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Code of Corporate Governance – A Critical Comparison between

Bangladesh and Malaysia

James Bakul Sarkar

Assistant Professor in Accounting

and MBA Coordinator

Faculty of Business

ASA University Bangladesh

E-mail: [email protected]

Mob: 0171-6599599

Dewan Muhammad Nur A Yazdani

Lecturer in Marketing

Faculty of Business

ASA University Bangladesh

E-mail: [email protected]

Mob: 0172-7681817

Md. Abdul Mannan

Assistant Professor

Department of Business Administration

Stamford University Bangladesh

Mob:0171-6418892

mailto:[email protected]






Code of corporate governance – A critical comparison between Bangladesh and Malaysia

Abstract:

Corporate governance is the way in which the corporate entities are governed. The question is:

Who will determine the way- the entity itself or the regulator. Different stakeholders with quite

diversified interests have stakes (interests) in the operation of business. Consequently, the

business entity should not be allowed to operate in every respect in the way it likes; the

regulators should come forward to impose certain restrictions and principles on the corporate

affairs to upkeep the best interests of stakeholders like investors, creditors and after all the

capital market. Such restrictions and principles can be termed as Code of Corporate Governance.

In this study, the authors make an attempt to critically examine the Codes of Corporate

Governance of Bangladesh and of Malaysia, contrast and compare these two Codes lucidly and

finally recommend a few suggestions for Code of Bangladesh. The suggestions have been

developed on the basis of weaknesses of existing Code in Bangladesh.

Key Words: Corporate Governance, SEC, Code, Guidelines, Principles, Best Practices.

Introduction:

Corporate governance is a concept that has drawn attention from the corporate world globally in

the last decade. A corporate entity can not survive in a social vacuum. It has to satisfy the needs

of diversified interest groups including shareholders, creditors, auditors and regulators. They are

interested to know how the business is governed and whether it is governed in the right way or

not. Regulators would like to know to what extent companies comply with preset rules and/or

how they apply principles in practice. It is observed that in some countries (like Bangladesh),

there is rule-based code on corporate governance; there is principle-based code on corporate

governance in some other countries (like Australia) and there is also hybrid code on corporate

governance in others. With this end, this paper is an attempt to critically analyze and compare the

codes of two different countries on corporate governance. The rest of the sections have been

organized as follows: Section 2 presents the concept of corporate governance; Section 3 and 4

describes the functioning of code on corporate governance and the necessity of having a code

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respectively. Section 5 and 6 entail a precise description of the existing Codes of two different

countries- Bangladesh and Malaysia; Section 7 presents a critical but lucid comparison of these

two Codes and Section 8 provides few constructive suggestions for Bangladesh and draws a

conclusion of the study.

What is corporate governance?

In today’s corporate world, corporate governance is a big buzzword. Corporate governance is a

pervasive concept, which basically tells about the code of conduct of the company’s operation.

Corporate governance is the set of laws, policies and procedures, and institutions affecting the

way a corporation is directed, administered and controlled. It includes the interrelationship of the

stakeholders, i.e., shareholders, management and the board of directors, employees, suppliers,

customers, banks and other lenders, regulators, the environment and the community at large.

This definition let us demarcate the micro form of corporate governance from the macro model.

The micro model is defined by the internal micro players such as employees, directors and

managers. The macro model is defined by the external players to corporation and includes the

regulatory institutions like stock exchange authorities, Securities and Exchange Commission

[SEC], legislatures and courts, fiscal acts and amendments, pressure groups (Bangladesh

Enterprise Institute, Center for Policy Dialogue etc.) and monetary policies. The term ‘Corporate

Governance’ gives an important insight regarding how a business should be governed. Sarkar

and Ahmed1 conceptualized the issue as, “Corporate practices to meet the corporate objectives”.

This encompasses many issues like internal control, rights and relation with stakeholders,

corporate social responsibility, structure and role of the management committee, management

transparency (refers to the disclosure of all reliable and relevant information) and accountability

(refers to broader corporate objectives to manage the socio-economic resources efficiently) and

the like. Parker 2 defined corporate governance as, “The way in which power is exercised over the

management and direction of the entity”. Corporate governance is basically the whole system of

governing the company. Ahmad and Baree3 viewed corporate governance as, “The system by

which business organizations are directed and controlled. Its structure specifies the distribution

of rights and responsibilities among company’s different participants, such as board,

management, shareholders, and other stakeholders. Transparency and accountability are its major

attributes.” For good governance, companies need either statutory regulation (imposed by SEC,

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government, Registrar of Joint Stock Companies, Bangladesh bank etc.) or self-control. There

are few key players who can play pivotal role in governance of corporate affairs: corporate

shareholders, board of directors, auditors and regulators.

