Recently, the government has approved a proposal to amend the Banking Companies Act of 1991. The newly proposed reforms will result in a two-fold increase in the number of directors -- if the regulatory body relaxes its limit about the aggregate size of the board without taking into consideration the equity ownership diffusion pattern of each of the corporate entities in the financial sector for proportionate representation of non-sponsor shareholders in it (board) -- from a single family, and extend the tenure of sponsor share-holding directors by two years.
Since its inception in 1991, the Banking Companies Act has been subject to various amendments on a regular basis. Such amendments, in conjunction with the Circular on corporate governance in bank management (Bangladesh Bank, 2003) have been contributing significantly to improving corporate governance in the banking sector in Bangladesh. The guideline on corporate governance brought about some important changes in the ways private commercial banks were managed in Bangladesh, including the introduction of independent directors and the requirement for the establishment of an audit committee. Later, further amendments were made with regard to the qualifications and experience of the board of directors and the chair of the audit committee. Also, since 2009, the Bangladesh Bank's initiatives in mainstreaming corporate social responsibility (CSR) in financial institutions have resulted in significant CSR investments made by banks in Bangladesh. However, despite such significant reforms, the state of corporate governance in the banking sector in Bangladesh failed to reach its desired level. This is predominantly due to the ownership structure of banking companies in Bangladesh.
The development of corporate governance regulation in any country requires a very careful consideration of the ownership pattern of the corporate sector. A widely dispersed ownership pattern, mostly prevalent in the developed world, is characterised by the classic problem between managers and shareholders. In the presence of such an ownership structure, the aim of corporate governance regulations would be to align the interests of the managers with those of the shareholders. Hence, such corporate governance models concentrate on careful development of remuneration packages for the managers, and ensure that the external auditors benefit from interactions with the audit committee and act in an independent and professional manner.
A concentrated ownership pattern, on the other hand, is characterised by what researchers refer to as a 'type II' agency problem between majority and minority shareholders. In the presence of such ownership structures, the dominant shareholding family may attempt to expropriate wealth from the minority shareholders. Such ownership structures are predominantly prevalent in developing countries, although some developed countries, such as Japan and Italy have similar structures. The objective of corporate governance regulations here is to protect the interest of the minority shareholders and ensure fair distribution of the corporate wealth amongst all shareholders.
Like many other developing countries, the ownership pattern in the Bangladesh's corporate sector is deeply rooted in the notion of traditionalism. Family firms are by far the most dominant form of companies listed in the stock exchanges in Bangladesh. Such ownership pattern is even more prominent in the banking sector. However, despite the presence of such ownership patterns, Bangladesh adopted a governance regime largely suitable for a corporate sector with dispersed ownership patterns. Our inability in developing corporate governance models that are suitable for Bangladesh, coupled with the pressures exerted by various foreign development agencies, has resulted in wholesale adoption of corporate governance models developed in the context of western countries.
Corporate governance regulations in Bangladesh thus represent a clash between rationalism and traditionalism. Naturally, in such a case, imported notions of rationalism could hardly compete with deep-rooted elements of traditionalism. Thus, presence of dominant family ownership in the corporate sector in Bangladesh has resulted in the development of a culture where important corporate decisions are made in family meetings, rather than Board meetings. Also, the family owners have been reported to be regularly failing to appreciate the value of important corporate governance mechanisms, such as external audit. Thus, despite the changes made in the Banking Companies Act, corporate governance practices in Bangladeshi banks have remained mostly ritualistic in nature.
In a bid to address this issue, the government introduced some important changes in the Banking Companies Act in 2013. The amended Act allowed each bank to have a maximum number of 20 members in its Board, and required that at least three of the directors would be independent. A maximum number of two family members, including spouses, parents, children or siblings could hold directorial posts. Also, the directors were allowed to hold their posts for two successive terms (six years), after which, they would have to take a break for at least one term. The amendments made to the Banking Companies Act appeared to be aimed at reducing family dominance in the Board, and protecting the interests of the non-family owners of the banks. Such regulatory reforms also put us ahead of our neighbouring countries. The Banking Regulation Act of India (1949) still does not have any provision to effectively tackle family dominance in the Boards of the banking companies, although the Guideline on Ownership and Management in private sector banks, issued by the Reserve Bank of India (RBI) in 2005 advises banks not to have 'more than one member of a family or close relative' in the Board. The Bangladesh Bank appeared to be very serious in implementing that regulation. In 2014, it reprimanded four commercial banks for their failure to comply with the new regulations relating to the maximum number of family members in the Board, and asked them to bring the number down in line with the new requirements.
Thus, slowly but surely, corporate governance regulation in the banking sector in Bangladesh was moving in the right direction. The corporate governance mechanisms, along with the Bangladesh Bank's efforts to mobilise resources through mainstreaming CSR activities in banking companies, were starting to get global recognition. It would be fair to expect that over a longer period of time, the reforms made prior to 2017 would contribute to offsetting the influence of family members in the Board and enhance the efficiency of the rational corporate governance mechanisms, eventually ensuring a fairer distribution of wealth amongst the shareholders. The newly proposed amendments, therefore, appear to be a step backward, and would be worth re-considering.
Dr Javed Siddiqui teaches auditing and corporate governance at Alliance Manchester Business School, University of Manchester, UK. firstname.lastname@example.org