The Financial Express

Strengthening the Securities & Exchange Commission

| Updated: October 21, 2017 18:52:56

Strengthening the Securities & Exchange Commission

The corporate board around the world nowadays is composed of executives who are an organisation's internal and non-executives who are its external. Non-executive directors (NEDs) are part-time and do not take part in day-to-day activities of the company. They attend company board meetings usually once or twice in a month and particularly look at the strategic issues, including if the executives are taking good care of the shareholders' money. NEDs are usually distinguished lawyers, university teachers, social workers and intellectuals of independent mind who must be free from any undue influence from the executives and the management. They are not only experts but also celebrated people who bring name and fame for the country. The role of NEDs in corporate governance has been well appreciated around the world.
Independent non-executives are more important in the government agencies than in the corporate sector. Again, they are more important in the public sector than in the corporate sector. In the corporate sector, there are institutional shareholders who have large stakes in the companies and therefore, have higher incentives to monitor the management. But in the public sector, such an incentive for monitoring is largely absent, particularly where parliament is non-functioning. Also, shareholders in the corporate sector can simply 'exit' by selling their shares if the share prices are not satisfactory. Thus unlike the corporate sector, government organisations do not have many control mechanisms available for pursuing the management for working in the citizens' best interests. Therefore, inclusion of independent outside experts is a little hope left for good governance in the government organisations.
THE SECURITY EXCHANGE COMMISSION: Our capital market is one of the lowest in the world by liquidity measured by annual turnover as a percentage of gross domestic product (GDP). The Bangladesh Securities & Exchange Commission (BSEC) consists of a Chairman and four full-time Commissioners appointed by the government for a fixed term - usually of four years. It has no part-time independent non-executive member. Most of the SECs around the world have part-time independent non-executive members. The Securities and Exchange Board of India (SEBI) has three full-time and four part-time members who are equivalent to non-executives but the problem is that they are all high government officials. Thailand SEC Board has 11 members of which six (6) are non-executive expert members. Sri Lankan SEC has 10 non-executive members and operates through a Secretariat headed by a Director General. It has six non-executives appointed by the Ministry of Finance taking into consideration the wide experience and vast knowledge they possess in legal, financial, business and administrative matters. The seventh member is the Deputy Governor of the Central Bank of Sri Lanka. The remaining members are the Deputy Secretary to the Treasury, the Registrar of Joint Stock companies and the President of the Institute of Chartered Accountants of Sri Lanka. In these Asian countries, Chairman and CEO are full-time. But they have part-time non-executives too. Only Bangladesh SEC does not have part-time non-executive. 
In large organisations in USA, UK and European countries, both private and public, the Chairman of the board is usually a part-time nonexecutive and majority board members are part-time non-executives (Cadbury Report and Committee on Corporate Governance, UK). The Financial Services Authority (FSA) was the UK equivalent of Securities and Exchange Commission until 2013; from 2013 the name changed to the Financial Conduct Authority (FCA). Like the FSA, the FCA is also governed by majority independent non-executive members and a non-executive Chairman. 
SPLIT OF CHAIRMAN AND CEO: The split of the positions of Chairman and Chief Executive Officer (CEO) or Managing Director (MD) is an established governance practice both in corporate and public sector around the world and the Chairman usually is a part-time non-executive. This is practically absent in our SEC because the Chairman is a full-time executive. The difference is that the Chairman is the executive for four years (and renewable) and the management head (MD or CEO) is permanent executive. The present BSEC Chairman is working nearly for eight years since 2010. Cadbury's Report and Committee on Corporate Governance (UK) reason and recommend that when Chairman and CEO positions are full-time jobs, there should be a senior non-executive director to whom concerns can be conveyed (Committee on Corporate Governance 1998).
  With a single executive holding the positions of the Chairman and CEO, or two separate executives holding the titles, the company's entire decision-making process lies in the hands of executives, and there is little in the way of checks and balances. The Sarbanes-Oxley Act requires the Audit Committee consists only of external board members. This means that no member of the executives (fixed-term or permanent) can sit in the audit committee. Even the Bangladesh SEC rules, regulations and notifications signed by its Chairman require an audit committee that shall have an independent member. So its governance and its regulations are inconsistent and self-defeating. 
TRUE INDEPENDENCE: Full-time executives remain busy and bogged down with own organisations and they are usually not critical of their own decisions and actions. But non-executives are part-time and they think beyond one organisation and their main purpose is to bring alignment of country's interests. 
True independence has the following broader meaning. Let us ask: why, when, and how do we influence others? One way is by information and knowledge, which is good. But we can also influence others out of self-interest and specific single narrow identity. Therefore, for free, fair, and independent decision one has to avoid narrow specific identity. An independent man has plurality of identities. The BSEC Chairman and the Commissioners have record of strong political affiliation and there was no public advertisement for their selection. But Adam Smith in his Theory of Moral Sentiment (1959) required for independence the 'impartial spectators'. Thomas Nagel (1986) expressed independence as 'view from nowhere than view from delineated somewhere'. Governance is thinking of things, critical thinking, epistemic and adequate justifications, making of new ideas, independent reasoning, purifying reason (Immanuel Kant), greatest good for greatest number, and aesthetics or the sense of proportions. A full-time executive usually does not have time for thinking all these virtues. An intellectual, a celebrated professor and a lawyer, a social thinker who has enough time for thinking of things works as a part time independent board member for check and balance in governance.  
Dr Dhiman Chowdhury is Professor of Accounting,
Dhaka University.
[email protected]


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