Corporate Governance of Commercial Banks in Bangladesh: An Evaluation

Abstract

The need for corporate governance arises from the potential conflicts of interest among stakeholders in the corporate structure. These conflicts of interest often arise from two main reasons. First, different stakeholders have different goals and preferences. Second, the stakeholders have imperfect information as to each other’s actions, knowledge, and preferences. Good corporate governance ensures that companies use their resources more efficiently, protects minority shareholders, leads to better decision making, and improves relations with workers, creditors, and other stakeholders. This study is an attempt to evaluate the Corporate Governance scenario of selected private commercial banks in Bangladesh which were listed in Stock Exchanges before 2000. Issues were analyzed from different perspectives, ranging from literature review to opinion survey. Data haven collected both from primary and secondary sources. A set of variables have been identified to measure the awareness and satisfaction of the shareholders, employees, directors and auditors. The level of satisfaction towards corporate governance issues of the stakeholders have been analyzed and verified whether their opinions are consistent or not. Corporate performance indicators like deposits, advances, non-performing loans, ROA, ROE, cost-income ratio, number of employees and, number of branches etc. have been analyzed through mean, standard deviation, co-efficient of variance, and correlation matrix. The selected banks have 'Board of Directors' as highest body and the agents of shareholders. The board and the Executive Committee review the policies and guidelines issued by BB regarding credit and other operations. Strategies are set by the board and delegated to branch management under the leadership of Managing Director. The management operates within the policies, manuals and limits approved by the Board. Regular meeting of the Board is held, at least once in a month. The Audit Committee examines the status the implementation of the bank's policies and manuals, BB guidelines. The Internal Control and Compliance Division of the selected banks makes a year wise risk based audit plan to carry out comprehensive audits and inspections on the banking operations in various divisions of head offices and branches in order to ensure that internal control practice and procedures are in place and complied with. Audit Committee meets with the external auditors to discuss audit plan, the risk management process. Regulatory framework of corporate governance in Bangladesh consists of governmental and non-governmental efforts prescribing legal, institutional and professional guidelines to ensure governance of corporate sector in the country. The corporate governance scenario of the selected commercial banks is satisfactory with regard to regulatory framework. The selected banks comply with the corporate governance rules, regulations and guidelines suggested by the Regulatory Bodies. The compliance unit of the selected banks ensures compliance with all regulatory requirements. The duty of the unit is to maintain liaison with the regulators and notify the other divisions/units/branches regarding regulatory changes and maintain proper record. This unit works as the point of contact when any regulatory inspection is carried out and ensures that cogitative measures are taken and the appropriate responses are made on a timely manner. If the regulatory authority identifies any major lapses then it notifies to the senior management and/or to the Audit Committee of the bank. Corporate performance is evaluated through some selected indicators. It is revealed that the selected banks have achieved growth in deposit mobilization, loans and advances, total businesses, and in the amount of net profits. It is supported by high standard customer service, trustworthiness of the depositors and efficient fund management of the selected commercial banks. The numbers of employees have increased and they have extended their network of branches across the country. The banks have contributed significantly to the government effort in collection of revenue. As per law the banks deduct sources income taxes, VAT, and excise duty from various payments, services and deposit the same to the Government Exchequer. Besides, they also pay income tax on their earnings. Result of hypotheses shows that the selected indicators of corporate performance are positively correlated at 1 per cent level of significance. Stakeholders play an important role to create an environment where transparency and accountability are encouraged, enforced and rewarded. Stakeholders were asked to give their opinions regarding corporate governance variables in order to measure their levels of satisfaction. From their opinions it is evident that the levels of satisfaction of the stakeholders are on an average satisfactory. 19 hypotheses were tested to find out significant differences in the opinions of the stakeholders among the banks. The level of satisfactions of the shareholders and directors with the selected variables do not show significant differences. In case of employees the level of satisfactions do not show significant differences with 7 variables and show significant differences with 4 variables i.e. Training Opportunities, Pay Structure, Performance based Incentives, and Management Responsiveness to the Employees' Problems. The opinions of the auditors do not show significant difference except the Adequacy of Information in Annual Report at 5 percent level of significance. The study suggests establishing Financial Reporting Commission, update the SEC Guidelines, establishing Commercial Court, introducing Corporate Governance rating to know the extent of compliance, adopting the OECD principles of Corporate Governance, introducing Corporate Governance department in stock exchanges and, national award for corporate governance for improvement of Corporate Governance.