1. Introduction
Corporate governance is an emerging issue in academic research because it ensures better monitoring and meets the company’s objective or shareholders demand of value maximization and interest of other stakeholders. Corporate governance monitors management effectiveness and makes sure legal conformity by preventing improper and irregular behavior (Turrent & Ariza, 2016) and ensures the protection of shareholders’ rights and investors’ confidence (La porta et al., 2000). Quality of corporate governance also scrutinizes the transparency and accountability of the firm’s governance related issues and helps to assess whether the firm is better or poorly governed. Effective corporate governance depends on code of corporate governance issued by the government or the regulatory authority. Code of corporate governance is also a relevant issue in academic research because of chain of financial scandals worldwide (Turrent & Ariza, 2016) and various corporate scandals such as Enron and Andersen in US and Marconi in UK (Khanchel, 2007). The major objectives of code of corporate governance are to improve the quality of board governance and to increase the accountability to minority shareholders (Biswas, 2012).
Bangladesh Securities and Exchange Commission (BSEC), the regulatory authority, introduces corporate governance guidelines in 20 February, 2016 on ‘comply or explain’ basis to ensure corporate governance for the interest of the general investors and capital market. Comply or explain basis implies that listed firms of stock exchange should comply the condition of corporate governance guidelines or should explain in case of non-compliance. Bangladesh Securities and Exchange Commission (BSEC), the regulatory authority further revised the corporate governance guidelines of 2016 and issued corporate governance guidelines 2012 on ‘comply’ basis in 7 August, 2012.
Thus, the objective of this study is to make a comparative analysis between corporate governance guideline 2016 and 2012 and area of further improvement to ensure better governance, accountability and transparency. This study is mainly based on the corporate governance guidelines 2016 and 2012 issued by the regulatory authority known as Bangladesh Securities and Exchange Commission (BSEC).
2. Comparative Analysis of Corporate Governance Guidelines 2016 and 2012
The comparative analysis between corporate governance guidelines 2016 and 2012 is presented in the appendix and details are explained below:
2.1. Board of Directors
2.1.1. Board Size
Board size should be not less than 5 and not more than 20 according to corporate governance guidelines 2016 and 2012. [Table 1] shows the comparative analysis of corporate governance guideline 2012 and 2016 in terms of board size.
[Table 1] Board Size
[Table 2] presents the comparative analysis of corporate governance guideline 2012 and 2016 in terms of independent directors.
Corporate governance guidelines 2012 incorporated some additional requirement for independent directors in compare to corporate guidelines 2016. Independent director increased from one tenth (1/10) or minimum one (CG guideline 2016) to one fifth (1/5) (CG guideline 2012) to ensure better governance. Corporate governance guidelines 2016 explained some criteria as part of explanation of independent director means, not as a part of compliance. But corporate governance guidelines 2012 incorporated those criteria of independent director means as the mandatory compliance requirement. Independent director should not –hold more than 1% shares of the paid up shares; be the sponsor of the company; have any pecuniary relationship; be the member, director or officer of any stock exchange; director or shareholder or officer of stock exchange; be the partner, executive during the preceding three years of the concerned company’s statutory audit firm; be an independent director in more than three listed companies; be a loan defaulter convicted by the court; be convicted for a criminal offense according to corporate governance guidelines 2012. In addition, independent director should be appointed by the board of directors and approved by the shareholders in the annual general meeting; post should not be remained vacant for more than 90 days, tenure of independent director should be for a period of three years and extended for one term only and compliance of code of conduct by the board members
There was no information about qualification of independent director in corporate governance guidelines 2016 but new corporate governance guidelines 2012 fix the qualification of independent director. New guidelines requires independent director should - be knowledgeable with integrity and have the ability to ensure compliance with financial, legal and corporate laws and make meaningful contribution to business; be a business leader or corporate leader or bureaucrat or university teacher having economics or business studies or law background or professionals like chartered accountants (CA), cost and management accountants (CMA) and chartered secretary (CS); have at least twelve years of professional or corporate management experiences. The qualification of independent director might be relaxed in special cases with the prior approval of the commission.
2.1.3. Chairman of the Board and Chief Executive Officer
The position of chairman and chief executive officer (CEO) should preferably filled by different individuals according to corporate governance guidelines 2016 which means that separation of chairman and CEO is preferred but not mandatory requirement. But corporate governance guidelines 2012 require position of chairman and CEO should be filled by different individuals and it is mandatory. Both of the guidelines 2016 and 2012 require that chairman of the board should be elected among the directors of the company and the roles and responsibilities of chairman and CEO should be defined clearly by the board.
