Volume : XIV
Issue : 3
July - December 2012
Modernization of the Companies Act A milestone towards establishing Good Governance
Institute of Chartered Secretaries of Bangladesh A Statutory Body Under an Act of Parliament
CONTENTS Institute of Chartered Secretaries of Bangladesh (ICSB) Institute of Chartered Secretaries of Bangladesh (ICSB), established under an Act of Parliament i.e. Chartered Secretaries Act 2010, is the only recognized professional body in Bangladesh to develop, promote and regulate the profession of Chartered Secretary in Bangladesh. The affairs of the Institute of Chartered Secretaries of Bangladesh (ICSB) are managed by a Council consisting of thirteen elected members and five nominees of the Government. The major contribution of a Chartered Secretary is in the corporate sector. Chartered Secretary is a requisite qualification to become a Company Secretary. Company Secretary is an important professional, aiding the efficient management of the corporate sector. Company Secretary is a Statutory Officer under the Companies Act 1994. According to Bangladesh Securities and Exchange Commission (BSEC) all the listed companies should have a Company Secretary. Company Secretary is the compliance officer of the company, who has to interact, coordinate, integrate and cooperate with various other functional heads in a company.
THE COUNCIL : 2010-2013 Mohammad Sanaullah FCS
: President
Md. Shahid Farooqui FCS
: Senior Vice President
M. Naseemul Hye FCS
: Vice President
Md. Monirul Alam FCS Mohammad Asad Ullah FCS Itrat Husain FCS N.G.Chakraborty FCS Md Abdus Salam FCS
: Treasurer
Safiar Rahman FCS Md. Selim Reza FCS
: Councilor : Councilor : Councilor : Councilor : Councilor : Councilor
A.K.M Mushfiqur Rahman FCS : S. Abdur Rashid FCS : Gopal Chandra Debnath FCS : Md. Shawkat Ali Waresi Joint Secretary, GoB : Md. Ekhlasur Rahman Joint Secretary, MoF : Nasreen Begum Additional Secretary, GoB : Prof. Md. Helal Uddin Nizami Commissioner, BSEC: Bijon Kumar Baishya Registrar, RJSC, GoB :
EDITORIAL BOARD
Councilor Councilor
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THE COUNCIL 2010-2013
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EDITORIAL
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FROM THE PRESIDENT
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INSTITUTE NEWS
ARTICLES 23
Chaos Theory and The Stock Market Prof. Dr. Feroz I. Faruque FCS
30
Special Leadership Intervention Akhter M Chaudhury FCA, FCS
34 39
Towards Governance Kazi Ashiqur Rahman FCS Recruitment of the Right Talent as Independent Director Bipul Kumar Bhowmik FCS
45 49 55
Economic Diplomacy Mohammad Enayet Rabbani Chowdhury Should Central Banks Be Independent? Mohammad Shahajahan ACS Notifications
The views and opinions expressed in the articles published in this Journal are those of the writers only Published by the Institute of Chartered Secretaries of Bangladesh (ICSB)
Councilor Councilor Councilor Councilor Councilor Councilor
107 Kakrail, 1st Floor G.P.O. Box : 3100, Dhaka-1000, Bangladesh Phone : 880 2 934 9578 & 933 6901 Fax : 880 2 933 9957 E-mail : secretary@icsb.edu.bd icsb@icsb.edu.bd Web : http://www.icsb.edu.bd
Editor Itrat Husain FCS Members Mohammad Sanaullah FCS M. Naseemul Hye FCS Kazi Ashiqur Rahman FCS Hossain Sadat FCS Publication Officer Raihan Hadi Design & Production
(A Concern of Tradex BD)
Subscription Rate For Students : per copy Tk. 100; per year Tk. 350 Others : per copy Tk. 150; per year Tk. 560
The Council
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EDITORIAL CONVENTION AND A NEW COMPANIES ACT If we look around, we see what appears today as ‘modern’. This again becomes backdated tomorrow. Like everything, changes took place, are taking place and will be taking place to make the Companies Act compatible not only to fulfill the present need of business but also to be compatible with other laws. In the mean time corporate structures and financial instruments have undergone significant developments. Many old concepts have been abandoned or modified and new concepts have been developed. Therefore, it has become a major issue for Bangladesh to have a new business friendly Companies Act with changing economic scenario of the Country in the global perspective. It is the responsibility of the government to reform the Companies Act. Government is normally slow in taking an action until an actual problem arises and tending to respond to the pressures from groups with vested interests. However in this case the Government of Bangladesh has taken the initiative to reform the age old Companies Act 1994. Ministry of Commerce of the People’s Republic of Bangladesh is concerned about the necessity of a more supportive and user friendly Companies Act. In this connection the Institute of Chartered Secretaries of Bangladesh (ICSB) has acted proactively and has spread the hands of co-operation towards enactment of a modern Companies Act. Taking this into consideration, ICSB organized a National Convention with the theme “Modernization of Companies Act: Enhancing Good
Governance” with a view to being a part of the process of modernization of the Companies Act. The aim of the Convention was to have a thorough understanding of the issues involved, through discussions and make suggestions to the government the necessary changes identified for formulating the new Companies Act. The Convention has provided strategic as well as provocative inputs towards reform of Companies Act. The move of the ICSB would further contribute to the enactment of new Companies Act to enhance good Corporate Governance in the country. Initiative of ICSB was fulfilled through arranging the Convention successfully. Paper presenters as well as the participants put forward many valuable suggestions to improve and develop areas which are essential to the enhancement of good Corporate Governance as well. We are optimistic about the enactment of a new Companies Act in 2013. ICSB will provide all the support required, prioritizing the pressing needs until enactment of a new Companies Act which will allow better legal framework that will fulfill the needs of the business community to innovate and embrace the changes in the global market place.
Itrat Husain FCMA, FCS Editor
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FROM THE PRESIDENT Dear Professional Colleagues, As’Salamu Alaikum.
At the very outset I wish you all a very happy and prosperous New Year. 2012 has been a successful year for our Institute. The key achievements for the year were: • Obtained Full Membership of Corporate Secretaries International Association (CSIA); • Established Examination Policy; • Developed Employees Service Rules; • 4th National Convention and 4th Convocation of the Institute were held successfully; • Conducted four CPD (Continuing Professional Development) Programs; • Issued License for Chartered Secretary in Practice; • Developed and Launched two Secretarial Standards; • ICSB included in the Budget Allocation of the Government of Bangladesh. 4th National Convention I inform all of you with utmost pleasure that our Institute has successfully held its 4th National Convention and 4th Convocation on December 21 & 22, 2012. The 4th National Convention was based on the theme “Modernization of the Companies Act: Enhancing Good Governance” where the Inaugural Session was graced by the Honorable Minister for Commerce Ghulam Muhammed Quader, MP, and Honorable Minister for Civil Aviation and Tourism and Muhammad Faruk Khan, MP, as the Chief
Guest and the Special Guest respectively. The occasion was further enlightened by the presence of a long time friend of the Institute CS Nesar Ahmed, President, Institute of Company Secretaries of India (ICSI). A lot of valuable perceptions and ideas were exchanged and I strongly believe that in the near future, the outcome of this Convention will prove to be one of the most fruitful in formulation of the new Companies Act, which as a consequence will help in establishing good corporate governance in Bangladesh. I wish to express my heartfelt thanks to the Members and the distinguished sponsors, without their collaboration it would not have been possible to make the programs a success. 4th Convocation The 4th Convocation of ICSB has also been very successful. The august occasion was graced by the Honorable Minister for Law, Justice, & Parliamentary Affairs Barrister Shafique Ahmed, who highlighted the need for highly skilled Company Secretaries in order to establish good governance in the corporate sector of the country. A very good number of students have qualified as Chartered Secretaries this year and I am very hopeful that soon after entering their career they will flourish as successful professionals, which is exactly what makes ICSB successful in its journey. Continuing Professional (CPD) Programs
Development
The Council is determined to update the knowledge and skills of its members by organizing Continuing Professional Development Programs. With this objective in mind the Institute in 2012 organized CPD Programs on the following topics -
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From The President
• Emerging Issues in Corporate Governance; • Capital Market and its Prospects in Bangladesh; • Corporate Governance Board Leadership for Chartered Secretaries; • SEC Corporate Governance Guideline: Expectation & Way Forward. The Programs comprised of distinguished speakers who discussed various contemporary issues on the relevant topics. The attendance and participation of the members in the CPD Programs was impressive. Management Development Program Quite a few training sessions have been held from July to December 2012 with the involvement of both quality trainees and participants. There had been two batches of trainings on Tax Management (three days each). After that there had been a five days training on Customs & VAT Management where a full batch of Professionals from various financial organizations and finance divisions of various companies participated in the training program. There had been another five days training session on Human Resource Management which involved some of the top executives from distinguished organisations operating in Bangladesh. 31st Batch Admission The admission for the 31st batch of students for ICSB started from late December 2012. There has been a very high response from professionals and students alike in collection of forms and appearing for the examination for admission. But the
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prime concern for ICSB remains to maintain quality of education, in order to establish role models of excellence in governance. The written test and interview for the admission will take place soon and the most worthy of students will be selected for the next batch as before. Planning ahead for the Year 2013 The Institute has come a long way since its inception; but it has an even longer journey ahead. I believe the Council and the Members of the Institute will focus on the following objectives in 2013 to take ICSB to newer height – • Establishing the Institute’s new campus; • To develop more Secretarial Standards; • To include the profession of Chartered Secretaries in various statutes; • To take vigorous programs to develop our Members through CPD Programs; • Concentrate more on the Capacity Building Project of the Institute. Conclusion We are looking forward to a brighter future with all the strong efforts that our Members are putting for the development of the profession. I wish you all a pleasant reading of the journal and remain at your service for valuable suggestions and comments. Once again I wish you all a very Happy New Year. May Allah always be with us. Kind Regards,
Mohammad Sanaullah FCS PRESIDENT
Institute News
INSTITUTE ACTIVITIES July - December 2012 The third & fourth quarters of 2012 had been full of events, including Internal and External Meetings, Continuing Professional Development Program, Training Programs, 4th Convention & 4th Convocation of the Institute. These were as follows: MEETINGS INTERNAL Council Meeting The 13th, 14th, 15th, and 16th Meetings of the Council of the Institute of Chartered Secretaries of Bangladesh were held during the third and fourth quarter of 2012. The Meetings were presided over by Mohammad Sanaullah FCS, President of the Institute.
A Council Meeting in progress
Many important discussions had been held in the Meetings and key decisions were derived regarding holding the 4th National Convention and 4th Convocation of the Institute, establishment of Service Rule and other significant operations of the Institute. The different Standing Committees and Sub-Committees were reconstituted as well.
Organizing Committee for 4th National Convention & 4th Convocation Several Meetings of the Organizing Committee (for 4th National Convention and 4th Convocation) were held during the third and fourth quarter where duscussions were held in order to make the programs more effective and successful. Significant decision were made regarding the budget of the Convention and Convocation and other key aspects. MEETINGS - EXTERNAL a. Meeting with Ministers i. Meeting with the Minister for Commerce – A Meeting was held with the Honorable Minister for Commerce Mr. Ghulam Muhammed Quader, MP, which was attended by the President of the Institute Mohammad Sanaullah FCS, along with Md. Shahid Farooqui FCS, Senior Vice President, Mohammad Asad Ullah FCS, Immediate Past President and Council Member and A. K. M. Mushfiqur Rahman FCS, Council Member. In the Meeting, views were exchanged regarding topics related to formulation of new Companies Act for Bangladesh and other issues relating to the establishment of good Corporate Governance in the Country. The Minister appreciated the views and gave his consent to be part of the activities of the Institute.
• Meetings of the different Standing and Sub Committees were held during the third and fourth quarter for the development of the Institute and its activities. • The Examination Policy of the Institute was improved and submitted for approval by the Examinations Committee.
Honorable Minister for Commerce with the President, Senior Vice President, and Council Members
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Institute News
ii. Minister for LJPA – A separate Meeting was held with the Honorable Minister for Law, Justice & Parliamentary Affairs Barrister Shafique Ahmed, which was attended by the President of the Institute Mohammad Sanaullah FCS, along with Md. Shahid Farooqui FCS, Senior Vice President, Mohammad Asad Ullah FCS, Immediate Past President and Council Member and A. K. M. Mushfiqur Rahman FCS, Council Member. In the Meeting views were exchanged regarding topics related to formulation of new Companies Act for Bangladesh, where the Honorable Minister was also invited to be the Chief Guest for the 4th Convocation. The Minister appreciated the views very highly and gave his consent to attend the Convocation.
Chairman of Bangladesh Securities and Exchange Commission with the President, Senior Vice President, and Council Members
Honorable Minister for Law, Justice & Parliamentary Affairs with the President, Senior Vice President, and Council Members
c. Meeting with the Commerce Secretary A Meeting was held with the Hon’ble Commerce Secretary prior to the 4th National Convention. In the discussions, the Hon’ble Commerce Secretary highly praised the views of ICSB towards establishing Good Governance in the corporate sector and mentioned the significance of ICSB in the formulation of the new Companies Act. The Commerce Secretary also acceded to attending the Convention as the Chairman for the First Technical Session and assured of his cooperation with the Institute in its future endeavors as well.
b. Meeting with the Chairman of Bangladesh Securities and Exchange Commission (BSEC) A Meeting was held with Prof. Dr. M. Khairul Hossain, Chairman, Bangladesh Securities & Exchange Commission, which was attended by the President of the Institute Mohammad Sanaullah FCS, along with Md. Shahid Farooqui FCS, Senior Vice President, Mohammad Asad Ullah FCS, Immediate Past President and Council Member and A. K. M. Mushfiqur Rahman FCS, Council Member. In the Meeting, discussions were held regarding the formulation of new Companies Act for Bangladesh and establishment of good Corporate Governance in the corporate sector. The Chairman expressed his appreciation on the activities of ICSB and shared his kind views in the Meeting.
