Why do Bangladeshi companies decline after the Founder’s demise? The answer lies in lack of corporate governance

Illustration: TBS

Islam Group, established in 1964, was founded by the then richest person in Bangladesh, celebrated industrialist Jahurul Islam. 

From 1966 to 1995, Islam Group was arguably the largest conglomerate in the country. There were very few local companies that came close to it. But the death of the Founder changed things. Islam Group broke up into three individual entities. 

The reason for the break up, among other things, was dependence on a single person and the lack of corporate governance. Had Islam Group incorporated strict obligations that corporate governance entails, the break up the company into separate entities may have been avoided and Islam Group would have still maintained its pole position even today.

Islam Group is not the only example that pertains to setbacks caused by the absence of corporate governance. There are plenty of examples of Bangladeshi businesses which experienced downfall or stagnation, following the Founder's death, due to the absence of corporate governance. 

It is therefore pertinent to ask: if some European and American companies can last for hundreds of years, why cannot any Bangladeshi business corporation last following the passing or the retirement of its owners? 

The answer lies in the limited growth of corporate governance in Bangladesh.

A Company vs An Owner

The idea of a company having its own legal identity is unfamiliar in Bangladesh. 

Here, the common perception about a company is that it is owned by an individual. However, that is hardly the case, a company is not really 'owned' by any one individual. An individual or a group may hold a few shares in a company, making them shareholders. 

A company is an entity of its own with perpetual succession. It can sue and be sued and can also participate in contracts. 

Once founded, a company needs money to do business. Creditors invest their money in a company for return of profit. However, these creditors can be both secured or unsecured creditors. 

Shareholders, creditors, the board and the management all have separate roles in the growth of a company. To ensure smooth operation, rules and regulations are laid out that everyone must follow. This is known as 'corporate governance,' and necessary for any company, organisation or association.

The concept is a fairly recent one. In 1992, a committee led by Sir Cadburry was formed to identify and solve problems of the companies of the UK and delivered a report, namely the Cadbury Report. The idea soon spread all around the globe. Till now three separate Corporate Governance Codes have been introduced, i.e., Anglosaxon, German and Japanese.

Corporate governance practices in Bangladesh 

In Bangladesh, unfortunately, although regulations relating to corporate governance have gradually been introduced over the last two decades, implementation remains seriously lax. Most Bangladeshi companies have devised workarounds to these regulations and ensured the effective control of companies remain with family members, irrespective of what the legal documents state. 

The securities regulator Bangladesh Stock Exchange Commission first issued Corporate Governance Guidelines in 2006. However, it was not made compulsory, rather as an option for listed companies. Then in 2012, it was updated and all listed companies were mandated to follow it. 

The current Corporate Governance Code of 2018 was enacted repealing the 2012 one. The regulator's expectation from these changes is to ensure four pillars of corporate governance: fairness, accountability, transparency and responsibility in operations and management. Here are some regulations Bangladeshi listed companies must abide by: 

Assigning an independent director

Listed companies including banks, non-bank financial institutions, insurance companies and statutory bodies shall not have less than five and more than 20 directors at a time, and among them at least one-fifth must be independent or non-executive directors. The chairperson of the board must be from the independent directors. The board shall submit a report on performance of independent directors to the shareholders.

Audit reports made mandatory

The Corporate Governance Code ensures that there will be two committees, 1) audit committee, 2) nomination and remuneration committee. Every listed company shall have an audit committee as a subcommittee of the board. The main task of this committee is to oversee the financial reporting process, suspected or presumed fraud, irregularity or material defect in the internal control system and monitor internal audit.

NRC committee

According to the Corporate Governance Code 2018, issued by Bangladesh Stock Exchange Commission, there will be a Nomination and Remuneration Committee (NRC) for criteria inaction and taking policy for determining qualifications, positive attributes, experiences and independence of directors and top-level executive as well as a policy for formal process of considering remuneration of directors, top level executive. 

Although Bangladesh has taken steps to enact proper and necessary legislative actions, corporate governance is yet to become a part of the culture of Bangladeshi companies. There has not been any recent study on the degree of compliance to the Corporate Governance Code, but anecdotal evidence - by simply judging the disproportionate presence of owner-directors as the face of companies in the media - suggests the directives exist only on paper. 

The compliance of the codes need to be ensured, loopholes must be identified and business entities must be made to abide by it. By doing so, businesses will thrive and the economy of this country will be enriched.

Kaium Ahmed. Illustration: TBS

Kaium Ahmed is an advocate at Dhaka Judge Court

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of her organisation or The Business Standard.