The functioning of a code of Corporate Governance:

The obvious function of a Code of Corporate Governance is to improve the general quality of

corporate governance practices and scenario. The Code does this by defining best practices of

corporate governance and specific steps that organizations can undertake for good governance.

The Code, thereby, begins to raise the quality and level of corporate governance to be expected

from organizations. Basically, the Code can be rule-based (providing certain guidelines only),

principle-based (providing certain broad principles only) or a hybrid (combination of rule-based

and principle-based). The Code provides certain principles, which allows the companies to

develop their own judgment and disclose corporate governance practice of their own- where

regulation may not work better. The Code also provides certain guidelines- where the companies

have to comply with rules and regulations. The Code functions well when it consists of both

rules and principles (the hybrid approach).

Necessity of having a Code of Corporate Governance:

Developing and using a Code to strengthen good governance can not only benefit the

organizations at the micro level but also the whole nation at the macro level. The Taskforce on

Corporate Governance4 sought out several potential benefits of having a code of corporate

governance as follows: a) An economy with sound system of corporate governance will be

rewarded with more investment and higher quality investors; b) Corporate governance systems

can better enable the capital market, private investors, international donors and financial

institutions to identify and fund successful enterprises; c) By identification of better performing

enterprises, and thereby through more efficient allocation of capital, corporate governance can

lead to greater economic growth by enabling the country to maximize the resources it has; and d)

a culture of corporate governance will begin to address the pervasive corruption that is crippling

the Bangladesh economy and development as a whole. In short, corporate governance can be a

catalyst for change, for higher economic growth, for a more efficient use of resources, for private

sectors that are accountable to investors and society, for a reduction in corruption, and for a

healthy climate of investment atmosphere.

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Objectives of the Study:

The study has been conducted to:

a) precisely narrate the Code of Corporate Governance of Bangladesh and Malaysia,

b) critically compare and contrast the Codes of these two countries, and

c) finally, recommend certain reforms in the existing Code on Corporate Governance of

Bangladesh based on its weaknesses as have been found on comparison.

Methodology:

The literatures used in this paper have been collected from different published articles and papers

at home and abroad on this issue. Secondary data has been used in the study. An interview has

been conducted with the SEC Officials to collect information regarding existing Code of

Corporate Governance of Bangladesh.

Code on Corporate Governance- Bangladesh perspective:

The corporate governance scenario is not up to the mark in Bangladesh. Moreover, there existed

no specific code on corporate governance in the country up to 2004. Even corporate people were

not also aware of this issue. Recently there is a growing awareness of corporate governance

among the corporate sectors. Consequently, The Taskforce on Corporate Governance (2004)

convened and supported by Bangladesh Enterprise Institute (BEI) developed a full-fledged Code

on Corporate Governance for Bangladesh in order to improve the general quality of corporate

governance practices. Securities and Exchange Commission (SEC) of Bangladesh has not fully

adopted this code. The Taskforce suggested that the SEC could adopt the Code on “Comply or

Explain” basis as a regulatory step (which was later accepted by SEC). Finally, SEC Bangladesh

has felt the necessity of having a code on corporate governance for the listed public limited

companies. SEC5 has issued “Corporate Governance Guidelines” in 2006, in order to enhance

corporate governance in the interest of investors and the capital market. Companies listed with

Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) shall be subject to certain

conditions underlying these guidelines on ‘Comply or Explain’ basis. They should comply with

these conditions or shall explain the reasons for non-compliance. The Corporate Finance

Department of SEC monitors the compliance status of listed companies. They also examine the

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Directors’ report; Auditors report etc. to check whether the requirements have duly been

complied with. As SEC newly introduced such guidelines for the listed companies, these are

flexible. There are few issues which SEC did not take into consideration under the broad scope

of rules such as compensation committee, ethical issues, nomination committee etc. As far as

these issues are concerned, companies are at liberty to choose their own way of doing and

disclose their own practice. This regulatory body basically follows the governance framework

practiced by Thailand. Broadly, these guidelines comprise of five conditions; 1. Board of

Directors, 2. Chief Financial Officer (CFO), Head of Internal Audit, 3. Audit Committee, 4.

External/Statutory Auditors and 5. Reporting the compliance in the Director’s report. Imposition

of aforesaid guidelines is compelling the listed companies to improve their corporate practices to

a significant extent. Despite the fact, corporate governance scenario is yet to develop much.

