The document discusses several aspects of corporate governance including good practices, key elements, types of financial systems, and governance structures. It provides details on internal control systems and promoting an ethical culture. Some of the main points are: 1. Good corporate governance involves openness and transparency, integrity and accountability, and reducing potential conflicts. The five key elements are the board of directors, senior management, shareholders, external auditors, and internal auditors. 2. There are two main types of financial systems - bank-based and market-based. They differ in factors like how households invest their assets and the degree of government intervention. 3. Governance structures are the legal and regulatory methods used to ensure effective governance

1. Governance & Ethics (Cont’d)
Good Practice in Corporate Governance
 Openness & Transparency: disclosure of information
 Integrity & Accountability: monitoring and judging directors’ performance based on the returns
 Reducing the potentials for conflicts
 Reconciling the interests of shareholders and directors as far as possible
Five key elements of Corporate Governance
1. The BOD (Executive Directors, Non-executive Directors and committee of BOD)
2. Senior Management
3. Shareholders
4. External Auditors
5. Internal Auditors (independent of directors and reporting to the Audit Committee)
Good corporate government should provide proper incentive for the Board and Management to attain
the objective
The effect of types of financial system on corporate government
The financial system in an economy facilitates the movement of funds from those who have an excess
to them to those who need them i.e., it facilitates lending & borrowing and transmission of money
Financial system comprise of
 Intermediaries like banks, financial institutions, insurance companies etc.
 Securities (equity and debt)
 Markets (Primary and secondary markets, capital and money markets)
Financial systems provide a means for individuals and households to invest heir excess money and for
business to obtain loans or fund.
Two types of financial systems: Bank based financial system & Market based financial system
SL Differential Factors Bank based financial system Market based financial system
1 How households prefer
to hold their assets
Households prefers little risk and
invest more in Bank or FI
Households bear more risk &
invest more in equity
2 Access to investment Households have less excess to
investment
Households have more excess to
investment
3 Banking structure Banks are highly concentrated
and integrated in banking and
non-banking service
Banks are more fragmented with
less intregration in banking and
non-banking service
4 Degree of give
intervention or regulation
More government regulation as a
result of historic financial disaster
Comparatively less government
regulation or no regulation
5 Integration between
banks and businesses
Banks and businesses are highly
integrated and have a long term
relationship
Banks have less close
relationships with the businesses
6 Nature of markets Markets are volatile and
speculative
Markets are stronger
7 Dominance force of
external finance for
business
Bank Institutional shareholders
Governance structure
A governance structure is a set of legal and regulatory methods that has been put in place to ensure
effective corporate governance.
It may comprise of both direct regulation and non statutory code of practice. Different countries have
different combination of regulation and code of practice depending on whether they have principles-
based or a shareholder-led approach to governance structure
Principle-based approach to governance structures:-
These principles focus on governance problems resulting from separation of ownership and control
and are intended to assist

2. “Government in their efforts to evaluate and improve the legal, constitutional and regulatory
framework of corporate government and to provide guidance and suggestions for stock exchanges,
investors and companies.” Principle of Corporate Governance, OECD
This is determined to adhere the principle of good corporate governance as noted below.
1. Promote transparent and efficient financial markets
2. Protect shareholders’ rights like
 To have secured methods of ownership registration
 To obtain relevant and material information on the company
 To participate in and vote at general meetings
 To elect and remove members of the board
 To share in the company’s profits
 To participate and be involved in fundamental company changes
3. Ensure the equitable treatment of all shareholders
 All shareholders in the same class should be treated equally
 Insider trading should be prohibited
4. Recognise the right of shareholders established by law or through mutual agreements
5. Ensure timely and accurate disclosure like Financial position and performance, ownership,
objectives, board remuneration, related party transactions and foreseeable risk factors
6. Ensure the strategic guidance of the company by the Board
Shareholder-led approach to governance structures
This is existed in market based financial systems (in UK and USA) where institutional shareholders
have very high levels of investment in shares of leading companies. Good corporate governance is
greatly assisted when the institutional shareholders have an agenda for dialogue with Board of
Directors and follow that up so that they can secure their own interests and those of their beneficiaries.
The governance structures of Bangladesh: as set by the following laws or organisations
Companies Act Rules regarding Board of directors
Rules regarding Directors’ power and duties
Relationship of the company with directors
Accountability for stewardship and financial reporting via FS
Rules on meetings and resolutions
SEC notification 20
February 2006
Large company should comply with the SEC requirements on corporate
governance
Explain why they have not so complied
Besides Bangladesh Bank is doing the following to ensure high standard of corporate governance
 Maintaining and promoting “The Financial Institution Act 1993”
 Ensuring that related guidance is current and relevant
 Influencing SEC an ICAB corporate governance developments
 Helping to promote boardroom professionalism and diversity
 Encouraging shareholder engagement
Policies and procedures for an ethical culture
Ethics is a system of behavior which is deemed acceptable to the society. It tells us how to behave.
Ethical culture is a business culture where the basic values and belief in a company encourage people
within the company to behave in line with acceptable business ethics. Business values are:
Integrity Objectivity Accountability
Openness Honesty Truth
Transparency fairness responsibility
Trust
Besides, the following values are the statutory requirements
 Equal opportunity for all
 No discrimination on any ground
 Freedom of information
Business values should be seen throughout the Company’s cultures and should be actively promoted
by the Board

