Major Changes in Revised Code of Corporate Governance & ICAB Recommendations. an independent correspondent member of

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Eustace Mark Bates
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1 Major Changes in Revised Code of Corporate Governance & ICAB 1

2 Contents CCG Global and Bangladesh Perspective Conditions of proposed CCG Major changes in draft CCG and ICAB recommendation Reconciliation between 2012 and

3 Corporate Governance Definition Corporate governance is the system of rules, practices and processes by which an organization is directed and controlled. 3

4 CCG Global Perspective Corporate Governance in the UK UK Code of corporate governance Cadbury report 1992 Organizations monitoring & assessment Greenbury report 1995 Director Remuneration Hampel Report 1998 List of good corporate principles Code of corporate governance 1998 Turnbull report 1999 & 2005 Framework for internal control Higgs report 2003 Role of NED Tyson Report 2003 Guidance on NED Smith Report 2003 Role of auditors and Audit Committee CCG 2003 CCG

5 CCG Global Perspective After more than two decades of evolving corporate governance in the UK, many of you may be thinking, is there anything left to improve? The economic, commercial and regulatory environments continue to change, and governance practice and guidance must keep pace. Simon Lowe, Chairman GT Governance Institute 5

6 CCG Global Perspective Corporate Governance in the USA In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to a spate of CEO dismissals. In the early 2000s, the massive bankruptcies of Enron and Worldcom as well as corporate scandals led to increased political interest in corporate governance. This was reflected in the passage of the Sarbanes-Oxley Act of

7 CCG Global Perspective The G20/OECD Principles of Corporate Governance, first published as the OECD Principles in 1999 Revised in 2004 Revised again and endorsed by the G20 in 2015 This internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories: Auditing Board and management structure and process Corporate responsibility and compliance in organization Financial transparency and information disclosure Ownership structure and exercise of control rights 7

8 Blame the deluded board members for Carillion's collapse- The Guardian Responsibility for Carillon collapse lies in the boardroom. It is the job of the directors to manage risk and the eight pages of Carillion s last annual report devoted to the subject clearly only scratched the surface. Carillion directors were boasting in March last year of having substantial liquidity with some 1.5bn of available funding yet the company ran out of money 10 months later. As usual with the construction sector, the immediate cause of failure is a mix of badly priced contracts, badly managed risks plus too much debt. On a good day, contracting firms run on tight operating margins of 3%. If debt is too high, there is little room to absorb calamitous contracts. When three contracts go sour in quick succession, the numbers can spiral out of control. Carillion, outrageously, was declaring a fatter dividend for shareholders only last spring. Given what we know now, the correct action would have been to go to those investors and ask for a big injection of capital via a rights issue. Half the board would have had to resign, but an over-stretched balance sheet might have been repaired. Instead Carillion seems to have chosen to chase more low-margin contracts in a desperate attempt to keep its revenue line moving. 8

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10 CCG Bangladesh Perspective Introduced in 2006 Revised in 2012 with certain major improvements Revamped in the draft of 2017 with six chapters 14 Conditions in 78 pages 10

11 Conditions of revised CCG Sl Condition Sl Condition 1 Board of Directors 8 Executive Committee 2 Governance of BoD of Subsidiary Company 9 Environment and Social Responsibility committee 3 MD/CEO/CS/CFO/HIAC/HICT 10 Financial Reporting and Disclosure 4 Board Committee 11 External/Statutory Auditors 5 Audit Committee 12 Exchange's Roles on compliance of CCG 6 Nomination and Remuneration Committee 13 Reporting and compliance of CCG 7 Risk Management Committee 14 Compliance of other laws * Bold stands for 2012 conditions 11

12 Composition of the Board General shareholders representative will be included as a BoD from General Shareholders portion One of the BoD shall be female ICAB 1/10 th of the BoD shall be young. If a listed company has got 5 directors 1/10 th comes to 0.5. Hence a separate sentence to be added as Any fraction shall be considered to the next integer/whole number for calculating the number of such director. (1.1)(iii) Change age bracket from 25 to 40 years to 30 to 40 years (1.1)(iii) 12

13 Independent Director Cannot hold any shares An individual can be appointed as Independent Director for 5 Listed Companies Prior approval from BSEC is required to appoint Independent Director Cooling period proposed ( ) ICAB If a company appoints one Independent Director, he/she must be a professional accountant. Remaining Independent Directors, if any, may be selected from other categories of the panel. (1.2)(i) 13

