1. Corporate governance-9 & 10 New Governance Rules and their Effectiveness 1

2. Historical background New governance rules are the responses to corporate scandals. Such scandals are not limited to US alone. Major non us scandals include Royal Ahold in Netherlands, Parmalat in Italy, Daweo group (South Korea), Vivendi universal (France), Adecco (Switzerland), Polly Peck (UK) 2

3. Types Of New Corporate Guidelines 1. Legislation : New Laws 2. Delegated Legislation: Corporate Governance codes/ rules by Securities and Exchange Commissions 3. Agreed Best Practices: Corporate Governance codes – at national and multi-national levels. 3

4. New Laws Examples of Law includes Sarbanes-Oxley Act. Laws are not comprehensive. They deal with particular issues. Some of CG issues are covered by Company Laws 4

5. SEC sponsored codes and rules The UK Corporate Governance Code 2010 is a set of principles of good governance aimed at companies listed on the London Stock Exchange. It is overseen by Financial Reporting Council and its importance derives from the Financial Services Authority’s Listing Rules. The Listing Rules themselves are given statutory authority under the Financial Services and Markets Act, 2000. 5

6. Main Features of UK Corporate Governance Code Companies: non-executive directors, remuneration, accountability and audit, relations with shareholders Institutional shareholders Detailed schedules on performance related remuneration, directors pay, liabilities of directors and disclosure of corporate governance arrangements. 6

7. Corporate governance rules Bangladesh, 2006. Corporate governance rules are binding for listed companies. These were imposed as additional conditions under section 2CC of the Securities and Exchange Ordinance, 1969. 7

8. Main feature of corporate governance reforms, 2006 Board size: 5 to 20 except banks and insurance (*regulated separately) Independent non-shareholder director: At least one-fifth independent director Separate chairman and chief executive 8

9. Main features of Corporate governance in Bangladesh Directors have to certify to AGM: (1) truthfulness of financial statement (2) books of accounting properly maintained (3) Appropriate accounting policies (4) international accounting standards as applicable to Bangladesh (5) The system of internal control is sound (6) the company is a going concern (7) no significant deviation from last years operating results (8) the reason for not giving dividend (9) significant plans and decisions (10) the number of board meeting (11) the pattern of shareholding 9

10. Main features f corporate governance reforms in Bangladesh The Company should appoint (1) Chief Financial officer (2) Head of Internal Audit and (3) Company Secretary Audit committee with at least three members and should include at least one independent member 10

11. Main features Reporting channels and responsibilities of audit committees specified. Report of audit committees should be disclosed in the annual report. The areas of conflict of interest of auditors defined. External auditors with conflict of interest excluded The compliance report has to be placed in the AGM. 11

12. Codes containing best practices There are more than 300 such codes. They are prepared at both national and multi-national levels. OECD Principles of Corporate Governance deserve attention. 12

13. Main Features of OECD Principles There are six major areas Transparency and efficiency of markets as goals The right of Shareholders and key ownership functions The equitable treatment of shareholders The role of stakeholders in corporate governance including employees Disclosure and transparency The responsibilities of the Board 13

14. Advantages of Law Enforcement is easy. Law frees individual from ethical responsibilities Law cannot cover all loopholes. As a result there has been a shift from rule-based to principle based auditing 14

15. Advantage of code Code is flexible. Laws force one size to fit all. It allows room for discretion. Code is flouted. In its 2007 response to a financial reporting council consultation paper in July 2007 Pensions and Investments consultants reported that in UK only 33% listed companies were fully compliant with all the provisions of the Code. 15

16. Effectiveness of corporate governance reforms -- Macro Analysis concentrating on the relationship between quality of quality of governance and economic growth -- Micro Analysis concentrating on relationship of firm level data and governance reforms 16

17. Macro Analysis 1. Corporate Governance Quality (CGQ) – simple average of three proxy measures of corporate governance: Accounting, Earning Smoothing and Transparency 17

18. Findings of Macro Study A macro study of 34 countries for the period 1994- 2003 suggests as follows: 1. The relationship between corporate governance quality and GDP growth, productivity growth and the ratio of investment to GDP is positive and significant. 2The overall quality of corporate governance has improved in most countries and the cross country variation in corporate governance quality is narrowing. 3. However, corporate governance quality is an artificial concept. Furthermore, the effects of specific components cannot be analyzed from this study. 18

19. Micro studies Four types of studies: 1. Studies based on perceptions of investors in stock markets 2. Performance of companies on the basis of perception of institutional investors 3. Governance ranking research 4. Survey on firm level data 19

20. Effects of perceptions of corporate governance on share price Surveys indicate that price of shares in companies whose corporate governance is well rated enjoy a premium price. A 2002 survey that investors in Canada 11% more for shares of well governed company; 14% in the USA, 16% in Italy, 21% in Japan, 24% in Brazil, 38% in Russia and 41% in Morocco. The reputation of corporate governance counts. 20

21. Perceptions of institutional investors for good corporate performance Nesbitt reported positive long term stock price returns to firms targeted by CalPERS. However, there is difference of opinion on the effects of independent boards 21

22. Governance Ranking Research Governance index is constructed on the basis of shareholder rights. Firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditure 22

23. Strength and Weakness of existing studies Studies indicate that good corporate governance helps realize value and create competitive advantage. Studies are yet at intuitive stage as the studies have not singled out effects of corporate governance variables 23

24. Survey of Firm level data A survey of firm level data on 296 of the world’s largest financial firms across 30 countries was undertaken by Erken, Hung and Mato in September 2010. They regress cumulative stock returns on board independence, institutional ownership and presence of large stockholders 24

25. Effects of Board Independence and higher institutional ownership The study finds that firms with higher institutional ownership and more independent boards had worse stock returns than others during the crisis. Further exploration of this finding suggests that this is because (1) firms with higher institutional ownership took more risk prior to the crisis which resulted in large shareholder losses during the crisis and (2) firms with more independent board members raised more equity capital during the crisis which led to a wealth transfer from existing shareholders to debt holders. 25

26. Limitations of the study 1.It is based on financial firms. The findings may not be applicable to other firms. 2.Another major issue is enforcement. When the general enforcement environment is weak and specific enforcement mechanism function poorly, as in developing countries, few corporate governance mechanism are effective. 3. Piecemeal implementation is not enough. All elements must be in place. The results may not be immediate., What can independent directors do when audit is defective. 4. Whatever be the short term gains, Public confidence is a goal with pursuing. This is the main justification of good corporate governance. 26