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Article-06 (Development of Corporate Governance Regulations: The

Case of an Emerging Economy)

3.1 Objectives of the Article:

Investigates the development of corporate governance regulations in emerging

economies, using the case of Bangladesh.

The shareholder theory or the stakeholder theory which is preferable for emerging

economic countries.
Literature concerning CG regulations in emerging economies.
The application of stock-holder and stakeholder models as market based and

institutionally based systems of governance in emerging economies.

To identify the problems of adopting Anglo Saxon (shareholder) model of CG in

emerging economies.
To identify the codes of corporate governance for corporate sector of developing
economies and the problems of adopting the codes of CG in developing countries like

To identify the initiatives for adopting CG in emerging economies.

3.2 Summary of the Article:

International financial agencies (IFAs) such as the World Bank included corporate governance
reforms as a development goal, significant changes have taken place in the regulatory
environment guiding corporate governance in emerging economies. These agencies have
prescribed models of corporate governance that have been tested and developed in developed
economy conditions as a powerful tool to battle against poverty.
The primary objective is to investigate the development of corporate governance (CG)
regulations in emerging economies, using Bangladesh as a case. Like many other developing
economies, the Bangladesh corporate sector is characterized by high ownership concentration,
reluctance of the corporate sector to raise funds through the capital markets, lack of shareholder
activism, availability of bank financing, and poor enforcement and monitoring of regulations.
In this paper the author seeks to address three questions: What type of CG model is conducive to

Bangladeshs current state of economic, legal and socio-political environment? What type of CG
reform has Bangladesh adopted? And, what has prompted such adoption?
After investigates the role of different actors, professional buddies, the private sectors and the
regulators the finding suggest that Bangladesh has also adopted the Anglo-American shareholder
model of CG, although is not considered to be entirely suitable for emerging economies, given
the economic, legal and corporate environment of these countries. An analysis of the behavior of
the principal actors in the Bangladeshi CG scenario indicates that the lack of self-regulation by
the professional bodies, and the absence of private-sector rule-making bodies have created the
scope for the IFAs operating in Bangladesh to intervene with policy-making decisions through
private-sector think-tanks.
The shareholder theory emphasizes that corporations are extensions of their owners, who should
be benefiting from it. Therefore, the corporation should be accountable only to the shareholders.
On the other hand, the stake-holder theory acknowledges corporation as a social entity that has
responsibility to a wider group of stakeholders including shareholders, creditors, management,
employees, the government and other interested groups. The shareholder model views that the
purpose of the corporation is to maximize shareholders wealth and the absence of stakeholders
involvement is viewed as the main obstacle for ensuring efficient controls because this model
emphasizes a trust based long term relationship between firm and stakeholders. Under pressure
from external forces, governments may be forced to change governance practices in order to
legitimize the economic system and attract foreign investments. The paper refers to stock-holder
and stakeholder models as market-based and institutionally based systems of governance. The
market-based system of governance is considered to be more appropriate where company shares
are generally owned by dispersed owners, and the managers are relatively free from close
scrutiny and control. Such systems are characterized by one-tier board leadership structure. The
socio-political and economic instability prevailing in many developing economies or emerging
market makes it harder to predict future prospects.
According to united nation Bangladesh is classified in to least developed countries. The
corporate environment in Bangladesh is characterized by concentrated ownership structure, bank
financing, poor legal framework and lack of monitoring.

