Friday, March 17, 2006














FE Specials



FE Education

FE Information Technology

Special on Logistics


Saturday Feature

Asia/South Asia





57th Republic Day of India






Site Search



Corporate governance: a comparison of practices
Jamaluddin Ahmed PhD FCA

          Corporate governance systems have evolved over centuries, often in response to corporate failures or systemic crises. The First well-documented failures of governance were documented in the South Sea Bubble in 1700, which revolutionised business laws and practices in England. Similarly, many of the securities laws in the United States were put in place following the stock market crash of 1929 and the Enron scandal in the recent past. Through this process of continuous change, developed countries have established a complex mosaic of laws, regulations, institutions and implementation capacities in the government and in the private sectors. The objective is not to shackle corporations but rather to balance the spirit of enterprise with greater accountability. The systematic enforcement of laws and regulations has created a culture of compliance that has shaped business customs and management ethos of firms, spurring them to improve as a means of attracting human and financial resources on the best possible terms.
Sound corporate governance is important not only to attract long-term patient foreign capital, but more especially, to broaden and deepen local capital markets by attracting local investors--individuals and institutions. Unlike international investors, who can diversify their risks, domestic investors are often captive to the system and face greater challenges, particularly in an environment that is opaque and does not protect the rights of minority shareholders. If the local capital market is to grow, corporate governance standards will need to improve in order to give investors the protection required to encourage them to provide the capital.
Corporate governance has only recently emerged as a discipline in its own right, although the strands of political economy it embraces stretch back through centuries. The importance of this subject is widely recognized, but terminology and analytical tools are still emerging. What constitutes corporate governance is still a topic of debate. From corporation's perspective, the emerging consensus is that corporate governance is about maximising value subject to meeting corporations' financial and other legal and contractual obligations. This inclusive definition stresses the need for board of directors to balance the interest of different stakeholders in order to achieve long-term sustained value for the corporation. From a public policy perspective, corporate governance is about nurturing enterprises while ensuring accountability in the exercise of power and patronage by firms. The role of public policy is to provide firms with the incentives and discipline to minimise the divergence between private and social returns and to protect the interest of the stakeholders.
There is no "one-size-fits all" blueprint for corporate governance since it has highlighted the relative weight given to shareholders or protection of stockholder rights. The most notable are the UK, the USA, German and Japanese systems. The UK and the USA models are often described as based on outside control and widespread ownership. Shareholder rights are relatively secured, and shareholders increasingly include institutional investors. There is one board per company and directors are often drawn from outside of corporate management. Banks play no direct role on boards but are influential in their role as creditors. In the UK and the USA, laws delineate the board members' legal duties to the company. The German model relies on two-tier board of directors, one executive and another supervisory, which includes representatives from labour. This is an insider model in which shareholders, banks and representatives from labour appoint those who will monitor management. The Japanese model of one board per company also emphasises insiders. The board normally includes representatives of management, such as, insiders, suppliers, customers and the main bank experts with informal influence through extensive crossholdings.
Corporate governance also routes from business practices, since these practices are influenced by environmental characteristics, such as, educational, socio-cultural, Legal, political and economic conditions of a country. In effect, these characteristics become constraints on a firm's ability to operate effectively and efficiently. For example, a firm operating in a country with high political and economic instability will have a difficult time planning, meeting schedules, and keeping workers' minds on their jobs and so on. Meticulous preparation of and widespread circulation of Corporate Finance in such a society obviously would not be a judicious use of corporate time.
Hundreds of cultural factors influence a society's corporate governance and corporate reporting. These are: degrees of conservatism, secrecy, distrust, and fatalism, coupled with the individuals' attitudes towards businesses, accounting and disclosures. The degree of conservatism influences a number of accounting principles and practices, specially valuation and profit determination. For example, the use of historical cost reflects a degree of conservatism, as do the lower-cost or market principle of recording of the contingent liabilities, over- allowances for bad debts and the practice of using wide variety of special reserves. These last two practices also generally result in lower reported profits, reflecting a higher level of conservatism and often a desire to appear weaker than one actually is.
