A Report on the importance of corporate governance

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A Report on the importance of corporate governance

1.1 Meaning & importance of Corporate Governance

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders/members, management, and the board of directors. Other stakeholders include labor (employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. For Not-For-Profit Corporations or other membership Organizations the “shareholders” means “members” in the text below (if applicable).

Corporate governance is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis shareholders’ welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world

There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance.

In A Board Culture of Corporate Governance, business author Gabrielle O’Donovan defines corporate governance as ‘an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity. Sound corporate governance is reliant on external marketplace commitment and legislation, plus a healthy board culture which safeguards policies and processes’.

O’Donovan goes on to say that ‘the perceived quality of a company’s corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus how policies and processes are implemented and how people are led. External forces are, to a large extent, outside the circle of control of any board. The internal environment is quite a different matter, and offers companies the opportunity to differentiate from competitors through their board culture. To date, too much of corporate governance debate has centered on legislative policy, to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause.

It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.

Report of SEBI committee (India) on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company.” The definition is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Corporate Governance is viewed as ethics and a moral duty.

1.2 History of Corporate Governance

In the 19th century, state corporation laws enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, to make corporate governance more efficient. Since that time, and because most large publicly traded corporations in the US are incorporated under corporate administration friendly Delaware law, and because the US’s wealth has been increasingly securitized into various corporate entities and institutions, the rights of individual owners and shareholders have become increasingly derivative and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for corporate governance reforms.

In the 20th century in the immediate aftermath of the Wall Street Crash of 1929 legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means pondered on the changing role of the modern corporation in society. Berle and Means’ monograph “The Modern Corporation and Private Property” (1932, Macmillan) continues to have a profound influence on the conception of corporate governance in scholarly debates today.

From the Chicago school of economics, Ronald Coase‘s “The Nature of the Firm” (1937) introduced the notion of transaction costs into the understanding of why firms are founded and how they continue to behave. Fifty years later, Eugene Fama and Michael Jensen‘s “The Separation of Ownership and Control” (1983, Journal of Law and Economics) firmly established agency theory as a way of understanding corporate governance: the firm is seen as a series of contracts. Agency theory’s dominance was highlighted in a 1989 article by Kathleen Eisenhardt (“Agency theory: an assessment and review”, Academy of Management Review).

US expansion after World War II through the emergence of multinational corporations saw the establishment of the managerial class. Accordingly, the following Harvard Business School management professors published influential monographs studying their prominence: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior). According to Lorsch and MacIver “many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors.”

Since the late 1970’s, corporate governance has been the subject of significant debate in the U.S. and around the globe. Bold, broad efforts to reform corporate governance have been driven, in part, by the needs and desires of shareowners to exercise their rights of corporate ownership and to increase the value of their shares and, therefore, wealth. Over the past three decades, corporate directors’ duties have expanded greatly beyond their traditional legal responsibility of duty of loyalty to the corporation and its shareowners.

In the first half of the 1990s, the issue of corporate governance in the U.S. received considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak, Honeywell) by their boards. The California Public Employees’ Retirement System (CalPERS) led a wave of institutional shareholder activism (something only very rarely seen before), as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors (e.g., by the unrestrained issuance of stock options, not infrequently back dated).

In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia, South Korea, Malaysia and The Philippines severely affected by the exit of foreign capital after property assets collapsed. The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies.

In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron and WorldCom, as well as lesser corporate debacles, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, led to increased shareholder and governmental interest in corporate governance.

2.1Parties to corporate governance

Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management and shareholders). Other stakeholders who take part include suppliers, employees, creditors, customers and the community at large.

In corporations, the shareholder delegates decision rights to the manager to act in the principal’s best interests. This separation of ownership from control implies a loss of effective control by shareholders over managerial decisions. Partly as a result of this separation between the two parties, a system of corporate governance controls is implemented to assist in aligning the incentives of managers with those of shareholders. With the significant increase in equity holdings of investors, there has been an opportunity for a reversal of the separation of ownership and control problems because ownership is not so diffuse.

A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organization’s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities.

The Company Secretary, known as a Corporate Secretary in the US and often referred to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and Administrators (ICSA), is a high ranking professional who is trained to uphold the highest standards of corporate governance, effective operations, compliance and administration.

All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organization. Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital.

A key factor is an individual’s decision to participate in an organization e.g. through providing financial capital and trust that they will receive a fair share of the organizational returns. If some parties are receiving more than their fair return then participants may choose to not continue participating leading to organizational collapse.


Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organization.

Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.

Commonly accepted principles of corporate governance include:

  • Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
  • Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.
  • Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors.
  • Integrity and ethical behavior: Ethical and responsible decision making is not only important for public relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that reliance by a company on the integrity and ethics of individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
  • Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

Issues involving corporate governance principles include:

  • internal controls and internal auditors
  • the independence of the entity’s external auditors and the quality of their audits
  • oversight and management of risk
  • oversight of the preparation of the entity’s financial statements
  • review of the compensation arrangements for the chief executive officer and other senior executives
  • the resources made available to directors in carrying out their duties
  • the way in which individuals are nominated for positions on the board

2.3 Systemic problems of corporate governance

  • Demand for information: A barrier to shareholders using good information is the cost of processing it, especially to a small shareholder. The traditional answer to this problem is the efficient market hypothesis (in finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient), which suggests that the small shareholder will free ride on the judgments of larger professional investors.
  • Monitoring costs: In order to influence the directors, the shareholders must combine with others to form a significant voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.
  • Supply of accounting information: Financial accounts form a crucial link in enabling providers of finance to monitor directors. Imperfections in the financial reporting process will cause imperfections in the effectiveness of corporate governance. This should, ideally, be corrected by the working of the external auditing process.

2.4 Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection. For example, to monitor managers’ behavior, an independent third party (the external auditor) attests the accuracy of information provided by management to investors. An ideal control system should regulate both motivation and ability.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. Examples include:

  • Monitoring by the board of directors: The board of directors, with its legal authority to hire, fire and compensate top management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. Whilst non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance.<href=”#cite_note-4″>[5] Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firm’s executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the financial criteria.
  • Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity’s board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors are personnel within an organization who test the design and implementation of the entity’s internal control procedures and the reliability of its financial reporting.
  • Balance of power: The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each other’s actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group check that the interests of people (customers, shareholders, employees) outside the three groups are being met.
  • Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise over the organization. Examples include:

  • competition
  • debt covenants
  • demand for and assessment of performance information (especially financial statements)
  • government regulations
  • managerial labor market
  • media pressure
  • takeovers




Objectives of the Study

The broad objective of the research is to understand the state of corporate governance in Public limited companies – Financial and Non-Financial institutions and State Owned Enterprises (SOE) in Bangladesh.

In particular, the research is expected to know the followings:

a. The current practice of corporate governance in terms of accountability to its stakeholders.

b. How far the current practice of corporate governance passes the test of fairness.

c. Whether corporate governance system in Bangladesh is transparent for all stakeholders.


In the first instance, extensive literary reviews indicated that corporate governance has been addressed, analyzed, defined from various perspectives. In order to narrow it down the scope the study concentrated on three sectors of Bangladesh. These are: a) state owned-enterprise (State Owned Enterprises), Public limited companies both b) financial institutions, and c) non-financial institutions.

After this, a series of discussions and meetings with key personnel of the organizations such as active board members, board secretaries, and company executives were held to identify the focus of the study within the context of Bangladesh. Similarly, consultation with academics and researchers were also conducted to further broaden the study.

It was found that the key issues related to ensuring good governance in the corporate sector includes a) transparency to all stakeholders, b) accountability of the management and the board, c) fairness in the decision making, and d) responsibility of the management and the board . Ensuring these in a corporate culture requires following rules and regulations both in the spirit and in the practice.

Based on these preliminary findings, a questionnaire was developed to collect specific information on the state of corporate governance in some selected industries. The questionnaire was divided into several sections: a) company profile, b) shareholders’ rights and disclosure,

c) Public disclosure and transparency, d) effectiveness of the board,

e) Function of the board, and f) effectiveness of the independent directors.

Preliminary discussion with key stakeholders also revealed that the corporate sector is yet not ready to reveal information beyond their statutory requirements. At this point, the questionnaire was made semi-structured to allow for in-depth interviews with key individuals of the companies.

However, because of the political changes in Bangladesh, and because of the actions taken by the government on several key companies (due to allegation of tax evasion and other malpractices), it became extremely difficult to collect information. The Dhaka Chamber of Commerce and Industries (DCCI) also provided assistance through its members so that the companies cooperate with the study team. However, even after repetitive assurance some organizations were reluctant to answer all the questions in writing. As a result, while the study team took interviews of some 20-25 individuals, information remained incomplete. This has limited the ability of the study team to analyze the results using quantitative technique


The study used interviews with key stakeholders, experts and executive, of these types of companies, a questionnaire survey and also group discussions to arrive at the following conclusions.