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Hon’ble Commerce Secretary Mr. Mahbub Ahmed speaking at the 4th National Convention
RESULT OF THE CHARTERED SECRETARY (C.S.) EXAMINATION The Examination Committee of the Institute of Chartered Secretaries of Bangladesh (ICSB) in its Meeting held during the third quarter announced the results of the Chartered
Institute News
Secretary Winter Session-2012 examinations held in July, 2012. Roll Nos. of the successful candidates are as follows: C.S. Inter.Level-I : Roll No.: 002, 017, 019, 022, 034, 035, 036, 045, 046, 047, 058, 062, 063, 070, 071, 072, 082, 083, 084, 095, 097, 099, 115, 116, 117, 129 and 131
005, 024, 038, 049, 064, 073, 085, 100, 118,
006, 025, 040, 052, 065, 074, 089, 106, 120,
007, 026, 041, 054, 066, 075, 091, 108, 123,
009, 027, 042, 055, 067, 077, 092, 109, 125,
012, 029, 043, 056, 068, 078, 093, 110, 126,
014, 030, 044, 057, 069, 080, 094, 111, 127,
Total = 81 (Eighty One) only
C.S. Inter.Level-II: Roll No. : 132, 134, 137, 140, 141, 143, 148, 149, 150, 152, 154, 158, 160, 163, 165, 166, 168, 171, 175, 176, 177, 178, 181, 183, 184, 185, 186, 187, 188, 189, 191, 195, 196, 198, 199, 203, 204, 205, 208, 212, 215 and 216 Total = 47 (Forty Seven)
146, 164, 179, 190, 206, only
C.S. INTER. QUALIFIED Roll No: 218, 223, 224, 230, 233, 234, 236, 241, 243, 246, 247, 248, 249, 250, 251, 253, 254, 255, 256 and 258 Total = 20 (Twenty) only C.S. FINAL GROUP I
C.S. FINAL QUALIFIED: Roll No. 01 F-34 02 F-35 03 F-38 04 F-39 05 F-43 06 F-44 07 F-48 08 F-49 09 F-50 10 F-54 11 F-57 12 F-58 13 F-61 14 F-63 15 F-65 16 F-68 Total - 16
Name Md. Shiful Islam Mohammad Delowar Hossain Md. Hirukuzzaman Shahadat Hossain Chowdhury Mohammad Anisul Islam Md. Rafiqul Islam Khan Mohammad Ashrafuddin Chowdhury Md. Mamunur Rashid Abu Zakir Ahmed Mohammad Mahtab Uddin Khandakar Taslima Rahman Sunita Barua S. M. Nooruzzaman Md. Aminur Rahman Khandker Abu Jafar Sadique Md. Al-Amin Chowdhury (Sixteen) only
ADMISSION OF THE 30TH BATCH OF STUDENTS Admission of 30th batch of the Students of the Institute was completed in July 2012. Total 200 students were enrolled in the July-December 2012 session after screeening out of a good number of applicants. Admission Progress of 31st Batch – A good number of applicants have shown keen interest but ICSB goes through a screening system and enrollment will start soon.
Roll No.: F-01, F-02, F-04, F-12, F-13, F-14, F-22, F-25, F-28, F-29, F-31, F- 32 and F-33 Total - 13 (Thirteen) Only
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Institute News
NEWLY ELEVATED FELLOW MEMBERS IN 2012 The Council has elevated ten Associate Members to Fellow Members. The newly elevated Fellow Members are:
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F-0121
F-0126
Hashim Reza ACMA, FCS Accounts Manager & Company Secretary Bata Shoe Company (BD) Ltd.
Aviram Bhowmik FCS Company Secretary Khansons Group
F-0122
F-0127
Mohammad Shafqat Zubair FCS Senior Accountant Ali Bin Ali Establishment, Doha, Qatar.
Mohammad Mahbubur Rahman FCS Senior Manager, Company Secretariat BRAC Bank Limited
F-0123
F-0128
Jashim Uddin FCS Company Secretary Delta-BRAC Housing Finance Corporation Ltd. (DBH)
Oli Kamal LLB, FCS Vice President & Company Secretary Reliance Finance Limited
F-0124
F-0129
Md. Mozharul Islam MBA, FCS Company Secretary M. I. Cement Factory Limited
J. Q. M. Habibullah FCS Vice President, Board Secretariat and Share Department Dhaka Bank Limited
F-0125
F-0130
Khandaker Habibuzzaman MBA, FCS Company Secretary Square Group
Md. Ataur Rouf FCS Assistant Company Secretary Banglalion Communications Ltd.
THE CHARTERED SECRETARY J U LY - D E C E M B E R 2 0 1 2
Institute News
NEW ASSOCIATE MEMBERS During 2012 the following Chartered Secretaries were admitted as Associate Members of the Institute: A-0254
A-0261
Md. Saiful Islam ACS Chief Executive Officer Hedayetullah Securities Ltd.
Mohammad Khasru Noman ACS Deputy Manager - Movement, Fertilizer Management Division Bangladesh Agricultural Development Corporation (BADC)
A-0255
A-0262
Mojibul Hoque Bhuiyan ACS HR Officer TESCO Bangladesh Liaison Office
Abu Taher Md. Muniruzzaman ACS Head of Internal Audit Renata Limited
A-0256
A-0263
Mohammad Hasan Imam ACS Deputy Director Bangladesh Bank
Kamrul Hasan ACS Deputy Company Secretary Bank Asia Limited
A-0257
A-0264
Mohammed Hafizour Rahman ACS Senior Vice President & CFO Fareast Finance and Investments Limited
Rajib Saha ACS Assistant Vice President Newton International Ltd.
A-0258
A-0265
Muhammed Moshiur Rahman ACS Head of Finance Syngenta Bangladesh Limited
Partha Protim Das ACS Assistant Manager, Corporate Affairs & HR Arab Bangladesh Foods Ltd.
A-0259
A-0266
Mohammad Jafar Ali ACS Company Secretary Central Insurance Co. Ltd.
Mohammad Mostafizur Rahman ACS Company Secretary and Legal Affairs Manager Heidelberg Cement Bangladesh Limited
A-0260
A-0267
Ahmed Zia Haider ACS Senior Internal Auditor Bata Shoe Co. (BD) Ltd.
Mohammad Abdul Quadir Bhuiyan ACS Assistant Accounts Manager SKF Bangladesh Ltd.
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Institute News A-0268
A-0276
Md. Masud Billah ACS Senior Officer Southeast Bank Ltd.
Rajib Chakraborty ACS Company Secretary (Acting) Bengal Windsor Thermoplastics Ltd.
A-0269
A-0277
Mohammad Monirul Islam Khan ACS Manager - Corporate Affairs & Corporate Financing Multimode Group of Companies
Swapan Kumar Chakraborty ACS CFO & Company Secretary Pharmadesh Laboratories Ltd.
A-0270
A-0278
Tauhidul Islam ACS Assistant Manager - Company Affairs Impress- Newtex Composite Textiles Ltd.
Md. Shahidul Islam ACS Deputy Manager-Board Gas Transmission Co. Ltd.
A-0271
A-0279
Wahida Prodhan ACS Senior Executive Officer, Off-Site Supervision Unit; It, Audit & Security Department Prime Bank Limited
Mohammad Showket Akber ACS VP (CAD) Islamic Finance & Investment Ltd.
A-0272
A-0280
Md. Rabiul Alam ACS Company Secretary Sunlife Insurance Company Ltd.
Mohammad Abul Mansur ACMA, ACS Deputy Manager-Company Secretariat Power Grid Company of Bangladesh
A-0273
A-0281
Syed Mohammad Nasim ACS Lecturer Shaikh Burhanuddin College
Md. Zillur Rahman ACS CFO, Reliance Finance & Investment Ltd.
A-0274
A-0282
Shantanu Debnath ACS Senior Officer - Recovery Department Prime Bank Limited
Milan Kumar Paul ACS Manager Marketing (Indo-Bangladesh) APHESIS MANAGEMENT SERVICES (India)
A-0275 Mohammad Abdul Mannaf ACS Deputy Manager (Secretariat) DESCO
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Institute News
Continuing Professional Development (CPD) The Institute of Chartered Secretaries of Bangladesh (ICSB) organized a CPD Program on “SEC Corporate Governance Guideline: Expectation & Way Forward” under its Continuing Professional Development (CPD) program on July 17, 2012 at the BIAM Auditorium. It was attended by a large number of Members of ICSB. Mr. Faruk Ahmad Siddiqi, the Former Chairman of the Securities and Exchange Commission (SEC) was the Chief Guest and Mr. Md. Arif Khan, Member of the Securities and Exchange Commission (SEC) was the Special Guest. The keynote paper on “SEC Corporate Governance Guidelines: Expectation & Way Forward” was presented by Mr. Hossain Sadat FCS, Company Secretary, Grameenphone Ltd. Mr. Mohammad Sanaullah FCS, Corporate Affairs Director of Singer Bangladesh Ltd. and President ICSB chaired the session while official discussants were Mr. Zakiullah Sayeed Munshi, Project Manager-Corporate Governance, IFC, Dhaka; and Mr. M. Naseemul Hye FCS, Executive Director & Company Secretary, Bashundhara Group Ltd.
Special Guest Mr. Md. Arif Khan in his address highlighted the initiative taken by the Securities and Exchange Commission (SEC) in updating Corporate Governance Guidelines and encouraging corporate organizations to abide by them. He also asked the Company Secretaries to come forward more strongly to implement Corporate Governance Guidelines in all listed companies. Mr. Mohammad Sanaullah FCS, President of the Institute expressed that ICSB strives to create ethos for good corporate governance. As part of its endeavor to improve standards of corporate governance and to achieve corporate excellence, the Institute has taken a number of exemplary initiatives. Training Programs Professional Training Program on “Human Resource Management" Institute of Chartered Secretaries of Bangladesh organized this five days training program from 16th September to 20th September, 2012.The Program had been designed keeping in view the importance of Human Resource Development in corporate management. The program is particularly suitable for the senior and mid-level executives engaged in human resource management as well as for those professionals seeking to build up career in HR and labor related issues of public as well as private companies and also NGOs to enable them to be familiar and reoriented with important aspects of the program.
CPD Program in progress
The Chief Guest Mr. Faruk Ahmad Siddiqi lauded the initiatives of the Institute in holding the CPD program, the first of its kind after the announcement of the SEC Corporate Governance Guidelines. He emphasized the importance of the Corporate Governance Guidelines in all sectors. He also emphasized on the implementation of the said guidelines in the Corporate Sector. Besides, he reminded that Company Secretaries are responsible to comply with the good governance practices in the Board.
Participants of training on Human Resource Management
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Institute News
The sessions were conducted by Mr. Mohammad Sanaullah FIPM, FCS, President, ICSB, Mr. N E A Shibly CEO & Chief Consultant, PRO-EDGE Associates, Mr. Saidul Haque Khan, Director - Human Resources, Syngenta (Bangladesh) Ltd., Mr. Suman Bhattacharjee, Director - Human Resources, Pacific Bangladesh Telecom Ltd., and Mr. Md. Shahid Farooqui FCS, General Manager & Company Secretary, The Ibn Sina Pharmaceuticals Industry Ltd. The significant number of participants in this training session were from renowned national and multinational corporate levels as well as from Banks, Investment Corporation & NGO. Professional Training Management”
Program
on
The session was conducted by Mr. Ranjan Kumar Bhowmik FCMA, Commissioner of Taxes, Mr. Mohammad Abdul Latif, Additional Commissioner of Taxes and Mr. Atikur Rahman Khan MBA, FCA, Partner, Atik & Wahid Chartered Accountants. Professional Training Program on “Customs & VAT Management” ICSB organized this training program from 08th July to 12th July, 2012. A full batch of professionals from various financial organizations and finance divisions of various renowned organizations participated in this training program.
“Tax
Institute of Chartered Secretaries of Bangladesh organized this training program from September 08, 2012 to September 10, 2012.The course was designed keeping in view the implications of the latest tax regulations as provided in the Finance Bill 2012. The program was particularly suitable for the senior and mid level executives engaged in accounts & finance, management, marketing, production and, in particular, those directly handling taxation matters. The program would also be useful for those professionals seeking to build up career in taxation profession.
Participants of the training on Customs & VAT Management
SUCCESS GREETINGS A-0236 A. S. M. Sayem Has recently been promoted as Assistant Secretary, Board Division, National Credit and Commerce Bank Ltd.
A-0248 Amit Kumar Roy Has recently been promoted as Assistant Manager, Finance Division, Lanka Bangla Finance Ltd.
Participants at the training on Tax Management
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Institute News
A timely theme for Modern Professionals – “Modernization of the Companies Act: Enhancing Good Governance” An overview of the 4th National Convention of Institute of Chartered Secretaries of Bangladesh By Raihan Hadi, Assistant Secretary, ICSB The modern world of business is never the same even for an hour – situations change, people change, modes of communications change, and thus overall scenarios change. What every business has to operate very closely with the laws it has to abide. The Companies Act 1994 governs company affairs in Bangladesh. Before its enactment in 1994, company law was governed by the Companies Act 1913. However, since promulgation the ‘Companies Act 1994’ has not been amended with any new provisions or changes. During the time frame of 1994 to 2012, the business environment and the corporate world of Bangladesh have had changes in scenario, ethical context, business methods and procedures, and everything else. Bangladesh is a part of globalization being one of the emerging economies of the world. At such a point, having laws governed by an act which has provisions made for companies a century ago, is not appropriate.
the laws are not friendly to the nature of a business or the organization that runs the business, there are bound to be conflicts of interests and thus the overall business state of affairs of a country may fall apart.
Inaugural Session of 4th National Convention in Progress
In order to reduce the amount of disputes it is necessary to have a simplified law. The more disputes there are, the more challenging it becomes to create and maintain good corporate governance and thus, disrupts the natural flow of any operation.
It is appropriate that comprehensive reviews of the Companies Act 1994 and to draft a New Company Law through a consultative process, which has already begun. Such reviews would enable working out an appropriate legislative proposal to meet the requirements of country’s growing economy and should form an integral part of the Company law making exercise. Good governance is a significant key to success for any organization at present. The principles of good governance, however, are not new. Good governance is, in short, authority and its institutions are accountable, effective and efficient, participatory, transparent, responsive, consensus-oriented, and equitable. Such should be the nature of the Companies Act of any country which the businesses running in that country abide by. Good governance depends largely on provisions of the law as by following the law governance is established and developed. If
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Hon’ble Minister for Commerce Ghulam Muhammed Quader delivering his inaugural speech
In the interest of the National Economy, new laws must be enacted to formalize the informal economy by empowering the entrepreneurs to carry on their businesses. But in the present context of globalization and significant changes in trade, commerce, telecommunications, etc. a major revision or a new Companies Act is well overdue.
National Convention Institute of Chartered Secretaries of Bangladesh (ICSB) is an organization working closely with Corporate Laws and the establishment of Good Governance since its inception. The Institute, founded and thereafter also run by highly dignified professionals, strives for the development of Good Corporate Governance in Bangladesh by developing, promoting and regulating the profession of Chartered Secretaries. However, working closely with Company Laws, Chartered/Company Secretaries are qualified professionals who can work in the formulation of various corporate laws and this is where the Members of ICSB have given a lot of new ideas towards formulation of a Modernized Companies Act for Bangladesh.