[Table 3] shows the comparative analysis of corporate governance guideline 2012 and 2016 in terms of Chairman of the board and Chief Executive Officer.
[Table 3] Chairman of the Board and Chief Executive Officer
2.1.4. The Directors’ Report to the Shareholders
Directors of the company should report to the shareholders by including some additional statements in the directors’ report. Both corporate governance guidelines 2016 and 2012 requires additional statement about the fairness of the financial statements; maintenance of appropriate books of accounts; constant application of accounting policies; financial statements are prepared following accounting standard like IAS, BAS, IFRS, BFRS; efficiency of internal control systems, compliance of assumption of going concern; significant deviation from last year’s operating results; key operating and financial results in a summarized form at least preceding three years; explanation for failure to pay dividend; number of board members meetings along with attendance of each director; and aggregate and name wise details of pattern of shareholdings.
But corporate governance guidelines 2012 requires new additional statements about industry outlook and possible future development in the industry; segment based and product based performance; risk and concern; discussion on cost of goods sold, gross profit margin, net profit margin, extraordinary gain or loss; related party transactions; utilization of proceeds from public issues, right issue or any other instruments; explanation for deterioration of financial results if the company goes for initial public offering, repeat public offering, rights offer, direct listing; explanation of variance of quarterly financial performance with annual financial statements; remuneration to directors along with independent directors; key operating and financial results in a summarized form at least preceding five years; and these additional statements were not incorporated in previous governance guidelines 2016.
In addition, in case of appointment or reappointment of directors, the company should disclose a brief resume of director, nature of expertise in functional areas and name of the companies where directors have the membership or directorship interest according to new corporate governance guidelines 2012.
There are some new issues which are included in the directors’ report to the shareholders as part of corporate governance guideline 2012 in compare to 2016 which is presented in [Table 4].
[Table 4] The Directors’ Report to the Shareholders
2.2. Appointment of Chief Financial Officer (CFO), Head of Internal Audit and Company Secretary
The company should appoint the chief financial officer, head of internal audit and company secretary and board should define roles, responsibilities and duties of the CFO, head of internal audit, and company secretary according to both corporate governance guidelines 2016 and 2012.
2.2.1. Requirement to attend the board meetings
There is no difference between corporate governance guidelines 2016 and 2012 in terms of attendance in board meeting. CFO and company secretary should attend the board meeting but they should not attend in board meeting if the agenda is related to their personal matters according to governance guidelines 2016 and 2012.
[Table 5] presents the comparative analysis of corporate governance guideline 2012 and 2016 in terms of appointment and requirement to attend the board meeting
[Table 5] Appointment and Requirement to attend the board meeting
2.3. Audit Committee
Both the guidelines 2016 and 2012 require that audit committee, a sub-committee of the board, should be formed and this committee should be responsible to the board of directors. In addition, the guidelines also require that duties of the audit committee should be clearly stated in writing and the audit committee should assist the board of directors to make sure that financial statements present the true and fair view of the company and good monitoring system is present in the business.
The comparative analysis between corporate governance guideline 2012 and 2016 is presented in the [Table 6] in terms of audit committee.
[Table 6] Audit Committee
2.3.1. Audit Committee Formulation
The audit committee should consist of three members including at least one independent director. The members of the audit committee should be directors of the company and they should be appointed by the board of directors. The guidelines 2016 and 2012 also require that if audit committee members are lower than prescribed number of three persons due to expiry of the term or any other circumstances, board of directors should recruit the new audit committee member(s) immediately or maximum one month from the date of vacancy to ensure continuity of the performance of the audit committee.
New corporate governance guidelines 2012 incorporate some new issues as part of constitution of the audit committee such as all members of the audit committee should have financial literacy and minimum one member should have the experience of accounting or financial management, company secretary should act as the secretary of the audit committee, and minimum one independent director should be present to fulfill the quorum of audit committee meeting.
2.3.2. Chairman of the Audit Committee
Corporate governance guidelines 2016 stated that chairman of the audit committee should be selected by the board and should have professional qualification or knowledge, understanding and experience in accounting or finance. But corporate governance guidelines 2012 require that the chairman of the audit committee should be an independent director and he should present in the annual general meeting.
