’. The analysis of their perception reveals the interviewees are disagreeing
to accept stakeholder model of governance as the appropriate one for Bangladesh due to four
reasons.
Firstly, the interviewees rejected the orthodoxy of the stakeholder theory that the well-being
interest of shareholders (Danielson et al., 2008; Ehrgott et al., 2011; Letza et al., 2008; Letza
et al., 2004a). The interviewees argued that, compromising shareholders’ interest for the sake
reference to the Companies Act 1994, interviewees stated that legally companies are liable to
ensure the maximum return to its shareholders. Since shareholders are the major stakeholders
maintain international best practices, companies are expected to consider the interests of its
other major stakeholders too but they strongly emphasized that that consideration should not
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Secondly, the interviewees in general rejected the theoretical presupposition of considering
the interest of ‘all stakeholders’. They argued that as the companies in Bangladesh are
already overburdened with different socio-economic challenges, which makes it very difficult
for companies even to maximize the return of its shareholders; and at this point considering
the interest of ‘all’ would threaten their survival. Considering the interest of all stakeholders’
achieve. Thus they feel that it would be over ambitious specially for small and medium
Chapter 2 discussed about some previous studies (e.g. Jenson, 2000; Letza et al., 2008; Letza
et al., 2004b; Letza et al., 2004a; Sundaram and Inkpen, 2004)which argued with the same
logic and stated that ‘multiple objectives is no objective’. While, Sternberg(1997, p.5)claimed
accountability that is diffuse, is effectively non-existent” . Moreover, there are some other
difficulties with the notion of the rationality or utility maximization concept (Letza et al.,
2008; Letza et al., 2004b;Letza et al., 2004a). For instance, previous studies have considered
that the standard measure of evaluating all the different stakeholders’ is oversimplified and
unrealistic, as they believe, “preference quantification is not at all that simple and one person
cannot exactly say by how much they prefer one choice over the other; and there is no
linkage between rationality and maximization if one does not need to measure some ‘utility’
like goodness, acceptability, or desirability” (Letza et al., 2008, p.24). A comment of one
interviewee who was a company secretary and the Head of Legal department of a listed
“With the changing corporate world, the needs, demands and wants of the
stakeholders are changing too. How can one company identify these
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multidimensional preferences, and how do you want me to measure the
extent to which they will consider it maximum? These perceptions of
satisfying all or reaching the maximum for all is hypothetical, at least not
possible for Bangladesh”(Company-B3)
Thirdly, the interviewees believe it will be more challenging for companies to ensure
reputation for the ethical treatment for their stakeholders and that will help them to build up
exchanges. This is because ethical behaviour reduces the costs of social association (Jones et
al., 2007; Letza et al., 2008), and thus companies are considered to be able to achieve
competitive advantage through both internal and external relationships(Letza et al., 2008).
However, the interviewees argued that achieving competitive advantage through such
relationships of trust is the ideal case, but the reality is different in Bangladesh. The reality is,
as the interviewees argued, the country has a dearth of professionals; people are short-term
oriented in general; and corruption is endemic where ethical values even among educated
people are at stake; and in such cases, expecting relationships of trust between stakeholders
and the company would be too optimistic. One of the interviewees from regulatory bodies
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Finally, and perhaps the strongest objection emerged in the area of the stakeholders’
integration concept of stakeholder theory. There were at least some interviewees who agreed
with the potential of the stakeholder concept of corporate governance, and showed their
interest to change their governance structure, but there was not even a single one who did not
strongly reject the proposal of involving stakeholders in any sort of organizational activities,
especially in any kind of decision making process. The arguments they placed are:
activities there would be benefits. They argue that, people in general are lacking in
knowledge; short-term oriented and lacking business acumen. On top of it, as they argue,
people in general are selfish in nature, and mostly lack the sense of ethics. Under such
conditions, bringing them into companies’ decision making is not perceived as being
“I wonder how many times companies were being hostage by their labour
union who were pressing their undue demands, then I am sorry I am in
favour of inviting them into my board in any form just because it will bring
a good image of mine....the companies who were hostage by their labours
or employees, do they have any image?....the investigation report could
not find any fault of the companies, but what is the result?”(Regulator-D1)
ii) They argued that considering the existing weak corporate environment, any kind of
involvement of the major stakeholders (if not all) would be threatening for the companies.
Taking the case of Government, the interviewees argued that as a major stakeholder, the
where political influence is considered to be one of the vital obstacles for good governance,
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the interviewees believe that the stakeholder model of corporate governance will legitimize
One of the noteworthy comments was made by an interviewee from the banking sector,
“The theory (stakeholder theory) is not appropriate for us, at least at the
moment. It does not clearly states who are my stakeholders, whom to
consider, to what extent to consider, and most importantly it has no
specification of whom not to consider and in what criteria. It simply states,
with whom company has long term relation. In that case, the local terrors
with whom the companies are to some extent bound to maintain a relation,
should I ask the companies to put effort to maximize their interest too; as
because, they have interest in my business? Should they be involved in my
business activities too?”(Regulator-D3)
Similar kinds of arguments were lodged by some other studies on stakeholder theory
(Antonacopoulou and Meric, 2005; Jansson, 2005; Lepineux, 2005; Plaza-Ubeda et al., 2010;
Sternberg, 1997; Wood and Jones, 1995) where they concluded with their concern because, at
present, the definitions of stakeholders are numerous, some are general while others are
narrower. If it is too general then nearly everybody is included. Referring to the ‘muscle man’
of AGM, one interviewee from the regulatory bodies stated that these rowdy group also have
Such claims are similar to the findings of Belal and Roberts (2010) and Belal and Owen
(2007). These two papers examined the social reporting practices in Bangladesh and
indicated that non-managerial stakeholders can play a positive role in improving social
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reporting standards. However, considering the existing level of corruption in Bangladesh, it is
hard to guarantee that the stakeholder-oriented reform will have a positive impact.
iii) They further argue that the status of stakeholders changes over time, and that might create
a problem once one stakeholder has been involved in the organizational activities, especially
in the case of the decision making process. Since there is not enough legal protection against
potential stakeholder abuse the interviewees believe the potential to change the stakeholders’
Turning the discussion to the abuse of executive power model of governance, the analysis of
the perceptions of the interviewees indicates that unlike other models discussed above, most
of the presumptions and presuppositions of this model matches with the existing corporate
status of Bangladesh. For instance, the major proposition of the model is that the current
management who may abuse it to serve their own interests at the expense of shareholders
(Hutton, 1995) and the interviewees opined that, this is the case of family businesses in
Bangladesh, where power and authority is centralized within family members who often use
Echoing the views of the abuse of executive power model the interviewees also stated that the
current institutional arrangement lacks any kind of threat of takeover, effective audit system
or independent NEDswhich could prevent these managers from abusing their corporate
power (see Conyon et al., 1995; Gregg et al., 1993). Rather, as they argued, kinship, blood
relation, marital connection and political power are the ways through which the abuse takes
place in Bangladesh. Moreover, considering the existing lack of competent managers and the
weak legal system of the country, the interviewees also do not believe that the theoretical
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recommendations of statutory changes like a four-year fixed term for chief executive officers,
independent nomination of NEDs and allowing power to the NEDs are suitable monitoring
mechanisms for Bangladesh, at least at this moment. Instead, they believe, some awareness
building programs and training focusing on the consequences of their abuse will be more
Moreover, in answering to what extent the interviewees prefer a company to consider the
interest of stakeholders, the interviewees opined that, the primary purpose of a company
should always be to ensure the maximum return for its shareholders and in so doing the
companies need to ensure fair treatment with all of its stakeholders. For instance, one of the
“The purpose is always to serve for shareholders. They are the financer
and the major stakeholders, if I serve them well I should be considered as
half the way of doing justice to my stakeholders. Then being fair to
everyone I am in transaction with will do the rest. A company should
ensure quality products for customers; better work environment and fair
salary for its employees; fair return to suppliers; and most importantly
ensuring that it is free from any kind of harm to the environment...and a
company which ensures all these should be considered as being
responsible to its stakeholders”.(Company-B5)
Table 7.7 summarises the perceived notion about the appropriateness of the stakeholder
the models of stakeholder perspectives were perceived as enough to understand the corporate
environment and the challenges of Bangladesh. It appears that, the existing corporate
infrastructure of Bangladesh has some elements in common from both the models of
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Table 7.7 Perceptions in Relation to the Appropriateness of the Stakeholder Perspectives of Governance in Bangladesh
297
stakeholder perspectives of corporate governance – i.e. the stakeholder model and the abuse
of executive power model; but neither of these two are enough to capture the existing
challenges of the country. The stakeholder model is being appreciated for its social concern,
but in the absence of ethics, knowledge and competence amongst stakeholders and the lack of
legal protection, the interviewees rejected the idea of involving any kind of stakeholders in
their company activities. Whilst the abuse of executive power model was found to effective
interviewees argued that the situation more family businesses but the source of power of
those managers is kinship. Hence they rejected the theoretical optimal solutions to control
such domination.