14 ICAB An Independent Director cannot be an executive for two years not only of the entity but also its related company (Parent, Subsidiary, JV, etc.) Number of Independent Directors in Banking Company should at least be equal to non-banking company. Rather this number should be increased for banking companies Exclude members of extended family*. It will be difficult for the Independent Director to determine shareholding by their extended family *Spouse, son, daughter, father, mother, brother, sister, stepfather, step-mother, step-brother, stepsister, adopted son, adopted daughter, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, sister in- law, grand- son, grand- daughter, grand-father, grand- mother, uncle, aunt, cousin, nephew and niece shall be considered as family members and extended family members 14

15 Qualification of Independent Director Business Leader, Corporate leader, Bureaucrat or Government Official s qualification has been well defined Role of Board of Directors Detailed code of conducts of the BoD and Senior Management of the company introduced The code must be posted in the company website Annual signed compliance statement must be included in the Annual Report 15

16 Chairperson of the Board The Chairperson/ MD/CEO of a Listed Company shall not hold the same position in another listed company Meetings of the BoD Conduct the meetings and record the minutes in line with Bangladesh Secretarial Standards (BSS)-1 and BSS -3 ICAB recommendations BoD will be evaluated through self evaluation define KPI (1.4)(ii)(k) How BoD will be trained? (1.4) 16

17 Responsibility of the Board Former Chairman of the BoD of General Motors, John G. Smale wrote in 1995: "The board is responsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management. A BoD is expected to play a key role in corporate governance. The board has responsibility for: CEO selection and succession; providing feedback to management on the organization's strategy; compensating senior executives; monitoring financial health, performance and risk; and ensuring accountability of the organization to its investors and authorities. 17

18 Nomination and Remuneration Committee NRC shall assist the BoD in formulation of the nomination criteria or policy for determining qualifications, positive attributes, experiences and independence of directors and key managerial personnel and senior management as well as a policy for remuneration. All members of the Committee shall be Non-Executive Directors, the majority of whom shall encourage being independent directors who shall be the Chairman of the Committee 18

19 Risk Management Committee The RMC shall be responsible for the overall process of risk management, such as framing, implementing and monitoring the risk management plan, including the related system of internal control of the company The RMC shall consist of at least 3 members who are appointed by the BoD from its Non-Executive Directors together with the MD/CEO ICAB Recommendation The HIA and Auditor may be invited to assist RMC to make effective decisions this will create advocacy threat 19

20 Executive Committee The EC shall assist the BoD or its sub-committees to deal with the day-to-day activities of the company and to develop and implement the business plans, policies, and budget of the company and report and recommend to the BoD and its subcommittees The Committee shall comprise of at least top 5 executives 20

21 Environmental and social responsibilities ESRC shall be responsible for making Environmental Issues policy in line with provisions /directives/ notifications/ requirements as per respective government authority as applicable for the respective industry/service sector as well as the implementation and monitoring of REI policy in compliance with the regulatory requirements. ESRC shall also make a statement that the implementation and monitoring of REI policy is in due compliance with the regulatory requirements, which shall also be disclosed in the Directors Report as annexed in the Annual Report of the company. Need to comply with the above condition within 31 December

22 Financial Reporting and Disclosures Some existing conditions have been brought under this condition which already exist in DSE Listing Regulations 2015: 10.1 PREPARATION OF FINANCIAL STATEMENTS Regulation-14 of DSE Listing AUDITING OF FINANCIAL STATEMENTS Regulation-15 of DSE Listing ADOPTION OF QUARTERLY FINANCIAL STATEMENTS Regulation-16 of DSE Listing SUBMISSION OF QUARTERLY FINANCIAL STATEMENTS Regulation-17 of DSE Listing SUBMISSION OF ANNUAL FINANCIAL STATEMENTS AND OTHER REPORTS Regulation-18 of DSE Listing ADOPTION OF ANNUAL FINANCIAL STATEMENTS Regulation-19 of DSE Listing AUTHENTICATION OF FINANCIAL STATEMENTS Regulation-20 of DSE Listing POSTING OF FINANCIAL STATEMENTS IN THE WEBSITE Regulation-21 of DSE Listing SUBMISSION OF ANNUAL REPORT Regulation-22 of DSE Listing ANNUAL GENERAL MEETING Regulation-24 of DSE Listing WEBSITE Regulation-44 of DSE Listing : E-FILING OF INFORMATION/DOCUMENTS Regulation-41 of DSE Listing : DISCLOSURE OF PRICE SENSITIVE INFORMATION Regulation-33 of DSE Listing DECLARATION OF SPONSORS OR DIRECTORS FOR BUYING AND SELLING OF SECURITIES SUBMISSION OF STATEMENT OF MONTHLY SHAREHOLDING POSITION AND FREE FLOAT an independent REPORTING correspondent member of Regulation-34 of DSE Listing 2015 Regulation-35 of DSE Listing 2015 Why are we making the code thicker? 22