The previous guidelines 2016 emphasized only the chairman of the audit committee who should have professional qualification or knowledge, understanding and experience in accounting and finance where as the new guidelines 2012 requires that all the members of the audit committee should have financial literacy and minimum one member should have accounting or financial management experience and chairman should be an independent director. Moreover, the new guidelines also include the presence of the chairman in the annual general meeting (AGM) which was not exist in earlier corporate governance guidelines 2006.
The requirements of the chairman of the audit committee vary between corporate governance guideline 2012 and 2016 and the variation is described in [Table 8].
[Table 7] Comparative analysis of audit committee formulation between corporate governance guideline 2012 and 2016.
[Table 8] Chairman of the Audit Committee
2.3.3. Role of the Audit Committee
Previous corporate governance guidelines 2016 didn’t explain anything about the role of audit committee where as new corporate governance guidelines 2012 discuss the role of the audit committee. The audit committee should oversee or monitor or review - about the financial reporting process; accounting policies and principles; external auditor recruitment and performance; quarterly, half yearly and annual financial statements before submission to the board; internal audit function; material related party transaction submitted by management; management letter or letter of internal control weakness issued by statutory auditor. The company should report to the audit committee about the uses/application of funds on a quarterly basis when money is raised through initial public offering (IPO) / repeat public offering (RPO) / right issue. Moreover, the company should prepare the statement of funds utilized for the purpose on an annual basis.
Role of the audit committee is included as a new item in the corporate governance guideline 2012 in compare to corporate governance guideline 2016 and presented in the [Table 9].
[Table 9] Role of the Audit Committee
2.3.4. Reporting of Audit Committee to the Board of Directors
According to both corporate governance guidelines 2016 and 2012, the audit committee should report its activities to the board of directors and immediately report to BODs in the following cases such as conflict of interests, presumed or suspected irregularity or fraud; or significant deficiency in internal control systems, suspected violation of laws including securities laws, rules and regulations, and any other significant matter.
[Table 10] presents the comparative analysis between corporate governance guideline 2012 and corporate governance guideline 2016 in terms of reporting of audit committee to the board of directors.
[Table 10] Reporting of Audit Committee to the Board of Directors
2.3.5. Reporting of Audit Committee to the Authorities
Corporate governance guidelines 2016 and 2012 stated that if the audit committee has identified any significant issue that is violated by BODs and management, the audit committee should report such finding to the Bangladesh Securities and Exchange Commission (BSEC).
[Table 11] shows the reporting of audit committee to the authorities and find that there is no change between corporate governance guideline 2012 and corporate governance guideline 2016.
[Table 11] Reporting of Audit Committee to the Authorities
2.3.6. Reporting of Audit Committee to the Shareholders and General Investors
The audit committee should report its activities including any report made to the board of directors and this report should be signed by the chairman of the audit committee and disclosed in the annual report according to both corporate governance guidelines 2016 and 2012.
[Table 12] presents the reporting of audit committee to shareholders and general investors and find that there is no variation between corporate governance guideline 2012 and corporate governance guideline 2016.
[Table 12] Reporting of Audit Committee to the Shareholders and General Investors
2.4. External/Statutory Auditor
Both corporate governance guidelines 2016 and 2012 require that the issuer company should not engage its external / statutory auditor to perform some services and these services are appraisal or valuation services or fairness opinions; design and implementation of financial information system; book keeping or other services related to accounting records or financial statements; broker dealer or actuarial services; internal audit services and any other services that the audit committee determines.
In addition, no partner or employees of the external audit firms should hold any shares of the client’s company during their tenure of audit assignment and this item is included as new item as part of external or statutory auditor in the corporate governance guidelines 2012.
The comparative analysis between corporate governance guideline 2012 and corporate governance guideline 2016 in terms of external/statutory auditor is presented in [Table 13].
[Table 13] External/Statutory Auditor
2.5. Duties of Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
Duties of CEO) and CFO are included as new item in the corporate governance guidelines 2012. CEO and CFO, to the best of their knowledge and belief, should certify to the board that to the best of their knowledge and belief- they reviewed the financial statements and these statement are free from material misstatement or omission of material fact or misleading statement; and these statements present the true and fair view of the company’s affairs and in compliance of existing accounting standards and laws; and company are not dealing any transactions that is fraudulent, illegal or violation of code of conduct.
The duties of CEO and CFO are described in the new corporate governance guideline 2012 and presented in [Table 14].
