ETL core es Challenges of Economic Growth Focusing Your Sales Conversations Horal Motif in Fashion. os‘The Executive Times Year-I1, Issue-10, April 2013 Founder Editor: Lind 5. Mostafa Editorial Board Euitor: Mohamed Golam Mostafa Managing Edtor: Shirin jahas Advisory Edlor: RomelS. Mostats, Ph. Business Siralogy: Syed Ayaz Rabbi BureauChiel, USA Abu Henn Mestafa Kael, PLD. Health Dosk: Dr, Pavel Shabir Most Senior Columnists Rodney Reed, Georg Gaon PRD. euler Contibutors: Nashuls Rahn, [Nsitipue Mahanuel, Akl Niza Mls Executive, Marketing: Moral shag Mosileson94 i037, 01611771097 Cover & Grapnie Design “Said Isham Photography Moir Hainan Taka Corporate Ofc ame 38, Road 15 Sector #1, Ure, Dae F230 Prone: 91886 Fras 28991856 Eau edienddeacctines om ieexecmes@hotmtlcorn excisions Web: wewescetinencon UK Office ysl Rays ba, 2he joie Mil Bese ‘bse, AB TSH UK. Prone L221580112 Us Bureau Office 3351 Tey Dr, Sant Clam, CA 95084 Phe: 4) 2113844 Dla the Paps om Dpaitel A tstnake Solar, Din 2? bl tin als Paes ne 1Svatp Dak Tretxceitve Times Reg No, DAS2 1 the Inst contury, we have seen stramatic improvement inthe pe capita incomes of some coun- tries across. the world. South Korea, which had a_per capita income less than that of india in the easly 1950s, is now vying with the Westera economies, But why do some poor countries exper cence dramatic growth while others remain poor? And more importantly, how can {hose impoverished countries catch up? economists have been a ese issues ever sine Adam Smith but they have found the task dannting. Experiences vary across coumires, and hardly is it possible ‘0n poor countries fo test the levance of any theor Robert Solow, & Nobel Laureate in Beo- nomies, shows that growth in output is not only attributable to capital per capita; another component, which he terms "echnological change’, is significant as wel. His findings have inspired research- es to study the impact of new technology and researehy & development on nations output Solow's growth model, however, implies that countries will eventually seach the same level of eapital and output per capita (tte so-called convergenee problem) and the differences will diminish with the pas sage of time ~ an implication that cannot be borne out by rea world data, Later, the model was modified to addtess the con- vergonee problem by including Inuman capital and to highlight the importance of education. Nevertheless, thore are counties - tor ex ample the Philippines and South Korea ~ that have had simile edveationsl levels ‘bu different growth experionces. Robert Lucas, another Nobel Laureate in. Eeo- nnomies, argues thet through learaing-by- BDITORIAL. doing countries ean enhanee their know= Ihow aud exploit uew areas (knowledge ‘spills ever’, thereby diversifying their in- distvial base, Further learning. by-doing in-those new areas takes place and the vir- uous circle continues. As a result, the countries enjoy rapid economic expan sion. But spillover effects are hard to measure and so Lucas! model remains to be sustained, Proponents of trade theory argue that counlties should take an open ecanomy approach 10 enjoy the benefits of trade, have avcess fo foreign technology and at- foreign investment. Institutional theory suggests tht rampant corruption nd violation of property rights in poor countries erente an unfriendly environ ment for inves holding back eco nomic growth, Its prescriptions are: enact properly sights and build strong institu lions. However, countries like China, which has experienced rapid economic expansion over the last two decades, have hot graciously embraced property rights and openness. And during the same peri- ‘oid most counties in Latin America, with lhe exception of Chile, that implemented market economies and strengthened insti- lutions have actually seen their GDP per ‘aia fll, relative to the US, ‘There are more theories, all hotly debat- cad. No one theory fits all and probably Br that is wot to say chat these Wve gone in vai Asian countries that have made remarka- ble economic progress have been abo to «do so by building comparative advantages in higher value added produets in a rela- lively short period of time, And with rap- id industrialization they have attained high levels of education, invested in tech- nology, built their institations and took advantage of trade, C1 Evncive & Exgulsie Apartment banani » ogandaria khilgaon kakrail A Cem etd hot lin iisi.com Eee ae dhaka cantonment « malibagh = motijheel » swamibagh « revel LEVI en) ety Ee PETS NUCL CLC cEdarch-April 2013 M1 Business & Beyond Editorial Readers’ Forum... oe Briefings... Real Estate. Medley... Others... Leading Our Young... cau Responsible owners will always have fire safe factories. Challenges of Economic Growth... iim RIS Dayan Focusing Your Sales Conversations Bangladesh Bank ‘Annual Report 2011-2012"... 