3. Business ethics: These are the moral standards that society expects from businesses. These are the
ways a company behaves in a society. Business ethics comes down to a company’s transparency,
trust, openness and real acceptance of responsibility for bad as well as good decisions.
Social responsibility: This is concerned with the company’s the company’s responsibility and
obligations to those stakeholders which are unprotected by contractual or business relationships with
the company, namely local community, consumers in general, etc.
How can an ethical culture be promoted? Ways to promote the ethical culture are as follows:
 Ethical leadership from the Board of Directors: The BOD should have the following attributes
Attributes Behaviors
Openness Be open minded and willing to learn and encourage other to learn
Courage Be determined and direct
Ability to listen Be aware of what is going on and know that the right thing is the right thing to do
Honesty Be considerate and cautious in managing expectations
Fair mindedness Be independent
 Code of ethics or business conduct: Code of ethics is a formalization of moral principles or
values, responsibilities and obligations. Each company should establish a written code of
ethics which is suited to its own unique situation, values and cultures. In developing a code of
ethics, a company should have the three objectives in mind
1. To improve behaviors
2. To build the company’s reputation and the trust of the stakeholders
3. To improve performance and build value.
 Policies and procedures to support ethical behaviors
1. Communication procedures so that everyone is aware of the code of ethics
2. Piloting of the code in draft form so that people have an input to its content
3. Review the code
4. Training
5. Speak-up helplines for internal ‘whistle-blowing’
6. Performance appraisals incorporating values
7. Remuneration policies not cutting across values
8. Disciplinary policies enforcing values
9. Monitoring how the ethical behavior is taking place
10. Audit and assurance regarding values
11. Reporting regularly
12. Complaints systems that help employees to draws attention to unethical behavior
13. Duty to report breaches of specific ethical requirements.
Ethical Audit: It is a process which measures the internal and external consistency of a company’s
values base. This is done to ensure that the code of ethics and its supporting policies and procedures
are operating effectively and to improve accountability and transparency toward the stakeholders.
Corporate Governance
Code of Corporate Governance
Code of corporate governance is a code of best practice embodying a shareholder-led approach to
corporate governance.
As per SEC notification, Listed Companies should make a disclosure on disclosure statement on
Corporate Governance requirements:
 How the company applies the main and supporting principle of corporate governance
 Confirming that it complies with the Code’s provisions
 Explaining why it does not comply, if it does not comply with the Code’s provisions
Contents of corporate Governance: as per SEC notification on 20 February 2006 for listed
companies
For Board of directors
1. No of Board member- Not less than 5 and more than 20
In case of Bank, non-bank FI, Insurance companies or statutory bodies which are
regulated by Bangladesh Bank, Department of Insurance etc. the number will be as
prescribed by the regulator
2. Independent directors- at least 1/10 of No. of Directors (subject to at least 1)