Shareholders Rights and Disclosures of Information

In terms of three sectors, this study found that financial and non-financial public limited companies are more open to their shareholders compared to SOEs. This means that except for SOEs, shareholders of the companies do receive information to protect their interests in the company. In the SOEs, the dominant player, the state, is more powerful and do not adequately share information with minority shareholders.

State Owned Enterprises need to improve the practice of disclosure of information to all shareholders, so that other shareholders feel that they are treated equitably.

Public Disclosures and Transparencies

The principle objective of this disclosure of information is to ensure transparency.

Organizations in all the three sectors need to improve their procedures of disclosures. At present most of the above issues are reported in Annual Reports (AR) and/or in the Reports to the Regulatory (RR) agencies. However rather than using a box checking methods (i.e. carrying out minimum requirements that ensures that the organization is complying with the regulations) organizations should focus more on the spirit of the disclosure. Some issues like directors selling or buying are not disclosed at all. This is crucial for the potential future investors of the enterprise. Directors remuneration are also rarely disclosed, this needs further improvement.

In the case of disclosure and transparency to the public State Owned Enterprises are doing better than the public limited companies both financial and non-financial institutions. The latter should develop and promote the culture of disclosure to public in more effective manners.

Effectiveness of the Board of Directors

Four separate issues were studied to understand the effectiveness of the board. An effective board is a sign of healthy corporate culture. These are discussed below.

CEOs are expected to carry out the vision of the board, take decisions and report to the boards the status of the organization on a regular basis. Board is expected to evaluate the performance of CEO in order to ensure good practice of corporate governance. In this particular case financial institutions and State Owned Enterprises are doing better than the non-financial public limited enterprises. Non-financial public limited organizations rarely evaluate their CEOs, this could be because in many cases CEOs are directly linked and/or have more shares than the other members of the board. This practice will not create a healthy and effective board culture.

Independent directors are appointed in board by law to protect the interest of the numerous small shareholders of the organization. Although most financial institutions have independent directors (following the legal compliance) they rarely or never intervene in the decision making process of the board; where as independent directors in non-financial public limited organization play nominal role. In case of SOE independent directors have significant influence in the decision making process of the board.

Given the above discussion and findings, it is fare to conclude that corporate culture in

Bangladesh is still in a state of infancy. While we have created legal requirements for good corporate governance, rushing to institutionalize the culture of governance through legal and regulatory requirements or through external pressures will do more harm than good to the culture. Under such circumstances, the spirit of the good governance will be lost and rather perfunctory structure will take place. The objective of practicing good governance is to help the corporation as well as the society and the nation. It promotes a mechanism to use the capital market to enhance the growth of the corporations and for this it is important that corporate sector are educated to understand the benefits from good corporate governance. It is under such a scenario, the state of governance in our corporations will mature.( Dr. A.K Anamul Hoque et el)

2.6 Islamic Bank Corporate Governance and Regulation:


In this paper, different means of reverse engineering a debt structure for Islamic banks’ liabilities, which would resolve the corporate governance and regulatory problems posed by the investment account structure (wherein holders of those accounts lack internal corporate protection through representation on the board of directors, and lack legal and regulatory protection as creditors and first claimants to the banks’ assets) have been analyzed.


Regulators mainly focus on protecting the interests of depositors through reserve ratios, capital adequacy requirements, etc., while managers focus on serving the interests of shareholders, who are the only remaining stakeholders, subject to regulatory constraints.

Since the majority of Islamic bank managers built their careers originally in conventional banking, they naturally bring this frame of mind to their Islamic financial institutions.

Consequently, it is highly unlikely that those managers would serve the interests of the others stakeholders: mainly the investment account holders and the bank-debtors (who receive credit through murabaha and ijara). This results in a regulatory dilemma for protection of the rights of those two groups, in the absence of loan-based structures of deposits and financing (where reserve ratios and capital adequacy protect the depositors, and usury and predatory lending rules protect borrowers). Thus, while Islamic bankers aim to avoid riba in form, their mode of operation may encourage the substance of riba, as argued earlier in this section. Mutuality – especially in its credit union form – appears to address simultaneously religious as well as secular regulatory and corporate governance concerns.(Mohmoud.A EL-Gamal)

2.7 Corporate Governance for Banks


To share the importance of Corporate Governance for Banks of Pakistan


Good corporate governance is essential in establishing an attractive investment climate characterized by competitive companies and efficient financial markets. It is imperative that

Pakistan’s banking sector develops and implements good governance practices, in order to provide impetus to economic growth. In the realm of a rapidly globalizing world – characterized by liberalization of markets, relatively free-era trade, sophistication of financial products and instruments, and growing awareness among consumers – Pakistan is ripe with lucrative opportunities for foreign and local investors alike.