2 16 29 C7 aT atS TI Aecs 7 Tee ae oe mesg EO oem ee (naan. ea Corporate Governance and Bangladesh Capital Market: Some Observations Customer § atisfaction = it is all about - 2 doing the complicated things In a simple way. 5th Académy Awards ‘Winning the golden statuette..... Floral Motif in Fashion... or FETC SC _the Airline Industry [dr ed asnociley rianagdtent & reonsuliig Toro ue Kener ara a Aree Git naeGOVERNANC he issue of corporate / governance has attracted enormous attention both i from policy makers and individual firms and is subject of much debate and empirical research, The review of economic Jiterature and literature on human behavior suggests that every rational individual tries fo maximize his/her own utility to satisfy various needs ‘There are chances of frustrating owners! interest and needs when the deeision maker is not the owner of the corporation, Corporate governance, in general, indicates the policies and Procedures applied by a company in attaining its set objectives, its corporate missions and visions with regard to its stockholders, employees, customers, suppliers and different regulatory agencies and the community at Farge. In other words, corporate govemance is the process by which the capital market monitors the actions of corporate ‘management and holds management accountable for its decisions. Thus, ‘corporate governanee provides a means of decision-making process, which maximizes value for the shareholders in 8 fully transparent manner. Those who ‘matter most in the process should sector has enough: preparation to’ protect their assets from further. sequential or unexpected losses. The speed at which the risk events unfold and the event of their impacts on the businesses across. different risk categories appear escalating. ‘April 2013 Corporate Governance and Bangladesh Capital Market: Some Oservations A.A, Mahboob Litany Chowalary themselves accountable to the appropriate authority. Such process agin takes into account las and regulations and voluntary practices used 10 direct and manage the business towards enhancing business prosperity For a group of people working int particular economy, coxporate tovernanee is a culture and for an individual itis mindset Corporate Governance System in Bangladesh ‘The size and realm of companies and corporation in Bangladesh are rolatively small. There are about 45,000 private limited companies and over 200 public limited companies listed with the Dhaka stock Exehange (DSH) ancl the Chitiagong Stock Exchange (CSE). The corporate sector is a mixture of focal- private, foreign-multinational and state ‘owned companies. Among the local companies very few have any \ernational operation, Unlike in other countries, the number of state-owned companies in Bangladesh is relatively large. In most of these companies the condition of management practices, intemal control and corporate governance is very pot. There is no effective st The Execiitive Times [34review and report on internal contol and other operations. Moreover, in companies where there is some kind af intemal audit unit, the auditors are not independent, financial reporting is faulty, there is no audit commnittce and there is no audit charter for internal audit Regulatory Environments Capital market regulations determine the sights and obligations of eapital market participants, Different regulatory environments ay result in different capital market imperfections; for example, effective prohibition of insider trading may rain the ability ofthe price ‘mechanism to aggregate and transmit insider knowledge, whereas anti-takeover regulations eliminate the disciplinary effets of an active matket for corporate control. Bangladesh stil follows the hybrid system of the fegal system inherited fiom the British ‘administration, Currently, the Companies Act of 1994 is the law that governs the inconporated domestic corporations and institutions, ‘The other significant laws “GOVERNANCE which have an important role in governing the corponite sectors are: Securities and Exchange Ordinance 1969, Bangladesh Bank Onder 1972, Bank Companies Act 1991, ‘nancial Institutions Act 1993, Securities and Exchange Commission Act 1993 and the Banlauptey Act, 1997, Although the Bangladesh Securities and Exchange Commission modified the book building method, a price discovery system for IPOs, no ‘company used the mechanism. Financial experts hold that the number ‘of now IPOs could have been higher in 2012 if the market remained stable, dards, and Disclosure The impact of recent developments in corporate governance and ‘manogement practices o ‘the internat azul: saccomnting standards and disclosure are mixed. There are now elements of both positive scope and new challenges and tisk for the coxporations in these arcas Following the tradition of English law, Bangladesh ‘accounting