Ownership structure like many other developing countries, most companies in Bangladesh are
either family owned or controlled by substantial shareholders. Company managements are
effectively just extensions of the dominant owners. They are closely held small and mediumsized firms where corporate boards are owner driven and most of the companies have executive
directors, CEO and chairman from the controlling family.
Shareholder involvement in Bangladeshi companies are reluctant to hold annual general
meetings (AGMs) even though this is a statutory requirement. When AGMs are held, these are
characterized by domination by a small group of people, poor attendance and discussion of
trivial matters.
The capital market in Bangladesh is still in primitive stage. The country has two stock exchanges
the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE). The capital market
in Bangladesh has not flourished in comparison with its South Asian counterparts.
Despite having a very large population, the number of auditors in Bangladesh is surprisingly low,
even compared with its neighbors because audit fees in Bangladesh are significantly low. ,
Bangladesh lacks the presence of any second-tier accountancy bodies to cater to the needs of the
corporate world, although neighboring countries have similar institutions. This means that a vast
majority of accountants working in the corporate sector do not possess any accounting
qualifications. In addition to this, the other second-order institutions, such as the judiciary, suffer
from lack of skills and proper training, especially in dealing with corporate cases.
Bangladesh is a former British colony, and has inherited the common legal system. The
Companies Act 1994 defines the structure of the firms, including the composition of the board of
directors, appointment of the CEO, appointment and remuneration of the auditors etc. The
financial sector is also regulated by the Banking Companies Act and the Insurance Act. The
problem with the legal environment has always been its poor implementation and the lack of
legal enforcement as a major problem.
Bangladesh inherited a private-sector-dominated economy. For this, from the independence to till
maximum investment occurs by the IFAs such as World Bank and IMF. Poor economic
performance and change in the government, allowed IFAs such as the World Bank and the IMF

to start intervening in economic policy making in Bangladesh.

The Bangladeshi banking sector is characterized by presence of large number of commercial
banks, excess liquidity in the banking sector and default culture. The main problem in the
Bangladeshi banking sector is the presence of default culture. 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
CG reforms in Bangladesh are still in very initial stages. So far, Bangladesh has failed to develop
any recognized code of CG. . The only code of CG developed so far has been through the
Bangladesh Enterprise Institute (BEI) a donor-funded private-sector think-tank without any
statutory power. The Bangladesh Bank (BB), the central bank of Bangladesh, issued a number of
circulars relating to formulation of audit committees, CG and appointment of the board of
According to Bangladesh Bank the board of directors of bank companies should be constituted of
a maximum of 13 directors. According to the BEI code, the size of the board should be between
7 and 15. The SEC suggests that the number of board members should be not less than 5 and not
more than 20. . According to SEC, at least one-tenth of the total number of the companys board
of directors, subject to a minimum of one, should be independent directors.
According to the SEC order the company should have an audit committee as a sub committee of
the board of directors. The audit committee should assist the board of directors in ensuring that
the financial statements reflect a true and fair view of the state of affairs of the company and in
ensuring a good monitoring system within the business. BB circular mentions that there should
be three directors nominated by the board for a period of 3 years. SEC states that in an AC there
should be three members selected by the board of directors, one of whom would be the chairman.
SEC mention that the chairmen would have to possess a professional qualification and must have
knowledge, understanding or experience in accounting or finance.
Bangladesh enterprise institute suggest that external auditors should be independent, well
qualified and free of conflict of interest. . Except tax work, the audit firms should not go for any
non-audit services and if they perform any non-audit service, both audit and non-audit fees
should be disclosed to the shareholders.
All three CG regulations are also similar in term of the bases of compliance. The Bangladesh

bank makes CG mandatory for the banking companies to follow the rules relating to composition
of the board of directors, regarding the formulation of audit committee. SEC adopt the CG code
on a compliance or explain basis and BEI adopt the CG code on comply and explain basis.
The early CG regulation have been rooted on the basis assumption of the agency theory. The
agency-based notions of market efficiency, opportunism and self-interest-driven motivations for
disclosure are also essential attributes of the Anglo-American model of CG. The authors argue
that economies in emerging markets are subject to abuse by managers, politicians and
institutions. Therefore, the assumptions of the agency theory do not hold. Consistent with
Paredes, the paper finds that the Anglo-Saxon open market models are not appropriate for
emerging economies. In the seminal paper on institutional isomorphism, DiMaggio and Powell
identified three mechanisms through which institutions become similar: coercive isomorphism,
mimetic isomorphism and normative isomorphism. According to them, coercive isomorphism
generates from political influence and problems of legitimacy; mimetic isomorphism is a result
of a standard response to uncertain environments; and normative isomorphism is associated with
professionalism. DiMaggio and Powell state that coercive isomorphism may arise due to formal
or informal pressures.
In Bangladeshi CG scenario is dominated by few professional accountancy groups who are
supposed to self-regulate their members.
At present, the Institute of Chartered Accountants of Bangladesh (ICAB) is the only professional
association for chartered accountants. The ICAB is responsible for developing the codes of ethics
for its members, as well as self-regulating them. The ICAB has its code of professional ethics,
and preserves the right to take disciplinary actions, including cancellation of membership against
members violating said code. Bangladesh Accounting Standards are actually carbon copies of the
International Accounting Standards.
The absence of self-regulation in Bangladeshi corporate sector would then create a scope for the
development of private regulations. However, there have not been any attempts by the
professional accountancy and business bodies in Bangladesh to initiate any private regulatory
initiatives in CG such as Bangladesh Enterprise Institute (BEI), the SEC, the Bangladesh Bank
and the Registrar of Joint Stock Companies (RJSC) and those committee remained largely
ineffective due to lack of capacity and qualified personnel.

