BSEC Codes of Corporate Governance - a critique

The Bangladesh Securities and Exchange Commission (BSEC) issued a new set of directives known as 'Codes of Corporate Governance' in June 2018, and asked the listed companies to comply with those by December 31, 2018, i.e. within the next six months.

While issuing the directives, the limitation of the timeframe, that is whether it is plausible to comply within such a short period, has not been considered. But the fact is, it would require considerable administrative exercises to thoroughly comply with the directives. A company has to expend significant time and attention for working on it. Some of the requirements in the codes are grossly debatable, and some are clumsy and cumbersome. The codes have been generalised for all listed companies - large or small, local and foreign. But their likely impacts, generation of confusions and the required workouts including detailed boardroom briefings and discussions have been ignored. Let us discuss some of the debatable issues.

ROLES AND RESPONSIBILITIES: The codes require a company to separately spell out detailed roles, responsibilities and codes of conduct for its chairman, all directors, Managing Director (MD)/Chief Executive Officer (CEO), Company Secretary (CS), Chief Financial Officer (CFO), Head of Internal Audit & Compliance (HIAC), Audit Committee (AC) and Nomination and Remuneration Committee (NRC). All these are to be posted in detail on the company website. Now, it would require considerable in-house discussions as well as boardroom studies to finalise the papers. A timeframe of six months is not sufficient to complete these tasks. Consequently, it would be too much to expect a company to finalise the texts and comply with the directives within the timeframe.

MANAGEMENT DISCUSSIONS: The codes require the companies to add to the annual board report a Management Discussion and Analysis signed by the MD/CEO, which should include among other things the following

a) Comparative analysis (including effects of inflation) of financial performance or results and financial position as well as cash flows for current financial year with immediate preceding five years, and explaining the reasons thereof;

b) Compare such financial performance or results and financial position as well as cash flows with the peer industry scenario.

c) Briefly explain the financial and economic scenario of the country and the globe.

d) Risks and concerns related to the financial statements, explaining the company's plan for mitigating such risks and concerns.

There is no such suggestion or argument in this article that these are not possible or cannot be provided in the report. Rather, what is being pointed out is that these are elaborate exercises and likely to require longer times for assimilation. Presently, the Annual Report already includes a comparative five-year summary of key-data of the company. So, further analysis of 5 years' financial performance would be a luxury. About comparison of financial performance, results and financial position of a company with those of the peer companies, the question may be posed why a peer company would share it's sensitive and may be classified data with a competing entity? Moreover, the economic benchmark in all companies may not be the same. So, picking up data from published reports may not serve the purpose. Besides, the peer companies may not be available in all cases, but the requirement has been generalised.

Independent analysis of economic and financial scenario of the country and the globe would require expert professionals to work on; but all companies may not be able to afford it. In that event, a sweeping requirement to that effect would almost inevitably lead to a cut and paste culture, which would serve merely as a decoration to the Annual Report. On risks and concerns, there is already a requirement in 1(5)(iii) of the Codes, including internal and external threats to the company in the Directors' Report. Further disclosure on risks and concerns related to the financial statements in the Management Discussion part of the Report seems to be an avoidable duplication.

SEPARATION OF TOP EXECUTIVES: It is stipulated in code 1(4)(b)  that the Managing Director (MD) and/or Chief Executive Officer (CEO) of a listed company shall not hold the same position in another listed company. Then again, it is required in code 3(1)(c) that the MD or CEO, CS, CFO and HIAC of a listed company shall not hold any executive position in any other company at the same time. This is a very strenuous restriction for a conglomerate or a company having many subsidiaries. Now, it has to engage separate top executives for each of its subsidiaries. This is like separate management for every separate company.

For argument's sake, even if we overlook the financial aspects involved in the issue, which is very important for the company, we just cannot ignore the management riddles for the Board. This is likely to produce supervisory knots for the Board in keeping matters under its common control. Good governance means better supervisory control, and better control culminates in better financial management.

COMPLIANCE CHECK-LIST: The directives require a company to obtain a certificate from any practicing professional regarding compliance of the Codes of Corporate Governance of the Commission, and such certificate has to be disclosed in the Annual Report. Now, such certification would obviously require the professionals to conduct thorough audit of compliance of the codes by the company. A standard report has also been shown in the directive on the professionals, where it is stated that they obtained all the information and explanations they required, and after due scrutiny and verification thereof. They reported accordingly. If that is to be the case, then the long check-list required to be presented in the Annual Report with mere tick marks for compliance may look superfluous, as the auditing professional audits the compliance by the company and also mentions this in his report.

CONTENTS IN THE ANNUAL REPORT: Apart from many other usual items, the Annual Report of a company shall have to include at least the following statements now: Directors' Profile; Directors' Report; Management Discussions; Certification by the CEO and CFO; Audit Committee Report; Nomination & Remuneration Committee (NRC) Report; Comparative financial data; Patterns of shareholding; Compliance check-list; and, Certificate of Compliance.

With all these, the Annual Report of a company, irrespective of its size and stature, shall now be a huge publication involving colossal costs. So, this is going to be highly taxing for the companies. In this era of simplification, the size of corporate report in Bangladesh is gradually on the rise. Despite suggestions from various quarters, the directives seem to be silent about the physical dispatch of Annual Reports to the shareholders, who are, in most cases, vast in numbers.

TOO SHORT A TIMELINE: The new Codes of Corporate Governance are to be implemented/complied with by the companies within the time-limit of December 31, 2018. But, given the limitations as mentioned above, a time-frame of six months is too short a period to comply with so many (often vague) requirements. For example, the quorum requirements for the Audit Committee and NRC deserve to be discussed and clarified. So, ideally the deadline should have been December 31, 2019 instead of the current year. That would give sufficient time to the companies to read, grasp, fathom and discuss with the board and the management, and finally go for its implementation.

CONCLUSION: The new Codes of Corporate Governance issued by the Bangladesh Securities and Exchange Commission (BSEC) is definitely an improvement over the earlier one. The most significant inclusion happens to be the requirement of Nomination and Remuneration Committee (NRC) for the companies. It has also spelled out the Certificate of Compliance to be issued by the professionals, which has filled up a long void in that area. This is a big exercise indeed, for which the Commission deserves kudos.

At the same time, it should be added that the regulatory regime should not be such that it takes up considerable management time and attention, when the focus should be to boost the company's business performance and social commitments. Also, care should be taken so that the regime does not cause potential investors to shy away from the capital market and pose difficulties for the existing ones.

 A K A Muqtadir FCS is a practising Chartered Secretary.

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