4. Independent directors means a director who
 Does not hold any share or
 Hold less than 1% shares of total paid up shares
 Not connected with promoters or directors or shareholders holding the above
 Doesn’t have any other relationship with the company or subsidiary/associate
 Not a member, director or officer of any stock exchange
 Not a shareholders, directors or officer of a member of stock exchange
Independent director should be appointed by the elected directors
3. Position of Chairman of the Board and CEO should preferable filled by different
individuals. BOD should define roles and responsibilities of Chairman and CEO
4. Directors should include the following additional statement in the Directors’ report (u/s
184 of the Companies Act 1994)
 The Financial statement (FS) of the company prepared by the management
present fairly its state of affairs, the result of operations, cash flows and changes
in equity
 Proper books of accounts of the company have been prepared
 Appropriate accounting policies have been consistently applied in preparation of
FS
 IAS as applicable for Bangladesh has been followed in preparation of FS and any
departure there from has been adequately disclosed
 The system of internal control in sound in design and has been effectively
implemented
 There is no significant doubt upon the company’s ability to continue as going
concern. If not, the fact along with reasons thereof should be disclosed
 Significant deviations form the last year in operating result of the company should
be highlighted and reason thereof should be explained
 Key operating and financial data of at least preceding 3 years should be
summarized
 If the company has not declared dividend for the year, the reason should be given
 The no. of Board meetings held during the year and attendance of each director
should be disclosed
 The pattern of shareholdings should be reported to disclose the aggregate
number of shares held by- Parent/associated/subsidiary company, other related
parties, Directors, CEO, company secretary, CFO, Head of Internal Audit,
Executives and shareholders holding 10% or more voting interest of the company
Here Executive means (top five salaried employees of the company other than
Directors, CEO, CFO, Company Secretary or head of internal audit)
For CFO, Head of Internal Audit and company secretary
 Company should appoint them
 BOD should define their roles, responsibilities and duties
 CFO and Company secretary should attend BOD meetings
For Audit Committee
 A Company should have a audit committee as a subcommittee of BOD
 Audit committee ensure that Financial statement should reflect true & fair view of the state of
affairs of the company and ensure a good monitoring system
 At least 3 members
 BOD should appoint members of the Audit Committee who should be directors of the
company with at least one independent director
 BOD should fill up any vacancy of the committee within one month
 BOD should select one member of the committee as chairman to the committee
 Audit committee should report to the BOD on the following
1. Report on conflict of interest
2. Suspected fraud or irregularity or material defect in the internal control system
3. Suspected breach of laws

5. 4. Any other matter which should be disclosed to the BOD immediately
 If the committee’s recommendation for rectification of any matter has been unreasonably
ignored, Audit committee should report such finding to the SEC, upon reporting such matter to
BOD for three times or completion of 9 months from 1st
reporting to BOD, whichever is earlier
For External/ Statutory Auditor
The company should not engaged its external /statutory auditors to perform the following service
 Appraisal or valuation services
 Financial information system design or implementation
 Book keeping or accounting record keeping
 Broker-dealer service
 Actuarial service
 Internal Audit service
 Any other service that Audit committee determines
Best practices in corporate governance
SAFA has adopted Best practice on Corporate governance on September 2005. Its main principles
Directors Remuneration Accountability/audit Relations with
shareholders
Effective composition of BOD
Responsibility of Chairman &
BOD
Professional development of
Board
Performance evaluation of the
Board
Level & component of
director’s remuneration
Policy development for
director’s remuneration
Audit committee &
auditors
Disclosure of share
trading
Financial reporting &
Annual Report
Rights of
shareholders
The board should include a balance of executive and non-executive directors such that none can
dominate the Board’s decision taking
Internal control:
Internal control is a process designed to provide reasonable assurance regarding the achievement of
organisation’s objective via
 Effective and efficient operations
 Reliable financial reporting
 Compliance with applicable laws and regulations
An internal control system should facilitates a company in the following
 Operate effectively and efficiently
 Respond appropriately to risks
 Safeguard assets from inappropriate use
 Ensure liabilities are identified and managed
 Ensure the quality of internal and external reporting
 Ensure compliance with applicable laws and regulations and internal policies
Responsible person for internal control
BOD – for policy making, reviewing and reporting on internal control
Management – for implementation and day-to-day monitoring of internal control
A sound internal control reduces but not eliminate the possibilities of:
 Poor judgement in decision making
 Human error
 Deliberate circumvention of control processes by employees and others
 Management overriding controls
 Occurrence of unforeseen circumstances
The system of internal control should:
 Be embedded in the operation of the company and form part of its culture
 Be capable of responding quickly to evolving risk
 Include procedures for reporting any significant control failing or weaknesses
Disclosures in the Board’s narrative statement of internal control:

6. 1. It acknowledge responsibility for internal control system and for reviewing its effectiveness
2. The system is designed to manage rather than eliminate the risk of failure
3. The system can only provide reasonable, not absolute, assurance against material
misstatement or loss
4. An ongoing process is in place for the year and up to the date of annual report and accounts
5. The process is regularly reviewed by the board
6. There is a process to deal with the internal control aspects of any significant problems
disclosed in the annual report and accounts.

7. 1. It acknowledge responsibility for internal control system and for reviewing its effectiveness
2. The system is designed to manage rather than eliminate the risk of failure
3. The system can only provide reasonable, not absolute, assurance against material
misstatement or loss
4. An ongoing process is in place for the year and up to the date of annual report and accounts
5. The process is regularly reviewed by the board
6. There is a process to deal with the internal control aspects of any significant problems
disclosed in the annual report and accounts.