The primary government regulator in the Bangladesh CG scenario is the Securities and
Exchange Commission of Bangladesh (SEC). Established in 1993, the SECs objective is to
protect the investors, promote and develop capital markets in Bangladesh, and regulate the
securities market. In 1999, the Asian Development Bank (ADB) initiated a US $1.07
million project to strengthen the capacity of SEC so that it can perform its regulatory
In this article the author investigate the development of CG codes in Bangladesh. It is found
that the Bangladesh corporate and economic environment is characterized by high
ownership concentration, primitive capital markets, and high government dependence on
IFAs, easy availability of bank credit and subsequent default culture, and poor labour
conditions. The presence of all these factors suggest that the Anglo-American shareholder
model of CG, based on agency-based notions of market efficiency, will not be entirely
suitable for Bangladesh. Rather, the presence of representatives of banks and workers, as
suggested by the stakeholder model, could contribute to better loan recovery and
improvement of working conditions. The adoption of the stakeholder model may be even
more appropriate against the backdrop of the ongoing financial crisis, which has seen major
slowdown in global economy.

3.3 Methodology analysis of the article:

The article is written for the purpose of theoretical study based on qualitative technique. The
maximum datas of the article are collected previous reports that were written in this sector.
In the whole report author only focus on three question and try to finding the answer of
those question based on Bangladesh and other least developing countries. After reading the
article we say that mainly it focuses on the problem of corporate governance structure of
Bangladesh, how to solve this problems and the appropriate corporate governance structure
for Bangladesh.

3.4. Critical analysis of the Article:

The article mainly focuses on only the qualitative data.
In the article author try to solve mentioned three question one by one in the entire

The author critically analyze the corporate governance structure of different
developing countries and suggest some indicators when choosing appropriate
corporate governance structure.
The author focus on Bangladesh corporate structure and describe the initiative for
adopting the CG only in Bangladesh perspective.
Author only focus on the actors of corporate governance of Bangladesh without
considering other emerging economies.
The author focus on only Anglo Saxon (shareholder) model of CG for emerging

Implications for Bangladesh:

The corporate environment in Bangladesh is characterized by concentrated ownership structure
(either family owned or controlled by substantial shareholders), bank financing, lack of
shareholder involvement, the reluctance of firms to raise capital through the stock markets poor
legal framework and lack of monitoring and eventual nonpayment of such loans, and lack of
quality manpower for operating the second-order institutions. In addition, the Bangladesh
corporate and economic environment also suffers from lack of timely information, political
instability, less developed capital market, absence of an active market for corporate control,
generally concentrated ownership, high reliance on bank financing and a passive managerial
labor market.
The article mainly focused on corporate governance structure of Bangladesh, problems of
corporate governance practice in Bangladesh and suggest stakeholders model as the best
suitable corporate governance structure for Bangladesh.
The number of auditors in Bangladesh is surprisingly low, even compared with its neighbors. So
increasing the number of audit firms for the fairness in the corporate sector.
According to World Bank and IMF it seems that stakeholder model is more appropriate then the
Anglo Saxon or shareholder model.

The IFAs have encouraged adoption of internationally accepted accounting and corporate
governance practices as a prerequisite for obtaining loans. In many cases, these agencies have
prescribed models of corporate governance that have been tested and developed in developed
economy conditions as a and the socio-economic conditions of the developing countries have
been ignored. Though its a problem for emerging countries they couldnt but take the loan. In
this case the countries need to focus on financing from banks and have representatives from
different groups to protect interest of each group and the society. The adoption of stakeholder
model will be beneficial for Bangladesh. The Bangladesh authority should give proper attention
to ensure appropriate corporate governance structure.