This section analyses interviewees’ perceptions relating to the appropriate model of corporate
governance for Bangladesh. In the course of discussion regarding the appropriateness of the
interviewees strongly opined that considering the existing deficiencies in the corporate
governance framework of Bangladesh, neither the shareholder model nor the stakeholder
model would be an ideal choice to establish good governance in Bangladesh. Rather, there
governance is the one that emphasizes on the basic characteristics of good governance (i.e.
shareholders rights, competence and independence of directors, quality audit, disclosure and
transparency), and emphasizes more on the existing barriers and socio-economic challenges
that companies in Bangladesh face in establishing good governance. Fairly typical comments
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“Despite of the fact that it has to face challenges from inside and outside,
as a developing country the economy of Bangladesh is doing great. It is
not important to argue in favour of shareholder or stakeholder
governance. What actually matters is, at this stage of globalization we
need to prove ourselves competitive, and for that we need to ensure we are
having a standard of governance, and to do that fundamentally and
primarily we need to focus on our problems, understanding why cannot we
ensure good governance, and then identifying what needs to be done so
that we can fight with these obstacles and ensure sustainability in this
global world”(Regulatory-D1)
“For the time being, the appropriate model is the one which responds to
our need. We cannot deny that companies from any sector of the world
need to maintain a standard of governance. What is the use of argument
then? If you have to ensure good governance, then we need to come
forward to understand what we need to do. Two things we need to do: one,
understand what are the best practices; two, understand what are the
obstacles Bangladesh have; and develop the policies accordingly, and
thus we will get the model of governance which is appropriate for
us”(Company-A1)
In fact, the findings relating to the need of a flexible and adaptive approach to design
corporate governance model is not unique for this study, rather quite a few scholars (like
Gamble and Kelly, 2001; Letza et al., 2008; Letza et al., 2004b; Letza et al., 2004a;
Sundaram and Inkpen, 2004; Wanyama et al., 2009) have argued the same and consider the
but the reality is different, and every country is unique which demands a continuum of
propositions to ensure good governance. Therefore, these studies have indicated that for
from much wider scope and with more flexible attitude. Also, by going beyond the current
debate over the superiority of the existing models, the interviewees of this study also believe
that an appropriate model for Bangladesh would be the one that is based on the basic
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recognizes and deals with the existing deficiencies, and thus helps companies to ensure better
governance practices.
believe that the regulators and policy makers should also take initiatives to develop the
culture and corporate framework to support more stakeholder orientation in the governance
model. To do so, the interviewees have emphasized on developing skill and ethical values
particularly amongst stakeholders and companies, creating awareness about good governance
and developing legal and regulatory support for companies. However, they also strongly
indicated that before adopting the features of stakeholder model of governance, the policy
makers must ensure that the country is ready to afford that model and companies are well
protected from any kind of abuse. Fairly typical comments came as follows:
7.5 SUMMARY
This chapter discusses the findings from the semi-structured interviews to address three
research questions of the study – the barriers to good corporate governance practices in
Bangladesh; the underlying causes of non-compliance with the Code; and the appropriate
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The overall discussion relating to the barriers to good corporate governance practices
indicates that the entire corporate governance system is dysfunctional in Bangladesh. The
weak legal and regulatory system; the lack of knowledge and competence amongst people;
political influence and bureaucracy; family businesses and agency problems; and finally the
lack of pressure on companies to practice good governance – these five issues have been
identified as the major barriers the companies are facing in establishing good governance .
Whilst prior studies on Bangladesh (Belal and Owen, 2007; Farooque et al., 2007a; Uddin
and Hopper, 2003) indicated that the legal system is weak in the country, the findings of this
study suggest that in spite of different reform activities (as discussed in chapter 3 it still
remains weak.
However, it was interesting to find that while incompetence and the lack of knowledge was
considered to be endemic, none of the interviewees think that knowledge and competence is
intense for the government bodies. Rather, ethical values and the mind-set of some political
members and bureaucrats are considered to be the primary factors behind their corruption.
Despite all these negative features, some interviewees were optimistic to expect a better
future for the country. They believe that Bangladesh still has some political leaders who have
ethical values and vision, they are educated, talented and on top of this, have the leadership
qualities to change the existing scenario. There are also talents among the bureaucrats who
they believe by virtue of their ethics, their work has become popular nationally and
internationally. Hence, if these two groups come forward, and they get support from the
people, the interviewees believe that as a developing country, Bangladesh can certainly hope
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The interviewees believe that many of the family businesses of Bangladesh lack proper
corporate culture, lack industrialization, and lack proper monitoring over the performance of
the board which is mostly comprised of family members. The independent directors are
believed to be ineffective due to family dominance. Although some of the family firms are
doing well, they considered that many of them are still struggling to understand the benefits
of good governance and thus this creates the fourth major barrier for the country.
Nevertheless, the interviewees were hopeful that the new generation of those family
businesses is more knowledgeable and flexible to adopt governance regulations. Finally, the
interviewees argued that the companies could show better governance standards if they had
enough pressure from their wider stakeholder groups. Whilst financial limitations are holding
back the private think-tanks and other watchdogs from being active in initiating corporate
governance activities, a lack of awareness, concern and knowledge about the rights and
responsibilities are not allowing other important stakeholders like customers and suppliers to
The discussion relating to the underlying causes of non-compliance with the Code reveals
another interesting fact. Although the five major barriers are considered to be the obstacles
for ensuring compliance, the interviewees opined they are not the major causes of non-
compliance with the Code. Rather, they believe the voluntary nature of the Code is the
primary reason for which the Code has not been adopted by companies. There was almost a
general agreement amongst the interviewees that even the voluntary Code would be accepted
(at least to some extent) by the companies if the BEI could create awareness amongst
companies to ensure compliance and to promote the benefits of good governance. However,
their opinion further indicated there are five other reasons for non-compliance with the Code
and these are: the lack of a culture for compliance, inadequate and ineffective provisions of
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the Code which are more likely to lead to mock compliance; a lack of knowledge amongst
companies; a lack of motivation to ensure compliance; and finally the lack of infrastructure.
Finally, to identify the appropriate model of governance for Bangladesh the study has
governance. The results indicate that elements of each theory have relevance in the
Bangladeshi perspective, but none of them could fully encapsulate its entire dysfunctional
understanding the consequences of agency problems despite the fact that the kind of agency
problem in Bangladesh is different than the theoretical one; however it has largely ignored
the fact that emotion, culture and the lack of competent professional will not allow separation
of management from owners, and not even the voluntary code will work in the absence of a
strong legal system and a culture of compliance. The business myopic model helped in
understanding, for long term sustainability, companies must take initiatives to ensure a long-
term perspective between the firm and its stakeholders, but seems to be largely deficient in
incorporating the other major problems like political influences, lack of knowledge and a
short-term perspective among people whose views are entrenched and not possible to change
overnight or even within a short time. Most importantly, the overall findings suggest that in
Bangladesh, the three-tier hierarchical governance structure (AGM, board and executive
managers) of the shareholder perspective has failed to ensure an adequate check and balance
mechanism to protect shareholders’ interests. Whilst the issues relating to AGMs seem to be
too complex to be resolved soon, the board and executive managers are suffering mostly from
issues relating to competence and ethics. Thus, in the absence of a robust legal system and
resilient capital market, it would be too optimistic to think that a shareholder perspective of
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governance will be able to ensure good governance in the existing vulnerable status of
Bangladesh.
On the other hand the stakeholder perspective has also been rejected as an ideal one for
competent stakeholders, the lack of culture, the lack of stakeholders’ ethics and, most
importantly, the lack of proper legislation to guard the companies against stakeholders’ abuse
are considered to be the major challenges in adopting the stakeholder concept. Although the
interviewees appreciated the theoretical propositions, and the social values of the theory, they
companies’ major objective and any kind of stakeholder integration in companies’ decision
making process. Rather they believe, at this moment, that companies should primarily work
in the best interest of the shareholders, and ensuring fair transactions in dealing with all of its
stakeholders. Moreover the interviewees indicated that it would be too difficult to convince
Hence, based on inductive reasoning, the evidence fundamentally rejects the dichotomize
view to take a static position in favour of one of the two extreme theoretical models-
shareholder and stakeholder. Since all four models are able to capture part of the reality of
Bangladesh, the interviewees believe an appropriate model for Bangladesh would be the one
that is tailored to the country specific needs and, by recognizing the existing deficiencies,
help the companies to ensure better governance practices, and thus support the demand of
thinking of corporate governance in a new way by going beyond the static polarized
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CHAPTER 8
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Chapter 8
8.1 INTRODUCTION
This concluding chapter summarizes the main areas covered in this thesis. The major findings
from the empirical work are brought together to develop recommendations for improving
governance standards in Bangladesh. In addition, the chapter discusses the major limitations
The aim of the study is to evaluate the overall acceptance of the Code of Corporate
Governance for Bangladesh (“the Code”) among firms. For the purpose of the study, the
research statement above is broken down into six specific objectives as outlined below:
1. To identify the overall level of compliance of the Bangladeshi listed companies with
the Code.
attributes.
3. To identify and discuss the Code provisions which are the most, and the least,
complied with.
4. To investigate and discuss the major barriers to good corporate governance practices
in Bangladesh.
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There are eight chapters in this study. Chapter 1 provides the motivation of the study and the
Chapter 2 deals with the theoretical framework and literature review. Both agency theory and
stakeholder theory are analysed to understand the theoretical propositions and assumptions of
the models of governance pertaining to these theories. These models are the principal-agent
model, the business-myopic model, the abuse of executive power model and finally the more
recent stakeholder model. The analysis also highlighted the ways these theories are used in
this study. For instance, to facilitate a thorough understanding, instead of focusing only on
the issues of traditional agency problems, the wider stakeholder perspective of governance is
used to view the corporate framework of Bangladesh in Chapter 3. Institutional theory is also
discussed which helped in reasoning the status of the Code adoption and implementation
process. The theoretical propositions pertaining to each model are also used to develop the
questions for the semi-structured interviews to identify the major barriers, the causes of non-
compliance and the recommendations for better governance standards in Bangladesh. Finally,
the theories are also used to explore the appropriate model of governance in Bangladesh.