Hon’ble Minister for Civil Aviation & Tourism Muhammad Faruk Khan, MP delivering his speech
A modernized Companies Act will be expected to come out of the various shortcomings it faces at present. It should also recognize the emergence of the private sector as a key driving force of the economy of Bangladesh, along with the activation of the stock market and money market. Keeping in mind all the new ideas about the demands of various interested groups, ICSB decided to hold their 4th National Convention on the theme “Modernization of the Companies Act: Enhancing Good Governance”. On an auspicious and chilly December afternoon, Institute of Chartered Secretaries of Bangladesh (ICSB) held the Inaugural Session of the 4th National Convention at Bangabandhu International Conference Centre (BICC). As mentioned earlier, the theme of the Convention was “Modernization of the Companies Act: Enhancing Good Governance”, which has been
lauded by professionals and dignitaries of Bangladesh. The red carpet was rolled out, the lights shining bright, and thus the Inaugural Session of the 4th National Convention started with Mohammad Sanaullah FCS, President of ICSB, chairing the session. The soulful occasion was graced by the presence of the Honorable Minister of Commerce Ghulam Muhammed Quader, MP, who inaugurated the program as the Chief Guest; while the Honorable Minister for Civil Aviation & Tourism, Muhammad Faruk Khan, MP, was the Special Guest of program. At the very outset of the program once after the National Anthem was playedwith a standing respect from everyone present, there was a blissful recitation from the Holy Quran.Mohammad Sanaullah FCS, the President of the Institute, gave the Address of Welcome to the Participants, Members, and Guests.The Theme Abstract for the Convention was presented by N G Chakraborty FCS, Council Member, ICSB. The Souvenir for the Convention was released by Itrat Husain FCS, Past President and Council Member, ICSB. Two Secretarial Standards, newly formulated by the Institute (BSS-1 & BSS-2) were also released by Mohammad Asad Ullah FCS, Immediate Past President and Council Member, ICSB. Concluding remarks were made by Md. Shahid Farooqui FCS, Senior Vice President, ICSB.
President of ICSB presenting crest to Hon’ble Minister for Commerce
The Honorable Chief Guest, during his speech, announced that a new Companies Act is being
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Institute News formulated and will be finalized very soon. He highlighted the importance of the profession of Chartered Secretaries and their role in the corporate sector. He also highlighted that without the professional skills no one can be fit for the profession of Company Secretary. He appreciated the initiative of the Institute (ICSB) for arranging a Convention on such an important topic that will ultimately help to establish good governance in Bangladesh. He gave the assurance about providing all necessary support to the Institute for the development of the profession of Company Secretaries and the establishment of good governance in the country.
President of ICSB presenting crest to Hon’ble Minister for Civil Aviation & Tourism
The Special Guest in his speech, highly appreciated the performance of the Institute. He also stressed on the need to provide modern educational equipments and the need of an appropriate premise for the creation of adequate education facilities. He also referred when the Chartered Secretaries Act 2010 was enacted how supportive the Government had been towards the Institute. He spoke very highly of ICSB and their approach towards establishing good corporate governance in the Corporate Sector of Bangladesh. He also requested the concerned Ministry to help in all the development work being carried out by the Institute. Mohammad Sanaullah FCS, in his speech highlighted the importance of the need of Company Secretaries and the need for a new Companies Act for the establishment of good corporate governance in the country. He also spoke about the need for development of the
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skills of the Members of ICSB, who are serving as Company Secretaries in renowned organizations all over Bangladesh. The President requested the concerned Ministry and the Government to help ICSB in developing the quality of education materials and establish its own premises. The Institute also arranged three technical sessions on the Sub-themes for the Convention. First Technical Session “Need for a New Companies Act for Bangladesh”
First Technical Session in progress
Hon’ble Commerce Secretary of Commerce Ministry, Mahbub Ahmed was the Session Chairman. Shawkat Ali Waresi, Joint Secretary for Commerce, Govt. of Bangladesh presented the Keynote Paper. Bijon Kumar Baishya, Registrar of Joint Stock Companies and Firms and Nanda Gopal Chakraborty FCS, Council Member, ICSB were the official discussants respectively.
Hon’ble Commerce Secretary presenting crest to the Keynote Presenter
National Convention
Second Technical Session
Third Technical Session
“Whole Time Company Secretary in Practice Compliance Management (Indian Experience)”
“Reforms of Companies Act for Good Governance”
Third Technical Session in progress Second Technical Session in progress
President, Dhaka Chamber of Commerce and Industry (DCCI) Asif Ibrahim was present as Chairman in this Session. CS Nesar Ahmed, President, Corporate Secretaries International Association (CSIA) and President, Institute of Company Secretaries of India (ICSI), presented the Keynote Paper. Nesar Ahmed stressed on how Company Secretariesarespecialized in matters of statutory, procedural and practical aspects involved in proper compliances under Corporate Laws, and the importance of technology to establish e-Governance that will facilitate business procedures and make systems more successful.
President of ICSI CS Nesar Ahmed presenting his Keynote Paper
Md. Shahid Farooqui FCS, Senior Vice President, ICSB and M. Naseemul Hye FCS, Vice President, ICSB were the official discussants respectively.
Dr. A. B. Mirza Md. Azizul Islam, Former Adviser, Ministry of Finance, Planning, Commerce and Posts & Telecommunications, Immediate Past Caretaker Government of Bangladesh, was the Chairman of the Session. President of the Institute Mohammad Sanaullah FCS, presented the Keynote Paper. He stressed on Innovation in corporate business which is ever-changing and therefore, how previous laws need to be reviewed and changes are needed to be done to incorporate current business model. Prof. Md. Helal Uddin Nizami, Member, Securities and Exchange Commission (SEC) and Ms. Lopa Rahman, Consultant, Sustainable Business Advisory, IFC were the official discussants respectively on the Keynote paper.
Chairman of Third Technical Session Dr. A B Mirza Md. Azizul Islam summing up the session
The Convention was attended by a large number of Members, Corporate Professionals, Foreign Delegates and other important dignitaries from all over Bangladesh. Many important views, suggestions, and opinions
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were exchanged during the Convention which in the near future will be helpful in the formulation of the new Companies Act for Bangladesh.
After the end of the technical sessions, it was time for the 4th National Convocation to commence and everyone waited to meet the qualified Chartered Secretaries.
Glimpses of the stage play
Institute of Chartered Secretaries of Bangladesh (ICSB) Training Program for 1st and 2nd Quarter of 2013 Sl No.
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Name of the Program
Date & Time
Fees
01
Internal Audit & Control Environment
March 08-09, 2013 (2 days Long)
8,000
02
Standardization of Annual Report
March 15-16, 2013 (2 days Program)
8,000
03
Corporate Affairs Management
April 06-10, 2013 (1 Week Program)
12,000
04
Board Management
April 27-30, 2013 (1 Week Program)
10,000
05
Management of PF, Gratuity & WPPF
May 11-13, 2013 (1 Week Program)
8,000
06
Effective Audit Committee
May 18, 2013 (Day Long Program)
4,000
07
Human Resource Management
May 25-28, 2013 (1 Week Program)
10,000
08
Compliance for Banking Companies
June 15-16, 2013 (1 Week Program)
6,000
09
Management of Company Meetings
June 29, 2013 (Day Long Program)
4,000
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Institute News 4th Convocation The 4th Convocation of the Institute of Chartered Secretaries of Bangladesh (ICSB) was held on Saturday, December 22, 2012 at Bangabandhu International Conference Centre (BICC), Sher-e-Bangla Nagar, Dhaka. Barrister Shafique Ahmed, Honorable Minister for Law, Justice & Parliamentary Affairs, Government of Bangladesh was present in the Program as Chief Guest while Suhel Ahmed Chowdhury, Former Secretary, Ministry of Commerce, Govt. of Bangladesh attended the function as Special Guest. The Convocation has been presided over by the President of the Institute Mohammad Sanaullah FCS. Mohammad Asad Ullah FCS, Past President and Council Member, ICSB was the Convocation Speaker.
professionally qualified members can play a vital role in formulation of the new Companies Act.
Hon’ble minister for LJPA presenting Certificate
After the presentation of the certificates a musical event was organized where various singers kept the function very lively with their fantastic music and selection of songs. After the musical event the Convocation program ended with a wonderful dinner and a vote of thanks from the President towards everyone who made the program successful.
Guests and Members of ICSB at the 4th Convocation
The Chief Guest, Barrister Shafique Ahmed, Honorable Minister for Law, Justice & Parliamentary Affairs, Government of Bangladesh felt proud to be present as Chief Guest. In his speech the Honorable Minister highlighted the qualities that are needed to become a sound Company / Chartered Secretary, and the roles needed to flourish in the corporate world. He also appreciated the educational curriculum of the Institute and emphasized on how Chartered Secretaries should contribute to the nation as good advisors to Board of Directors as well as the Government. He said the day was incredibly memorable for the qualified Chartered Secretaries for entering into a new era of the profession. He stressed on the importance of the role of Company Secretaries in establishing good governance in the corporate sector of Bangladesh. He also felt that the Institute by its
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Graduates after receiving their Certificates
Cultural Event of the 4th Convocation
Article
CHAOS THEORY AND THE STOCK MARKET Prof. Dr. Feroz Faruque PhD (USA), CPA, MCISI (London), FCS
Definition of 'Chaos Theory' Chaos Theory is a mathematical concept that explains that it is possible to get random results from normal equations. The main precept behind this theory is the underlying notion of small occurrences significantly affecting the outcomes of seemingly unrelated events. Also referred to as "non-linear dynamics", the Chaos theory has been applied to many different things, from predicting weather patterns to the stock market. Simply, chaos theory is an attempt to see and understand the underlying order of complex systems that may appear to be without order at first glance. Related to financial markets, proponents of chaos theory believe that price is the very last thing to change for a stock, bond, or some other security. Price changes can be determined through stringent mathematical equations predicting the following factors: 1) A trader's own personal motives, needs, desires, hopes, fears and beliefs are complex and nonlinear. 2) Volume changes. 3) Acceleration of the changes. 4) Momentums behind the changes. Background Chaos Theory can be generally defined as the study of forever-changing complex systems. Discovered by a meteorologist in 1960, chaos theory contends that complex and unpredictable results will occur in systems that are sensitive to small changes in their initial conditions. The most common example of this, known as the "Butterfly Effect," states that the flapping of a butterfly's wings in China could cause tiny atmospheric changes which over a period of time could affect weather patterns in
New York. Although chaotic systems appear to be random, they are not. Beneath the random behavior patterns emerge, suggesting, if not always revealing, order. Recognizing that the stock market is a non-linear, dynamic, chaotic system 's Max Cohen (Sean Gullette) applies the principles of Chaos Theory in order to determine the pattern behind apparent random nature of market prices. Apart from the stock market, Chaos Theory can be used to model other highly complex systems, including everything from population growth to epidemics to arrhythmic heart palpitations. When applying chaos theory, it is revealed that even something as seemingly random as a dripping faucet has an order behind it. It started off with an assignment to do extrapolations when the inventor was still under-graduate student. He used some of the Stock Exchange (SE) data as basis for input, and the regression methodologies. It soon turns out that these methodologies have some inherent shortcomings regarding extrapolations. This triggered off the development of his own extrapolation algorithm. After 6 years of development and refinement he had a workable methodology. It worked fine, except every so often his predictions were wrong - he did not know at the time that it was chaos that hit him, he called it investor madness! This was something that he could not wish away, so some 8 more years of development and refinement follows in which the accuracy went up from 30% to 90%, with the occasional 100%. With this accuracy he decided to invest some of his own money on the Stock Exchange, using his algorithm. By using his algorithm he was able to make more that 37% net profit during the same period. We all know that in a declining market there are always individual shares that will rise; the algorithm was therefore quite successful in picking out the correct shares to buy and sell at the right time.
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Article Development and Application It is a common knowledge that share prices run in cycles, with each share having its own individual cycle or set of cycles - almost like the fingerprints of a human being. This is the base of the algorithm - given the closing prices of any share over a time period; the algorithm finds all the possible cycles that exist in the given data by using developed fractals. Once the cycles have been found, the strongest cycle identified (which he called the chaos cycle, as all shares and indices follow this cycle), extrapolation becomes a trivial Algebra exercise. This behavior of each individual share is predicted a day, a week, a month, or even a year in advance. As once-off exercise, he used the terminal of a local stockbroker and feed in prices for 50 randomly selected shares on an hourly basis. After each input the extrapolation algorithm was run to predict what will happen in the next hour. Success rate was a staggering 95% correct. As he could not repeat the above exercise, he turned to some other (He thought, more accessible!) data. He changed the input and output format, keep the algorithm the same, and feed in data about aircraft accidents. After accumulating some input, the algorithm was able to predict that kind of accident (i.e. a flat tire), can be expected, what kind of aircraft (i.e. twin engine, prop) will be involved, geographically where this accident will occur, and in what time window it will occur, with more than 90% accuracy. Unfortunately he had to stop that too as all these data are considered sensitive and not for public consumption. The Future As many investors use the so-called conventional indicators (moving average, overbought/oversold and a host of others) for decision making in buying and selling, stock markets all over the world react to this kind of behavior. In an effort to push up the success rate of the algorithm, several of these indicators are currently used in conjunction with the extrapolations. Initial success rate increased from one-day-in-a-week 100% correct to two days-in-a-week 100% correct.
