Independent directors failing in listed companies

Independent directors appointed as observers to the boards of listed companies are not working in reality although they were supposed to protect the interests of general shareholders.

The capital market regulator has set the duties and qualifications of independent directors through formulating relevant rules to ensure good governance in listed companies, but the purpose cannot be met.

Professor Shibli Rubayat Ul Islam, chairman of Bangladesh Securities and Exchange Commission (BSEC), was making these comments at a webinar on Saturday. He warned of taking a "strict decision" in this regard.

The webinar, styled "Towards a Sustainable Capital Market: The Drivers of Growth", was jointly organised by the Bangladesh Merchant Bankers Association (BMBA) and Capital Market Journalists' Forum.

According to BSEC rules, it is mandatory to appoint one independent director against every three shareholding directors on the board of each listed and aspiring company. Independent directors are supposed to observe whether the company and its business are operating well.

They are also responsible for reporting any irregularities or weaknesses in the management of the business or company to the regulatory authority. Appointments of independent directors also require the approval of the BSEC.

"We have checked the weak and loss-making companies in the 'Z' category. The independent directors on those company boards did nothing but take fees. They did not even inform the BSEC about their lack of good governance and consistent loss-making performance," the BSEC chairman said.

Many speakers at the webinar complained about nepotism in the appointment of independent directors.

They alleged that the companies' rogue entrepreneurs were cheating on general shareholders by appointing incompetent independent directors. At the same time, weaknesses in law enforcement eroded the confidence of ordinary investors in the stock market.

The BSEC chairman said a panel of independent directors was being formed to stop these irregularities. Besides, a new law would be enacted soon by increasing board fees for independent directors.

Meanwhile, sources said the newly listed companies, on the advice of the regulator, would have one independent director on their boards, who will act as a watchdog.

The commission has already held primary talks with several companies, including Walton, which have received new IPO approvals. However, plans about who will be appointed to the boards have not been finalised yet.

Sources have said the commission will take such a decision to monitor the activities of the newly listed companies for the first three years. As a result, the companies will not be able to commit any major irregularities. The commission will also play a role in protecting the interests of investors.

Md Moniruzzaman, managing director of IDLC Investment, presented the keynote paper on the stock market at the webinar.

He pointed out that an adjustment was required between listed companies' profit growth and the increase in their share prices, without which growth would not be sustainable.

"In such cases, share prices of relevant companies are overvalued. The stock market crashes in 1996 and 2010 were a result of such behaviour."

Dr Hasan Imam, president of the Association of Asset Management Companies and Mutual Funds, said the index rose and fell in other parts of the world too. But in those countries, the gap between rise and fall lasted for only 5-6 months. "And our country has seen the rise and fall of the index twice. But the gap is 10 years."

"Most of our retail investors invest after taking margin loans. And when the market collapses, their equity in portfolio becomes negative, making it very difficult for them to repay high-cost margin loans. It takes a long time to get out of this trap. So, when the index falls in our country, it takes time to turn around."

In this regard, the BSEC chairman said high interest on margin loans is a big problem "because we have much cost of funds here. In that case, the interest on margin loans can be reduced by taking foreign loans at low interest. As such, lenders have been encouraged to take loans from abroad to raise funds."

Asif Ibrahim, chairman of Chattogram Stock Exchange, said brokerage houses in Bangladesh, as elsewhere in the world, should be given an opportunity to raise funds through opening shares in the capital market.

Rakibur Rahman, director of Dhaka Stock Exchange, said the stock market was not allowed to run normally in the last 10 years. The regulatory body controlled the index, causing damage to the confidence of investors.

He requested the current commission to refrain from controlling the index.

He added that if the rule of law was ensured in the stock market, the confidence of general investors would grow.

Eunusur Rahman, chairman of Dhaka Stock Exchange, said marginal and common people were working for the development of the stock market or the country. "But we, the educated and well-to-do, are doing nothing."

The BSEC chairman said current transactions in the Dhaka Stock Exchange were to the tune of Tk1,000 crore, which was insignificant. If it had been Tk3,000-5,000 crore, many problems of market intermediates would be solved.

He went on to say that a special scheme would be set up to compensate the general investors of companies which were closed down and whose owners could not be traced. Under this scheme, the investors would get money against their shares in the shut-down companies.

Besides, a list of those who have been banned from the stock market over irregularities and corruption so far would be prepared too, he said.

Speaking on the occasion, BMBA President Md Sayadur Rahman said there was no alternative to listing leading business organisations in different sectors.

He called on the government to provide more incentives to encourage them.