Chapter 2 also reviews previous literature on code compliance and the barriers developing
countries are facing in establishing good governance. The discussion indicates that the degree
of compliance varies among developed countries and non-compliance with code provisions
are found to be commonly evidenced in the studies on developing economies. Perhaps that is
the reason a rich vein of research has emerged debating the appropriateness of a reformed
that there is a major gap in the literature concerning Bangladesh and its compliance standard.
307
It argues that before commenting on the appropriateness of the Code it is very important to
see the extent to which companies are complying with the Code, whether companies are
facing difficulties in complying and if the Code provisions are appropriate – which should
systematically solve the dilemma of the country to decide whether or not the suggested model
Chapter 3 discusses the corporate governance framework and the socio-economic context of
Bangladesh with three different aims. First, to have an insight into the way the governance
system of Bangladesh has evolved; second, to understand the factors influencing its
governance system and finally to discuss about the key players of corporate governance in the
country. The discussion indicates that, like many other developing countries the corporate
governance in Bangladesh has evolved through its long history, culture and mostly political
changes. The legal system is based in part on English common law, but it is not quite similar
to the absolute form of English law from the perspectives of socio-cultural and religious
values. Previous studies relating to Bangladeshi corporate governance suggested that the
corporate practices are mostly governed by the Companies Act 1994, and the socio-cultural
aspect has significant influence over it. There are five bodies which regulate corporate
governance practices in Bangladesh – the Registrar of Joint Stock Companies and Firms
(RJSC), Bangladesh Bank, the SEC, the Stock Exchanges and the ICAB. However, the
overall discussion supports the findings of Siddiqui(2010) that these key players are exposed
to the problems of legitimacy. For instance, the SEC is financially dependent on the
government and the lack of self-regulation by the professional bodies and their inefficiencies
have created the scope for the donor agencies in Bangladesh to intervene with policy-making
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The discussion also indicated that the corporate structure is mostly comprised of small and
medium sized firms. In many of the cases the Board of Directors are also entirely comprised
of family members. Listed firms rely heavily on either bank or public funds and the
mechanism for market control is almost absent in Bangladesh. The capital market and its
that the ability of Bangladesh to participate in this future growth will depend on how quickly
and effectively its government can resolve issues in socio-economic and political struggles,
bureaucratic control, corruption, unsupportive legal structure in general and also with special
Chapter 4 discusses the Code of Corporate Governance of Bangladesh. It discusses the basic
features of the Code and compares its provisions with the SEC Guidelines of Bangladesh, the
OECD Principles 2004, and the Codes of India and Pakistan to understand the extent to
which the provisions of the Code vary with these provisions. The discussion indicates that
both the SEC Guidelines and the Code is a reflection of the OECD recommendations. The
SEC Guidelines focus only on five major areas of governance and comparatively the Code is
more comprehensive and covers detailed provisions on different areas of corporate practices.
Although the Pakistani Code is almost a reflection of the OECD Principles 2004, the revised
version of the Indian Code has some detailed provisions on some areas (like independent
directors) which can serve as a guideline for the policy makers of Bangladesh to understand
Chapter 5 then introduces the methodology and methods used to gather and analyse the data.
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interviews are the two methods adopted to obtain the primary data for this study, while the
secondary data was collected from the company annual reports, web-sites etc. The
questionnaire contained the provisions from the Code and was distributed among the listed
Chapters 6 and 7 deal with the findings and analysis of the data collected in the study.
Chapter 6 addresses the first three research questions relating to the status of compliance with
the Code provisions, whilst Chapter 7 covers the rest of the three research questions which
were addressed through interviews with wider stakeholder groups. The following sections
Research Objective 1: Level of Compliance with the Code Provisions amongst the
Listed Companies
The Code states that its aim is “to improve the general quality of corporate governance
practices which can be achieved when companies acknowledge, incorporate and fully
comply with its provisions” (BEI, 2004, p.4). That is why, in the present study, the analysis
of the overall acceptance of the Code in Bangladesh started with an analysis of the extent to
which the companies are complying with the provisions of the Code. Companies are
The findings suggest that on average, the level of compliance amongst sample companies is
at a moderate level (67%). In comparison with the results of others (see Akhtaruddin, 2005;
Belal, 2001; 2004; Haque, 2007; Reaz, 2006) who measured compliance against the
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Companies Act 1994 or some other regulations (e.g. corporate social reporting) 92 , the
findings of the present study suggest that there is an increasing trend of compliance over
time. For example, Akhtaruddin (2005) examined the level of mandatory disclosures made by
listed companies and found only 43% of the sample companies were complying; whilst the
study of Sobhani et al.(2009) indicated companies are disclosing at least one item of
disclosure on human factors, 47% on community issues and 19% on environmental issues.
Compared to their findings, the level of compliance is high in the present study, where the
majority (73%) of the sample companies are complying within the range of 60% to 79% with
the Code provisions. Sobhani et al. (2009) also realized an increasing trend in corporate
social reporting practices and stated that the level of disclosure has increased over the last 10
years in Bangladesh.
Nonetheless, this moderate level of compliance does not compare favorably with the level of
compliance in some other emerging economies like Brazil, China, Russia, and especially
India. These countries are ranking high on the ease of getting credit, and the sovereign credit
rating of them is higher than Bangladesh. Their stock exchanges have the largest volume of
trades in the world. Even in India which has a lot of socio-economic similarities with
Bangladesh, its corporate governance landscape has been changing fast over the past decade.
By contrast the present study’s findings indicate that corporate governance has been slow in
It has already been eight years since the Code was introduced. The questions thus naturally
arise, if the Code represents an appropriate synthesis of international and national best
practices that are wholly applicable to the Bangladeshi context, then why are only 6% of
92
See details in Chapter 2, section 2.3.1.3
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companies highly compliant with it and why so far are even the listed companies only
moderately compliant with the Code provisions? These questions further validated the need
for understanding the rest of the research questions which are framed to extend understanding
To understand the pattern of compliance better, the second research objective was set to
examine the extent to which the level of compliance varies with different company
characteristics. From prior studies and the dominant corporate features of Bangladesh, six key
characteristics are identified as explanatory variables, and these are: company age,
profitability, size, industry type, company type, and finally the type of auditors.
To facilitate understanding, at first the overall compliance score was examined through the
industry classification. The summary of the descriptive analysis indicated that the level of
compliance varies significantly among the industrial categories. Although the average
compliance score was at a moderate level in each of these categories, the mean score
significantly varies between FIs (including banks and NBFIs) and NFIs, suggesting that the
FIs in general, and the banking industry, in particular, are more compliant with the Code.
However, the result of the multivariate analysis suggests that except for the NBFIs, the
industry classification has a negligible effect on the level of compliance of the sample
companies93.
The findings indicate that all other things being equal, the compliance score of NBFI will be less by
93
9.79 points (p< 0.01) than would have been the case for NFIs.
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In the recent past, Bangladesh has taken some major initiatives to strengthen its FIs, for
instance it has reformed many of its policies and placed mandatory provisions for FIs to
regulate their corporate practices. Additionally in year 2010, the Government launched two
insurance laws: Insurance Act 2010 and Insurance Development and Regulatory Authority
Act 2010, to further strengthen the regulatory framework and make the industry operationally
vibrant. A significant number of the interviewees claimed that unlike the judicial system of
the country, Bangladesh Bank is comparatively stricter in enforcing its regulations and take
immediate actions against non-compliance for which FIs are perceived to have better
governance than the NFIs. However the findings of the present study suggest that the
regulatory effort did not make an impact on the level of compliance with the voluntary Code
provisions. This is perhaps the reason behind the moderate level of compliance with the Code
However, the fact regulatory pressure can increase the level of compliance in Bangladesh was
indicated by the compliance score of the Fuel and Power industry, which scored highest
amongst the NFIs. This particular industry is mostly comprised of family-owned companies
and has been declared as a growth sector by the Government of Bangladesh. Hence, different
policies have been developed and the progress is monitored with special attention by the
Government. Hence it can be argued that, Government and regulatory pressure on companies
in Bangladesh has the potential to improve the level of compliance with codes of corporate
governance.
The findings from the regression analysis also suggests that other than the industry type, age,
size by total assets, and the type of company have a statistically significant association with
the level of compliance with the Code. As indicated by the t-statistics, all other variables are
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either positively or negatively associated with the level of compliance, but statistically
insignificant.
Research Objective 3: The Code provisions which are most, and least, complied with
Chapter 1 of this study discussed in detail that before the Code is revised, it is essential for
the policy makers to identify the provisions which are most and least complied with. The
third research objective of this study intended to address such need. The Code has three major
categories of provisions: board issues, shareholders’ rights issues and issues related to
financial reporting, auditing and non-financial disclosure (“financial reporting issues”). The
findings suggest that irrespective of the industry, the sample companies were mostly
compliant with the provisions related to financial reporting, and poorly compliant in the case
Discussion indicated that companies are non-compliant with some provisions of the Code
because these provisions are not a legal requirement, or they are ambiguous or inappropriate
because the country lacks enough infrastructures. The interviewees also argued the same
thing that lack of infrastructure is leading to non-compliance. For instance, the lack of
training facilities is one of the reasons behind non-compliance with the provision that
arguable, because even though the country does not have plenty of facilities for training their
directors, it does not mean that it does not have any. There are a few institutions like the BEI,
ICMAB, ICMA which run training programs on corporate governance related issues. The
question thus arises as to whether the companies are aware of the need of training at all which
could drive them to find available facilities to train their directors to ensure better
governance. Perhaps the answer to such question has been provided by the later findings from
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the interview analysis (in Chapter 7) which indicates that other than the lack of infrastructure,
the lack of culture, inadequate knowledge and the lack of awareness among people are the
most likely reasons behind the reluctance of companies for attaining trainings.