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The entire system is PC-based and written in PASCAL. All calculations are done every time new input is received, and it usually changes the extrapolation curves significantly. So these graphs are only valid for one day. A Butterfly Flaps Its Wings... According to Chaos Theory, a seemingly irrelevant action can precipitate, and contribute to, a major event. The right set of factors comes together and a major event takes place. It's easy to imagine a fanciful chain of events that would initiate a market move. Many people follow his advice and a massive sell off takes place. Just like how scientists claim, according to Chaos Theory, that a butterfly can start a hurricane, you can imagine that a few key seemingly minor events can start a major market move. Is it Economic Factors? Or Fear and Greed? Many investors view the markets from a traditional long-term buy-and-hold strategy. They look at the markets in terms of fundamental variables, such as consumer confidence, demand, and general economic factors that impact a stock price. If a company makes profits that are in high demand, the price goes up. Market timers though, realize that many market moves are the result of psychological factors, such as opinions or emotions of fear and greed. In the short-term, anything can happen, and it is vital to keep this in mind. Nothing is certain in the markets, but is this something to worry about, not if you take precautions. By precautions, I mean "following a strategy that uses the ups and downs (trends) of the market itself to generate buy and sell signals." This way you are always in the current trend, never miss a trend, and are never trading against the market's trend. Worry can be the doom of Market Timers Indeed a potential chaotic event can be a good thing. The initial event that set off a market
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move isn't important. Who cares why the masses buy or sell, for example, as long as you take advantage of the move? Market timers must learn to view such moves as opportunities to profit. If you have a timing signal that is ruined by an unexpected adverse event...the chaotic nature of the markets coming to the forefront... there is no reason to worry. In fact, it is absolutely "going to happen." Signals will go against you. Accept this and you will profit. Worry so much that you jump out of a tried and true strategy because of a losing trade or two, and you will eventually fail at timing the markets. If you are following a trend, and it unexpectantly reverses, the (trend following) strategy will quickly reverse and place you right back on the right path. It is necessary to accept that trading can be chaotic. Anything can happen, but it doesn't need to be a source of worry. As long as losses are kept small, and profits are allowed to run, you will beat the markets. Worry can be the doom of market timers and traders, but if you accept the fact that uncertainty and chaos are part of the inherent nature of the markets, you will accept it when it occurs and recognize that this same chaos is what will make you profitable in the end. A losing trade here, a losing trade there. All meaningless in the big picture. By following trends, which is Fib Timer’s market timing specialty, you are always profitable over time. You profit in "all" of the big trends. By following trends with Fib Timer’s timing strategies, you are always with the big market moves when they occur...and there is always a big move (trend) just around the corner. Chaos Theory and Market Reality When a new trader examines the trading problem, his first reaction is that in order to be successful, he must learn to predict the markets. Minimum research will teach him that you use fundamental analysis to make long-term predictions and technical analysis to make short-term predictions. If our new trader examines commodity market price history, he finds what appear to be repetitive patterns. Over the long term, the markets move up and down in broad cyclic waves. If he looks
carefully, he can find certain short-term chart patterns that occur over and over. Once he discovers the world of mathematical indicators, he finds that certain configurations of the indicators and price patterns repeat themselves--often at major tops and bottoms. At the same time as he is discovering these repetitive patterns of various types, he is also learning to appreciate the incredible profits that are possible if one takes action at the right time. It should not be surprising that our eager beginner concludes that the markets are entities that keep repeating themselves over and over in various ways. If he or she can learn the patterns and cycles, large profits should be easy. Maybe the markets are so organized that they repeat themselves perfectly over and over in a highly disguised way. If our trader can crack this secret code, not only will huge profits be possible, he or she can eliminate almost all losses. Our trader should pursue these goals using the available literature. Profits are usually elusive. Eventually, the mail brings offers of special systems that do in fact take advantage of these patterns known only by a select group of insiders. These system brochures often contain stories of legendary or reclusive traders who discovered secrets of the markets and made millions. Through various means, the seller has acquired these secrets which he now agrees to share with only a few lucky traders. These stories reinforce the belief that the few traders who are making the big money are successful because they have discovered something about market behavior that only the insider super traders know. In spite of the abundance of such prediction methods in books, systems and software, during any given year about 75 percent of commodity traders lose money. In the long run, probably 95 percent of traders lose. Nevertheless, almost no traders question the proposition that exploitable, repetitive price patterns exist. I saw a recent article titled "The Magic of Charting Price Patterns and Projections." There was nothing in the article itself that showed any performance, much less "magic." People are naturally susceptible to wishful thinking. They believe what they want to
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believe in spite of obvious evidence to the contrary. Short-term luck causes many such faithful traders to reinforce their invalid beliefs. In a recent interview, I was asked “what is the greatest skill a trader can possess or develop?�. My answer was as follows: "There are obviously a number of different skills that a trader needs in order to be successful. They are all important. If I had to pick just one that is most important, I would say it is the ability to perceive true reality. "Unsuccessful traders have a distorted view of the markets, themselves and what they are really doing when they trade. It is very difficult for them to shed these misconceptions so they are doomed to long-term failure."The whole market universe is constructed in a way that reinforces their misconceptions. This compounds the challenge of overcoming them." It turns out that it is possible to examine historical market price action with mathematical and statistical tools and determine whether such repetitive patterns and cycles exist. According to respected authorities, the markets are non-linear, dynamic systems. Chaos Theory is the mathematics of analyzing such non-linear, dynamic systems. Chaos analysis has determined that market prices are highly random with a trend component. The amount of the trend component varies from market to market and from time frame to time frame. A concept involved in chaotic systems is fractals. Fractals are objects which are "self-similar" in the sense that the individual parts are related to the whole. A popular example is a tree. While the branches get smaller and smaller, each is similar in structure to the larger branches and the tree as a whole. Similarly, in market price action, as you look at monthly, weekly, daily and intraday bar charts, the structure has a similar appearance. Just as with natural objects, as you move in closer and closer, you see more and more detail. Another characteristic of chaotic markets is called "sensitive dependence on initial conditions." This is what makes dynamic market systems so difficult to predict. Because we cannot accurately describe the current situation and because errors in description are infinitely compounded in the future by the systems overall complexity, accurate prediction
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becomes impossible. Even if we could predict tomorrow's stock market change exactly (which we can't), we would still have zero accuracy trying to predict only 20 days ahead. A number of thoughtful traders and experts have suggested that those trading with intraday data such as five-minute bar charts are trading random noise and thus wasting their time. Over time, they are doomed to failure by the costs of trading. At the same time these experts say that longer-term price action is not random. Traders can succeed trading from daily or weekly charts if they follow trends. The question naturally arises how can short-term data be random and longer-term data be deterministic in the same market. If short-term (random) data accumulates to form long-term data, wouldn't that also have to be random? As it turns out, such a paradox can exist. A system can be random in the short-term and deterministic in the long-term. The trachea in human lungs is an example in nature of just such a system. My study of chaos theory led to my conviction that knowing the limits of our ability to predict is much more important than the predictions themselves, a lesson we can apply to both climate science and the financial markets. Despite having written about financial markets regularly since 1996, I have never before explained in print what I meant by that. This summer’s heat wave and stock market turbulence illustrate how my intuition about chaos theory informs both my understanding of the financial climate and the stock market in particular. Chaotic Systems and Feedback The definition of a chaotic system I use is any system in which a tiny change in initial conditions can lead to a large change in results. Most chaotic systems are chaotic because they contain positive feedback. Positive feedback tends to amplify trends over time, while negative feedback tends to reduce trends over time. Complex systems such as climate and the financial markets have both positive and negative feedback. In stock markets, financial bubbles grow with the help of several types of positive feedback.
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One such is “The specious association of money with intelligence,” as John Kenneth Galbraith described it in his short and very readable book on bubbles, A Short History of Financial Euphoria: Financial Genius before the Fall. When we see others make money in a stock market rise, we tend to think they must have been smart to have known when to get in. If we made money recently by buying stocks, we tend to think we are smart for having done so. In both cases, we’re more likely to think that buying stocks is a smart thing to do, even if the profits were just dumb luck. Collectively, this leads to more buying, which further raises prices. Even if those price rises are justified in the beginning, the positive feedback can carry them up far beyond any level justifiable by the value of the underlying companies. Many other positive feedbacks such as the wealth effect, relative valuation methods, and the increased ability to borrow against inflated asset prices operate in financial bubbles and bull markets. In contrast, fundamental and value investors produce negative feedbacks by buying when prices have fallen and selling when prices have raised. As with weather, external shocks to the system can reverse even these self-reinforcing trends, as we recently saw when the US’s political paralysis around the debt ceiling debate and Europe’s inability to effectively deal with their debt crisis recently ended the two year bull market in July. Strange Attractors and Regime Change Highly complex systems which have both positive and negative feedbacks tend not to be chaotic all the time, but rather exhibit chaotic behavior only some of the time. The system will behave quite predictably in a deceptively regular fashion for a while, but then shift with little warning into another mode of behavior that is also regular and predictable, but seems to follow a different set of rules. Such behavior can be mapped with simple chaotic systems and often exhibits a pattern called a Strange Attractor. As the system moves through such a strange attractor, it will often stay in one set of the rings curves for an extended period, before jumping to another set after an unpredictable period.
Chaos Theory: Destroying Economics from Within?
Mathematical
The hottest new topic in mathematics, physics, and allied sciences is "chaos theory." It is radical in its implications, but no one can accuse its practitioners of being anti- mathematical, since its highly complex math, including advanced computer graphics, is on the cutting edge of mathematical theory. Chaos theory is even more challenging when applied to human events such as the workings of the stock market. Here the chaos theorists have directly challenged orthodox neoclassical theory of the stock market, which assumes that the expectations of the market are "rational," that is, are omniscient about the future. If all stock or commodity market prices perfectly discount and incorporate perfect knowledge of the future, then the patterns of stock market prices must be purely accidental, meaningless, and random ("random walk"), since all the underlying basic knowledge is already known and incorporated into the price. The absurdity of believing that the market is omniscient about the future, or that it has perfect knowledge of all "probability distributions" of the future, is matched by the equal folly of assuming that all happenings on the real stock market are "random," that is, that no one stock price is related to any other price, past or future. And yet a crucial fact of human history is that all historical events are interconnected, that cause and effect patterns permeate human events, that very little are homogeneous, and that nothing is random. With their enormous prestige, the chaos theorists have done important work in denouncing these assumptions, and in rebuking any attempt to abstract statistically from the actual concrete events of the real world. Thus, the chaos theorists are opposed to the common statistical technique of "smoothing out" the data by taking twelve-month moving averages of monthly data-whether of prices, production, or employment. In attempting to eliminate jagged "random elements" and separate them out from alleged underlying patterns, orthodox statisticians have been unwittingly getting rid of the very real-world data that need to be examined.
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These are but a few of the subversive implications that chaos science offers for orthodox mathematical economics. For if rational expectations theory violates the real world, then so too does general equilibrium, the use of the calculus in assuming infinitesimally small steps, perfect knowledge, and all the rest of the elaborate neoclassical apparatus. The neoclassicals have for a long while employed their knowledge of math and their use of advanced mathematical techniques as a bludgeon to discredit Austrians; now comes the most advanced mathematical theorists to replicate, unwittingly, some of the searching Austrian critiques of the unreality and distortions of orthodox neoclassical economics. In the stock market, we have bull and bear markets. In bull markets, good news is greeted with euphoria and strong stock buying, while bad news is discounted or ignored. In bear markets, the opposite is true: good news is often ignored, while bad news leads to repeated bouts of selling. In his excellent but somewhat inaccessible book, The Alchemy of Finance, George Soros describes how he tries to spot such tipping points or regime changes as they happen. Much theoretical work has been done to understand and model such changes, but the lesson I draw from chaos theory is that recognizing such changes in hindsight may be simple, but predicting them in advance is and will continue to be extremely difficult. That’s probably why Soros did a much better job describing market regimes than explaining how to spot them. Nassim Taleb also addresses regime change in chaotic systems in his book The Black Swan. His Black Swans are events which cannot be predicted solely by studying the past. Such events occur, he says, because the rules we infer from the observation of events never contain the full range of possibilities. He applies this lesson to societal events, personal experiences, and financial markets– all of which are chaotic systems. Chaos and Trend Following: Does It Make Sense? •
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How will stock market react over next 12 months?
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• • • • • • •
Stocks: will the bears return? Should you trade on government statistics? How to navigate the currency maze? Bull or bust: where are softs headed? How sentiment moves the market. Bears to crash stock market's party? Is the bull back?
Prediction Possible!! The headlines above all imply that market prediction works. They seem to back the ruse that a crystal ball will help see the chaotic future. The world of mathematics has been confined to the linear world for centuries. That is to say, mathematicians and physicists have overlooked dynamical systems as random and unpredictable. The only systems that could be understood in the past were those that were believed to be linear, that is to say, systems that follow predictable patterns and arrangements. Linear equations, linear functions, linear algebra, linear programming, and linear accelerators are all areas that have been understood and mastered by the human race. However, the problem arises that we humans do not live in an even remotely linear world; in fact, our world must indeed be categorized as nonlinear; hence, proportion and linearity is scarce. How may one go about pursuing and understanding a nonlinear system in a world that is confined to the easy, logical linearity of everything? This is the question that scientists and mathematicians became burdened with in the 19th Century; hence, a new science and mathematics was derived: chaos theory. The stock markets are said to be nonlinear, dynamic systems. Chaos theory is the mathematics of studying such nonlinear, dynamic systems. Does this mean that chaoticians can predict when stocks will rise and fall? Not quite; however, chaoticians have determined that the market prices are highly random, but with a trend. The stock market is accepted as a self-similar system in the sense that the individual parts are related to the whole. Another self-similar system in the area of mathematics is fractals. In the market price action, if one looks at the market monthly, weekly, daily, and intraday bar charts, the structure has a similar appearance. However,
Article
just like a fractal, the stock market has sensitive dependence on initial conditions. This factor is what makes dynamic market systems so difficult to predict. Because we cannot accurately describe the current situation with the detail necessary, we cannot accurately predict the state of the system at a future time. Stock market success can be predicted by chaoticians. Short-term investing, such as intraday exchanges are a waste of time. Short-term traders will fail over time due to nothing more than the cost of trading. However, over time, long-term price action is not random. Traders can succeed trading from daily or weekly charts if they follow the trends. A system can be random in the short-term and deterministic in the long term. Face book IPO issue and its dramatic price movement and ultimate nose dive is a few minutes on the very first day of its trading in New York market is a burning example in the recent history.
also operate on a much more compressed time scale, with bubbles and busts compressed into a few short years or decades. This difference financial markets and climate in number and scale means that we know much more about the chaos of financial markets than the chaos of climate. We’ve probably already seen most possible financial market regimes in at least one of the thousands of financial markets, from tulip bulbs to CDOs that have operated over the course of human history. Although the rules of markets change with new technology and communication, the basic rules of human psychology which govern these regimes have not. To paraphrase Mark Twain, financial history may not repeat itself, but it does rhyme.
The Writer is a Visiting Faculty, International Business & Finance, American University, Tajikistan
Conclusion There is only one climate, while there are hundreds if not thousands of financial markets operating at any one time. Financial markets
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SPECIAL LEADERSHIP INTERVENTION Akhter M Chaudhury FCA, FCS
This
is yet another article in a seemingly interminable series of writings on the much hyped subject of Leadership. At this level of attention there is a danger of it being relegated to cliché status. Paradoxically, any less attention could condemn the subject to sad indifference and poor note, which would be most unfortunate as the need for leadership is critical, particularly during current times. A natural question that arises is “Exactly what do we mean by Leadership?” Is there a universal definition? After all, the perception of Leadership has been different at different times as different circumstance prevailed. Is it not strange that leaders seem only come to the fore during a crisis rather than in good times? Do we really need leaders except in a crisis? Is there no role for leaders in the good times? Is there indeed a need for leaders when all is well? If so, how does leadership in a crisis differ from that when all is (apparently) well? This article will attempt to address these issues and other questions that may dwell in the minds of those who ponder. So much has been written about Leadership that I am almost embarrassed to add to the vast litany. Yet I feel I must, as I would like to add a new perspective to the discussions and debates on the role of leadership at different times. I must hasten to add that this article is not about political or military leadership. I shall focus instead on the role of Business Leadership at critical junctures of the economic cycle. While any discourse typically starts with a definition of the subject, I will not oblige. It is a term difficult to define, often subjective and applicable to specific situations and therefore of limited general use. I will instead focus on certain dimensions of Leadership and their applicability and value. I say with due humility but fair assertion that my studies on Leadership, though not comprehensive and
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perhaps not even extensive, are nevertheless significant enough to dare venture into a dissertation on it. These studies include John Adiar’s “Inspiring Leadership”, from which I have drawn some of the context. While harbouring no pretence to great leadership itself, I confess that I vie to it someday. The experiences here are therefore not all my own but of others gleaned from the extensive literature on the subject. The analyses and the propositions are however entirely mine – based on my own studies of the subject and many hours of reflection aided by several decades observing, reading about and trying to emulate the good and the great. No one other I should be the object any derision that this petty prose may provoke. It is said that the need for Leadership is greatest in a crisis. I would take fundamental issue with this widely held view – but more on that later. Meanwhile, let us look briefly at the history of Leadership. Leadership and Military Leadership were synonymous in antiquity. This is because without military might neither political nor commercial power was sustainable. Power really did, to paraphrase Mao Zse Dong, ‘flow from the barrel of a gun’. Other legends that leap to mind are Alexander the Great, Julius Caesar, Queen Elizabeth I and of course the all too familiar Robert Clive. As political power and military power progressively diverged, military leadership remained important, but political leadership took centre stage with the greatest bearing on day to day life and the future prospects of nations. In parallel with the growing prominence of politics as a national force, commerce grew independently of military and politics. Politics needed leaders to achieve political ends, as did commerce to achieve commercial ends. Distinct streams of leadership grew in each arena, the emphasis and focus of each being separate although the tools were often similar. These continued to
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evolve and, in the 21st century, political, military and business leadership are all seen as vital but distinct - each with a role specialised for the purpose, similar in means but distinct in manner and application.