No amount of regulatory intervention can fully institutionalize corporate governance unless Boards and senior management of banks appreciate the value addition of corporate governance to their productivity and competitiveness. In this context, banks should strive to build a reputation for honest and fair dealing while interacting with their internal as well as external stakeholders. Ethics, transparency and the competition for reputation, which are the cornerstone of good corporate governance, would invariably be the distinguishing features of banks that emerge ahead in an increasingly competitive market.(Dr. SHAMSHAD AKHTAR)




To find whether the regulatory intervention be the most important corporate control mechanism in banking or should regulators focus on introducing incentives for appropriate market behavior.


The common mechanisms of corporate governance, which are valid for firms in general, are not equally valid in banking and this legitimates the regulatory authorities to influence, or even dominate, the corporate governance of banks in place of private monitors. They justify this on a variety of different grounds in the course of time. The traditional argument is the grater opacity of banks: bank assets are extremely difficult for outsiders to value and, consequently, market mechanisms cannot adequately control bank managers and shareholders. Today, the authors who underline the uniqueness of banks seem to have switched their attention to such different aspects as the need for an expanded set of fiduciary duties for bank directors and the empirical differences in the governance-relevant variables between banking and manufacturing firms.

On the other hand, Levine and his co-authors from the World Bank, on the basis of the first empirical works on the topic, affirm that the same core corporate control mechanisms that influence the governance of non-financial firms also influence bank operations: bank valuation is, indeed, influenced by shareholder protection and ownership structure as nonbank firms. Prudential regulation, on the opposite, does not seem to have any impact either on market valuation of banks or on their risk taking behavior. The regulatory goal of preventing excessive risk-taking should be better pursued through the introduction of incentives for appropriate behavior by bank shareholders, debt holders and depositors. Government intervention can reduce the opacity of banks, thus fostering the private ability to assess and price bank risk, by improving the flow of information through increased disclosure requirements. This means that a stronger importance should be posed by the regulatory authorities on the third pillar of Basle 2, which today is the least, developed one. (ANDREA POLO)

2.9 Corporate Governance:

An essential mechanism to curb malpractices by Organizations


To find how good governance can prevent corporate failure.


It should be kept in mind that the main objective of good governance is not to deter the growth prospect of the corporations, rather to assist them to grow in a rational and transparent way. In finale, some of the major issues that should be taken care of to ensure good governance are recommended:

a) Developing infrastructural facilities of the total systems. Government, development partners, NGOs, private sectors should work together to build the infrastructural facilities that will ensure maximum availability of information, reducing the asymmetries of information, ensuring the availability of information at minimal cost.

b) Building the awareness among the corporations, public, beneficiaries and other related stakeholders about consequences of the good governance. A platform should be crated where different interest group can post their concerns, issues and updates.

c) International standard for financial reporting system should be incorporated gradually into all corporations, where option for adjustment/tuning up will be kept open for indigenous need.

d) Coordinating different laws, acts, regulations that handle the same category of issues. It has been observed that most of the malpractice cases escaped due to lack of uniformity of laws, rules and acts. A high powered coronation committee can be formed in this regard, who will align the dissimilarities of existing laws regarding the issues.

e) Forming a central watchdog to dig into the complaint, non-compliance, misrepresentation, malpractices, window dressing and other negative matters. It should be headed by the experts form different streams of expertise and knowledge.

f) Privatization of SOEs has to be implemented gradually and with cautions, as the motive of SOE and the motive of private one differs. To safeguard the benefits of mass people and to be a profitable at the same time, the standard operating procedure (SOP) of the privatized SOE will have to be designed with collaboration of regulatory authorities and watchdogs.

g) The good wishes from the government part are indispensable in this regard.( M. BAKHTEAR UDDIN TALUKDER)



This paper highlights the corporate governance of financial institutions with particular reference to banking sector of Bangladesh. The importance of corporate governance of banks remains crucial given their contribution in economic growth through financial development. This paper has shed light on the structures of corporate governance of banks in Bangladesh involving their ownership structure, board issues, executive aspects, disclosure, and audit practices along with their associated weaknesses. The paper has also showed how political interference and failure by the regulators has contributed to the governance problems in the banks.