Legal provisions for shareholders rights are, for the most part, adequate in Bangladesh (BEI,
2004). However, the Code has recommended some provisions regarding shareholder issues
which are aimed towards empowering the shareholders and making them understand their
rights and responsibilities. Although the findings suggest that the sample companies are
complying with some of the provisions relating to shareholders’ rights, concern remains
because the effectiveness of these attempts to empower the dispersed shareholders was found
to be challenging during the interview analysis in Chapter 7 which indicated that in most of
the cases, the AGMs in Bangladesh fail to ensure an effective check and balance mechanism
through which shareholders’ could create pressure on companies for good governance.
Although the sample companies are mostly compliant with the provisions relating to financial
reporting, on an average, the level of compliance is at the higher end of the moderate level.
Since, at a different point in the analysis, the findings indicated that the sample companies are
following the SEC Guidelines, not the Code, to reconfirm, Chapter 6 concluded with an
analysis of the provisions which received more than 80% and less than 50% compliance.
These most and least complied with provisions are then compared against the SEC
Guidelines and the Companies Act 1994 provisions to understand whether they match with
the legal and regulatory provisions of Bangladesh. It was interesting to find that none of the
Code provisions which had below 50% compliance score, were a requirement of the Act or
the regulatory provision; whereas all the ‘mostly complied with Code provisions’ are actually
a requirement of either the SEC Guidelines or the Act. Also compliance was found to be
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higher when the Code provisions coincide with both. Thus this study argued that among the
at this stage when the concept of good governance is relatively new in Bangladesh, the
comparison of the most and least complied with provisions indicates that amongst the least
complied with provisions, there are some areas which are very sensitive governance issues
e.g. having a nomination committee, directors’ training, disclosure of credit rating etc. For
countries like Bangladesh where the independence of NEDs is questionable, competence and
awareness about the need for good governance amongst the board of directors is challenged,
In summary, the overall discussion relating to compliance with the Code indicates that:
- Companies are not complying with the Code; rather they are following the legal and
- The level of compliance has the potential to increase with pressure from Government
and regulators
In order to validate and complement the findings from the survey, further investigation was
needed to understand whether such compliance reflect the realities. Chapter 5 discusses that
researcher to explored cases in depth. Hence the last three research questions which sought
stakeholders’ perceptions were addressed through qualitative analysis and reported in Chapter
7.
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Research Objective 4: The Barriers to Good Corporate Governance Practices in
Bangladesh
The Code claims that its provisions “are set out in a manner which represents an appropriate
synthesis of international and indigenous best practices that are wholly applicable to the
Bangladeshi context”(BEI, 2004, pg.4). To understand whether the Code objectives are met,
Chapter 7 of this study, begins by diagnosing the barriers the companies face in ensuring
good governance, because it is undeniable that any code is most likely to be rejected by
companies if it does not recognize and deal with the domestic issues.
The findings indicate that the entire corporate governance framework is in fact dysfunctional
employees, customers, shareholders, lending agencies, legal and regulatory bodies, watch
dogs etc. According to their opinions, Bangladesh suffers from five major barriers which
must be addressed before developing Code provisions, and these are - a weak legal and
regulatory system; a lack of knowledge and competence; political influence and bureaucracy;
issues relating family businesses; and finally the lack of pressure on companies for good
governance.
Whilst prior literature, like Klapper and Love (2004) (as discussed in Chapter 2) suggest that
it was found to be weak, ineffective, politically biased, poorly manned, and most importantly
weakened by inadequate and ineffective law provisions. A lack of competence among people
in general was identified which is directly and indirectly hindering many of the aspects for
ensuring good governance Bangladesh. While typical agency problems prevails, the study
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identifies that lack of concern, awareness, and motivation are some other factors which are
The pay structure has been found to be a major area of concern. Because many of the existing
problems seem to be linked with the poor pay structure for professionals like government
officials, regulators, academics and most importantly the auditors who were supposed to be
independent enough to control the forgeries of companies. The findings indicate that the
the existing pay structure which makes it almost impossible for many of the professionals
living standard. Hence, they are to some extent bound to compromise their ethics at the cost
of their independence.
During the survey analysis, it was found that the sample companies comply with many of the
provisions relating to shareholders’ rights and opportunities. However the interview findings
here revealed that those opportunities are not utilized because of the existence of hooligans
(“muscle man”) who are hired by the companies to press their (companies’) decisions. Hence
shareholders do not find it worthy to participate in the AGMs. The companies which are not
taking any such unethical measures, their AGMs are not successful enough to ensure a check
and balance mechanism. The country lacks well informed investors to exercise their rights
and responsibilities of shareholders and thus fail to take the opportunities offered by the
In the absence of a strong legal and regulatory framework, stakeholders are considered as an
effective source to create pressure on companies for ensuring better governance standards.
Unfortunately, the findings suggest that the companies in Bangladesh are not only free from
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takeover threat, but also lack internal and external pressure for governance. Other than the
weak shareholder base, the suppliers, consumers, government, community are claimed to be
lacking in awareness, competence and mind-set to challenge company decisions and make
demands for better governance standards. Although some new pressure groups have emerged
in the country like CAB, CRAB, they lack funds and enough regulatory power to work
effectively.
In summary the analysis indicated that the overall corporate governance infrastructure of
Bangladesh is dysfunctional in most, if not all, aspects. Overall findings indicated that any
initiatives to improve governance standard must pay attention to these deficiencies, if any
In order to support the understanding of the appropriateness of the Code in Bangladesh, the
study then analyzed the specific causes of non-compliance with the Code. As identified in
Chapters 3 and 6, like many other developing countries, Bangladesh has already taken some
major steps to improve its governance standard. Hence, in this research question, the study
identified the reasons that still remain as a cause of non-compliance with the Code.
The findings suggest that not all the barriers as identified in Chapter 7, are causing non-
compliance with the Code. Seven particular reasons were identified for which the
interviewees believe the Code has not been accepted yet in Bangladesh, and companies are
non-compliant with its provisions, and these are – the voluntary nature of the Code; the lack
of communication from the BEI; the lack of culture for ensuring compliance, inadequate and
ineffective provisions of the Code; the lack of knowledge; the lack of motivation among
people to comply with the Code; and finally the lack of infrastructure
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Whilst, the survey findings indicate that the companies may not be following the Code to
ensure their governance standard, almost all of the interviewees’ opinions support that claim
and stated that companies are actually following the SEC Guidelines for corporate
governance standard – suggesting the Code as a whole has not been accepted by the
companies of Bangladesh. The voluntary nature of the Code and the lack of legal power in
the hands of the BEI (i.e. the donor-funded private think tank which introduced the Code) are
considered to be the fundamental reasons behind such non-acceptance. Although the legal
and regulatory arrangements in Bangladesh is weak and ineffective, the interviewees believe
that due to a lack of knowledge and awareness, the people of Bangladesh tend to comply only
with those provisions which are legally imposed on them or they are pressurized to do so.
The Code has also not been accepted yet because it has not been properly communicated to
companies in Bangladesh. Although some initiatives were taken by the BEI for raising
awareness about the necessity of compliance, the interviewees in general believe those were
not enough to convince people to bear the cost of compliance. However it is not unique for
Bangladesh that unless people find some potential benefit, tangible or otherwise they will be
reluctant to comply voluntarily. The interviewees from BEI and donor agencies also agreed
that the awareness building program was not sufficient to ensure proper implementation of
the Code, whilst the interviewee from the BEI argued that they could not do it due to lack of
funding. However, the question remains unanswered as to why, when the donor agencies of
Bangladesh like the World Bank were found to be effective in bringing the companies to
comply with CSR provisions (see Belal, 2004) did they not do the same in case of the Code
provisions? They funded the project for the Code development (for details, see Chapter 4),
but why did they not continue to support the project until its successful implementation and
monitoring, knowing that mere publication of an effective Code does not necessarily
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guarantee its success in practice, especially in developing countries where the culture of
The findings further indicated that even if companies intend to comply with the Code, some
of its provisions will be difficult to comply with due to their ambiguity or inappropriateness
shareholders or training directors on corporate governance). Instead of blaming only the Code
or the BEI, a significant number of interviewees believe non-compliance with the Code is
also because of the lack of motivation among companies to comply, the lack of knowledge
especially amongst family businesses which are in a ‘growth trap’ and the lack of
infrastructure which resists compliance with Code provisions in Bangladesh. Thus the causes
of non-compliance with the Code as identified by the interviewees from the wider
stakeholder groups have similarities with the possible causes of non-compliance identified
However, some of the interviewees had hopes that overtime, the new generation is getting the
control over the business and the first generation who are more resistant to change are
gradually being phased out. This new generation is perceived to be more educated and more
aware of the needs of voluntary compliance. Thus they believe, if people are made well
aware about the needs then, if not now, then at least in the future it is not absurd to expect
practices.