Guidelines issued by SEC have been issued as conditions under Section 2CC of Securities and

Exchange Ordinance, 1969. Any condition imposed under said Section has overriding effect i.e.

be adhered to, despite the fact that those conditions contradict with any other Acts including

Companies Act, 1994. Failure to comply or explain, therefore, shall be violation of securities

law and hence liable to be disciplined.

The Guidelines have specified that Chairman and CEO should preferably be manned by separate

person. The word “preferably” should not have been used. In that situation the listed companies

would be compelled to have separate person as Chairman and CEO.

SEC’s Guidelines borrowed certain provisions from Sarbanes Oxley Act of USA. Auditors have

been barred to carry out non-audit functions. In a recent follow-up it has been found that

significant number of companies is complying with SEC Guidelines. SEC has put pressure on

delinquent companies to comply with the guidelines. Companies that informed that they have

complied with the guidelines have been asked to inform SEC how they have complied with the

guidelines.

SEC Guidelines put maximum emphasis on disclosure and transparency issues, especially,

functions of audit committee and functions and reporting of auditors. The guidelines elaborately

focus on the constitution of the audit committee, reporting of auditors to the board of directors,

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Securities and Exchange Commission, shareholders and general investors also restrict the non-

audit services by the external auditors.

The listed companies just comply with certain guidelines only; they do not feel encouraged to

disclose their own corporate governance practice. The reasons why they are not inclined to

disclose are many. The main reason is that they try to conceal their profit and they try to evade

tax. Entrepreneurs and management in the corporate sectors lack necessary skill and awareness

to disclose corporate governance practices of their own. Moreover, many listed companies in

Bangladesh are family-oriented. They are not also ethically sound. While the awareness of the

corporate management does not suffice, the implementation and strict monitoring with reward

and punishment remain a far cry.

In order to have objective reporting of issuer, SEC has been exerting pressure on statutory

auditors. If it is found that financial statements have not been prepared by the issuer in

accordance with IAS and financial statements have not been audited in adherence to ISA, SEC

issue show cause notice and provide the auditor an opportunity of being heard to refute the

allegation raised by SEC as to not discharging professional responsibility while auditing. If the

auditor fails to defend, Commission under securities laws may take disciplinary measures against

the auditors. Because of Commission’s efforts statutory auditors are behaving more

professionally.

Despite the fact that Companies Act, 1994 addresses entire array of governance issues, yet

administration of the same is very dismal. Office of the Registrar of Joint Stock Companies and

Firms are not capable of enforcing Companies Act due to shortage of manpower and dearth of

skill.

Code on Corporate Governance- Malaysian Perspective:

The Malaysian Code on Corporate Governance was developed by the Working Group on Best

Practices in Corporate Governance and subsequently approved by the high level Finance

Committee6 on Corporate Governance. The members of the Working Group comprise a mix of

private and public sector participation. The private sectors play a key role to initiate the Code in

order to lead a review and to establish reforms of standards of corporate governance at a micro

level. The Code essentially aims at setting out principles and practices on structures and

processes that companies may use in their operation so that they can achieve optimal governance

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framework. This structures and processes includes issues such as the composition of the board,

procedures for recruiting new directors, remuneration of directors, the use of board committees,

their mandates and their activities etc. This is based on the fact that there are some aspects of

corporate governance, where statutory regulation is necessary and others where self-regulation,

complemented by market regulation is more appropriate. There are three broad approaches to the

issue of corporate governance that have been undertaken by jurisdictions around the world;

Prescriptive approach (This approach simply requires compliance of certain corporate

governance guidelines along with specifying desirable practices), non-prescriptive approach

(This approach simply requires corporate governance practices in a company to be disclosed)

and hybrid approach ( This approach requires that there is a need for broad principles and that all

concerned should then apply these flexibly and with common sense to the varying circumstances

of individual companies. This is the approach preferred by the Hampel Committee). Malaysia

has accepted the Hampel approach7 in 2000 for two reasons; First, best practice prescriptions are

necessary as the standards of corporate governance in Malaysia were lacking and therefore there

was a need to raise these standards. Second, companies must be encouraged to consciously

address their governance needs. The Code comprises of four parts such as: a) Part 1 specifies

broad Principles of good corporate governance for Malaysia, which allow companies to apply

these flexibly and scrupulously considering the varying circumstances of individual companies;

b) Part 2 consists of Best practices in corporate governance for companies, which identifies a set

of guidelines or practices intended to assist companies in designing their approach to corporate

governance; c) Part 3 is addressed to investors and auditors to enhance their role in corporate

governance; and d) Part 4 provides explanatory notes for the Code set out so far.