In order to restore discipline and bring sound corporate governance the first priority is to keep the system out of political influence. The political considerations/influence reigns supreme in Bangladesh banking from running the public sector bank to issuing private bank licenses and from interfering with the central bank to protecting bank defaulters. Banks and regulators need total autonomy and must be allowed to deal with banking issues in terms of economic and commercial viability. The central bank must be given the freedom of acting on behalf of the depositors. However the central bank needs to restructure it self with better monitoring techniques, use of technology and improve the quality and accountability of its own human resources.

The preferential treatment of ‘Sponsor’ shareholders is creating a large chunk of the problems in the local private banks. Equal treatment and rights of all shareholders would bring about much positive disciplinary change in the banks. The banks in Bangladesh are still closely held companies. Releasing more shares to public and particularly to institutional investors should be encouraged as it will bring about market-driven and closer monitoring of bank activities. Prudential regulation should be designed taking into account the audit and disclosure problems that make much of the baking decisions non-transparent. The central bank should work closely with the other regulators such as ICAB to make improvements in the audit and disclosure practices of the banks without which good governance will be difficult to achieve. Had these issues been considered more than 20 years ago when government started to liberalize the banking sector, the sector could have avoided many of the underlying problems and losses it is burdened with today. In other words the issue of corporate governance of financial institutions must get due importance along with the decision of financial liberalization or else liberalization would only add to the woes of thousands of depositors along with inefficient banking system ( MAZRUR REAZ ET EL)

2.11Corporate social responsibility

Corporate Social Responsibility (CSR) has been described as corporate citizenship, moral and transparent business values, ecological sustainability or corporate charity. It is a business practice to deliver sustainable and ethical values to the equity holders, employees, customers, environment, society, government and other stakeholders at large.

Corporate Social Responsibility is the commitment of businesses towards the society to contribute to sustainable economic development by working with employees, the local community and society at large to improve their lives iii ways that are good for business and for development.

Corporate Social Responsibility (CSR), also known as corporate responsibility, corporate citizenship, responsible business and corporate social performance’<href=”#cite_note-0″>[1] is a form of corporate self-regulation integrated into a business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure their adherence to law, ethical standards, and international norms. Business would embrace responsibility for the impact of their activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Furthermore, business would proactively promote the public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the honoring of a triple bottom line: People, Planet, and Profit.

The practice of CSR is subject to much debate and criticism. Proponents argue that there is a strong business case for CSR, in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate, short-term profits. Critics argue that CSR distracts from the fundamental economic role of businesses; others argue that it is nothing more than superficial window-dressing; others argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations.


Business ethics is one of the forms of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business environment.

In the increasingly conscience-focused marketplaces of the 21st century, the demand for more ethical business processes and actions (known as ethicism) is increasing. Simultaneously, pressure is applied on industry to improve business ethics through new public initiatives and laws (e.g. higher UK road tax for higher-emission vehicles).

Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career specialization, the field is primarily normative. In academia, descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings (e.g. ethics codes, social responsibility charters). In some cases, corporations have re-branded their core values in the light of business ethical considerations (e.g. BP‘s “beyond petroleum” environmental tilt).

The term CSR came in to common use in the early 1970s although it was seldom abbreviated. The term stakeholder, meaning those impacted by an organization’s activities, was used to describe corporate owners beyond shareholders as a result of an influential book by R Freeman in 1984.

Whilst there is no recognized standard for CSR, public sector organizations (the United Nations for example) adhere to the Triple Bottom Line (TBL). It is widely accepted that CSR adheres to similar principals but with no formal act of legislation.


Some commentators have identified a difference between the Continental European and the Anglo-Saxon approaches to CSR. And even within Europe the discussion about CSR is very heterogeneous.

An approach for CSR that is becoming more widely accepted is community-based development projects, such as the Shell Foundation‘s involvement in the Flower Valley, South Africa. Here they have set up an Early Learning Centre to help educate the community’s children, as well as develop new skills for the adults. Marks and Spencer is also active in this community through the building of a trade network with the community – guaranteeing regular fair trade purchases. Often alternative approaches to this are the establishment of education facilities for adults, as well as HIV/AIDS education programmes. The majority of these CSR projects are established in Africa. A more common approach of CSR is through the giving of aid to local organizations and impoverished communities in developing countries. Some organizationsdo not like this approach as it does not help build on the skills of the local people, whereas community-based development generally leads to more sustainable development.