Based on the interviewees perceptions regarding the appropriate model of governance for
Bangladesh, earlier findings related to the problems of corporate governance and the causes
of non-compliance with the Code, this research question, in particular aimed to identify
which model fits better in the corporate governance framework in Bangladesh: the
shareholder model which is prescribed by the Code? Or the stakeholder model which has
The overall findings suggest that none of the theoretical models alone or even in combination
is enough to encapsulate the major governance challenges of Bangladesh, hence does not fit
support the claim of prior studies like Siddique (2010), Mir and Rahman (2005) (see details
in Chapter 2) that the dominant shareholder perspective is not applicable for Bangladesh, it
extends such understanding by finding that the shareholding perspective becomes inadequate
to understand the pattern of agency issues, the newly emerged stakeholder concepts of
governance were found to be inappropriate because Bangladesh lacks strong stakeholders and
lacks legislative support for companies against the potential manipulation of existing
stakeholders, weak legal and regulatory system, and lack of willingness for better governance
supporting the arguments of others scholars (e.g. Davies, 2008; Letza et al., 2008; Letza et al.,
2004a) this study also takes a standpoint against the polarization of these two contrasting
paradigms of governance and claims that being rigid to one particular model is somewhat
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By finding evidence for the need of a new approach to design a corporate governance model
for Bangladesh, this study also complements earlier studies(e.g. Davies, 2008; Letza et al.,
2008; Letza et al., 2004a; Shankman, 1999) which advocate a flexible, adaptable and
innovative approach for developing a corporate governance model. The overall findings of
this study indicate that both the shareholder and stakeholder model have their own merits in
dealing with the corporate governance challenges in Bangladesh, but a more effective
governance model would be the one that emphasizes on the best practice recommendations;
considers the ability of the country to adopt best practices; and highly prioritizes the needs of
the business environment. It also recommends that the method of governance practice needs
to be reviewed regularly to bridge the gap between standard and reality. In doing so, the
interviewees suggested that the existing Code should be reformed according to the needs and
deficiencies of the country. Policy makers are also recommended to take initiatives to
develop a corporate environment in which companies will be willing to maximize the interest
of both shareholders and stakeholders. Thus, a high emphasis is placed on training for
capacity building, networking and developing core groups which can be identified as ideal
for reforming the Code and also for the policy developments to ensure better compliance by
the companies of Bangladesh. Recommendations are developed in the light of the suggestions
made by the interviewees, previous literature, measures taken by neighbouring countries and
the developments in the global capital market. The codes of India and Sri Lanka have been
emphasized in particular because these two countries regularly revisit their code provisions to
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incorporate recent developments which can help Bangladesh to understand how neighbours
with a similar kind of infrastructural and cultural challenges are dealing with the problems.
i) The Code needs to be revised. The provisions must be amended according to the needs
and affordability of the country. The findings of the study thus can be a good help to
understand the needs, the possible barriers for compliance and also the areas where
inadequacy or ambiguity in provisions have been traced. It is important that the Code is
revised on a regular basis to incorporate the emerging needs, accommodate the changes
ii) The use of NED as a proxy for understanding board effectiveness is very common and
popular method amongst corporate governance literature. However, this study could not
work on the provisions relating to NED because most of the sample companies did not
declare who are their NEDs, and what is qualification and expertise of their IDs. A
of NED in their board setup and also communicate the criteria and qualifications needed
iii) Interviewees recommended that issues relating to family-owned companies are quite
legal system, transparency and accountability, the policy makers should realize what is
happening in the name of separation and resulting in mock compliance. Rather, the
interviewees believe before reforming the Code provisions for the family owned
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companies, the policy makers should also consider the views of the entrepreneurs,
iv) The policy makers should also consider developing provisions relating to the whistle-
establish the mechanism for whistle-blowing, and ensure a safe environment for
regard. Following the Indian Code, the Chairman of the audit committee can be given
the authority to have direct oversight of whistle-blower issues. Whilst the interviewees
of the study believe establishing a safe culture of whistle-blowing is possible only if the
whistle-blowers are confident about their anonymity, the policy makers must emphasise
this area and think about other possibilities. In order to avoid any kind of victimization
from any side, the companies need to ensure that the employees know exactly when and
v) There was a general agreement among employees that there must be some provisions in
the Code for dealing with non-compliance, and the regulators must set examples by
Whilst some of the interviewees raised concerns about the possibility of the wrong
interviewees counter-argued by stating that ‘it is the penalty that is most effective in
making people to be well-aware about their rights and responsibilities’. Hence they
believe, if the penalty mechanism is implemented fairly that will reduce the risk of
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Along with penalties, a reward mechanism should also be adopted. However, as the
interviewees believe that recognition only will not be sufficient at this moment to
motivate people to comply, then some kind of material benefit like tax benefit, or credit
(OECD, 2008)identifies a system of chartered directors that can help to overcome the
directors’ incompetence issue in future. This study indicated that the young generation
taking their place in the corporate environment of Bangladesh. Hence some provisions
can be developed according to the system of chartered directors to guide the young
Government, regulatory and professional bodies should come forward to support such
academics and professionals to identify the need; design the course; and develop the
opined that the country lacks adequate infrastructure to support training needs, it
appears that the problem is actually with proper communication, organization and a lack
of vision. As some of the interviewees indicated the universities of Bangladesh are well
equipped to support effective training programs along with the few professional training
institutes, whilst others believe there are some entrepreneurs who can be used as
professional trainers to fill the competence gap. All that is needed is to have the vision
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vii) The provision related to the nomination committee should be extended to ensure a
formal and transparent procedure for the appointment of new directors. Or in the
absence of a nomination committee, as has been suggested in the Sri Lankan Code of
Corporate Governance, the board as a whole should annually assess board composition
to ascertain whether the combined knowledge and experience of the Board matches the
strategic demands facing the Company. The findings of such an assessment should be
taken into account when new board appointments are considered and when incumbent
viii) In order to address the incompetence issue, some provisions can be developed relating
to training. In addition to the existing brief training related provisions, the interviewees
suggested to include some specific provisions to ensure that at least its senior and
middle level managers are regularly trained to the required level of competence,
updated on the latest technology and are well aware of the global needs especially with
issues relating to good governance. Considering the limited training facilities the
provisions must be flexible enough to allow a reasonable time for companies to comply
ix) After developing an appropriate code of corporate governance, it is essential that the
Code is communicated among the relevant parties in a comprehensive and well planned
The regulator (SEC) needs to play a significant role in communicating the code among
the enlisted companies. For instance, they can provide the Code to the enlisted
companies and make an electronic version available in their website. For successful
communication, it is imperative that both electronic and printed version of the Code is
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made available and awareness on the Code availability created among the relevant
parties.
x) For successful implementation of the revised Code, strategies need to be developed and
high emphasis need to be given. The overall findings of this study suggest that the
voluntary mechanism of the Code is less likely to make any significant impact on level
of compliance. Therefore, some sort of regulatory pressure is necessary for the Code
adoption. However, interviewees also agreed that the effectiveness of the Code will be
achieved when companies will realise the importance of the Code and adopt it
voluntarily. In solving this dilemma, interviewees suggested that two parallel process
make the concerned parties understand the beneficial sides of following the code. On
the other hand, to create the regulatory pressure on companies, the SEC Guidelines is
suggested to be revised in light of the revised code. The SEC needs to monitor very
xi) It is equally important to develop strategies for post implementation monitoring of the
xii) In order to instil good governance in day-to-day practices, special attention must be
companies must be provided with clear definitions, guidelines and policies of the ethical
and non-ethical behaviour. They also suggested that ethical practices can be encouraged
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should be established. To do so, companies need to communicate and reinforce the
good governance norms through regular campaigns, events, recognition at team and
Recommendations for the regulators, policy makers and the Government of Bangladesh:
i) Since the study indicates that the country is not yet ready to ensure compliance
earlier section, it is very important that the SEC Guidelines of Corporate Governance is
revised according to the need of the country and they should be made comprehensive.
ii) For ensuring a successful implementation of the SEC Guidelines, a high emphasis
should be placed on the capacity building of the SEC and other law enforcement
iii) The overall findings indicate that the most effective and perhaps ‘the only way to
ensure quality AGM’ (opined by the interviewees) is to make the shareholders aware
about their rights and responsibilities; and there was almost a general agreement
amongst interviewees that comparatively, regulators are the most significant means
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through which any realistic initiatives can be taken at this moment. Quite a few
education program which will help investors to make the right investment decisions and
make them aware about their rights and the issues relating to the AGM.
iv) The Companies Act 1994 needs to be revised to overcome the inadequacies and to
incorporate the latest development. For instance, it should include the definition,
criteria, extent of power, roles and responsibilities of NEDs and independent directors;
takeover mechanisms which might create a pressure on companies for performing well.
However, the interviewees also recognize that development of provisions for takeovers
needs time and needs thorough analysis but they believe that the takeover mechanism
should be considered from now on, so that in future it can be established. Once the
takeover threat mechanism is in place, they believe the country can start thinking of
vi) For improving the audit environment, interviewees made several recommendations like
quality control on the audit practice, amendment of the audit education system,
structuring audit fees, and most importantly continuous training of auditors to keep pace
with recent developments. ICAB must keep its eyes open to understand whether the
companies are facing any problems in ensuring compliance with their prescribed
standards. In order to improve auditor’ competence, the ICAB can refer to some recent
studies (Crawford et al., 2011a; Crawford et al., 2011b) which have particularly
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addressed the gap between the competence auditors and company expectations. These
papers have also addressed some generic skills that a competent auditor must have.
vii) Other than the SEC, a separate institute for corporate governance (with regulatory
and support to companies for ensuring good governance. Although BEI has taken such
initiatives, but the interviewees believe that a lack of regulatory power and being
dependent on foreign aid, mean that the BEI could not perform these duties as is needed
by the country.