A critical comparison between codes of Corporate Governance of these two countries:

The Code practiced in Bangladesh is more than a rule-based approach (Prescriptive approach) as

this follows certain guidelines with a greater emphasis on the condition of ‘Comply or Explain

basis’. The biggest problem with such approach is that it would encourage directors to

concentrate on form rather than on exercising their discretion on what corporate governance

practices are best suited for their companies. Directors simply adopt a practice of ticking a series

of boxes to indicate that they have complied with the prescribed best practices. Moreover, the

checklist method of ticking every box may be perceived by investors as implying endorsement

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by the regulator (the Exchange) of the company’s corporate governance practices. Shareholders

or their advisors would be interested only in whether the letter of the rule has been complied

with- yes or no. A “Yes” would receive a tick.

Besides, lazy or unscrupulous directors may get the unfair opportunity to arrange matters in such

a way so that the letter of every governance rule is complied with but not the substance. Even it

might be possible to emerge in a company with, on paper, a 100% compliance with rules. So box

ticking is neither fair to companies, nor likely to be efficient in preventing abuse.

Bangladesh basically follows the findings of the Cadbury and Greenbury reports with certain

conditional rule- comply or explain basis. The strongest point in this Code is that companies

need to explain in case of non-compliance with any rule, otherwise, the regulator can adopt any

legal action upon the respective company.

Unlike the rule-based approach, Malaysia follows the Hampel Committee recommendations,

which is basically the combination of rule-based approach and principle-based approach. The

principle-based approach is that companies apply the broad principles flexibly and with

judgment as individual companies may encounter varying circumstances. It was recommended

that companies should include in the annual report a narrative statement of how they apply the

relevant principles to their particular circumstances. Given that good corporate governance lies

with the board of directors, the written description of the way in which the board has applied the

principles of corporate governance represents a key part of the process. Such clarification or

explanation ensures that the investment community receives an explanation for the company’s

approach to governance so that it is in a position to support the approach or work to influence

change.

In such a way, the investors may confide in the corporate affairs. The Code does not prescribe

the form and content of the narrative statements. Rather it aims to secure sufficient disclosure so

that investors and other can assess the company’s performance and governance practices, and

can respond in an informed way.

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In contrast with the rule-based approach, Malaysian Code on Corporate Governance is more

flexible in the sense that it allows companies to develop and nourish their own corporate

governance approach. Because the reality is that corporate governance scenario and practice vary

from company to company. Box-ticking system won’t inspire companies to develop such

practice. The Working Group in Malaysia has the very real experience regarding box-ticking

system in the form of audit committees, where companies merely comply in form by setting up

such committees without giving heed to the spirit of the requirement by ensuring, for example,

the quality of the people within the committee. Under this Code, there is no hard and fast rule as

to the strict compliance with best practice prescription as while the prescriptions establish a

sound approach to corporate governance, companies may develop alternatives that may be just as

sound.

To quote the Hampel report (1998), “With guidelines, one asks, how far are they complied with?

With principles, the right question is “How are they applied in practice?”

The Hampel Committee did not add any radical recommendations over findings of the two

earlier committees, viz. The Cadbury (1992) and Greenbury Committees but set out a number of

general principles of good corporate governance. Serious application of Cadbury and Greenbury

Codes ended up in “box-ticking” rather than the application of informed and independent

judgment by experienced and qualified individual from executives and non-executive directors,

shareholders and auditors. It was recommended that companies should include in their annual

reports as a narrative statement as to how they apply the principles and the explanations for any

exception. The principles focused in the Hampel Committee include directors’ appointment;

remuneration etc., shareholders’ voting, AGM and finally accountability and audit. Hence the

Hampel report is the most acceptable Code of Corporate Governance to the business community

worldwide. Hence the Hampel report is the most acceptable code of corporate governance to the

business community worldwide.

Recommendations:

From the previous discussion and comparison, the following recommendations can be

developed:

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1. Entrepreneurs of Bangladesh mostly belong to first generation of entrepreneurs. Because

of lesser knowledge about running companies combining with poor state governance at

post independence period governance scenario could not take a good shape. Guidelines

on corporate governance could not be a panacea unless improvement in ethical area

improves. Justice system, police enforcement system and above all dismal status of state

governance need to be improved that have different ramification.

2. Unless investor becomes vocal about their rights governance scenario will not be

improved to a desired level whatever efforts put by regulators. Investors have hardly ever

filed a case against the directors, auditors or officers for violating fiduciary responsibility.

3. Box-ticking system (Rule-based approach) may not improve the corporate governance

scenario in Bangladesh as dishonest and unscrupulous directors are likely to comply

100% with rules on paper without regard to the spirit of them. So the regulators can take

necessary steps to critically monitor and check the compliance status of listed companies.