2.14Potential business benefits

The scale and nature of the benefits of CSR for an organization can vary depending on the nature of the enterprise, and are difficult to quantify, though there is a large body of literature exhorting business to adopt measures beyond financial ones (e.g., Deming‘s Fourteen Points, balanced scorecards). Orlitzky, Schmidt, and Rynes found a correlation between social/environmental performance and financial performance. However, businesses may not be looking at short-run financial returns when developing their CSR strategy.

The definition of CSR used within an organization can vary from the strict “stakeholder impacts” definition used by many CSR advocates and will often include charitable efforts and volunteering. CSR may be based within the human resources, business development or public relations departments of an organization, or may be given a separate unit reporting to the CEO or in some cases directly to the board. Some companies may implement CSR-type values without a clearly defined team or programme.

The business case for CSR within a company will likely rest on one or more of these arguments:

Human resources

A CSR programme can be an aid to recruitment and retention, particularly within the competitive graduate student market. Potential recruits often ask about a firm’s CSR policy during an interview, and having a comprehensive policy can give an advantage. CSR can also help to improve the perception of a company among its staff, particularly when staff can become involved through payroll giving, fundraising activities or community volunteering.

Risk management

Managing risk is a central part of many corporate strategies. Reputations that take decades to build up can be ruined in hours through incidents such as corruption scandals or environmental accidents. These events can also draw unwanted attention from regulators, courts, governments and media. Building a genuine culture of ‘doing the right thing’ within a corporation can offset these risks.

Brand differentiation

In crowded marketplaces, companies strive for a unique selling proposition that can separate them from the competition in the minds of consumers. CSR can play a role in building customer loyalty based on distinctive ethical values.<href=”#cite_note-9″>[10] Several major brands, such as The Co-operative Group, The Body Shop and American Apparel<href=”#cite_note-10″>[11] are built on ethical values. Business service organizations can benefit too from building a reputation for integrity and best practice.

License to operate

Corporations are keen to avoid interference in their business through taxation or regulations. By taking substantive voluntary steps, they can persuade governments and the wider public that they are taking issues such as health and safety, diversity or the environment seriously, and so avoid intervention. This also applies to firms seeking to justify eye-catching profits and high levels of boardroom pay. Those operating away from their home country can make sure they stay welcome by being good corporate citizens with respect to labor standards and impacts on the environment.

2.15Criticisms and concerns

Critics of CSR as well as proponents debate a number of concerns related to it. These include CSR’s relationship to the fundamental purpose and nature of business and questionable motives for engaging in CSR, including concerns about insincerity and hypocrisy.

CSR and the nature of business

Corporations exist to provide products and/or services that produce profits for their shareholders.<href=”#cite_note-11″>[12] Milton Friedman and others take this a step further, arguing that a corporation’s purpose is to maximize returns to its shareholders, and that since (in their view), only people can have social responsibilities, corporations are only responsible to their shareholders and not to society as a whole. Although they accept that corporations should obey the laws of the countries within which they work, they assert that corporations have no other obligation to society. Some people perceive CSR as incongruent with the very nature and purpose of business, and indeed a hindrance to free trade. Those who assert that CSR is incongruent with capitalism and are in favor of neoliberalism argue that improvements in health, longevity and/or infant mortality have been created by economic growth attributed to free enterprise.

Critics of this argument perceive neoliberalism as opposed to the well-being of society and a hindrance to human freedom. They claim that the type of capitalism practiced in many developing countries is a form of economic and cultural imperialism, noting that these countries usually have fewer labor protections, and thus their citizens are at a higher risk of exploitation by multinational corporations.<href=”#cite_note-13″>[14]

A wide variety of individuals and organizations operate in between these poles. For example, the REALeadership Alliance asserts that the business of leadership (be it corporate or otherwise) is to change the world for the better. Many religious and cultural traditions hold that the economy exists to serve human beings, so all economic entities have an obligation to society (e.g., cf. Economic Justice for All). Moreover, as discussed above, many CSR proponents point out that CSR can significantly improve long-term corporate profitability because it reduces risks and inefficiencies while offering a host of potential benefits such as enhanced brand reputation and employee engagement.

CSR and questionable motives

Some critics believe that CSR programs are undertaken by companies such as British American Tobacco (BAT), the petroleum giant BP (well-known for its high-profile advertising campaigns on environmental aspects of its operations), and McDonald’s to distract the public from ethical questions posed by their core operations. They argue that some corporations start CSR programs for the commercial benefit they enjoy through raising their reputation with the public or with government. They suggest that corporations which exist solely to maximize profits are unable to advance the interests of society as a whole.


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