The Indonesian example can be noted in this regard. The country has developed a
National Committee on Governance which is responsible to review and revise the Code
on a regular basis, to ensure that the code is more contextual and fit for the current
situation. This committee has revised the Code and is emphasizing the implementation
viii) Corruption is endemic in Bangladesh, but that does not mean that everybody is corrupt.
Even among this entire corrupt environment interviewees believe, there are ethical
people in all professions who must be identified, must be supported, and must be made
vocal to stop corruption. Corruption cannot be removed but surely can be reduced if
proper knowledge, concern, awareness and a pressure from other sources like the media
is there.
ix) For addressing the incompetency issues among people generally, other than developing
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Bangladesh (UGC) should come up with some policies to ensure that the course
curricula are adequate enough to ensure companies are getting the workforce as a useful
resource; to ensure that the faculty members are qualified enough, paid enough, and are
supported enough to enhance their knowledge and qualification. The UGC also needs to
ensure that the courses are updated regularly. The student admission and evaluation
institutes.
Interviewees stated that full compliance with any standard of good governance depends
much more on the behaviour of the relevant parties than about rules. To ensure
directors, boards have the right attitude to the requirements, which is not possible to
develop overnight or only through trainings. Rather it is important that business ethics
and ethics in general are taken into serious consideration at every sphere of life.
different stages of the education system to ensure that ethical values are instilled
academics should come forward to develop business cases. Instead of looking into
companies which will be more acceptable for companies who argue that corporate
governance is not an issue for Bangladesh, or claim that as long as they earn a profit
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However, this study does not claim that these recommendations are the optimal solutions for
ensuring better governance in Bangladesh. The recommendations are not without reservations
but expected to help the policy makers and regulators to identify some development areas of
corporate governance which need immediate attention and also some plausible solutions have
been suggested. The study argues that the policy makers must have an open mind to learn
from every possible way to develop appropriate Code provisions which fits into the country
and Bangladesh in particular. The study is the first attempt to measure compliance against the
Code of Corporate Governance for Bangladesh. Whilst there is an increasing trend in the
literature measuring the extent to which companies are complying with international
standards of corporate governance, there was a lack of understanding from the Bangladeshi
perspective. The findings of the study thus fill this gap and provide evidence for shareholders
recommendation is the most common, popular and accepted method of study in both
compliance with best practice recommendations not only have positive impact on stock
market (e.g. Fernández-Rodríguez et al., 2004; Igor et al., 2006) or improve performance
(Bauwhede, 2009; Mallin and Ow-Yong, 2012), but also helps the code to remain abreast (e.g.
Akkermans et al., 2007). Findings of non-compliance further allows countries to trace their
gaps between standard and reality following an appropriate action for code improvement (e.g.
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MacNeil and Li, 2006; Parsa et al., 2007). Understanding the overall corporate governance
goals and strengthening corporate governance could help the country to attract foreign
investment. The findings of the present study thus potentially contribute to the economy of
Bangladesh in two ways. Firstly, whilst earlier studies on Bangladesh report poor levels of
compliance when measured against different standards, by taking recent evidence the
findings of the study indicate that the situation is not as bad as before. This sign of
improvement in the governance standard is expected to have an impact on the domestic and
foreign investors’ level of confidence in Bangladesh. Secondly, the overall findings also
inform companies and help them to take corrective actions to improve their governance
standard.
One of the major theoretical contributions of this study is on the existing debate over the
and 2, finding the shareholder perspective inappropriate, some critics opined that stakeholder
perspective of governance would be the best alternative for developing countries. The
existing studies on Bangladesh also suggested exploring the possibility of adopting the
stakeholder approach for Bangladesh. However, there was no clear answer whether the
stakeholder model would be an optimal solution especially when in countries like Bangladesh
there is a dearth of professionals, a lack of knowledge and ethics among people, and
corruption is everywhere. The findings of this study fill this gap and suggest that neither the
shareholder nor the stakeholder perspective of governance is enough for developing countries
like Bangladesh. Whilst the study supports the previous studies that the shareholder
literature by finding that the country is not yet ready to adopt a stakeholder perspective of
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governance. Thus by finding the way to develop an appropriate model of governance, this
study helps to strengthen the corporate governance practices in Bangladesh which at the
national level, are expected to lead to a process of revitalizing the national economy (BEI,
2004).
The findings of the study complements some recent theoretical arguments where researchers
like (Letza et al., 2008; Letza et al., 2004a)opined that the polarization of shareholder and
governance in a new way, by going beyond the traditional static conception of good
governance. With empirical evidence the findings of this study have responded to those calls
and argue that, in countries like Bangladesh where no particular model is able to capture the
real situation, good governance needs to be strategized in some other way, even if it means
The study also contributes to knowledge as it contains the first attempt from Bangladeshi
perspective to compare compliance with the Code provisions across industries and an insight
into the compliance pattern between mandatory and voluntary provisions. Whilst most of the
earlier studies on developing countries found poor compliance with both mandatory and
voluntary provisions, the findings of the study suggest that even within low or moderate level
of compliance companies, in countries like Bangladesh, companies comply only/or more with
mandatory/regulatory requirements. The findings thus also indicate that the regulators should
be aware of the guidelines they set and emphasize the implementation process.
As discussed in Chapter 1, there was a gap in understanding the reasons behind bad corporate
methodology allowed the study to respond to the call of the policy makers and enhance the
335
understanding of the corporate governance practices from the developing countries’
perspective. Whilst most of the previous studies are based on either a quantitative or a
qualitative approach, adoption of a mixed method allowed this study to take advantage of
and specific understanding on the compliance level, the qualitative approach helped the study
to broaden its scope by exploring different stakeholders’ opinions regarding compliance and
other unique problems of governance, Overall, the mixed method enabled the study to
provide a richer explanation of why, how and where companies are non-compliant. Whilst
many of the studies concluded by providing evidence of non-compliance, the present study
takes a unique position by providing evidence of non-compliance and identifying the reasons
behind this and their possible solutions. Thus, the study has made an attempt to respond to the
recent call for "engagement" based research made by researchers like Gray (2002). An
engagement based approach allowed the study to explore different stakeholders’ perceptions
who are directly and indirectly involved with the governance practices of companies in
Bangladesh.
The findings are a particular help for the Code and the SEC Guidelines as both of these are
due for revision and amendment. An understanding of the overall corporate governance
environment was necessary for the policy makers. It is undoubted that before making any
meaningful reformulation of the Code provision, the reviewers must know what the needs of
the country are; which provisions remain those are complied with and what are the reasons
behind this; and what might work best for the country to ensure full compliance. The findings
of the study are a response to these needs. The recommendations which are developed in the
light of the wider stakeholder groups’ opinion, the literature review and the corporate
336
governance practices of neighboring countries can be followed to identify some possible
solutions.
Finally, the overall study indicates that the corporate governance status in Bangladesh is
similar to many other developing countries(e.g Garay and González, 2008; Kota and Tomar,
2010; Okike, 2007; Olayiwola, 2010; Wanyama et al., 2009) which are of the opinion that
mere code development will not guarantee good governance, rather changes are needed at
political and cultural level. However, the study extends such understanding by finding that in
countries like Bangladesh where the compliance decision is greatly influenced by regulators,
it would be too optimistic to think that companies will be ready to step forward for voluntary
compliance without any pressure, or that a culture of compliance can be created within a
short time. Whilst the need for political, cultural and infrastructural changes are obvious, as a
beginning, countries like Bangladesh should also ensure that the good governance initiatives
are well supported by the regulatory authorities. Moreover adding to the previous literature’s
understanding of the issues relating to compliance, this study suggests that a culture of
voluntary compliance in Bangladesh is possible if the Code reflects country’s needs and
ability, companies and users are well communicated with about the Code and most
importantly companies are made well aware about the necessity for voluntary compliance.
However, as with any other research, the present study has some limitations. For instance,
considering the sample size of the survey analysis, caution must be applied as the findings
questionnaires were administered to identify the level of compliance with the Code and 32
interviewees were conducted to capture the wider stakeholders’ perceptions. Although the
337
study tried to include the perception of wider stakeholder groups, that might not be an
exhaustive list of all of them; especially when the concept of stakeholder varies across
different industries. However the findings have merit because the opinions expressed by the
respondents in the questionnaire and the views expressed by the interviewees did not
contradict with each other, rather complemented each other. Hence it is expected that the
Another limitation relates to the sample bias and thus further relates to the generalizability of
the study findings. Since the random method did not work, this study used the snow-balling
technique to reach an acceptable sample size. However, precautions were taken to avoid bias
and every effort was made to include all the industries in the sample. The next limitation is,
due to cost and time factors, only one year’s annual reports were considered, whereas the
findings could be more robust if a trend of compliance could be drawn by considering the
Some limitations lie with the research methods. For instance, both the questionnaire survey
and the semi-structured interviews could be illusory in some cases as usually respondents by
nature tend to reflect themselves as the ideal case or may not want to reveal their lack of
knowledge. Moreover, in any empirical research it would be irrational to expect that the
respondents will be comfortable in giving a bad impression about them; rather most of them
will try to provide an impressive image of them. Moreover the qualitative analysis is also
threatened by being too impressionistic and subjective as the analysis relied to a great extent
on the researcher’s perspective and evaluation. However to safeguard the study from such
threat the data triangulation strategy was adopted in which the findings are verified with the
338
Again, the study has used only six variables to understand whether the level of compliance
varies with different company attributes. Some more variables like different other measures
of profitability, culture could enhance the robustness of the findings. Thus it gives a future
Another limitation of this study is that it relied on the questionnaires mostly being completed
practice, and there is a chance that compliance in practice may vary from the findings of this
study. However the study tried to balance this shortcoming by using several methods of data
According to the researcher’s best knowledge, the current study is the first attempt to
understand the overall corporate governance practices, the corporate governance standards
and associated problems in Bangladesh. However the corporate environment is dynamic and
Considering the limitations and implications of the present study, the following are some
Firstly, being the first attempt the present study could not measure the progress of
compliance with the Code. Moreover the compliance status was measured on the basis of a
particular point in time (2009/2010), hence the claims may not be generalizable to other
periods. It would be interesting see the findings of future research which can carry a
339
Secondly, the present study draws attention to poor shareholders’ participation in AGM.