stmdards are not based on codified law, but rely on Generally Accepted Accounting Principles (GAAP) developed by counting profession, ‘These principles are primarily sharebolder oriented and are independent of tax considerations. In Bangladesh, the companies have to make disclosure of information required by law. Disclosure requirements for Initial Public Offerings are defined by the Companies Act and the orders under the Securities and Exchange Ordinance, 1969, Periodic disclosure requirements are mentioned in the Securities anxl Exchange Rules, 1987. Te was argued that the Companies Act of 1913, the ‘main component of the financial reporting and ‘regulatory framework was Tong outdated and there was a lack of adequate oversight on securities market an on ‘companies listed on stock ‘exchanges. However, six major developments, directly or indirectly relevant to corporate financial reporting and governance, took place in Bangladesh from 1993 to 2000. First, the Securities {21 The Executive Times sand Exchange Commission (SEC) was established in 1993 under the SEC Act of 1993, Second, a new Companies Act was enacted in 1994 that came into force from October 1, 1995, replacing the companies Act of 1913. The third development took place in October 1997 when the SEC amended the securities and Exchange Rules (SER) of 1987 to require the listed ‘companies (o prepare al = yearly financial statements within one month of close of the first half-year of its accounting year and issue those statements to the stock cexchange(s) in which its secutities are listed, to hholders ofits securities and tothe Commission, Fourth, the share market scandal of 1996 has reveated willful malpractice of some of the directors of the listed ‘companies and share brokers of the DSE and CSE on the cone hand and poor control of the regulatory bodies on the other and the absence of time provision of reliable financial information inthe market (Report of the Enguity Committee, 1998), Fifth, since the stock market debacle in 1996, the SEC has been insisting om the listed companies holding ‘Annual General Meetings (AGMs) and publishing up to date annual reports. Finally, on January 4, 2000, the SEC amended the SER 1987, to require, among ‘other things, thatthe financial statement of an issuer shall be audited within 120 days or within & period as extended by the SEC. Shareholders in the corporation The Companios Act provides certain rights to the shareholders ie, the right to participate in the decision making, elect and remove April2013the directors, aevess to information, dhe right to dividend and the right and power to fundamental corporate change, Minority protection actions are filed in court in Bangladesh with some regularity, although a large number of these are ‘not related to the issties covered under the rubric of minority shareholder protection. Moreover, many sharcholders are not aware of the section 233 under Which minority shareholders with at east 10% of the share may scek remedies in the court in ease of any reservation about the corporate activity, Board Issues ‘There are no statutory provisions and guidelines About the duties of the diroctors of the companies jeholding and for independent directors Bank has been ng circulars providing, the duties and responsibilities ofthe board of directors specifying work planning, lending, deposit and tisk management, internal control, constitution of the board of ditectors snl the appointment of the Chief Executive Officer (CEO) in {he bost interest of the ‘depositors. For the banking sector the number of directors is limited to thirteen including two independent directors that represent depositors. For the insurance companies at least ‘one-third of the directors should represents the policy holders, at teast another one third come from public subscribed shareholders and the rest from sponsor shareholders in ease of life insurance company. tn Bangladesh a small number of independent directors are appointed for their expertise nd others for their existing connections to company ‘Apiil 2013 ‘managements or in th future. So, there is room For appropriate guideline in this yecl. Revently, the goverment tried to take a vision to lower down the ‘number of directors to fifteen at the private cconmereial banks, But the government finally gave in to pressure from influential bank owners and backed off Tom its previous position. Over the last decade, successive governments took a umber of initiatives fo limit the number of directors on the board (0 ‘ensure betier corporate governance and discipline, But the moves fell flat due {o pressuze from various corners, Diiring the time of last BNP government Bangladesh Bank set the maximum number of directors at 13 but could not implement the directive as the provision ‘was not included in the Banking Companios Act. It is