My response to the Bangladesh SEC’s public consultation on draft corporate governance guidelines

My response to the Bangladesh SEC’s public consultation on draft corporate governance guidelines

On 21 December 2017, the Bangladesh Securities and Exchange Commission (hereinafter the “BSEC”) published Draft Corporate Governance Guidelines (hereinafter “the Guidelines”) on their website for public consultation, applicable to all companies listed on stock exchanges in Bangladesh including banks, financial institutions and insurance companies. The Guidelines are a welcome update of the earlier Notification No. SEC/CMRRCD/2006-158/134/Admin/44 of 07 August 2012, as they elaborate upon the existing guidelines (referred to hereinafter as “codes”) concerning the role and composition of the board of directors, senior management and the audit committee and introduce codes on, inter alia, other board committees, corporate social and environmental responsibility, financial and non-financial reporting and the responsibilities of Stock Exchanges with respect to the corporate governance of listed companies.

The proposed reform of Bangladesh’s corporate governance framework comes at an opportune moment given the concerns raised about the underperformance and misconduct of bank boards, which has contributed to the burgeoning of non-performing loans. As of September 2017, non-performing loans comprise 10.67% of loans disbursed – or BDT 80, 307 crore in absolute terms. (Dhaka Tribune, 22 November 2017) Analysts have attributed these default loans to nepotism, wrongful related party transactions and board interference in management decisions, among other factors (Dhaka Tribune, 26 November 2017; Dhaka Tribune, 17 December 2017). The prevalence of financial crimes and unethical practices has eroded investor confidence (BIBM, 17 December 2017), undermining laudable initiatives of the Securities and Exchange Commission and Stock Exchanges to enhance the robustness of the securities market through digitalization, financial literacy drives and other ancillary services. Similar issues have arisen with respect to non-financial listed companies, particularly corporate groups. Good governance will be key in rebuilding investor trust.

This update also complements the recently enacted Banking Companies (Amendment) Act 2017 and ongoing effort to pass a Companies Act that will succeed the Companies Act, 1994. In particular, given the concerns raised that the former will further concentrate directorial power in single families, extend board tenure and diminish the power of the Bangladesh Bank to oppose the appointment of a director, MD/CEO and Chairman (The Daily Star, 27 November 2017; Dhaka Tribune, 08 May 2017), the proposed Guidelines go some way towards allaying these apprehensions by providing extensive qualification and experience requirements for the appointment of executive, non-executive and independent board directors.

Corporate governance codes are also being revisited in jurisdictions with developed capital markets, such as the United Kingdom and the Netherlands, with both countries replacing earlier guidelines in 2016. The UK’s Financial Reporting Council is again revisiting the country’s Corporate Governance Code and it is likely to be substituted in the first quarter of 2018. While learning from these developments is useful, I suggest that the Guidelines should be tailored to the realities of Bangladesh’s corporate sector, with its concentrated share ownership and family-dominated boards, rather than uncritically transplanting provisions from jurisdictions with dispersed shareholding patterns (Siddiqui, 12 May 2017). For instance, among the 30 banks listed on the Dhaka Stock Exchange, directors/sponsors have a greater shareholding in 16 banks than public, institutional, governmental and foreign shareholders. In two others, government and institutional investors respectively have greater shareholdings than directors/sponsors, foreign and public shareholders do. A similar pattern emerges among non-banking companies (Farooque et al, 2007:131). Thus, as the horizontal agency problem between majority and minority shareholders is more acute in Bangladesh than the vertical agency problem between shareholders and directors, the country’s corporate governance regime should ensure that the former is adequately addressed. Along with this pragmatic approach, the Guidelines should facilitate the strategic objectives of Bangladesh’s capital market (Bangladesh Capital Market Development Master Plan 2012-2022) and economy in general, in terms of both overall growth and sustainability (Vision 2021; Sixth Five Year Plan Part 1: 61-62, Part 2: 69-70). In view of this, the recommendations for amendment of the Guidelines in the enclosed document are informed by examples of other developing countries that share similar corporate ownership patterns and are often bracketed in the same group of rapidly emerging economies: Thailand, Pakistan, Nigeria and the Philippines (PWC, 2017: 5; Goldman Sachs, 2007; Thanatawee, 2013: 122; Abbas et al., 2013; Okafor et al., 2016; Pratyaksa et al., 2015: 53).

Given that the Guidelines opt for a rules-based system of corporate governance, with codes that have to be mandatorily complied with, the decision to open the Guidelines for public consultation is appreciated. (Chapter D on the Environment and Social Responsibilities Committee will have to be mandatorily complied with after a transition period ending on 31 December 2020. During the transition period, a ‘comply or explain’ approach will be adopted.) The comments below, in response to this public consultation, mainly address the substance of the Guidelines, with only a few remarks as to the clarity of the codes/conditions. The comments are furnished in my personal capacity as a lawyer and academic researcher of corporate law and corporate governance. They do not reflect the views of my employer.

Response to Public Consultation of SEC on Draft Corporate Governance Guidelines – Final

The Hague