23 Role of Exchange s on corporate governance The exchange shall review the reports on compliance of corporate governance The exchange shall inspect every listed company once in every two years The exchange will also make a pool of prospective independent directors Are they ready? 23

24 Reporting related recommendations Since BAS/BFRS will no longer be used amendment is required in the following conditions: 1.6 (xv), Annexure D Since BSA/BAPS will no longer be used amendment is required in condition 10.2 (5). 24

25 Reporting related recommendations Both basic and diluted EPS should be considered while adopting Financial Statements in the following conditions: 10.3 (2) 10.6 (2) Annual FS should be audited within 120 days instead of 90 days (10.5) Exclude the following disclosure in quarterly FS (10.4) Detailed break-up or composition of shareholders equity- paid-up capital, share premium and number of ordinary shares with face value & date of issue, Preference Share Capital, number of preference shares with face value & date of issue, conversion features of preference shares (if any) with conversion date, conversion features of any other securities (if any) with conversion date, detailed break-up of reserve & surplus (10.4)(a) In addition to disclosures on direct method of cash flows, a reconciliation of Net Income or Net Profit with Cash Flows from operating activities- making adjustments of for noncash items, for non-operating items and for the net changes in operating accruals. (10.4)(e) 25

26 Reporting related recommendations To exclude product-wise performance (1.6)(ii) To include if any for clause (1.6)(xxxii). Compare such financial performance/results and financial position as well as cash flow with the peer company explaining industry scenario To include notes to the Financial Statement as component of Financial Statements (5.1 (v) (Explanation) Define industry specific ratio and Exclude unnecessary ratio on the FS as per Annexure-C (10.5)(2) (f) Annexure-C.pdf 26

27 Hierarchy related recommendations Senior management has been defined in the explanation of 1.2 (h). The hierarchy should be MD/CEO/CFO/CS/HIAC/HICT but the same has not been followed in the following conditions: 1.6 (xxviii)(c) (e), (xxxii) 3.1 (i), (ii), (iii), (iv),(v)

28 CFO related recommendation No person shall be appointed as Chief Financial Officer (CFO) by the BoD without being a Professional Accountant (3.1)(i) CFO should be part of the Risk Management Committee (7.1)(1) 28

29 External Auditor Not only the Partners and employees of audit firm but also their family members cannot hold shares of an audit client Will be required to submit a signed declaration to the company Will be required to be present during the AGM to answer the queries of Shareholders ICAB Recommendation (11.0) Clause (1) (viii) should be re-numbered as clause (2) and (2) and (3) should be re-numbered as (3) and (4) 29

30 Other recommendations In the terms of reference of the Audit Committee instead of writing the audit committee shall it should be re-written like (5.4) The Terms of Reference (ToR) of the Audit Committee shall be clearly set forth in writing covering the areas of financial and other reporting, audit and internal control, and Corporate Governance in accordance with best practices which shall include: The company shall not get its FS audited by any firm of chartered accountants who has been convicted by the Council of ICAB. (10.2)(6) 30

31 The Company should disclose only material information on litigation, conviction, violation of securities laws, loan defaulters etc. rather than all litigation, conviction, violation of securities laws, loan defaulters etc. (1.6) (xxxi) The timeline for submission of Q1 financial statements of companies other than life insurance company should be extended to 45 days from 30 days (10.4) Since a company is required to upload annual report in their website, requirement of sending annual report through may be made as optional (10.9)(2) 31

32 Specific guidelines should be mentioned for whistle blowing policy (10.12)(f) The BSEC should insert a Preamble/Preface to the Guidelines setting out underlying principles of good corporate governance as well as the purpose for formulating and reforming Guidelines. CS will be part of all the committees including signing the FS but in clause 3.3 (Duties of MD/CEO/CFO), CS has not been included lessons learnt prior to SOX. Sign in Annexure-D 32

33 Reconciliation of CCG of 2012 vs 2017 Presentation\Recon of CCG of 2012 vs 2017.xlsx 33

34 Questions 34

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36 Presenter Contact Details Snehasish Barua, FCA (ICAB), ACA (ICAEW) Partner Snehasish Mahmud & Co Chartered Accountants

Bangladesh Securities and Exchange Commission

Bangladesh Securities and Exchange Commission Securities Commission Bhaban E-6/C Agargaon Shere-e-Bangla Nagar Administrative Area Dhaka-1207, Bangladesh NOTIFICATION 20 June 2018 No. BSEC/CMRRCD/2006-158/208/Admin/81:Whereas,