A critique of draft corporate governance guidelines  

In order to make corporate governance of the country better in the interest of the investors and capital market, Bangladesh Securities and Exchange Commission (BSEC) has circulated the draft corporate governance guidelines on December 21, 2017 for comments from the stakeholders..

This is the third guideline the BSEC issued so far. The first and second guidelines were issued in 2006 and 2012 respectably. The third guidelines, which are currently at draft stage, will be in practice on 'mandatory compliance' basis soon. Chapter D of the draft guidelines that deals with environment and social responsibilities will be made mandatory by December 2020.

The BSEC is trying to bring good corporate governance practices in Bangladesh for strengthening investor's confidence in the capital market. Strong capital market is a driving factor of economic progress in a country. Capital market enhances efficient financial intermediation. It increases mobilisation of savings and therefore improves efficiency and volume of investments, economic growth and development. Generally, people investing in a listed company through the capital market do not take part either in managing or in the governing processes of the company. They are to rely on the numbers and stories provided in the annual reports and in the quarterly financial reports published in the stock exchange and company's web site and newspapers to make investment decisions. Reports are the only vehicle through which investors can look into the business of the company and its financial results and positions. Given the prevailing socio-economic condition of the country, general investors do not have sufficient trust in the numbers and stories provided to them through these reports.

The BSEC is mandated to regulate capital market by issuing principles, policies and procedures to be followed by listed companies including insurance, banking and other financial entities in order to enhance investor confidence on financial and other reports. Confidence of the investors grows when they know that the information provided by these reports come through rigorous scrutiny and well defined corporate governance system. The BSEC's role is to make corporate governance system efficient that ensures transparency and accountability of the listed companies.

The draft guidelines are more elaborate than the one issued in 2012. The previous one was 15 pages in all, while the current draft is 78 pages. It has stipulated detailed requirements as regards the role of board of directors and its composition, qualification required for independent directors, directors' reports to the shareholders, meeting of the board of directors, governance of subsidiary companies, composition of senior management stuffs and their appointment and removal, duties of managing director, chief executive officer and chief financial officer, financial reporting and disclosure, annual general meeting, price sensitive information, website, reporting of corporate governance etc. The guidelines also made it mandatory for inclusion of at least one female director on the board.

In addition to further detailing of the roles and responsibilities and composition of audit committee, the draft guidance stipulates four more committees as sub-committees to the board of directors. These committees are: nomination and remuneration committee (NRC), risk management committee (RMC), environment and social responsibility committee (ESRC) and executive committee (EC). Further detailing of the requirements and bringing new requirements will definitely make corporate governance systems efficient and transparent. The guidelines also stipulated some conditions that are required to be reviewed, modified and/or deleted altogether. Some of the major contentious conditions that require further review by the BSEC and discussions with stakeholders are discussed below.

One of them is proportional representation in the board of directors by general shareholders. According to the guidelines, general shareholders are those shareholders who are not sponsors or promoters or shareholders who operate individually or through persons in concert. Generally, these shareholders are called minority shareholders or non-controlling shareholders. As they do not have enough voting right to elect board members from themselves, they do not have representation in the board of directors. The draft guidelines, if made effective as it is, will make it mandatory to include non-controlling shareholders in the board in proportion of their shareholding. That means, if a listed company has 20 per cent shares in the market and it wants to maintain a board of directors with ten members, the company has to bring two members from non-controlling shareholders. Since board of directors are constituted with people from similar background and mind-sets, making business decisions with people from non-controlling shareholders who do not have adequate understanding of the business models, value chains, strategies and long term vision may become troublesome.

The draft guidelines stipulate that the BSEC from time to time shall determine minimum percentage of shareholdings both jointly and individually by sponsors or promoters and directors. The BSEC can fix the percentage in the guidelines. Keeping the percentage open to be determined by the BSEC from time to time may create disparity among the listed companies and be a source of bureaucratic hassle.

The purpose of self-evaluation of the performance of the board directors is not clear. Does the BSEC think that the evaluation will improve board's performance? Financial results and position of a company are the performance indicators of the board of directors. Self-evaluation by any model would simply be useless, as objective oriented evaluation is not a practical proposition given the country's corporate environment.

Chairman and Managing Director are the leaders. Persons with right leadership qualities may not be available in a particular sector or industry. Hiring a competent person will not only incur high cost but may also dislodge continuity of business.

The draft guidelines makes it mandatory that product-wise performance and discussion on costs of goods sold are to be disclosed in the annual report. Product-wise performance is a business secret that the businesses are not willing to share with competitors. Segment-wise performances can be shared.  Managing cost of goods sold is the key to profitable business strategy. Businesses maintain this key confidentiality at its highest level. Discussion on the issue will leak this confidentiality to the competitors.

A company may have many litigations awaiting remedy. Disclosing and discussing all those could be sub-judice before final verdict of the court. This may also dent image of the company. Any litigation that may have significant financial impact should be treated as contingent liability as per IAS 37.

Comparing financial performance/results and financial position as well as cash flows with the peer company explaining industry scenario will be impossible for companies that do not have peer companies listed in stock exchanges. Example: MJL, Berger Paints

Without implementation of proper Enterprise Risk Management (ERM) Systems, compliance with the guidelines will not be possible. Implementation of ERM involves considerable amount of money. Moreover, human resource with required expertise is not available in the market. The BSEC should allow at least two years time in this regard.

Future projection of performance and financial position may lead to controversy, as the projections may not materialise with full accuracy. Moreover, unscrupulous companies will have scope for presenting phoney picture to deceive investors.

Company Secretary is neither responsible for recording of financial transactions nor for preparation of financial statements. Signing the financial statements by Company Secretary does not signify anything nor add value to the statements.

Furnishing of management's discussion would be very difficult to record and report as the essence of the discussions is converted into management decision and financial statements. Thus it would not be wise to compel listed companies to furnish management discussion to the shareholders before annual general meeting.

Board discussions are not important. Board's decisions are important to the stakeholders. Furnishing continuous and uninterrupted audio visual recording of the entire proceedings of the board of directors' meeting, involving sensitive decision may invite unexpected observations or queries from stakeholders as the discussions may contain controversial and confidential issues that should not be disclosed with other parties.

The issues discussed above are the major ones. The professional bodies, chambers of commerce, business associations are also highlighting some other issues at various forums. Before finalising the guidelines, the BSEC should review them thoroughly. The BSEC should have detailed discussions on the draft Corporate Governance Guidelines with all stakeholders and collect inputs from them, consider their suggestions with openness and accommodate those in order to render the guidelines pragmatic.

The writer is a FCA. [email protected]