The society's degree of secrecy affects the amount of disclosure an enterprise is willing to make in its external reporting: the greater the level of secrecy or distrust of outsiders, the lower the level of distrust, thereby making it more difficult to implement a system of internal control and performance because no one wants to have his/her activities scrutinised. Secrecy also affects the audit function being one of the tools of corporate governance, making it difficult to obtain necessary support information, verification, and corroboration of the accounting data supplied by the enterprise. Curiously, in certain circumstances, a high degree of trust may cause similar problems. In Japan, for example, to question someone's word is to question his honour--a serious insult and definitely a form of bad mannerism. Thus, an auditor who attempts to obtain proof of accounting information supplied by someone else is in a difficult and uncomfortable situation, and certainly one not likely to win friends.
Government support toward corporate governance can lead to establishing and regulating and protecting stakeholders' interests by ensuring accounting procedures and practices. Finally, the attitude of the society towards image of accounting professionals, the type of persons who enter it, its credibility, and the level of work the accounting professionals do, can have a great impact on the governance. There are countries where accounting is still regarded as low-paid, low status occupation filled with thieves and people not fit for meaningful jobs. In a country, where the best and brightest people do not aspire to become accountants, less liable environment and ultimately less corporate governance is found.
In Bangladesh, how can corporate governance be achieved when: 8 secretaries of the government are sitting on the board of national airlines-Bangladesh Biman, while Education and Industries Secretary sit on financial institutions' board? Ministers and bureaucrats sit on the Boards of Essential drugs, two five-Star hotels, PDB, DESA, DESCO, REB, Petrobangla and its 8 companies and on the boards of other 51 SoEs without any accountability. Bureaucrats sit on the central bank board, on the board of four nationalized commercial banks, three development financial institutions, and two specialized banks holding the depositors' and government money that are involved in sanctioning and rescheduling of loans interest waiver, and transferring to block account and finding creative ways to extend loans to known defaulters and make them default again. Interesting to note that the board of directors of the central bank, four NCBs, three Development financial institutions, BPDB, and so many SoEs cannot appoint its auditors. This is done at the concerned ministry level as recommended by the clerks in malicious route. It is surprising that in Bangladesh none of the board members were ever punished for their wrong doings with the affairs of SoEs either in the banking sector or otherwise. The public accounts committee and public undertaking committee do not often work in Bangladesh in line with the requirements of the constitution and rules of business. On the other hand, in the private sector, excepting few MNCs, most of the private and public limited companies do not have the accepted corporate rules and procedures that can work as catalyst for effective corporate governance.
Examples of good practices, such as, protection of creditors, protection of shareholders and enforcement of rights, are important indicators of corporate governance of any country, especially in Bangladesh. The British system is found to afford the best protection to creditors and shareholders and, in contrast, the French code, which is used in France, in its former colonies, Spain and Portugal provide greater protection to managers and debtors. The Scandinavian and German systems afford the strongest enforcement of stakeholder rights while enforcement of bankruptcy law ensures strong corporate governance.
Comparative chart of corporate governance in few Asian countries and Mexico can be seen on 20 variables developed by the World Bank (1998), which has been compared with that of Bangladesh. This chart shows that Bangladesh law qualifies only 9 points of corporate governance out of 20 variables to protect the shareholder's rights. While framing the code of corporate governance in the concerned authorities should consult all the relevant aspects the field before they embark on making decision on such issues.
The writer isVice President of the Institute of Chartered Accountants of Bangladesh and Treasurer, Bangladesh Economic


  More Headline
Meeting housing needs of the non affluent in the city
Corporate governance: a comparison of practices
Growing illegal immigration in the US
Court orders cable TV compliance

Print this page | Mail this page | Save this page | Make this page my home page

About us  |  Contact us  |  Editor's panel  |  Career opportunity | Web Mail





Copy right @ financialexpress.com