If such monitoring is carried out by the regulators even on sample basis, this will give a

message to those companies, where directors tend to unscrupulously play the game.

4. Even in case of non-compliance, the SEC should carefully justify the reasons as set out

by the companies in the annual report and take actions if the reasons are not proper for

the non-compliance.

5. Corporate entities can set up an independent Corporate Governance Committee, which

will continuously monitor and oversee the Corporate Governance affairs inside the

organizations. The Committee should include at least one member appointed by the

regulatory body. The board should be held responsible and accountable to the Corporate

Governance Committee in case of Corporate Governance affairs. The Committee can also

suggest any change or direct the board of directors regarding how the entities comply

with and implement the Corporate Governance guidelines. Finally, this will submit a

report on corporate governance on bi-annually or yearly basis to the regulatory body.

6. As corruption has mushroomed in all the sectors of Bangladesh and there is no or low

moral or ethical standards in business practice, the regulators should go for rigorous

standards for corporate governance like Malaysian Code on corporate governance. If it is

possible to shift from the rule-based approach to principle-based approach, each company

will be at liberty to develop their own governance framework.

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7. Gradually Bangladesh should go for the hybrid approach- the combination of rule-based

approach and principle-based approach. In this regard, two-fold benefits can be obtained;

a) companies will follow the best practice prescriptions (rules) accompanying with a

narrative statement in the annual report – where statutory regulation is necessary, and b)

companies will be encouraged to develop their own governance practice and disclose it in

the interest of investors and others- where self-regulation is necessary. Such hybrid

system will prevent the abuses as possibly suffered from the box-ticking system; rather

regulators will get a true picture of corporate governance. The narrative statement given

in the annual report will explain how companies apply principles in practice. Companies

can disclose its practice and be transparent to the investors.

8. Like the Malaysian Code on Corporate Governance, the regulators in Bangladesh can

also include a part in its Code towards investors and auditors- two other big players in

good corporate governance to enhance their role in corporate governance. This will

increase their awareness of good governance.

9. Corporate governance is a continuous process in which many can contribute. Everybody,

who is a part of it, should play their role in the way they are expected of. Stockholders,

auditors, directors and regulators should contribute to the working of good governance in

the corporate sectors.

10. SEC has also shortage of manpower and to some extent lacks skill. Compensation

package of SEC staff members is similar to government servants. Capacity of SEC

should be enhanced so that effectively exercise oversight on companies and contribute

towards elevation of good corporate governance.

11. Companies Act, 1994 needs to be updated. Moreover, manpower and efficiency of the

Office of the Registrar of the Joint Stock Companies and Firms need to be enhanced for

their effective enforcement of Companies Act.

Conclusion:

Corporate governance is not about rules and regulations, principles and procedures. It is

about the spirit in which the business is operated in the best interest of stockholders and

others. Neither rule-based approach nor principle-based approach of corporate governance

works better if there is no constant awareness on the part of key players of corporate

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governance- board of directors, corporate shareholders and auditors. Despite the fact it is

experienced that principle-based approach of corporate governance is better than rule-based

approach over the world to ensure good governance in the corporate sectors. The hybrid

approach (combination of rule-based approach and principle-based approach) is best suited in

most of the cases. The regulators have to prescribe Codes on corporate governance so that

companies will comply with rules in some cases where regulation seems to work and at the

same time they will be encouraged to develop and disclose their own corporate governance

practice. On the other hand, key players in ensuring corporate governance should also be

constantly watchful of such practice. Stakeholders particularly auditors and investment

community have to enhance their role to have better governance in the corporate sectors in

context of Bangladesh. This is how; Bangladesh can go a long way to achieve good

governance in the corporate sectors.

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References:

1Sarkar, J. B. and Ahmed, H. (2007), “Disclosure on corporate governance by listed companies in Bangladesh”,

The Cost and Management , January-February.

2Parker, R. H. (1992), Macmillan Dictionary of Accounting , London: The Macmillan Press Ltd.

3Ahmed, J.U. and M.A. Baree. (2000), Corporate Governance for Transparency and Accountability, The

Bangladesh Accountant , Vol. 29; No. 2, April-June.

4Taskforce on Corporate Governance (2004), The Code of Corporate Governance for Bangladesh.

5The Security and Exchange Commission (SEC), Corporate Governance Guidelines, 2006.

6Finance Committee on Corporate Governance (2000), Malaysian Code on Corporate Governance.

7Final Report of the Committee on Corporate Governance (1998), Hampel Committee.

Interview with SEC Officials as on 18th October 2007

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