Political economy of corporate governance in Bangladesh

The issue of corporate governance in financial and non-financial firms has received attention and recognition as one of the most critical developmental issues in Bangladesh. This paper draws on two of the recently proposed political economy models to explain the corporate governance realities in Bangladesh. The ‘voting model’ and the ‘interest group politics model’ are tested using survey data as well as interviews to determine whether the macro-level assumptions of these models can explain firm level governance dynamism.

The voting model regards the voting process as the prime determinant of investor and employee protection, whereas the ‘interest group politics model’ stresses the notion of power and influence of powerful interest groups in shaping corporate laws of investors’ protection and transparency.

The main findings of the study include:

• concentrated shareholding in the hands of the controlling family and/or multiple shareholders (e.g. sponsors), coupled with family-aligned board and management is the prime determinant of firm-level voting behaviour and boardroom politics.
• the direct or indirect link of these controlling shareholders with political process, along with the rent-seeking motives of politicians and bureaucrats, is shaping the nature of corporate laws and accounting standards to serve their mutual interests.
• even though Bangladesh is founded on the English common-law and thus fall under the majoritarian system of voting model poor shareholders’ rights in corporate laws is contradictory to the theoretical predictions of the legal-origin as well as the macro-level voting model.

The authors argue that these models might work well in the presence of real democracy associated with transparent and stable political environment, but such preconditions are seldom present in developing countries like Bangladesh. Nevertheless, the political economy model of proportional voting system appears to fit into the firm-level analysis, where controlling shareholders or sponsors tend to use their proportional majority of votes (e.g. shares) to expropriate private benefits at the expense of general shareholders. This is despite the fact that model’s prediction of strong employee protections is not recognised by the beneficiaries.

The study, however, finds little evidence of the widely discussed indirect control (voting) measures through pyramidal and/or cross-sectional ownership.