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Streamlining business

Corporate governance key to attracting foreign investors

Zakiuliah Sayeed Munshi
Bangladesh today is the 70th largest exporter and the 3rd largest RMG exporter in the world, boasting the 21st fastest growing economy. The world's two top credit rating agencies, Standard and Poors (S&P) and Moody's Investor Service, for the first time, assigned sovereign credit ratings to Bangladesh. S&P assigned BB- and Moody's Investors Service assigned Ba3 to Bangladesh and termed the macroeconomic outlook of the country 'stable', putting Bangladesh at par with Philippines, Vietnam and Turkey. In the South Asian context, Bangladesh is positioned higher than Pakistan and Sri Lanka.
Several global financial institutions have identified Bangladesh as one of the potential economies of the world. Leading US investment bank Goldman Sachs has included Bangladesh as one of the rising economies of the world, the so-called Nextll (Nil), after the BRIC nations of Brazil, Russia, India and China. Similarly, JP Morgan, another global leader in investment banking, has included Bangladesh in its 'JP Morgan Frontier Five'. And, in their 2006 report on “The World in 2050", Price Waterhouse Coopers extended their analysis to include 13 other emerging economies including Bangladesh in their new 'PWC 30 list' as one of the long-term potential growth economies by 2050.
While these are all extremely positive for Bangladesh, the big question now is what will ensure that this growth trajectory remains consistent and ensures that Bangladesh becomes a middle income country by 2030?
Sustained long-term economic growth is fuelled mainly by investments, employment and technology and good corporate governance is the sustainability factor that will ensure the consistency of this growth. A good corporate governance framework is one that is accountable, fair, transparent and responsible. These ensure strategic guidance of the company,
the effective monitoring of management by the board, and the board's accountability, and protect shareholder rights, treat all shareholders, including minority shareholders, equitably and provide effective redress for violations.
Transparency provides timely and accurate disclosure of all material matters of the corporation including financial situation, performance, ownership and governance.
Being responsible recognises legal rights of shareholders and encourages active co-operation corporations and shareholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
The good news is that the public and private sectors in Bangladesh have taken steps to improve corporate governance in recent years. The Securities and Exchange Commission issued guidelines on corporate governance in 2006 and the creation of a Central Depository has made share ownership and transfers more secure. International standards for accounting and auditing have been partially incorporated into local standards and the development of the accounting and auditing profession has been assisted by a wide-ranging donor-supported programmes. Bangladesh Enterprise Institute, Institute of Governance Studies, Bangladesh Bank Training Academy and, more recently, Bangladesh Institute of Capital Market have championed corporate governance efforts in Bangladesh.
However, obstacles remain. In spite of the above achievements, the basic legal framework for corporate governance in Bangladesh is dated, and there are a number of contradictions and points of confusion between the various rules and regulations that apply to listed companies. Building on current efforts, more needs to be done to raise the quality of accounting and auditing. Greater independence and professionalism is required in the boardrooms of both listed companies and state-owned enterprises and, nei-
ther the Registrar of Joint Stock Companies nor the courts are particularly effective at enforcing the Companies Act.
Understandably, one question may come up: why would corporate governance be of benefit to Bangladeshi companies? The reasons are simple:
Corporate governance improves shareholder value and competitiveness by
Optimising operational and financial efficiency: Good corporate governance streamlines business processes, leading to better operating performance and lower capital expenditures (Gompers, Ishii and Metrick, Corporate Governance and Equity Prices, August 2001), improves the company's return on capital employed (ROCE) and ensures better share price performance, higher profitability, larger dividend payouts and lower risk levels than peers (Lawrence Brown, Georgia State University, Sept. 2003)
Improving access to outside capital: Global institutional investors managing more than 1 trillion of assets state that they will pay a premium for well governed companies. Premiums average 30 percent in Eastern Europe and Africa and 22 percent in Asia and Latin America
(McKinsey Global Investor Opinion Survey on corporate governance, 2002).
Escalating valuation and lowering the cost of capital: Over 10 years, well-governed companies across a wide range of sectors have seen superior valuation multiples of more than 8 percent over their badly governed peers (Metrick, Ishii and Gompers, Corporate Governance and Equity Prices, August 2001).
One standard-deviation improvement in governance brings an improvement in valuation multiples that ranges from 18 percent for companies in major OECD markets to 33 percent in emerging markets (Clapper and Love, World Bank, 2002)
Builds/improves the company's reputation and trust: Corporate governance can make or break reputations by creating confidence, establishing goodwill and build-ing/restoring investor trust.
Naturally, there is the issue of cost. Good governance entails real costs. Some of the costs include hiring dedicated staff such as corporate secretaries, experienced and independent directors, or other governance specialists. It will likely require the payment of fees to external counsel, auditors, and consul-
tants. The costs of additional disclosure can be significant as well. Furthermore, it requires considerable managerial and supervisory board time, especially in the startup phase. These costs tend to make implementation considerably easier for larger companies that may have the resources to spare than smaller companies whose resources may be stretched quite thin.
A company will not always see instant improvements to its performance due to better corporate governance practices. However, returns generally exceed the costs. This is especially true when one takes into account that without good corporate governance too much power is centred on one individual without proper oversight, and one enters markets that one does not understand and fails to properly set strategy and manage risks.
In absence of good corporate governance, board fails to ensure controls, poor disclosure and transparency becomes commonplace, and shareholder rights are mistreated.
In extreme cases, systemic governance problems may even undermine faith in the financial markets and threaten market stability.
Building on the existing efforts
mentioned earlier, the International Finance Corporation (IFC) of the World Bank Group has recently initiated a comprehensive corporate governance advisory project — Bangladesh Corporate Governance Project (BCGP) — which aims to improve financial performance and operational efficiency by promoting better corporate governance practices among business enterprises in Bangladesh. This project is jointly funded by the Netherlands and SEDF (SouthAsia Enterprise Development Facility, a multi-donor facility funded by IFC, DFID, NORAD and managed by IFC).
The BCGP will work with various stakeholders (e.g., regulators, financial institutions, family-owned businesses, business associations, chambers of commerce etc.) to (i) improve corporate governance codes at the country level, (ii) raise awareness on corporate governance and its best practices (iii) develop a pool of trainers to help codify corporate governance principles in the market and also (iv) work with business enterprises on a one-one-one basis to improve their corporate governance practices. In addition, to sustain the advancement of corporate governance practices and to effect positive change in the market in the long run, the BCGP will aim to build/enhance the capacity of key corporate governance service providers (training and research institutes, consulting firms etc.), press and universities in Bangladesh.
In conclusion, it must be noted that corporate governance is not a one-off exercise but rather an ongoing process. No matter how many corporate governance structures and processes the company has in place, it is advisable to regularly update and review them. Markets tend to value long-term true commitment to good governance practice and not a single action or boxticking exercise.
The author is project manager, Corporate Governance, International Finance Corporation, Dhaka, and can be reached at zaki.munshi@gmail.com.