gathered thatthe newly initiated amendment will bring stringent measures to cour figs i fel collection from peopte in the name of deposits. If any ‘non-bank institution collects deposits from the public, it will have to take approval From the central bank, Bangladesh Bank (BB) will ‘also monitor the activities of these organizations and take punitive measutes in case of any irregularities, The amendment also empowers the BB to remove the Chief Executive Officer (CEO) of the government owned banks. On the other hand, under the existing Act, the power of moving the chairman, directors and other high officials, including the mnanaging directors of the stale-nn andl special banks, remains in the hand of government. The existing GOVERNANC Act says the central nk can remove the ehairman, any director or official of all commercial banks on charges of irregulacities, except for the government nominated ch directors or CEO. In ease of inreqularities in such cases the central bank can only submit a report to the government for its consideration, Corporate Enviroument and Ownership Structure of Listed Cor ‘The governance structure of public limited companies is also responsible for the ‘weak condition in that these ‘companies prefer to keep ‘ownership holdings within the family connections ic, closely-held companies. is revealed that in Bangladesh 72.5% of the outstanding shaves are owned by houscholds/sponsors and individuals, Insignificant concentration is observed by bank and financial institutions Le.,3.1% and foreigners held 16% and Government/financial institutions held only 16% of the outstanding shares in 2000. IL is also reported that even when the company is ited on the slock exchange, few shares are available for trading, as majority remain held by the original sponsors, The original sponsors often buy additional shares from the market to taise their holdings to as high as 70 petcent or 80 percent though shares are floated in the primary market on 50:50 basis, cial Seetor and Corporate Governance {In Bangladesh financing for ‘commercial purposes is ‘obiained by borrowing imainly from the non- secutily segments rather than issuing financial elaims i.e. debt and equity in the soourity segment, itis ‘observed tnat institutional investors constitute a ve large segment of the potential demand for stock market securities, but they are reluctant to invest in these securities due to unavailability of securities in {orms of both quantity and «quality, and organizational and legal restrictions on utily investment, although it was reveated that the officials of insttutio investors have reasonable ability to analyz information for sound investment Moreover, b ineflicien ridden banking s was apprehension that lange part ofthe credit flow ‘would turn into bad loans and the wide spread cultuve ‘of loan default has ted to a rise ina high costs of financial intermediation by financial institutions However, banks are required to comply with Intemational Accounting Standard -30 (GAS 30). Under this provision banks require to lassify their loans and advances in different categories Le, substandard, loubifil or bad based on the stalus ofthe credit and default activity. They are also required fo maintain a Joan toss provision for Unclassified loans and advances, Compliance with this requirement is expected to provide superior information to stockholders and reduce the information asymmetry between them. For the improvement of the situation Bangladesh Bank is enjoying more autonomy in recent yeats, With 2 view to minimizing default culture, discipline the financial sector and ensure governance the central bank introduced Lending, Risk Analysis (LRA) procedures The Executive Times [83{or loans above a certain amount. Because ofthe inefficient nd comuption-ridden banking system, a large part of the credit flow would tara into bad loans. Recent studies reveat that bad loans ased by Taka 7,282 crore (0 Taki 36,282 crore in the third quarter ill September 2012 as a significant amount of fx related fo the recent seams \was rendered classified. That excludes the over Taka 3600 crore that Hall Mark ancl five other companies swindled out of the Sonali Bank Limited. The figure would rise to Taka 40,000 crore when the amount is added to the cessed category. Waves of scams in stale owned banks involving thousands of erores of Taka, hhave shaken up the industry as well as the regulator Much of the money went out of the bank's coffers in the trame of loan against forged documents Itis observed that the amount of default loans in the banking sector almost doubled in 2012 mainly due to seams, loan stuck in some sectors and the new loan classification rules. The amount siood at 10,03 percent of the banks* outstanding, loans fo reach Tk.42,726 crore on December 31, according to the Bangladesh Bank statistics. In