Corporate Governance in South Asia

Trends and Challenges

Tom Kirchmaier, Carsten\ Gerner-Beuerle, Irum Ahsan, Gregorio Rafael P. Bueta

• Verlag: Asian Development Bank
• Jahr: 2021
• ISBN:
  9789292626723
• Thema: Business
• Thema: Corporate Governance

This publication looks at several corporate governance issues, and provides an analysis of four core areas of corporate governance in South Asia in light of global trends and best practices. These include: i) corporate governance legal frameworks; ii) board structure and board diversity; iii) corporate governance of state-owned enterprises; and iv) anti-money laundering and compliance. The publication assesses the necessary regulatory preconditions for strong financial and economic development, and identifies areas for regulatory action. The findings are relevant for many developing countries around the world, as corporate governance will impact evolving challenges such as the COVID-19 pandemic, climate change, and sustainable global trade.

1 CORPORATE GOVERNANCE FRAMEWORKS

Introduction

Corporate governance is typically regulated by a combination of hard law,¹ binding provisions in company legislation regulating the basic governance architecture of companies, directors’ duties, shareholder rights and minority shareholder protection mechanisms; and soft law,² best practice standards set out in corporate governance codes. This trend toward a more flexible regulation of the conflicts of interest prevalent in corporations began in the United States in the early 1970s with statements regarding the role and responsibilities of directors issued by the Business Roundtable, the National Association of Corporate Directors, and the Council of Institutional Investors.³ Since then, private organizations, stock exchanges, and some large institutional investors or associations of investors in most developed and developing economies have produced increasingly detailed sets of best practice standards containing provisions on board composition, independence requirements for outside directors, committees of the board, and the role of shareholders. In some countries, these standards have been incorporated into the listing rules of stock exchanges and are, accordingly, binding on companies listed in prime market segment;⁴ in others they operate on a comply-or-explain basis.

Corporate governance codes exist in most, but not all, member countries of the South Asian Association for Regional Cooperation (SAARC). Table 1 gives an overview of the most recent initiatives.

Table 1: Corporate Governance Codes in SAARC Member Countries

SAARC = South Asian Association for Regional Cooperation.

^a Bangladesh Securities and Exchange Commission. 2018. Corporate Governance Code. 3 June. https://www.sec.gov.bd/slaws/Corporate_Governance_Code_10.06.2018.pdf.

^b Bangladesh Enterprise Institute. 2004. The Code of Corporate Governance for Bangladesh. http://bei-bd.org/wp-content/uploads/2015/03/whc4f4b6d540eb13.pdf.

^c Government of India, Ministry of Corporate Affairs. Corporate Governance Voluntary Guidelines 2009. https://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf.

^d Capital Market Development Authority. Corporate Governance Code (last amended 14 January 2014). https://www.cmda.gov.mv/assets/Laws-and-Regulations/Code-Coporate-Governance/Corporate-Governace-CodeJan-2014-English-Searchable.pdf.

^e Government of Pakistan, Securities and Exchange Commission of Pakistan. Listed Companies Code of Corporate Governance Regulations 2019. https://www.secp.gov.pk/document/listed-companies-code-of-corporate-governance-regulations-2019/?wpdmdl=36088.

^f Institute of Chartered Accountants of Sri Lanka. Code of Best Practice on Corporate Governance 2017. Colombo. https://www.casrilanka.com/casl/images/stories/2017/2017_pdfs/code_of_best_practice_on_corporate_governance_2017_final_for_web.pdf.

Source: Asian Development Bank.

Corporate Governance and Financial/Economic Development in South Asia

The goal of corporate governance, according to the World Bank and most national policy makers, is the protection of minority investors. The World Bank Doing Business reports measure good governance as an aggregate of six elements: (i) review, approval, and disclosure of requirements for related-party transactions; (ii) ability of minority shareholders to sue and hold interested directors liable for prejudicial related-party transactions; (iii) ease of filing a minority shareholder lawsuit (derivative action), (iv) shareholder rights in major corporate transactions, (v) governance safeguards protecting shareholders from undue board control and entrenchment, and (vi) extent of corporate transparency.⁵ The World Bank has carried out an assessment of the four SAARC economies that are the focus of this study along these dimensions with the results summarized in Table 2.

Table 2: Minority Investor Protection Index (0-10)

Source: World Bank Doing Business 2019.

The following country sections build on the World Bank’s analysis, with certain modifications: the scope of this publication is narrower, focusing on the regulatory framework governing the general management of companies, as opposed to fundamental transactions. At the same time, a more granular and detailed analysis is offered, considering, for example, the precise structure of directors’ duties or the content of best practice standards where this is relevant to an evaluation of the effectiveness of corporate governance codes, such as the definition of independence. Finally, it considers how the relevant provisions are enforced in practice and offer a view on the law “in action”, including, where applicable, leading case law.