Nothing they do escapes attention. They encourage people. They renew spirits, giving others fresh courage to pursue the common goal. Leaders should be strong administrators, as a lack of firmness leads to loss of respect.
Military leadership can rely the most on command and obedience - political leadership the least, relying more on guile and perception. Somewhere in between is business leadership. Leadership often deals in the intangible, the unknown and the unseen. Faith, trust and confidence in the leader are essential for teams to function properly. The truth about wars often remain shrouded in mystery and misinformation for so long that reports of questionable military leadership only surface many years after the soldier is dead - and very few are inclined to vilify the dead. Failure in political leadership is often rewarded with a peerage or some juicy diplomatic diversion. Failure in commercial leadership is however unforgiving and dealt with very harshly and promptly. Disgrace is immediate. I will concentrate here on leadership in commerce and industry, not so much on the traits of leadership as on the junctures of the economic cycle at which leadership and intervention are of the most crucial need and the greatest importance.
Now to my dispute with the contention, that “leadership is most needed in a crisis”. A crisis arises after much has already gone wrong and the situation is desperate. So, where was the leader when things started to go wrong? In my opinion, leadership is most needed, and therefore is of the greatest value, before the situation descends into a crisis. Intervention must come before the crisis occurs. It must take place immediately that things start to go wrong, not after disaster occurs. Good leaders will intervene to prevent a negative trend from descending into a crisis. This is when corrective actions are most needed. They must quickly chart a course to prevent a slide into disaster and to prepare for the upturn. Timely intervention by the leader can minimise the depth of the trough and restore the organisation, more quickly, to the road to recovery.
But first let us recapitulate some of the essentials of leadership. There are three forms of authority: the authority of rank or position, the authority of personality and the authority of knowledge. Authority is power – not leadership. Knowledge, on the other hand, is the gateway to leadership. As far back as the time of Socrates it was believed that leadership is tied to situations and depends largely upon the leader having the appropriate knowledge. Obviously people will obey willingly only those whom they perceive to be better qualified or more knowledgeable than they are in a particular situation. Professional or technical competence should therefore be a prerequisite for holding a position of leadership responsibility. Once leadership has been established, however, it must be continually reinforced by the actions of the leader. Exercise of sound knowledge or technical skills is not enough. Leaders must lead by example.
My second but related proposition is that the value of leadership is equally vital in times of prosperity as in adversity. Just when things are going well, there looms the spectre of the inevitable decline that follows the peak, manifest in the cycle of boom and bust. Leadership intervention at this critical juncture will enable an organisation to prepare for the downturn. There never really is a good point in the economic cycle, as each point is either declining or it is ascending towards a peak from which it will then decline. Anticipation, planning and communication can lengthen the up cycle and shorten the down cycle. Complacency in times of prosperity is a common human failing. Leaders however must rise above the common – in fact that is a hallmark of their leadership. They must intervene when the trend is positive so that the organisation can maximise opportunities, ride the crest for longer and peak higher than otherwise. On the way down a good leader will intervene to ease the slope of the decline and minimise the depth of the trough before the
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cycle of recovery begins again. A clear impression that the leader has the situation in his grip provides confidence to the team that the organisation will ride out the storm with a minimum of pain. The enthusiasm of the leader can spur the energy of the team to achieve the future that they in fact create for themselves. From the foregoing it should be obvious that good leadership is critical for minimising troughs of adversity and maximising peaks of prosperity. Leadership is needed when times are good, when in a crisis, when things are getting worse and also when they are improving. Leadership is therefore always needed and always critical and always important, regardless of the point in the economic cycle. It somewhat demeans the vitality of leadership to contend that it is critical merely in a crisis or even in some other
particular circumstance. Having said that, leadership intervention is more crucial at certain critical junctures of the economic cycle than at others. These critical points, I suggest, are about halfway up the boom cycle and about halfway down the bust cycle. Such intervention I have dubbed as “Special Leadership Intervention” (SLI) and the points at which such intervention is needed as “Special Leadership Intervention Points” or SLIPs. SLI maximises the peak and minimises the trough. Leadership is of course crucial at every stage of the economic cycle but none more so than that at the SLIPs. Theoretically, at least, Special Leadership Intervention can completely avoid the worst effects of at least one downturn in five. The attached diagram illustrates my proposition, rendering, I think, further elaboration on this specific aspect unnecessary.
Typical Economic Cycle
Special Leadership Interventio n (SLI) Points (SLIPs)
Without SLI
Leaders must know when to intervene. They must therefore be sensitive to trends. They must anticipate and challenge conventional wisdom. They must devise solutions to confront the many challenges they face from time to time. They must be creative as each challenge is unique. After all, no two objects or phenomenon in the universe are identical – so why should any two issues be so identical as to
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With SLI
be responsive to the same solution? Learning from each challenge improves a leader’s judgement but they do not provide him with a toolbox of readymade solutions. A leader must be prepared to be decisive even in the absence of full information. Most decisions that leaders take are about the future, about which it is impossible to have all facts and information. This calls for judgement.
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Those who require full facts and information before they can make a decision do not make good leaders. To quote marketing guru Philip Kotler “The best way to predict the future is to create it” or words to this effect. And who better to visualise the future and inspire the team to create it than the leader? Leaders must have the courage to take bold decisions. Courage is not being devoid of fear; it is the will or ability to control fear and to draw from it energy and resolution – to turn adversity to advantage! In the words of Rahm Emanuel “Never waste a crisis”!
In line with the basic precept, leaders should never take their eye off the ball. They must always be visible, even palpable. Leadership is needed at all times, particularly at the SLIPs. I end this article with the hope that this modest offering will be of some help to good leaders in their quest to become great leaders. The Writer is the Chairman & Managing Director, Nuvista Pharma Ltd.
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TOWARDS GOVERNANCE Kazi Ashiqur Rahman FCS
Proverb goes that “Emperor rules Empire,
who rules Emperor”. There must be someone who rules the emperor. Naughty thinking point toward the Empress and good sense indicates governance. Sometimes we hear a common question; where does governance start? Obviously governance starts from family. Family is the first source of giving lesson a human being and what he learns from his family, govern one’s whole life irrespective of moral or bad lessons. Even though family is the extreme bottom layer and smallest institution of a society or a country, it is the first institution of learning. Quoting from Napoleon Bonaparte - “You give me a good mother - I will give you a good nation”, it indicates that mother is the source for developing an individual in every sphere of life; ethics, ultimately leads to governance. If any individual didn’t receive proper ethical development in the early life, self governance perhaps is not possible. Just on the contrary, government is the highest authority of introducing and exercising governance. Likewise governance might start from the family level but ends at the government level. German playwright, poet, novelist and dramatist (1742-1832) Johann Wolfgang Von Goethe quotes that “Which is the best government? That which teaches us to govern ourselves”. This should be the source of learning and practicing governance at every level. Governance: Obligatory or Voluntary? The task of making sense of governance is a daunting one especially because of the extensive interdisciplinary nature of the debate in which there is no one accepted definition of governance and there are diverse disciplinary
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based entry points to it. Though governance can explain in many ways, it established that without governance no institution can be effective. But let us leave this question in the background, and address the famous quotation of Peter and Jean Medawar published in The Life Science Magazine (1977) which indicated towards ethical governance. “Only human beings guide their behavior by a knowledge of what happened before they were born and a preconception of what may happen after they are dead; thus only humans find their way by a light that illuminates more than the patch of ground they stand on.” On the other hand, the last scenario of “Around the World in Eighty Days” by famous British novelist Jules Verne indicates good governance, perhaps erroneously but that can be the best practices of voluntary governance at the end of 19th century “Phileas Fogg, then, had won the twenty thousand pounds; but, as he had spent nearly nineteen thousand on the way, the pecuniary gain was small. His object was, however, to be victorious, and not to win money. He divided the one thousand pounds that remained between Passepartout and the unfortunate Fix, against whom he cherished no grudge. He deducted, however, from Passepartout's share the cost of the gas which had burned in his room for nineteen hundred and twenty hours, for the sake of regularity.” Two examples refer that practicing governance is primarily be obligatory but ultimately this should be voluntary at every level. Journey to Governance From the late 70’s, the word “governance” has become a common word of political speech in official publications and research papers from
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the offices of national governments and international institutions. It seems to listen that governance is near recent word but Prophet Hadhrat Mohammad (Peace be upon him) gave the governance guideline in his last Hajj. It was the first institutional approach towards governance. He declared that “All mankind is from Adam and Eve, an Arab has no superiority over a non-Arab nor a non-Arab has any superiority over an Arab; also a white has no superiority over black nor a black has any superiority over white except by piety and good action. Learn that every Muslim is a brother to every Muslim and that the Muslims constitute one brotherhood. Nothing shall be legitimate to a Muslim, which belongs to a fellow Muslim unless it was given freely and willingly. Do not, therefore, do injustice to yourselves. Remember, one day you will appear before ALLAH and answer your deeds. So beware, do not stray from the path of righteousness after I am gone.” After fourteen hundred years of declaring governance guideline by Prophet Hadhrat Mohammad (Peace be upon him), today’s modern world feels presence of governance. From Governance to Clean Governance Though they are not new concepts, the terms “Governance”, “Good Governance” and “Clean Governance” can protect the society from dysfunctioning. Governance is also seen as a continuous process, in which social stability (“conflicting interests”) is the focus. Conflict and diversity of goals are the key pillar of governance, which governments attempt to address. In governance, different actors are supposed to come together and define with certain restrictions, their own priorities and agendas. Governance - From the late 70’s, the word “governance” has become a common speech in official publications and research papers of national governments and international institutions. The World Bank and IMF were those twin agencies who for the first time
talked about the basic tenets of governance like transparency, accountability, efficiency and fairness in order to check the excessive concentration of state power. Good Governance - It was only later that the term good governance was used to represent the interest of all the groups in the society. It encompasses the mechanism, processes and institutions through which citizens and groups articulate their interests, mediate their differences and exercise their legal rights and obligations Good governance aims to develop institutions and processes that are more responsive to the needs of all groups. Good governance promotes participation, accountability, effectiveness and exercise their legal rights and obligations at all levels and link between governance and discourse which is fundamental for capital’s accumulation. Clean Governance - Clean governance as a concept stressed the promotion of honesty and uprightness among the public, especially government officials. It urges to strengthen education on the public about the value of honesty and cleanness combining social morality, professional ethics, family virtues and personal moral character. Clean governance talks of corrupt-free governance. It talks of upholding the highest levels of integrity, rising above their private lives in the execution of their duties. Not accepting material or financial gain arising from their public positions beyond the official remuneration which they receive in their capacity. Corporate Governance Government at various levels is accountable to people. Its functioning comes up for scrutiny in parliament, state legislatures and local government authorities and also in the media. The government is also held accountable by courts. This level of accountability and transparency is absent so far as corporate sector is concerned.
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It has been recognized world wide that free markets are not free for all markets. Taking into consideration this, government felt to create a regulatory regime so that the interest of the investors can be secured. Liberalization marked by deregulation, privatization has also made corporate governance more crucial as in the absence of it the possibility of scams, frauds and market manipulation increases which ultimately leads to low investor confidence. Corporate governance stresses on reliable and transparent disclosure of allocated available funds. By demanding transparency in corporate transaction, in accounting and auditing procedure and in all business transactions, corporate governance has attacked the supply side of the corruption relationship. It also stresses on transparency on the procedures for corporate decision-making, the distribution of authority among the company organs and the design of incentive scheme. Through all these means corporate governance tries to ensure effective monitoring of capital that is handed over to the firm. A Road to Governance in Bangladesh For good governance, there should be a stable government and truly representative and which accelerates the economic growth and development and ensures the welfare of all sections of the society. Good governance is closely related to processes of democratization, where the primary challenge concerns deepening and strengthening the quality of democracy. But Bangladesh experience of parliamentary government has been far from satisfactory. In contemporary Bangladesh anyone who criticizes the government or indeed the opposition is branded as a political and even personal enemy. This uninterrupted tradition of official hostility to criticism has, however, been of little service to the government since it has proved to be seriously harmful to good governance in Bangladesh.
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Public accountability and transparency are as important for the corporate sector as for any other sector of the economy. A Start to Corporate Governance in Bangladesh Corporate governance stresses on investment process, effective property protection and secure method of ownership registration. Bangladesh corporate sector has escaped this responsibility for too long. Thus in order to avoid various scams, frauds and criminal conducts the government introduced corporate governance guideline in 2006 with an objective that listed companies become accountable to their shareholders in particular and society at large. First corporate governance guidelines were reluctant - favor a “comply or explain” basis and boards to improve corporate governance when they are free to choose not to do so. However, this was an attempt to make the listed companies to be familiar with the corporate governance. Very recently Bangladesh Securities and Exchange Commission imposed new corporate governance guidelines aimed at promoting transparency and avoiding the failures of the past. The intention is to prevent the interest of stakeholders being plunged into recent capital market scam as a consequence of inadequacies in how companies are run. New corporate governance guideline set out a code establishing binding laws “comply or else” philosophy. The stick, of course, is already familiar - and, if anything, is likely to become even more so. In the face of persistent and unwavering disinclination, the realistic option, Bangladesh Securities and Exchange Commission is to forcibly impose ever-stricter corporate governance guideline that leave those that refuse to comply with less and less room for maneuver. One could sincerely question the objective of these guidelines, not least amid the current governance climate, yet it is by no means an attempt that is widely welcomed. Even many
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companies went for challenging the newly introduced corporate governance guideline at the court of law.
invite bad governance. Awareness of citizens, however bind the government to walk through the pavement of good governance.
Governance and Prejudices
Besides, investors can become knowledgeable about what makes for good corporate governance, and then study up on each company in which he is interested in order to make sure that it follows practices in accordance with sound corporate governance. And also to take advantage of the information published by the institutions that specialize in rating and reporting on the governance practices of listed companies.