December 2011 the amount was 22,644 crore or 6.12 percent of the banks* outstanding loans. Sonali Bank Limited tops the lists, of banks, which saw a rise in their default loans, due to a hnge amount entangled in the Hall Marie Scam. In 2012, default loans in state bbanks rose by Tk 12,344erore, while the ‘amount increased by Tk. 5,833 crore in private banks, 34) The Executive Times by Tk.219 erore in foreign banks and by Tk. 1.685 ‘erore in specialized banks, non-performing regulatory mowork is evident in the financial sector af Bangladesh. The recent share market debacte has indicated that banks should have sufficient resilience ‘capacity against market risk Notable examples are the share market debuele in 1996 and 2010, Destiny seam and the recent Hall ‘Mark scam. Consequently, a question lias risen about whether the banking sector has enough preparation to protect their asseis from further sequential or unexpected losses, The speed at whic the risk ‘events unfold and the event ‘oftheir impacts on the businesses across different risk categories appear escalating, Th role of the tisk control framework is to evaluate the risk inherent in business activities of an institution and to ensure that these tisks clo not endanger the institution in extreme cases, However, the financial institutions (Fis) have struggled as the current ‘global financial crisis has unfolded aind many have not been able to resist the shocks (hat the financial system has experienced. In our country banks are allowed to invest in the capital market; therefore, it is necessary to analyze the real development of the risk exposure capacity of the banking industry after the BASEL-2 implementation, Nowadays, Risk ‘management is bocoming a crucial part of the business strategy. Without i, thousands of people are adversely affected ie, shareholders, bankers, employees, customers, depositors, creditors and ceven the government who GOVERNANCE spends a Tot to baila bank ut. Thus, banks need to analyze risk reports, assess and test controls and select the appropriate risk mitigating strategy. Ics argued that atthe end of last year, the boards of the public banks did not function, which might have led to the rise in dtnult loans, Loan sanctioning Uupon political persuasion, dishonesty of bank officials caused the spike in default loans. Analysts observe that in case of Sonali Bank the augement has trated its sheee negligence in safeguarding depositors’ money, What is ‘worse is that some of the officials joined hands with the seanisters, making the swindle all 100 easy. Thus, the role ofthe boar, the ‘management and the central bbank are questionable in the tind of general people, policy makers, planners and others concerned. Moreover forthe stock market manipulation the enquiry reports were not faken into consideration for punishing the responsible persons and! institulions behind the game. These have adverse impact con the stock market, The role and steps taken by Bangladesh Securities and Exchange Commission (BSEC) were not up to the desired level to address the issue. Appropriate steps niced to be undertaken to boring back the lost confidence of the investors by addressing the issues and their concern properly ‘The discussion no doubt called for a strong corporate governance system. The condition of management and corporate gov ‘most of these companies are very poor. There ate som ‘weaknesses in its regulatory framework in the corporate sector regarding the methods of trading, protection of shareholders, finaneial reporting and conduct of ‘members, I is revealed that market fundamentals are not in appropriate order. The ‘minority shareholders are unideteducated and lack knowledge in understanding the finaneial reports published by the corporations. Moreover in ‘most of the eases tnatkel prives do not reflect the net asset value or the actual situation that the company is ‘going through, As a result, the siock market does not have any disciplinary role in terms of price activist policies and thus promote the idea of non-transtucenee in the cosporate sector Nonetheless, public awareness and development, of governance structure ic, enforceable regulation, ensuring financial finmework, supportive administrative culture and any form of market ‘manipulation are essential for the development of capital market. It is belioved that vigorous auditing practice (internal and external), improvernent of logal system and judicial enforcement capacity would improve governance to a large extent and bring back the confidence of the investors and the eapit market will able to work as ne for collecting and allocating the nation’s limited resources for the overall economic evelopment of the country in the future. A. A. Mahboob Uddin Chowdhury, Ph.D is Professor and Former Chairnian, Departnent of ‘nance, University of Dhaka. April 2013,