Although some of the interviewees being shareholders explained some reasons for their
reluctance to be present at the AGM, a thorough study is needed to understand the culture, the
shareholders’ issues and everything around AGMs in Bangladesh, with the aim of
establishing the AGMs as an effective tool for check and balance mechanism of corporate
governance.
Thirdly, the study considered some of the predominant variables to understand whether the
level of compliance varies with different company attributes. But future research could be
carried on by taking some more variables like leverage, liquidity, and most importantly
listing status and culture. Fourthly, it would be interesting for future research to see the
Finally, future study should investigate the impacts of compliance with the Code on firm
performance. Case studies are particularly recommended to develop success and failure
business cases which are high on the agenda for ensuring better implementation of corporate
governance, and also for ensuring that compliance with the Code reflects regular practices by
In conclusion, the findings of the study indicate that corporate governance in Bangladesh is in
its early stage. The culture of compliance is gradually taking place. The level of compliance
with the Code at a glance may not be impressive, but considering its existing home grown
challenges, it can be appreciated. Moreover, for any developing country like Bangladesh
where the entire corporate governance system is vulnerable, it is too optimistic to expect that
340
companies will live up to a high standard of governance compared to the developed
countries.
The overall findings indicate that the Code has not been widely recognized by the companies
in Bangladesh. Nevertheless, the study does not want to make any sweeping comment against
its potential – because the non-acceptance is not entirely due to the weaknesses of the
contents of the Code. It is the lack of communication and lack of awareness which did not
allow the Code to exert its best possible benefit for the country. The problems as identified by
the study might seem frustrating and puzzling. However, the findings relating to non-
compliance with the Code suggest that a high level of compliance is very much a possibility
if proper attention is being paid to the barriers of governance and the deficiencies of the
Code. Once the Code is revised, it is likely that compliance with its provisions has the
It is good to note that despite the continuous socio-economic challenges, the country has been
taking initiatives to reform its governance practices since its independence. Whilst some of
those initiatives could not contribute much to the overall growth of the country, some others
have certainly made a significant contribution. The depth of knowledge and understanding of
the interviewees indicated that there is an urge among the people for better governance,
which is further evidenced by the recent governance reform initiatives taken by the country.
For instance, the development of a corporate governance unit in the SEC; regulators’
attention to the core deficiencies of the SEC and the capital market94; ICAB’s new roles to
94
For instance, in the middle of the year 2011, the SEC has created a new and separate corporate
governance unit comprised of professionals and experts on stock market and finance. Their aim is to
monitor compliance status vigorously, increasing their capacity in terms of number and competency.
341
improve the quality of audit95; or UGCs new initiatives to improve governance standards96,
all of these have the potential for a better governance standard in the coming days. Although
some major issues (for instance, the audit fees; the pay structure of Government officials; the
manipulation of political members in the legal system; and the quality of primary and legal
education) still remain unaddressed, the recent steps are expected to make a difference to the
corporate governance standard of the country in the future. Hopes can be placed especially
when the interview analysis revealed that there is an urge among companies to pay attention
to good governance as a global need. The question may arise as to why hope is placed on
recent initiatives when earlier initiatives were found to be ineffective. However, no country
so far excelled in improving its governance practices overnight, it is their constant efforts,
understanding and, on top of everything, positive attitudes to change the situation that helped
them to bring success. These recent initiatives in Bangladesh thus certainly bring hope for a
better future.
are stepping forward in promoting their codes of corporate governance and showing concern
about the necessity of having an appropriate model of governance, the Code of Corporate
Governance for Bangladesh is halted with its mere introduction. It needs to be revised and
requires proper implementation. Hence, the study emphasises that continuous effort should be
95
The recent quality assurance department which was established by ICAB to comply with the IFAC
quality control requirements is ensuring that “regular visits are being made by the ICAB's quality
assurance team to different audit firms across the country to ensure that their audits are of the
standards set by the IFAC. Also, workshops, training programs are being organized regularly to create
awareness regarding audit quality in Bangladesh. The entire syllabus for ICAB examination has also
been revised” (Siddiqui, 2011, p 5-6).
96
Bangladesh Research and Education Network, a World Bank funded Higher Education Quality
Enhancement Project with collaboration of UGC (University Grants Commission) of Bangladesh has
taken initiative to develop networks all over Bangladesh. Networks are developing among the
universities and for video conferencing.
342
placed in identifying the needs of the country to ensure that the Code provisions remain up-
to-date according to the local and global needs. While some aspects of the Code should be
enshrined by the Government through its Ministry of Commerce, the SEC and other
regulators; the rest depends on the willingness of the companies. Nevertheless, considering
the existing lack of commitment amongst companies, this study argues that at least, for a start
it is the regulatory pressure that is more likely to initiate the expected changes. This study
also recognizes that the benefit of compliance can be fully realized when companies accept
the Code compliance as important for their business process and not as a mere compliance
issue. Hence, along with the legal and regulatory pressure for compliance strong emphasis
should be placed on raising awareness of corporate governance. That is why instead of blind
adoption of any particular model of governance, the policy makers should pay attention in
amending the Code and the SEC Guidelines, facilitate companies to comply, and thus help
them to see the benefit of compliance. Finally, efforts must be taken to ensure that companies
are implementing the provisions – whether on a regulatory or a voluntary basis - with the
Completing the thesis was an amazing journey and a great learning experience. This three
years’ project has helped me to learn a lot apart from the direct research related knowledge. I
believe this learning will surely add values in my profession as an academic and also as a
person. Found below are some key learning which might be important additions to my
personal account.
343
Planning and time management
The first thing that came to me as a great learning is the structured work plan for the thesis.
planned and scheduled my project from the very beginning which helped me to get a
comprehensive view of important project activities, its deadline and available time for
completion of those. Completion of a PhD program offers personal, social and academic
challenges, and for me that clear structured project plan always worked as a guideline for
checking progress against timeline and adopt accordingly. This is very useful in work life
also, as practicing such planning gives advantage in balancing different roles and
Improvisation
Whilst a structured work plan helped me to keep my studies on track, I have also learnt that
not everything will go as planned and it is extremely important to have flexibility in the work
process. For instance, as I have mentioned in Chapter 5, that my initial sampling plan did not
work in Bangladesh. It was almost impossible to get data even from a single respondent.
Having a clear deadline in mind it was very difficult to accept the reality. However, the quick
improvisation of the initial sampling plan helped me to get access to the source of
information. Adoption of a snowball technique was more appropriate for the local context in
Bangladesh, and as I have explained in the thesis it opened new avenues for me to explore
new areas. Furthermore, the idea of getting written consent from the respondents did not
work for some of the interviewees. As I realized, due to the data sensitivity, the respondents,
to some extent felt threatened to give a written consent on paper. While they were convinced
344
with the data protection process followed in the University of Birmingham, they thought that
a written consent is a violation of the guarantee provided for anonymity. Hence, after
discussing this issue with the supervisors, and other researchers from Bangladesh, the study
had to continue with the oral consent from those respondents. Thus a quick improvisation
removed barriers and allowed me to adjust with the local context and flexibility in the
approach allowed me to access to the data required for an in depth analysis of the problems
Work-Life Balance
Balancing ‘work’ and ‘life’ is one of the challenging aspects of PhD life. The PhD
experience is much more than learning and doing research. It needs commitment, passion,
patience and self-confidence to face the challenges of research – which definitely demands
time from personal and family life. However, a good research needs social context. I have
learned that people learn better by interacting with others, and people can produce better by
engaging with families, friends, colleagues and other society members. Whilst it was
and a wife, but after completion of the study I have realized that the continuous ‘work-life’
balance has made me even stronger and more confident. I have learned that life offers
challenges every time, but there is also a solution for every problem – we just need to be
committed to the things that we want and face the challenges with patience and confidence.
Overall, the PhD life as I have experienced, is an excellent way to learn, to investigate and to
see life in a new way- which is challenging and exciting all at the same time.
345
346
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Appendices
400
Appendix I
Code_ _ _ _
Survey on
Corporate Governance Practices in Bangladeshi Companies
To the respondents
Thank you very much for your willingness to participate in this survey. This survey is
being conducted as part of academic research study into understanding corporate
governance practices in Bangladesh.
Questions in this survey are based on the provisions of the Code of Corporate
Governance for Bangladesh and your valuable responses will be helpful in better
understanding the corporate governance in Bangladeshi companies.
