State entities to require 20% independent directors, timely publishing of audited financials

Highlights: 

• Govt outlines qualifications and criteria for selecting independent directors
• Experts and economists view these decisions as positive steps
• Finance ministry will also formulate a code of corporate governance for state-owned cos 
• It will prepare a code of conduct for autonomous institutions
• The proposed codes will be implemented in 2025

State-owned entities and autonomous institutions will have to publish their audited financial statements within six months after the end of the fiscal year, as part of the government's efforts to enhance their fiscal risk management and ensure financial transparency.

Additionally, all state-owned entities registered with the Registrar of Joint Stock Companies and Firms (RJSC) will be required to appoint at least 20% independent directors to their boards. The government has also outlined the qualifications and criteria for selecting these independent directors.

The finance ministry's monitoring cell issued letters on 7 October to the secretaries of various ministries, informing them of these new directives, according to ministry officials.

The letters, copies of which have been obtained by The Business Standard, instruct the ministries to make sure that the state-owned entities and autonomous organisations take the necessary steps to ensure smooth compliance with the government's decisions.

Iftekharuzzaman, executive director of Transparency International Bangladesh, views these decisions as positive steps. 

He emphasises the importance of implementing these measures in state-owned companies and noted that audited financial statements should ideally be published within six months of the financial year's end.

"The requirement to appoint at least 20% independent directors to the boards of state-owned companies is also a positive move. But, since these companies are state-owned, it would be more logical to have 50% independent directors on their boards. At a minimum, independent directors should make up at least one-third of the board," he told TBS.

The finance ministry will also formulate a code of corporate governance for state-owned companies and a code of conduct for autonomous institutions in consultation with relevant stakeholders. The implementation of the proposed code of corporate governance will be made mandatory from December 2025, while the code of conduct will come into effect from March 2025.

State-owned companies and autonomous bodies have long faced numerous allegations of irregularities and corruption, with a lack of transparency and efficiency in their management. Consequently, many of these entities are currently operating at a loss.

Experts view the government's decisions as positive steps. They believe that if properly implemented, these measures will restore transparency in state-owned companies and autonomous organisations. Increasing the number of independent directors will lead to more efficient management, enhancing competitiveness with the private sector.

A finance ministry official told The Business Standard that most state-owned companies and corporations fail to publish their audited financial statements on time. Many entities only have audit reports that are two to three years old available on their websites. As a result, the ministry lacks up-to-date financial information about these institutions, which creates challenges in managing fiscal risks.

The official noted that the boards of state-owned companies typically include officials from various ministries, many of whom lack business expertise. The chairman of these boards is usually the secretary of the relevant ministry or the head of the respective organisation himself.

"In this setup, other directors rarely contribute to the decision-making process. As a result, decisions are often made based solely on the directives of the chairman, minister, or ministry secretary. Increasing the number of independent directors on the board could help resolve this issue," he added.

The finance ministry's letter stated, "Independent directors must be free from any material or financial interest or relationship with the management of the relevant company, major shareholders, or ownership entities. Additionally, they cannot be government employees."

The criteria for appointing an independent director include a minimum of 10 years of technical or professional experience in the relevant field. Furthermore, the individual must not have been convicted of any criminal offence or involved in fraud, financial crimes, or other illegal activities.

A person who has not been subject to any adverse observations by legal authorities or through any legal process is eligible to serve as an independent director. However, the individual must not be associated with any company or firm whose registration or license has been revoked, cancelled, or that has gone into liquidation.

Individuals who have defaulted on loans or been declared bankrupt by a court are disqualified from serving as independent directors. Additionally, there must be no affiliation with the relevant company, its directors, patrons, shareholders, or any of its holding or sister concerns.

Fahmida Khatun, executive director of the Centre for Policy Dialogue, also stressed the significance of these decisions. She highlighted the need for in-depth audits to accurately assess the financial health of state-owned companies and organisations.

"We are all aware that state-owned companies, corporations, and organisations are in poor financial condition. But, it's crucial to understand the extent of their problems. There are weaknesses in the governance of these institutions, along with a lack of accountability and transparency," the economist told TBS.

Former senior finance secretary Mahbub Ahmed described the decisions as both logical and progressive. He noted that the appointment of at least 20% independent directors would allow many experts to contribute to the management of state-owned companies.

He also commended the initiative to publish audited financial statements within six months of the fiscal year's end, calling it a positive step. However, he cautioned that implementation may be challenging.

"The difficulty lies in the fact that our country lacks a sufficient number of high-quality chartered accountant firms capable of completing audits within this timeframe," he added.

New regulations applicable to those entities

According to the Bangladesh Economic Review 2024, the net profit of 49 non-financial state-owned enterprises in fiscal 2022-23 was Tk109.89 crore. As of February 2023, the total debt owed by 30 state-owned enterprises to state-owned banks amounted to Tk59,730 crore, with Tk185 crore in default.

Bangladesh currently has 232 self-governing, autonomous, and statutory institutions, each managed by a board or governing body. The government provides funding to these institutions through grants. In FY23, the total grants provided to these institutions amounted to Tk50,783 crore, representing 6.66% of the national budget and 1.01% of GDP.

The Economic Review reports that of the 137 entities receiving grants in FY23 for management purposes, 91 had no income. While 46 institutions generated some revenue, it covered only 10% of their total operating expenses. Each year, these institutions are becoming increasingly dependent on government funding.

The Economic Review observes that by improving the fiscal management of these institutions, preparing and publishing annual financial statements, and increasing their own revenues, it would be possible to reduce their reliance on government support and play a more significant role in the country's socio-economic development.