As far as best practice standards are concerned, it records (i) the proportion of nonexecutive to executive directors on the board; (ii) the number of independent directors; (iii) the definition of independence; (iv) the separation of the two central roles on the board, that of chair and chief executive officer (CEO); (v) the delegation of sensitive issues involving particularly pronounced conflicts of interest to independent committees, including succession planning, responsibility for the review of internal control procedures and the appointment of the external auditor, and remuneration decisions; and (vi) the mechanisms facilitating the enforcement of best practice standards.⁶

These best practice standards have to be assessed against the backdrop of the binding legal and general institutional system. Hence, the country reports also evaluate (i) the legal rights of shareholders to appoint and remove directors, (ii) the structure of directors’ duties, (iii) the enforcement of these duties by minority shareholders on behalf of the company, and (iv) the nonlegal institutional determinants of the effectiveness of the above. Other complementary or functionally equivalent regulatory institutions, for example, disclosure regulation and the activities and powers of public regulatory bodies, are outside the scope of this study.

National Approaches

Bangladesh

Overview of the Regulatory Framework

Companies are incorporated and regulated by the Companies Act, 1994. The act is supplemented by a Corporate Governance Code, the most recent edition issued in 2018 by the Bangladesh Securities and Exchange Commission (BSEC). The code does not operate on a “comply-or-explain” basis, but is binding on all companies falling within its remit. It was published by the BSEC by virtue of its authority to “impose conditions” under s. 2CC of the Securities and Exchange Ordinance, 1969. Although the code itself does not mention penalties for noncompliance, the Securities and Exchange Ordinance, 1969, s. 22(b) contains penalties for noncompliance with an order or direction of the BSEC. No “explain” provision is found in the code.

Government regulators for corporate governance in Bangladesh are the Registrar of Joint Stock Companies and Firms, the BSEC, and Bangladesh Bank, the central bank of Bangladesh. Nongovernment regulators are the Institute of Chartered Accountants of Bangladesh, Chittagong Stock Exchange, and Dhaka Stock Exchange.

Board Structure

Table 3 gives an overview of the regulation of corporate boards in Bangladesh along the five dimensions that section 1.2 identified as critical in ensuring that boards operate as an effective, independent control mechanism. The table also gives information on the manner in which the regulatory requirements are enforced, in particular whether companies can deviate from them, provided they give an explanation of their noncompliance; or the board structure framework is laid down in binding regulations. The provisions are contained in the Corporate Governance Code, 2018.

Table 3: Board Structure Regulation in Bangladesh

Dimension	Regulatory Requirements Applicable to Listed Companies	Summary
Proportion of nonexecutive directors	No distinction between executive and nonexecutive directors (but see the requirements on independence, which implicitly establish a minimum percentage of nonexecutive directors)	No minimum proportion
Number of independent directors	Condition no. 1(2)(a) of the Corporate Governance Code, 2018: At least one-fifth of the total number of directors on the company’s board shall be independent directors.	One-fifth
Definition of independence	Condition no. 1(2) of the Corporate Governance Code, 2018: “independent director” means a director: • who either does not hold any share in the company or holds less than 1% share of the total paid-up shares of the company; • who is not a sponsor of the company or is not connected with any sponsor of the company or director or nominated director or shareholder of the company or any of its associates, sister concerns, subsidiaries, and parents or holding entities on the basis of family relationships, and his or her family members also shall not hold abovementioned shares in the company; • who has not been an executive of the company in immediately preceding 2 financial years; • who does not have any other relationship, whether pecuniary or otherwise, with the company or its subsidiary or associated companies; • who is not a member or a Trading Right Entitlement Certificate (TREC) holder, director, or officer of any stock exchange; • who is not a shareholder, director (excepting independent director), or officer of any member or TREC holder of any stock exchange or an intermediary of the capital market; • who is not a partner or an executive or was not a partner or an executive during the preceding 3 years of the concerned company’s statutory audit firm; • who is not an independent director in more than five listed companies; • who has not been convicted by a court of competent jurisdiction as a defaulter in payment of any loan or any advance to a bank or a nonbank financial institution; and • who has not been convicted for a criminal offense involving moral turpitude.	Detailed and demanding definition
Separation of chair and CEO	Condition no. 1(4)(a) of the Corporate Governance Code, 2018: The roles of the chair of the board and CEO have to be separated and held by different individuals.	Required
Committee structure	Succession planning: The board must set up a Nomination and Remuneration Committee (NRC) to assist the board in the formulation of nomination criteria or the policy for determining qualifications, positive attributes, experiences and independence of directors and top-level executive, as well as a policy for considering the remuneration of directors and top-level executives (condition no. 6 of the Corporate Governance Code). The NRC must comprise of at least thre...

Inhaltsverzeichnis

• Front Cover
• Title Page
• Copyright Page
• Contents
• Tables, Figure, and Box
• Foreword
• Abbreviations
• Background
• 1. Corporate Governance Frameworks
• 2. Board Structure, Board Independence, and Board Diversity
• 3. State-Owned Enterprises
• 4. Compliance and Anti-money Laundering
• 5. Summary of Findings and Recommendations
• Appendix: Selected Indian Laws and Regulations
• Footnotes
• Back Cover