The survey results will only be used for research purposes and presented in an
aggregate form thereby not revealing any individual firm’s practices.
I have collected some background information about your company from its annual report and the code at the top of
the survey enables me to link my background analysis with your response to the survey
401
Please read each question carefully and mark the most appropriate response considering the
YES NO
Duties of the Board
1 Does a Code of Conduct exist for the board detailing directors’ roles and
responsibilities?
2 Are the key risk areas of the company identified and monitored by the
Board?
3 Are the performance indicators of the company identified and monitored
by the Board?
4 Does the Board collectively appoint the Managing Director/Chief
Executive Officer (MD/CEO)?
5 Does the board collectively participate in the appointment of senior
management?
6 Is the performance criterion for MD/CEO established by the Board?
7 Is the performance of the MD/CEO evaluated by the Board?
8 Does the Board evaluate the performance of its individual members?
9 Does the Board have in place a succession plan for senior management
and the MD/CEO?
10 Is the internal control mechanism regularly reviewed and monitored by the
Board?
11 Is the risk management system regularly reviewed and monitored by the
Board?
Board Membership Criteria and Nomination of New Board Members
12 Is the board free from directors holding directorship in more than 6
Boards?
13 Does a director become ineligible for re-election to the board incase of
failure to attend at least 50% of the board meetings (without a leave of
absence) of previous year?
14 Does the Board have a Nomination Committee or a method to nominate
402
YES NO
qualified person for directorship?
Training:
15 Does the Board provide opportunities for training of individual directors?
16 Does the Board provide funds for training of individual directors?
17 Does the Board require new directors to attend corporate governance
orientation or training programme offered by reputed
institutions/individuals
Board Composition:
18 Is it mandatory to retire 20% of the board members annually by rotation?
19 Are the vacancies in the board normally filled at the AGM?
Board Agenda:
20 Is the agenda for each board meeting circulated to directors sufficiently in
advance of that meeting?
21 Is the Board Agenda approved solely by the Chairman?
Audit Committee:
22 Does the company has an Audit Committee: ( if ‘NO’, then please
directly go to question number25)
23 Does the Audit Committee exclude/ restrict the Chairman of the Board
from being a member of the Committee?
24 Does the Audit Committee meet at least quarterly?
25 Does the Audit Committee prepare reports on all meetings for the board?
YES NO
26 Does your company provide a Shareholders Handbook which informs
shareholders about their rights and responsibilities?
27 Do your shareholders receive notice of the AGM, through a standard
means of communication at least 21 days before the meeting?
28 Are the outcome and proceedings of general meetings recorded and
verified?
29 Does the AGM held in a convenient location in the vicinity of the
company’s registered office?
30 Do the shareholders receive information about company resolution,
403
decisions and operations in a manner that can be understood by a
layperson?
31 Do all the shareholders have the same voting right of 1 vote per share?
32 Do the shareholders have an opportunity to nominate items for the
AGM agenda prior to the AGM meeting?
33 During the AGM, can your shareholders question the Board, subject to
reasonable limitations?
34 Does your company facilitate the voting process of the shareholders
beyond that established by law? (like using a ballot procedure rather
than a hand count for counting multiple shareholdings)
35 Are your shareholders allowed to nominate Board candidates before
the notice of AGM?
36 Can your shareholders nominate audit firms prior to the notice of
AGM?
DISCLOSURE
YES NO
Accounting Standards and Accounts
37 Does your company ensure that the accounting standards are
implemented within the time frame given by ICAB?
38 Does your company employ appropriately qualified personnel to
prepare financial statements and accounts?
External Auditors:
39 Are your external auditors independent?
40 Are your external auditors appointed by the shareholders?
41 Does a shareholder, nominating an audit firm need to submit
standardized information about the firm to facilitate comparison
among nominating firms?
42 Are the audit firms or partners involved in your firm’s audit rotated
every three years?
43 Does your audit firm provide accounting or non-audit consulting
activities in your company (where they are appointed as the statutory
auditors)?
404
YES NO
44 Does your company disclose both audit and non-audit fees (where
applicable) to the shareholders?
45 Does your company restrict the shareholding of statutory auditors to
a maximum of 1% of the shares in your company?
Internal Auditors
46 Does your company have an internal audit function? (If no, please
proceed to Question 49).
47 Is your internal audit department independent from management?
48 Does your internal audit department have authority to propose
initiatives and changes directly to the board?
Disclosure
49 Does your Board present a balanced assessment of the company’s
position that may be understood by shareholders?
Other
Please make any additional comments here if you would like to do so.
General Information
405
Appendix II
INTERVIEW QUESTIONS
Maximize the interest of shareholders only (since they are the owner of the
company)
customers and Local community) (since they have long-term relationship (in
terms of both contribution and risk sharing) with the firm and affect its long-term
success.)
the parties who contribute specialized inputs (e.g. employees, banks, customers
etc)
406
A2: Please rank the following options you consider as major problems of governance in
(As it provides opportunities for mangers to work for their own interest and not
(For example: Mangers are solely concentrating on short term market value,
current share price, and ignores the long-term expenditure to create long-term
________________________________________________________
A3: Then which of the following options do you think will better address the governance
407
Restriction and control on corporate, capital market and managers.
Not strong control and restrictions, but adopting appropriate incentive systems to
(E.g. if a firm underperforms its share price will drop which will provide a chance
Promoting an environment for emphasizing long term vision and long term
performance.
empowering other groups like employees, suppliers to have long run relationship
with firm).
that contribute specialized inputs. The stakeholders who make firm specific
investments and contributes and bear risks in the corporation, should have residual
Other ________________________________________________
408
A4. Does your company follow Corporate Governance guidelines (such as SEC guidelines,
the Code of Corporate Governance for Bangladesh (BEI Code), OECD guidelines etc.)
Yes No
A5: If you are following a specific guideline, please explain why you have chosen that one?
It is a listing requirement
A6: What difficulties have you faced in ensuring compliance with your guideline in
(THE CODE)
B1: How did you come to know about the Code of Corporate Governance for Bangladesh
409
Seminar/ Workshop Bangladesh Enterprise Institute
(BEI)
Stock Exchange
B2: To what extent, you think the BEI Code is useful for ensuring better governance in
Very Useful
Useful
Why?__________________________________________________________
B3: As you know that the BEI Code is more comprehensive compare to the SEC
In which area of the Code, do you think the companies of Bangladesh will find it difficult to
comply with?
Board Issue
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Shareholder Involvement
Disclosure
Why?__________________________________________________________
B4: Most of the developing countries’ have developed its Code of Corporate Governance
in the light of OECD Principles. However, this adoption has been criticized because
developed countries’ (like UK, US) corporate structure is not similar in structure as
B5: The critics suggests that stakeholder model of governance which emphasizes on
shareholders).
Do you think at this moment, the major stakeholders are knowledgeable, capable and
governance?
B6: Critics also argue that shareholders being reluctant, less interested, legally restrained or
411
B7:Criticism has also been raised against stakeholder model – critics argue that aligning the
interest of different stakeholder groups is difficult. Even in single group, for example
changeable attitudes toward interest in and relationship with a particular company over
model will work for ensuring good governance in Bangladesh? Why and how?
B8:In our competitive global business environment, which of the following action should
as it is appropriate.
Retain the existing model of governance, but introduce reforms in the following
areas; Like______________________________________
Develop a new code which will reflect a balanced approach between shareholder
Bangladesh, what sort of provisions you think the Code must include that will better
412
C1: Has the recent financialSECTION C: FINANCIAL
crisis prompted CRISIS
you to change or reconsider the governance
C3: What sort of code provisions do you think will help your company deal with this
financial crisis?
SECTION D: OTHER
413
Appendix III
Components of the Corporate Governance Index
Sub Section of
No Components of the CGI Data Source
CGI
414
Sub Section of
No Components of the CGI Data Source
CGI
415
Sub Section of
No Components of the CGI Data Source
CGI
416
Sub Section of
No Components of the CGI Data Source
CGI
Disclosure Does your company employ appropriately
Questionnaire
2 qualified personnel to prepare financial
survey
statements and accounts?
Questionnaire
3 Are your external auditors independent?
survey
Are your external auditors appointed by Questionnaire
4
the shareholders? survey
Does a shareholder, nominating an audit
Questionnaire
5 firm need to submit standardized
survey
information about the firm?
Are the audit firms or partners involved in Questionnaire
6
your firm’s audit rotated every three years? survey
Does your audit firm provide accounting
Questionnaire
7 or non-audit consulting activities in your
survey
company?
Does your company disclose both audit Questionnaire
8
and non-audit fees? survey
Does your company restrict the Questionnaire
9
shareholding of statutory auditors? survey
Does your company have an internal audit Questionnaire
10
function? survey
Is your internal audit department Questionnaire
11
independent from management? survey
Does your internal audit department have
Questionnaire
12 authority to propose initiatives and
survey
changes directly to the board?
Does their statement further signed by the Company
13
Chairman of the Audit Committee? annual reports
Does your Board present a balanced
Questionnaire
14 assessment of the company's position that
survey
may be understood by shareholders?
Does the company publicly disclose: Company
i
quarterly un audited results? annual reports
Does the company publicly disclose: Half
Company
ii yearly Balance Sheet and Profit and Loss
annual reports
Accounts?
Does the company publicly disclose: Company
iii
Audited annual Balance Sheet? annual reports
417
Sub Section of
No Components of the CGI Data Source
CGI
418
419
Appendix IV
420