The word “Governance” is much talked and deserved issue in this era. Putting our hands on the heart, can we say that governance is well practiced? We all expect governance every where but unwilling to start from ours own side. Due to double standard, governance stays far away of desired level; because we believe in regulated compliance rather than ethical reason and accountability. However, a true example will help in understanding the scenario of governance in Bangladesh. In a weeding reception, maternal uncles of the bridegroom were being introduced with the guests. These gentlemen were smart, successful and dynamic (!) business personalities and of them one was the chairman of a bank, one was chairman of an insurance company and another was the director of another bank. Unfortunately they were very much eager to be introduced as owner of those companies rather than introducing as chairman/director. It was not just an isolated event rather it was an effect of unwillingness of being governed. Very seldom indeed it happens. Even government could do no other than witnessing because it does not feel accountable at all. For valid reason, those people may think themselves as owner of some companies as mentioned earlier. However, we don’t wish to hear anymore from our entrepreneurs what Ex. British Prime Minister Winston Churchill quotes “Personally I’m always ready to learn, although I do not always like being taught.” Governing Governance If citizens of a country are ignorant about their rights and obligations, governance becomes vulnerable and good governance stay far away. Likewise, investors without having knowledge on potential pitfalls of investing in companies
When citizens and various groups articulate their interest, mediate their difference and exercise their legal right and obligation, governance must prevail their. The Second Caliph of Islam Hazrat Omar bin Khattab (R) had been the real life example and appeared as ever the best individual of practicing good governance; all citizens, including the Caliph himself, were equal before the law. An example from out of thousands of him can make us understand how he governed. Once Omar (R) appeared before the court of Medina. Somebody had made a complaint against him. The judge stood up to show respect to the Caliph as he entered the court. "This is the first injustice you have done to the plaintiff," said Omar (R), addressing the judge. Modern democratic states have yet to reach this level of governance. Their heads cannot be summoned before an ordinary court. In the 19th century, famous philosopher Henry David Thoreau in his Resistance to Civil Government (1849) expressed the boundary of governance “I heartily accept the motto, ‘That government is best which governs least’; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe -‘That government is best which governs not at all’; and when men are prepared for it, that will be the kind of government which they will have. Government
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is at best but an expedient; but most governments are usually, and all governments are sometimes, inexpedient.” Conclusion Governance might start from the family level but ends at the government level. Therefore, government is the authority to learn its citizen in exercising their legal right and obligation. It is commonly said, that government is the best government, which teaches us to govern ourselves. Governance as well as good governance concept should be supplemented with clean governance and it should encompass all the sections of the society such as the government including the private sector. Only then objectives of achieving larger good of the largest section of the society can be achieved. Besides, clean governance as a concept should not be confined to public sector but should also encompass private sector as in this age of liberalization where the role of private sector is increasing.
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We can only hope that genuine evidence of good governance being rewarded by the markets will persuade more boards and companies to implement improved practices of their own desire. We need to remember the Winston Churchill’s famous quotation “If you have ten thousand regulations you destroy all respect for the law.” Yes, respect to others right and comply with the own obligation can only be the governance guideline in stead imposition. Before ending again quoting from “The Resistance to Civil Government (1849) by Henry David Thoreau” - “It is truly enough said that a corporation has no conscience; but a corporation of conscientious men is a corporation with a conscience, it indicates that self governance is the best governance. The Writer is the Corporate Affairs Manager, Singer Bangladesh Limited
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RECRUITMENT OF THE RIGHT TALENT AS INDEPENDENT DIRECTOR Bipul Kumar Bhowmik FCS
INTRODUCTION There have been substantial changes concerning corporate governance rules, although each jurisdiction may emphasise different aspects of corporate governance after taking into account the special features in its local community but one thing is certain across all jurisdictions: the increasing burden placed upon independent directors of listed companies. Bangladesh is also not an exception to this. There have been significant changes in the Guidelines on Corporate Governance Practices and the introduction of the Independent Director is one of them. The present revised Corporate Governance Guideline – ‘Comply basis’ (SEC, 3rd July, 2012) replaced the former Guideline of Corporate Governance – ‘Comply or explain basis’ (SEC, 20th February, 2006). The concept of independent directors remains of primary importance in protecting investors amidst a more demanding economic and regulatory environment. In Bangladesh, in particular, there is increasing recognition of the pivotal role independent directors’ play in providing an independent, objective view and in balancing the interests of different stakeholders. It is not disputed that there has been an ever-increasing role and importance of independent directors to further strengthen the corporate governance of listed companies as they are the key to good corporate governance. The need for quality independent director is imperative particularly in light of the development of our economic globalization and recent examples of massive corporate failures which forces us effectively to play by a new set of rules to conform to globally accepted practices. That is, one that demands much greater integrity, transparency and accountability than in the past. However, boards of listed companies in Bangladesh are facing extreme snag on how to
identify the right one as independent director apart from how increasing demand for independent directors will be met. No authoritative view on effective means to identify and recruit the right talent is available that can be followed by the listed companies for an independent director as an appointee. However, certain recommendations are outlined here need to be considered so far applicable to induce the independent director to the Board in true spirit and also call for clear-cut authoritative and/or institutional view to be established as it is a matter of good corporate governance. The perspectives provided herein are not the answers but should act as a good first step in making boards more effective. WHO IS AN INDEPENDENT DIRECTOR? An independent director is an appointee to the board who either does not hold any share in the company or holds less than one percent share and is not connected with the sponsors or directors or shareholders of a company who hold one percent or more shares. The family members of an independent director should not hold more than one percent shares of the company. Further, the person should not be related to the director or officer or partner or executive of a subsidiary or associated company, any stock exchange and intermediary of the capital market, and audit and consulting firm. QUALIFICATIONS OF AN INDEPENDENT DIRECTOR Today when we discuss about independent directors, there is an expectation that they are required to play the role of watch dogs and nothing more. In that sense, the independent directors are expected to play the role of whistle-blowers on the board. Needless to say, this thinking has brought in an element of sameness to boards in Bangladesh with a THE CHARTERED SECRETARY J U LY - D E C E M B E R 2 0 1 2
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greater focus on compliance. What is required is a diverse group of individuals who can examine issues from diverse perspectives and add value to overall performance rather than merely examining issues from a compliance angle. According to SEC Guideline, independent director shall be a knowledgeable individual with integrity who is able to ensure compliance with financial, regulatory and corporate laws and can make meaningful contribution to business [Condition 3.1 (i)]. The person should be a business leader/corporate leader/bureaucrat/university teacher with economics or business Studies or law background/professionals like Chartered Accountants, Cost & Management Accountants, Chartered Secretaries. The independent director must have at least 12 (twelve) years of corporate management/professional experiences [Condition 3.1 (ii)]. In special cases, the above qualifications may be relaxed subject to prior approval of the Commission [Condition 3.1 (iii)]. In an order issued on January 9, 2006, the SEC had sought to improve corporate governance in the country in the interests of the investors and capital market. The commission had put in place five conditions: all companies must have a board of directors, appoint a chief financial officer, head of internal audit and company secretary, they must constitute an audit committee, must have an external/statutory auditor, and compliance of all the above conditions must be mentioned in the report of the board of directors. A sub-condition under the first condition had also called for independent, non-shareholder directors: "All companies should encourage effective representation of independent non-shareholder directors." It also said at least one-fifth of the total number of a company's board of directors should be independent, non-shareholder directors. Another SEC notification issued on February 20, 2006 superseded the earlier order saying "at least one-tenth of the total number of the company's board of directors, subject to a minimum of one, should be independent directors".
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Now, in the final CG Guideline (July 3, 2012), the SEC decided the ratio to one-fifth. HOW TO IDENTIFY THE RIGHT TALENT AS INDEPENDENT DIRECTOR? The recent change to the Corporate Governance (CG) Guideline is evidence of the growing significance of independent directors to act as not only valuable strategic advisers in providing to the board valuable knowledge, expertise and experience but also as corporate guardians of shareholders’ interests. In an attempt to advance the pivotal role of independent director in corporate governance, the CG Guideline now requires the minimum number of independent director for listed companies to be raised immediately. It guarantees the views that independent directors carry significant weight in the board’s decisions. Issuers are also required to appoint at least one independent director with appropriate financial management experience, corporate management experiences or professional qualifications/experiences. Following the implementation of the revised CG Guideline, the independent directors are expected to play more important roles and have more responsibilities, as evidenced by their representation in the different board committees which are required or recommended to be set up, as the case may be. The existing and traditional method of identifying independent directors in Bangladesh, which is usually informal and relies very much on personal networks, may no longer be able to cope with the increasing demand for independent directors. The use of the traditional recruitment method always means that people having largely similar background or experience will be recruited. The low level of diversity in terms of skills, experience and knowledge in the board may very likely mean a narrow range of perspectives. A board with high diversity can enhance board effectiveness and in the light of the requirement or recommendation to set up board committees of various kinds, each having different focus and terms of reference, it is all the more important that independent directors with different skills and expertise should be recruited if the functions of such
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committees are to be fully and properly fulfilled. It is recommended that there should be a broadening of the range of individuals from whom the independent directors can be identified and recruited. It is commented that
the standard way (essentially one of personal contact which is widely used by most of the listed companies in Bangladesh) by which independent directors are selected often overlooks talented individuals with a wide variety of experience, background and skills required for effective board performance.
CHECKLIST FOR NEW DIRECTOR APPOINTMENTS What is the business requirement going forward? What skills, knowledge, experience are we looking for or feel we are missing? What’s the overall balance of the board in terms of age, profile, gender, and geographical spread? How does any new appointment relate to longer term succession planning? What is the availability of people with the right skill sets, experience and market credibility we need? Select the best available candidate. Source: ‘Building Better Boards’, UK Dept. of Trade and Industry (DTI), December 2004
There should be a minimum of five and maximum of 20 directors of a listed company, the guidelines stipulate. For the sake of discussion, as of Dec 13, 2011, there were 249 independent directors for 198 listed companies among a total of 3,094 directors (figure-1), making the ratio 1:12.5 (according to
information on the DSE). Assuming the total number of directors and other things remain same, to comply with the condition of independent directors on the Boards of listed companies under the prevailing CG Guideline, 370 additional independent directors (figure-2) need to be induced to the Boards accordingly.
Table: Size of the Board and required number of Independent Director Number of Sponsor/Director 5-7 8-12 13-17 18-20
Minimum required independent director 1 2 3 4
[In the above examples, market understanding in dealing with the fraction figures has been considered. However, the above understanding can be double checked with the SEC.]
Figure-1
Figure-2
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No formal studies were carried out so far in Bangladesh on how companies can draw on broader pools of talent with varied background, experiences and perspectives so as to enhance board effectiveness. But studies in different countries revealed that the selection of independent directors should rest on a careful assessment of the needs and challenges facing a particular company and on a broad, transparent and rigorous search which reflects this assessment since “identification of independent director talent cannot take place in a vacuum without reference to a particular company and its needs, which will always be unique and subject to change”. Apart from identifying the four personal attributes suggested as the essential qualities of independent directors, namely integrity, sound judgement, ability and willingness to challenge and probe and strong interpersonal skills,
companies should then recruit independent directors with such skills and experience which according to their own assessment are lacking in their companies. These suggestions in respect of “independent directors” are equally applicable to independent directors in Bangladesh. For Bangladesh an empirical assessment is that the major problem in relation to independent directors which most listed companies now face is not only a lack of supply of talented independent directors’ candidates but also a lack of effective means to identify and recruit the right talent for their boardrooms. Mostly believe that a formal search through advertisement, relevant industry publications or executive search firms is feasible in Bangladesh though we anticipate that it may take some time for listed companies to adapt to this approach.
SPECIFIC QUESTIONS THE BOARD SHOULD CONSIDER REGARDING A POTENTIAL CANDIDATE: Has the board identified the skills required in terms of expertise, background and types of personalities? Has the board ensured that a wide net has been cast for directors? Does the candidate understand the business/industry of the company? Can the candidate work as part of the board? Can the candidate work effectively with a diverse group of people – can he disagree without being disagreeable? Does the candidate demonstrate a high level of integrity and honesty? Is the candidate able to commit sufficient time to discharge board duties? Source: ‘The Company Director’s Tool Kit’, KPMG, 2008
A formal and rigorous search is also likely to ease the imbalance in different aspects now present in the boards of many Bangladesh listed companies. It is the current practice for listed companies to invite people with boardroom or top management experience to be their independent directors. Such experience is undoubtedly valuable but there is no reason to suggest that it guarantees the four personal attributes of independent directors as suggested earlier or is essential for
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effectively discharging the duties of independent directors. This current practice may be the main reason for the under-representation of women or young people in the boardroom since generally speaking, people with such experience tend to come from the more senior age group and are more probably of male gender. It is also suggested that companies can extend their search for independent directors to new pools of talents which are very often overlooked
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under the traditional recruitment method. Another source of independent directors which is also recognized by the CG Guideline is professionals, such as lawyers, accountants and chartered secretaries.
To providing newly appointed directors with guidance, supporting experienced directors in the continual pursuit of professional excellence and offering preparatory training for potential directors;
The company’s Board of Directors while appointing independent directors must assess and judge the integrity, expertise and experience of the appointee. A tall task indeed because it is a common sense that no promoter-group would like to appoint persons as “independent director” on their board, who may put uncomfortable questions and mat scuttle all the deals which the promoters group may find otherwise beneficial to the promoters group. So, when the independent directors are hand-picked by the promoters, sponsored and appointed by the promoters, how much independence and impartiality can be expected from them in decision making process is a big question which does not have any ready-made solution. On the other hand, if the SEC or the concerned ministry in consultation the Supreme Court or with the High Court prepares a list of persons who match the criteria given in the CG Guideline (though such criteria is not exhaustive in all respects), then such persons can be appointed on the Boards of companies. To begin with, such SEC or Regulator approved appointment of “independent directors” can be made at least in the stock exchange listed companies.
To disseminate up-to-date information on corporate governance and empowering directors in world-trend best practices;
The idea of having a panel of independent directors maintained by an independent body has been mooted in recent times. Institutional approach like establishment of Institute of Directors (IoD) can be considered as a platform of professional directors that will facilitate strongly to fill-up the increasing demand for independent directors to the Boards. The proposed Institute of Directors (IoD) could be a premier body that will represent professional directors working together to promote good corporate governance and to contribute towards advancing the status of Bangladesh internationally. The Institute’s mission can be set-out in the following manner: To coordinate directors in joint efforts in a multi-cultural environment with international perspectives;
To establish an influential voice in representing directors in the promotion of the prosperity of Bangladesh. From its broad membership base consisting of directors from listed, public and private companies and statutory/non-profit-distributing organizations, the Institute will continually develop multi-prong strategies to nurture excellence in corporate governance. There is no certainty that nominating an independent director from such a panel will result in better governance. Ultimately, the decision as to who should be an independent director on the board is as much the prerogative of the company and its CEO as much as it is the responsibility of the board. In order to ensure that board composition is right, it is important for the Board Chair, CEO and the rest of the board to work cohesively to identify as to what is the mix of skills that is required to take the company to the next level. Board succession planning is a process that the full board should own. Another possible source is the human resources (“HR”) profession. The skills and experience of the HR profession are particularly relevant to the remuneration committee and the nomination committee. The HR profession will be able to bring a new dimension to the independent role and ensure that an organization’s key driver of value namely its people - is taken seriously at board level. Further, their expertise in dealing with issues like remuneration, induction, training, and performance management are actually the kind of skills required for independent directors serving on the remuneration and nomination committee or for provision of training to directors.