[Table 14] > Duties of Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
2.6. Reporting and Compliance of Corporate Governance
Directors of the company should report that the company has fulfilled all the conditions in accordance with the corporate governance annexure 2016 and 2012 in the directors’ report.
But new corporate governance guidelines 2012 require one additional requirement as part of reporting and compliance of corporate governance. This new requirement says that the company should obtain a compliance certificate from the professional accountant or secretary like chartered account or cost and management accountant or chartered secretary and this compliance certificate should be sent to the shareholders along with the annual report on a yearly basis.
The reporting and compliance of corporate governance is presented in the [Table 15].
[Table 15] Reporting and Compliance of Corporate Governance
3. Areas of Further Improvement of Corporate Governance Guidelines
The regulatory authority should consider some additional issues as part of corporate governance guidelines such as:
There is no guideline or instruction in the corporate governance guideline 2016 and 2012 about how tax should be reported in the financial statements. All the firms submit the tax return according to income tax law or income tax ordinance but the reporting quality is very poor in the annual report in absence of information in the corporate governance guideline. Corporate governance guidelines should include how tax should be reported, additional statement of tax compliance and computation (current and deferred tax) in details, area of tax rebate etc. Bala and Moniruzzamand (2011) study also recommend reporting tax as part of corporate governance.
Bangladesh bank, the central bank and regulatory authority, introduced some guidelines about the risk reporting and mentioned about only six kind of risk such as: credit, asset liability management, foreign exchange, money laundering, internal control and information and communication technology risks. There was no information about risk reporting in corporate governance guideline 2016. Corporate governance guideline 2012 requires that directors should include an additional statement in the director’s report about risk and concerns. But there are no specific guidelines in the corporate governance 2016 and 2012, what kind of risk should be reported other than Bangladesh bank guidelines, how risk should be measured and managed, how many risk should be considered, how to deal with about future risk. As a result, most of the firms reporting quality is not up to the mark. Thus, risk management and reporting guideline should be in details in the corporate governance guidelines.
In most of the developed and developing countries, there exist a separate nomination and compensation committee. But there are no separate nomination committee and compensation committee according to corporate governance guideline. Boards of directors nominate and decide the compensation of the management and employees. But a separate nomination and compensation committee may be most effective for company and will reduce workload of the board of directors. Corporate governance guidelines should incorporate separate nomination and compensation committee as part of corporate governance guidelines. Biswas (2012) study also recommends these two committees as part of corporate governance.
Most of the firms have no appropriate measurement tools or techniques to evaluate the performance of the board. It is also almost difficult for the firm to evaluate individual and independent director’s performance. Thus, corporate governance guidelines should set the guideline to measure the individual or board performance. Biswas (2012) study also arguing in favor of individual or overall performance analysis of the board.
Corporate governance guidelines 2012 and 2016 increase the proportion of independent directors in the board. Most of the firms have the minimum number of independent directors but it is difficult to assess the true independence of the board, audit committee, executive committee, risk management committee and other supporting committee without any specific criteria or guidelines. Thus, regulatory authority should include specific criteria or requirement in the corporate governance guidelines to judge the true independence of the independent directors. Biswas (2012) study also supported this recommendation.
4. Conclusions
Corporate governance guidelines have some positive implications. First, this guideline will improve the quality of corporate governance practices of the company. Second, compliance of guidelines will enhance transparency and accountability to the shareholders. Biswas (2012) study also stated that new corporate governance guidelines will improve the corporate governance practices of the listed companies in Bangladesh. He also added that new guideline will indirectly reduce the cost of monitoring of regulator and general investors because the company needs to obtain a certificate of compliance of corporate governance guidelines from the chartered accountant or cost and management accountant or a chartered secretary and this certificate ensure the verification of the contents of compliance of corporate governance guidelines.
In summary, this study finds that corporate governance guidelines 2012 introduces some new issues such as criteria and qualification of independent director; some additional statements in the directors’ report; mandatory requirement of separation of chairman and CEO; constitution of audit committee, chairman of audit committee; role of audit committee; duties of CEO and CFO on financial statements; and collection of compliance certificate from professional accountant or secretary. These are the major changes in corporate governance guidelines 2012 in compare to corporate governance guidelines 2016.
In addition, this study provides some suggestions that the regulatory authority should include some issues such as tax management and reporting, risk management and reporting; individual and overall performance analysis of the board and independent directors; separate nomination and compensation committee; assessment of true independence of the board and its supporting committees as part of corporate governance to ensure high quality of corporate governance and transparency.
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