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However, there is a need to adopt a more professional, independent and transparent approach to appointing independent directors. It is important for companies to align their strategic priorities to skills required in the board room and accordingly seek candidates for non-executive positions on the board. For instance, a company which has embarked on a strategy of growth through acquisitions will need someone on the board with good experience in post-acquisition integration. Similarly, a company with a strong domestic presence and expanding internationally will need someone on its board with experience of growing businesses internationally.
the diversity of the boards to ensure a wider range of perspectives and knowledge which can be brought to bear on the issues of company strategy, risk and performance. It will also facilitate to reduce huge gap between professing good corporate governance and its actual practice. The independent directors can play an effective role in good corporate governance and in fulfilling the corporate social responsibility to take the Bangladesh companies to new a height. So it’s high time to set and follow a structured process for selecting the independent director on the board and defining the role is its own demand.
CONCLUSION
REFERENCES
The traditional method of identifying and recruiting independent directors is by “who you know” rather than “what you need”. This method is hardly able to meet the challenges which Bangladesh listed companies are now facing. It may be the right time to consider using a rigorous and formal search which identifies the independent director talent with reference to the particular needs of a company. It is suggested that the formal recruitment method is a feasible idea for Bangladesh and is the right way to go. It can help alleviate the imbalance of many boards in terms of age and gender, widen the pool of available independent directors candidates and increase
Higgs, Derek (2003), "Review of the role and effectiveness of non-executive directors", London, UK: http://www.ecgi.org/ codes/documents/ higgsreport.
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Reid, A.S. (2003), "The Internationalisation of Corporate Governance Codes of Conduct", Business Law Review.
The Writer is a Fellow Member of ICSB
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ECONOMIC DIPLOMACY OF BANGLADESH Mohammad Enayet Rabbani Chowdhury
Economic diplomacy: What it is? Economic diplomacy is the process through which countries tackle the outside world, to maximize their national gain in all the fields of activity, including trade, investment and other forms of economically beneficial exchanges, where they enjoy comparative advantage, it has bilateral, regional and multilateral dimensions each of which is important. In recent years multilateral economic diplomacy has gained in prominence leading some to assert this form is ‘more important’ than the bilateral. In reality the relationship between pairs of state is the building block in the composite process, where multilateral arrangements are more vital today than ever before. Economic Diplomacy Conducted by MOFA or other government Ministry officials has been defined as follows: Economic Diplomacy is concerned with economic policy issues, eg-work delegations at standard setting organizations such as WTO and BIS. Economic Diplomats also monitor and report on economic policies in foreign countries and give the home government advice on how to best influence them. Economic diplomacy employs economic resources either as rewards or sanctions in pursuit of a particular foreign policy objective. This is sometimes called “economic statecraft”. Economic Diplomacy of Bangladesh in recent times: WITH THE IMPROVEMENT of ICT driven technology, particularly the Internet, this time-consuming traditional diplomatic system has become redundant. Friendship to all malice to none is the motto of our foreign policy. Economic diplomacy through dialogue with
neighboring and regional countries seem to be the need of the time for our survival and growth. The people of Bangladesh are happy to see that our Foreign Ministry has initiated a new approach towards the unresolved issues with India and some other countries in the world. The foreign minister had demonstrated this in New Delhi last September, 2011. The discussion was fruitful and result was an instant and welcome change in the Indian attitude in the economic sphere. Several measures of economic cooperation were mooted by India and given out in a joint communiqué issued at the end of her visit. The seriousness of the Indian side for solving the unresolved issues was reaffirmed when the Indian foreign secretary came to Bangladesh on a day-long visit recently to finalize the program of the impending 3-day state visit of Prime Minister Sheikh Hasina to India in the second week of January, which should help in confidence building not only in our relationship with India but with Nepal, Bhutan and Myanmar as well. In fact, in her visits to Nepal and Bhutan some time ago, the prime minister had unremarkably set this new trend of diplomacy by way of informal talks at the highest level, which opened up avenues of bilateral cooperation for improved trade and commerce between Bangladesh and the two neighbors. It is again with her nod that a secretary level meeting was held in Dhaka to firm up an agenda for another meeting for decisions at a higher level later. These bilateral initiatives are well within the declared sphere of action by BIMSTEC, an economic coalition of Bangladesh, India, Singapore and Thailand. The prime minister and her delegation played an equally crucial role in the same vein in the recently concluded Climate Summit in Copenhagen -- in the open forum and in behind-the-scene lobbying.
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Consequently, Bangladesh's viewpoints were given adequate attention, and the country has been identified as the one of worst effected, though the final outcome could not satisfy all aggrieved parties. While trying to resolve the outstanding Indo-Bangladesh issues in this impending visit and in later negotiations, a "give-and-take" approach should be the best option for us, but on specific issues and with equal advantage. Both sides should strive to make the lives of their overwhelmingly poverty-stricken masses of people a little better. The first step towards this would be larger and improved trade and commerce between the two countries without hurting their respective national prides and psyches. It is interesting to note here that the Indian foreign secretary took out some time from her very busy daylong program to have a meeting with the leader of the opposition. This underscores the importance India attaches to the role of the opposition in Indo-Bangladesh bilateral understanding or agreement to make them meaningful, enforceable and lasting within a timeframe. The existent trade gap between India and Bangladesh should be minimized at a level where both countries would be benefitted. The most recent problem between the two country is that India is taking only a few export vehicles from Bangladesh through Benapole- Petrapole route and sometimes not allowing to enter into the Indian premises. As a result a long traffic jam around 3 kilometers has been created from the border to Sharsha upzilla of Jessore. Therefore, Bangladeshi Exporters are discouraged and have to pay a demurrage of tk. 2000/- everyday for a truck and incurring losses. This problem should also be resolved through dialogue. Meeting of Joint Group of Customs and conference at national level (Foreign Ministry) should be held regularly. However, adequate infrastructure should be developed in Indian side at petrapole for exportable cargoes from Bangladesh. Indo-Bangladesh relationship has become important not only for us but for India as well in view of the sea-change in world politics and
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economy. In the post cold war period, societies are now more focused on their own welfare rather than glory. In modern democracy, the use of force is avoided because it jeopardises economic objectives. In the last year of his two-term presidency, George Bush had met his nemesis. America's economy took a nose-dive as it never had before.Trade balance in America had dropped heavily and bankruptcy became rampant. Thousands of workers were rendered jobless after the unprecedented financial meltdown. On the other hand, a strong Russia with growing economic and political power has been emerging on the scene. Having paid off all its debt to the World Bank and the IMF, and now considered a "reliable partner," Russia has begun to increase its defense outlay. It has a multiparty democracy now, where periodic elections are held on universal adult suffrage. A number of parties, including the old Communist Party, are funded by the state for elections, like France, and not by corporate interests as in America. Russia is also the second largest world producer of oil, and is now widening its relations with Western Europe. Then comes China and, to a lesser extent India, as the growing economic power. China's GDP has been growing more than ten percent annually over a decade, and Chinese consumer goods are now flooding the world markets like Australia, USA, Canada, EU and some Asian countries. India, too, is leaping forward as a strong economic and military power. Its export of skilled workers is growing unabated as much as its software development and outsourcing jobs. It is now trying to repair the ruptured relation with China. Such is the multipolar world scenario in the context of which we have to formulate our foreign policy objectives and strategy for the next decade or so. Instead of frittering away our scanty resources on traditional diplomatic gimmicks, we should concentrate on economic activities alone. Even a political subject is to be
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viewed from an economic angle. This should be issue based and target-oriented, and not indulgence in generalities. Moreover, Bangladesh needs a series of reforms in almost every sectors to materialize the digital Bangladesh which is the dream of the present government. The government has already given legal validity to e-mail, e-documents, digital signature and electronic communications requires for processing files. All ministries and its divisions will come to this network step by step. But without economic development an ICT driven Bangladesh will not be possible. For rapid economic development emphasis should be given on economic diplomacy. Bangladesh has to promote trade, attract foreign investment, integration with mainstream diplomacy, employment in abroad and utilize the available technology effectively and efficiently. Brand image is one of the pre -condition to attract foreign investment. Bangladesh needs a positive image in abroad. Bangladesh missions in abroad can take positive steps to mobilize investment, promote tourism and pervade the national image. The political leaders should also be careful while speaking about the country. The diplomats in abroad have to be proactive. Our missions in foreign countries have to take appropriate steps to promote business by arranging trade fairs, highlights the one stop services offered by Bangladesh government to the foreign investors, investors conference and dialogue with them so that our products and services can create a brand image in the consumers mind. It would facilitate a better market access of our products and services. The missions can also identify the demand of our products and services in abroad and facilitate interactions among the importers and exporters of both countries. As a Least Developed Country (LDC), Bangladesh should adopt a state of art technology and sustainable economic diplomacy to attract FDI. Recommendations & Suggestions: The following recommendations and suggestions have been outlined by the researcher for the success of effective economic diplomacy of an LDC like Bangladesh.
Establish a database of developing country’s items of imports & exports country-wise, update them and disseminate such information to their Missions and abroad periodically. Identify commercial bottlenecks and work towards its elimination in close coordination with Ministry of industry and Commerce and Chambers of Commerce. Sensitize the Missions abroad of any new development in this sphere at home and issue directives to pursue them from that end. Be pro-active in efforts to make developing countries a tourist destination point with inputs from the Ministry of Tourism and related departments. Development of full partnership with the sectoral ministries and private sector in the conduct of Economic diplomacy is essential. Contribution to the integration of national economic policies into the developing country’s foreign policy goals and strategies is necessary. Proper planning and organizing of all the commercial functions should be undertaken by the Missions. Monitoring and facilitation of the aid management and business promotion activities should be carried out in the developing countries by donor countries and international organizations. Identification of opportunities for regional and sub-regional cooperation is necessary for strengthening bi-lateral Joint Economic Cooperation. However the Economic Counselors were, in particular required to play a pivotal role by: • Collecting information on economic activities of the developing countries and host countries through a regularly updated database. • gathering intelligence on business opportunities in the host countries. THE CHARTERED SECRETARY J U LY - D E C E M B E R 2 0 1 2
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• Promoting trade fairs, exhibitions etc.
2.
• Supporting systematic development of business related contacts by simplifying visa procedures and developing contacts with governmental bodies and business association in host countries.
Lampreia, L.F and da Cruz, A.S (2005) “Brazil”: Coping with Structural Constraints,’ in Robertson, J. and East,. M.A (eds), Diplomacy and Developing Nations, Rout ledge, London.
3.
Sanner, Raymond (2000), “International Economic Diplomacy: Mutations in Post-modern Times, vol.14, No.1, pp.80-92.
4.
Friedman, Thomson,” The Lexus and the Olive Tree: Understanding Globalization, “Harper Collins, pp. 7.
be
5.
Earnest, Satow(1979), “Satow’s Guide to Diplomatic Practice”, Longman, pp.3
• Recommend any other matters they consider important to the theme of economic diplomacy.
6.
Raymond, Sanner (2002), “Zur Kultur eines Berufs: Was ist ein Diplomat?”
7.
Rick, Coolsaet (1998), “The transformation of Diplomacy at the threshold of the new millennium,” University of Ghent (Belgium), pp.3-5.
8.
UNCTAD (1998), “World Investment Report: Trends and Determinants”, Geneva, pp.43.
9.
G.R, Berridge; Alan, James (2001),” A Dictionary of diplomacy”, Penguin, Hampshire, U.K, pp.207.
• Prescribe viable mechanism to achieve objectives • Identify targets that should be met and the steps needed to achieve them. • Examine how funds may generated/organized for such activities.
In the final Analysis, Economic Diplomacy of Bangladesh may also involve the process of decision making, Management of Trade Policy, Capacity Building for better negotiation, Regional Diplomacy and role of sub national entities. To what extent, and how best we can do this, will depend upon foresight, intellectual resources, realistic planning and efficient working of the foreign office guided by the deliberations of the Parliament. In doing so, the foreign missions may also seek the views of the good negotiators, specialists, academics, politicians, industrialists, professionals, media and NGOs. A recurrent theme for all trade negotiations is the need for skilful negotiators, Unfortunately, Bangladesh has not built up this capacity our resources are few and most countries negotiate with trained and experienced negotiators. References 1.
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Kantha, S (2006), Building India with Partnership. The Story of CII 1885-2005, Penguin, New Delhi.
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10. Raymond, Sanner (2000), “The Impact of Policy and role of Donor Agencies on SME”. Pp.331-346.
The Writer is the Sr. Assistant Director, Bangladesh Land Port Authority, Ministry of Shipping and Student of the 30th Batch of Chartered Secretaryship Course
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SHOULD CENTRAL BANKS BE INDEPENDENT? Mohammad Shahajahan ACS
Introduction
of central bank (Hasse, 1990; Eijffinger and Haan, 1996).
The degree of freedom of the central bank to pursue monetary policy without interference from political considerations is central bank independence (CBI)(Sirivedhin and Hataiseree, 2000; Griffin, 2011).The traditional argument for central bank autonomy is that the power to spend money (the government) should be separate from the power to print money (the central bank) (Griffin, 2011). During the 1970s and earlier 1980s, major industrialized economies experienced sustained periods of high inflation; research showed that countries whose central banks were independent experienced lower rates of inflation.
b)
Financial independence: Ability of the government to finance government expenditure either directly or indirectly through central bank credits (Hasse, 1990; Eijffinger and Haan, 1996).
c)
Political independence: Free from political influence in defining central bank’s policy objectives(Grilli, Masciandaro, and Tabellini1991).
d)
Economic independence: Allowing the central bank to freely implement policy in pursuit of monetary policy goals(Grilli, Masciandaro, and Tabellini 1991).
e)
Goal independence:the central bank’s ability to determine the goals (price stability or inflation target) of policy without the direct influence of the fiscal authority(Debelle and Fischer 1994; Schwödiauer,Komarov and Akimova, 2006).
f)
Instrument independence: The central bank’s ability to freely adjust its policy tools in pursuit of the goals of monetary policy(Debelle and Fischer 1994; Schwödiauer, Komarov and Akimova, 2006).
Objective The objective of this study is to justify “whether central bank should be independent and to evaluate the impact of central bank independence (CBI) reviewing the experience with independent central banks”.Before justifying this, it is necessary to know the meaning,theoretical and empirical foundation,measures, empirical evidence, advantage and disadvantage, reforms of CBI, response to global financial crisis, CBI arrangement in advanced economies and accountability and transparency of Central Bank. Central Bank Dimensions
Independence
and
Its
CBI is an institutional mechanism to lead price stability and enhance the credibility of policymakers’ commitments to stable prices. An independent central bank has the freedom to implement monetary and exchange rate policy in order to achieve its objective(Griffin, 2011; Diana et al., 2004). Dimensions of central bank independence are as follows: a) Personnel independence: The influence of the government in appointing procedure
4. Theoretical Foundation of CBI Inflation: Countries with independent central banks have lower levels of inflation than countries where central banks are not independent. Inflation Variability: CBI may reduce pre-election manipulation of monetary policy which results more stable money growth and less variability in inflation. Politicians strive to remain in the office as long
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as possible and partisan and wish to deliver benefits to their constituencies (Hibbs, 1977).
More transparency reduces uncertainty of monetary policy and increasing social welfare.
The Level and Variability of Economic Growth:
Therefore, CBA could be implied mechanism of commitment, enhancing monetary policy credibility and requiring even less CBI. At the same time, transparency is both a complement to increase accountability and related to changes in how monetary policy conducted, notably to introduction of inflation targeting (Crowe and Meade, 2008).
Central bank independence may further economic growth. Independent central bank is vulnerable and has more credibility which enhances the economic stability and reduces risk premia in interest rates, thereby stimulating economic growth (Alesina and Summers, 1993). CBI reduces the inflation variability and promotes less inflation uncertainty and hence, the economy may prosper (Eijffinger and Haan, 1996). Empirical Foundation of CBI “Central bank independence bases its foundations on empirical studies that show favourable correlations between CBI and some economic variables: inflation, output growth, disinflation costs (sacrifice ratio), inflation benefits, productivity growth, private investment, unemployment, real interest rates, product and inflation trade-off, fiscal deficit and high powered money growth” (Sousa, 2002). Most studies refer to the negative correlation between CBI and average inflation except any clear and significant correlation between CBI and real product. CBI, Accountability and Transparency Empirical studies (De Haan et al, 2000; Sousa, 2002) found a negative correlation between CBI and central bank accountability (CBA). This conflict can reduce by increasing both dejure and de facto accountability without any relevant losses in CBI. Empowering parliament (Ministry of Finance) with instruments to monitor more accurately the policy decisions, legal requirements for central bank to report to parliament and to explain its behaviour, making clear legal statements and establishing objectives prioritisation are termed as de jure accountability which improves both CBI and CBA. Improvement of the picture without changing the law but through de facto transparency (openness, clarity, common understanding and honesty) termed as de facto accountability.
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Measures of CBI Cukierman, Webb and Neyapti(1992) developed four unified and broadly based measures (16 different legal variables, each coded on a scale of lowest level on independence 0 to highest level of independence 1) of CBI and explored the relation between CBI and inflation outcomes. An aggregate legal index was developed for four decades in 72 (51developed and 21developing) countries. They also developed three indicators of actual independence i.e. (1) the rate of turnover of central bank governors (2) an index based on questionnaire answered by the specialists in 23 countries and (3) an aggregation of the legal index and the rate of turnover. They note the difficulty in quantifying central bank independence, and how legal vs. operational independence can vary, especially in developing countries. The proxy of central bank governor turnover has since been used in many studies, such as Carstens and Jácome (2005), who found that the average rate in Latin America is 0.4 which means the central bank governor remains in the office around 2.5 years average. This high rate of turnover suggests that Latin American central banks still remain vulnerable to political pressures. Longer term in office of the governor is considered as more politically independent central bank (Jácome and Vazquez, 2005). Other measures of CBI are the Grilli, Masciandaro and Tabellini, (1991) (GMT) Index, which was one of the first formulated indices for CBI and measures political and economic independence;Alesina and Summers, (1993) which investigates whether one can find a correlation between central bank independence and the level and variability of
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real economic variables such as growth, unemployment and real interest rates; Bade and Parkin (1982) construct a (1-4) scale of central bank independence for twelve countries based on the "political independence" of the central bank and using the same criteria as Bade and Parkin, Alesina (1988) adds four more countries, and the Cukierman et.al, 1993 which based on the original Cukierman, Webb and Neyapti, (1992) (CWN) Index. Recently Crowe and Meade (2008) use the Cukierman, Webb and Neyapti (the Modified Cukierman Index) measure due to its comprehensiveness and broad base. The index has four components and is an updated version of the original Cukierman Index. Empirical Evidence of CBI Griffin, (2010) uses GMT index and modified CWN index and examines CBI in developing countries of Latin America and Asia as well as selected developed countries to determine the actual impact of CBI including as financial crisis (current global crisis of 2008-2009 also), inflation targeting, legal systems, country development and fiscal policy to determine the effects of these items on not only inflation, but the broad spectrum of macroeconomic outcomes. Although there is some empirical evidence to support the benefits of CBI, the study shows, it is limited in scope to certain areas. The results of Griffin, (2010) are as follows: 1)
Regarding Inflation and Unemployment, there seems to be some evidence that level of tax revenue is correlated with CBI effectiveness. However, there is no evidence regarding GDP growth.
2)
There is no evidence of greater CBI effectiveness in any of the three variables when examined under the lens of Government Consumption.
3)
For Inflation, a low level of corruption is linked to CBI effectiveness (as expressed by operational and/or legal independence). For GDP growth and Unemployment, there is no apparent link.
4)
There is little to no evidence of any difference in CBI effectiveness when examined on the basis of a country’s legal system.
5)
There seems to be no clear link between CBI effectiveness and the level of Inflation Targeting as they relate to any of the key variables.
6)
Regarding Inflation, there is some evidence of greater CBI effectiveness under high constraint levels. For GDP growth and Unemployment, there is no evidence of a relationship.
7)
There is moderate support for greater CBI effectiveness in more economically developed countries as it relates to Inflation. However, there is little to no evidence of such regarding GDP growth or Unemployment.
Ćorić and Cvrlje, (2009) analyse the independence of Croatian National Bank by using 3 different methods; 1) central bank governor turnover rate (TOR), 2) Petursson G. Thorarinn criterion and 3) Cukierman, Webb and Neyapti (CWN) questionnaire. The results affirm high level of CBI in Croatia. Central bank turnover rate 0.21 means 4 governors in 19 years period, Petusson G. Thorarinn criterion which analyses 5 criteria of CBI and scale is 0.7 to 65, results score 63.55 indicates high level of CBI and CWN questionnaire result 0.904 out of highest score 1 indicates highest independence of Croatian National Bank. This empirical evidence on the relationship between CBI and economic variables suggests negative relationship between CBI and inflation. The strong evidence of CBI influence on other macroeconomic variables so far has not been found. Advantages and Disadvantages of CBI Grilli, Masciandro and Tabellinini (1991) described CBI’s benefits - “Having an independent central bank is almost like having a free lunch; there are benefits but no apparent costs in terms of macroeconomic performance”.The basic theoretical argument
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for CBI is that high long-run economic growth requires price-level stability and that CBI has less incentive to inflate than the government and enhances fiscal responsibility of the latter(Schwödiauer, Komarov and Akimova, 2006). The empirical studies revealed the following advantages of CBI: a)
b)
A negative correlation between CBI and long-term inflation: A low inflation rate is more likely to be found in countries with independent central banks than in countries where the central bank is subject to government control. A negative correlation between CBI and the long-term budget deficit: Countries with independent central banks tend to have smaller budget deficits than those with government-controlled central banks.
Others advantages: c)
Independent central bank is more flexible in adopting the new ideas/ information and then can act faster.Itcan be argued that independence has allowed central banks the flexibility to utilize increasingly creative tools in combating the highly complex global financial crisis (Arner, Panton and Lejot, 2010). d) Politically controlled central bank will be forced to push up inflation in the short run to get political benefits of low unemployment but leads to higher inflation. Independent central bank is free from this. e) Independent central bank, an incentive to be more open, to look for better ways to explain the data such as several times periods forecasts. f) When policy effects are uncertain, the conservative central bank is better to maximise the society’s welfare. g) Rule based central bank determine rules and then follow it. Rules would be easy way to force transparency when the Monetary Policy Committee (MPC) is not transparent. Disadvantages of CBI a)
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No correlation between CBI production growth/ employment: In
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and
medium or long run CBI have no effect on production or employment. b) In most cases, central banks have constituted a monetary policy committee toformulate and approve the monetary policy. But in some cases, the arrangements forthe approval of monetary policy are suboptimal (Akhtar, Lorie and Petersend, 2009). c) CBI prevents effective coordination of fiscal and monetary policy as well as other economic policies(Schwödiauer, Komarov and Akimova, 2006). d) Central bank acts in order to maximise its own welfare, like customers seek to maximise utility. Its welfare arises from its ‘power and prestige’. e) If central bank is independent in its decision making abilities, the government in power at the given time will be unable to turn back monetary decisions that have been made on, in a similar vein, force actions to be undertaken (Griffin,2011). f) CBI gives an incentive to cheat and pursue the personal aims of the directors/ members of the banks (the public choice theory). g) In short run CBI has a negative impact on economic growth i.e. employment and output. h) High degree of conventional CBI indicates irrelevant to prevent global financial crisis and domestic fiscal crisis (Buiter, 2009). i) CBI should consider multiple conditions rather than only price stability. Central Bank Reforms and CBI: During the 1950s to 1980s there hardly had been reforms in central bank legislation, based on a number of legal indexes(Cukierman, 2006). From 1990s and early 2000s the legal independence of most central banks has been updated. CBI reforms have been in 132 countries during the period 1980-2005. Advanced Economies The high volume of central bank reforms during 1990s within the advanced economies is mainly attributed to the Euro area members. According to Maastricht Treaty provisions, the
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European Monetary Union (EMU), EMU-participants have gradually reorganised their central bank laws until thelast stage of currency unification in 1999 and non- EMU Denmark, UK and Sweden also reformed their CB legislations on the same lines to be benefited (Dimakou, 2010). Other non-EU advanced economies, Australia, Canada, Denmark, Japan, New Zealand, Switzerland, and USA, reformed CB legislations. A comparison of the GMT-index between 1991 and 2003, assessed by Grilli, Masciandaro, and Tabellini (1991) andArnone, Laurens, and Segalotto (2006), shows on average independence increased by around 60%, and for the Euro area has almost doubled (Dimakou, 2010). Europe and Central Asia (ECA) Central banking reforms were part of broader structural changes (transition from planned to market economy)in the ECA region. During the 1990s, all former socialist economies created new central bank laws and Central and East European countries reformed pre-existing Charters. These reforms were influenced by western institutional arrangements (e.g. Budensbank) and granted a high level of central bank independence (Dimakou, 2010). Latin America and Caribbean Latin America’s central banks were strengthened in the 1990s by independence laws, adoption of new policy regimes (foremost inflation targeting), and more transparent policy decisions bound by ex-ante rules and ex-post accountability. Central bank modernization led to one-digit inflation rates and contributed to higher and more stable growth than in the past (Hebbel, 2011). In contrast to Latin America, changes to CB legislations were largely absent in the Caribbean (Dimakou, 2010). In this area economic independence is higher but improvement in political independence is needed. East Asia and the Pacific (EAP): The average level of CBI in East Asia and the Pacific (EAP) is relatively low and the Asian
economiccrisis 1997-98 raise the importance of CBI. The economic independence is higher but political independence is limited in EAP. Sub-Saharan Africa (SSA) SSA’s central banks are fairly new and coinciding with the introduction of national currencies.Thoughsome countries attempts to modernise their monetary policy frameworks and strengthen the CBI, SSA countries face a set of different structural and political problems. Both economic and political independence is limited in SSA. Middle-East & North Africa (MENA): Early 1990s, partial central bank reforms took place in Algeria, Egypt, Qatar, Jordan, Morocco and Tunisia. CBI in the region has been largely ignored both in policy and academic cycles. Centralbank independence in the region is very low, scoring around 6.28(Arnone, Laurens, and Segalotto, 2006). Global Financial Crisis 2008-09 and CBI Central banks are facing a choice in the context of global financial crisis 2008-09: remain relevant to crisis prevention and resolution, but lose much of your independence, or remain independent and become irrelevant (Buiter, 2009).The start of the global financial crisis 2008-09 signalled the beginning of the end of CBI. The commitment to CBI breaks down due todifficult fiscal and monetary environments, such as the aftershock of the global financial crisis. The recent removal of Iceland’s central bank governor, David Oddsson during the global financial crisis, may have signalled the beginning of a trend towards attacks upon CBI (Stokes, 2009). CBI sustainability may come under fire as banks trespass into politically sensitive areas and “more uncertain questions open up, politicians will be tempted to break central bank independence and take back decision-making” (Tabellini, 2008). Very recent, a range of calls to limit the independence of the Fedhas observed in USA. The European Central Bank (ECB) still has high operational independence left, and it will have to give that up if it is to be effective on going European crisis (Buiter, 2009). So ECB has to THE CHARTERED SECRETARY J U LY - D E C E M B E R 2 0 1 2
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play a significant financial stability role, reducing the degree of operational independence pursuing price stability (Buiter, 2009).Problem with high independent ECB is absent of treasury authority to repatriate, or take back, under extreme circumstances, the power to conduct monetary policy from the ECB. The Bank of England Act 1998 created the Treasury Reserve Powers for this purpose; the Reserve Bank of New Zealand Act 1989 contains a similar provision (Bruit, 2009). Therefore, as the financial crisis lengthens and deepens, the absence of close cooperation between the fiscal authorities in the Euro Area and the ECB, make both the ECB and the fiscal authorities progressively less effective. As a result the ECB encounters unconventional monetary policy involving outright purchases of private securities or unsecured lending to banks or other private counterparties(Bruit, 2009). In Latin America, though the region’s new policy framework was put to severe testing by the global financial crisis and recession, quick and innovative policy responses by the region’s central banks helped domestic financial systems and the real economy to resist well the massive financial and real consequences of the banking crisis and recession in industrial countries but now facing a large array of policy challenge (Hebbel, 2011). CBI arrangement Economies
in
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The Reserve Bank of New Zealand Act 1989 says that the Minister of Finance and the Governor of the Reserve Bank shall together have a separate agreement setting out specific targets for achieving and maintaining price stability. This is Policy Targets Agreement which can only be changed by agreement between Governor and Minister of Finance. According to the Bank of England Act 1998, monetary policy objectivesare to deliver price stability and, subject to that, to support the Government’s economic objectives including those for growth and employment.
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The Federal Reserve Act, Section 2agives 3 mandates to the Fed: 1) maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, 2) promote effectively the goals of maximum employment, stable prices, and 3) moderate long-term interest rates. The ECB sets its own quantitative operational targets i.e. annual inflation rate below but close 2% (HICP). The Bank of England’s operational target is set by the Chancellor of the Exchequer i.e. annual inflation rate 2% (HICP). The Fed has no quantitative target for any of its three fundamental objectives. Stanley Fischer (1997) says“They are arguments from the world of the second best. In a first-best world, monetary and fiscal policy would be perfectly coordinated and chosen, and there would be no need for an independent central bank.” But in imperfect world independent central bank have to ensure price stability. Conclusion Independent central bankers can, and where possible should, cooperate with and coordinate their actions with those of the fiscal authorities and with those charged with structural reform. If central banks, ministers of finance and planning act cooperatively toward each other, and with credible commitment towards the private sector, good things may well happen. So central bank should be operationally independent but policy targets should remain perfectly coordinated with treasury.
The Writer is the Deputy Director, Mission Audit Directorate and Associate Member, ICSB
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