Wikipedia - Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.
Investopedia - The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy and rule of law.
ResCon – Corporate governance is the tool to run a company in ethical manner by keeping in mind the company’s values and laws & stakeholders’ interest.
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Due to lack of good corporate governance, we have witnessed fall of many big corporations worldwide. The fall of Worldcom, Enron (which eventually led to Sarbanes-Oxley Act) and of late – Satyam tells us one thing very clearly: Corporate Governance is must for any company to sustain in this competitive world. And this case applies in Nepal too. In the recent past, Nepalese people have witnessed and become victims of companies going bust due to poor corporate governance.
In today’s episode, we try to bring to you the cases of poor Corporate Governance running amuck in Nepalese companies and also pitch in some of the lessons learnt from these events.
Case I: Nepal Development Bank (NDB)
On 2nd June 2009, Nepal Rastra Bank (NRB), regulator of Banking & Financial Institutions, decided to liquidate NDB.
NRB, from last five years, had invested effort to revive the ailing NRB. But due to incompetent and defiant management, NRB was not able to resurrect NDB. As of Mar-2009 end, NDB was way below the par in terms of Non-Performing Loan and total accumulated loan. Its capital fund had gone down by 30% while the non-performing loan touched 30% mark. The major reason behind this was due to loss which today stands at Rs 678.6 million.
NRB had declared NDB a problematic bank back in 2007 and had given a set of directives to ameliorate NDB’s financial health. Sadly, NDB’s management was not serious at all and finally the entire saga lead NRB to push NDB to liquidation.
Case II: National Life Insurance Company (NLIC)
On 4th Jun 2009, Insurance Board (IB), regulator of insurance companies in Nepal, instructed NRB to freeze all its bank accounts. Due to the dispute in the NLIC’s board, the Beema Samiti got in touch with the NRB to stop all transactions.
The decision was taken by IB to safeguard the interest of the policy holders. Over the past six years, the NLIC board — comprising seven members — has been engaged in inter-personal bickering. The management was clearly divided into two, one being lead by ex-chairman Dambar Bahadu Malla (having support of four board members) and the other by new incumbent Prema Rajya Lakshmi Singh (having support of three board members). As the situation got worse, IB, to control the damage, stepped in.
On further investigation, IB found that NLIC had a clear violation of directives. Even after getting candid directives from IB, NLIC was found to have invested Rs 20 million in a private company called Tara Fund Pvt. Ltd. Although IB had been directing the insurance firm to withdraw its investment from Tara Fund from past one year, the management was not taking a serious note of that. This ultimately led to the freezing of bank accounts of NLIC.
Case III: World Merchant Banking & Finance (WMBF)
On 14th Jun 2009, Police arrested, Chief Executive Officer (CEO) and Promoter of WMBF, Binit Mani Upadhyaya on charges of fraud. Police arrested Upadhyaya under the direction of Commission for Investigation of the Abuse of Authority (CIAA) and Nepal Rastra Bank (NRB).
As per arthakoartha.com, WMBF had provided loan to Easter Suppliers, Biratnagar in December 2002. But later it found that the client was in no position to repay the loan. Then to save the company from making colossal loss, the bankers got together and decided to open a new account and there by turn the bad loan to good loan. This foul play was conducted in co-ordination with Eastern Suppliers.
But as with all the goof ups, the plan didn’t move as drawn out on the board. The borrowers now turned hostile and lodged a complaint at the CIAA which eventually led to the arrest of Binit Mani Upadhyaya.
Lessons Learnt:
Well there might be other such companies whose fraud, window-dressing of financials and ill-practices are yet to surface. The companies which we cited above are some of the examples where good corporate governance, transparency and disclosure were taken for a ride. Had these companies been transparent and disclosing everything that interest stakeholders, situation could have been a different one – something benefitting these companies and public at large.
Let’s dig in…..
As of today, Nepse has categorized the listed companies into nine different sectors. And the interesting thing here is that only four out of these nine sectors are currently being regulated by two regulators. The following table gives a distribution of sector and its corresponding regulator.
| # |
Sector |
Regulator |
| 1 |
Commercial Banks |
Nepal Rastra Bank |
| 2 |
Development Banks |
Nepal Rastra Bank |
| 3 |
Finance Companies |
Nepal Rastra Bank |
| 4 |
Insurance Companies |
Insurance Board |
| 5 |
Hotels |
NA |
| 6 |
Manufacturing & Processing |
NA |
| 7 |
Hydropower |
NA |
| 8 |
Trading |
NA |
| 9 |
Other |
NA |
Hence we see that FIs are being prudentially regulated by Nepal Rastra Bank (NRB) while Insurance Companies are being regulated by Insurance Board (IB). Other than these, rests do not have BIG BROTHERs, so to say, to supervise, regulate and monitor them.
Now, all the companies mentioned above are being regulated – two by NRB and one by IB. Still then these companies took undue advantage through bad corporate governance. Hence, this definitely compels us to ask one simple question – what about those companies which are not being regulated at the moment? These companies may be facing some problems due to management conflict, fraudulent transactions, window-dressing of financials etc. But in the absence of a regulatory body, any information about bad health may not come out in the market.
What should an investor do in this situation?
One major reason why investors have faith in FIs is due to the very fact that all the listed FIs publish their financial statements every quarter (as it is a mandatory provision by NRB). This really helps the investors to adjudge the financial health of companies which in turn assists them to analyze the performance of their investments in these companies.
Besides these FIs, investors hardly receive quarterly or annual financial statements of other companies. Hence, we see a greater role of Securities Exchange Board of Nepal (SEBON) coming into picture. SEBON could act as a major regulator for all the listed companies. But its supervision and regulating capacities have to be strengthened for this very role. On that pretext, recent provisions (cited below) set by SEBON definitely will help to bring in transparency and need of disclosure amongst the listed companies.
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Every listed company has to publish its quarterly financial statement within 30 days of quarter end.
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Every listed company has to furnish any company news, decision, information etc., that affect market price, as soon as possible.
When it comes to investment, an investor has to be careful about investing his/her hard earned money in any of the listed companies. Investments should be based on major fundamentals and not on whim or mere speculations. Investors must measure the major fundaments such as BOD, earning history, profitability, growth rate, information on dividend & right share, future plan, capital extension plan, EPS etc., before and after investing in a company. Constant monitoring of investment portfolio is another must to-do for any investor.
Benefits of Corporate Governance (CG):
James Gordon, a Senior Resident Representative at IMF India in 2002, has mentioned the macro benefits of corporate governance as shown below.
- Growth Effects
A company paying good amount of attention to corporate governance and following the principles in true spirit will be able to create a bond of trust with the investors. This will definitely be a pivotal point when the company plans to raise capital through equity or bond. Moreover, the cost of capital for such a company (with good governance) will also be lower as investors are able to better price the risk.
- Stability Effects
If a company is stable and has good financial health, it will have positive impact in the overall economy. Whereas if the company has poor governance, its financial health is most likely to be negatively impacted - this essentially means that investors will have less or no confidence in such a company. Now from a macro level, a company with bad financial health will have some sort of impact on the overall stability of the economy. Hence if a country has companies following good corporate governance, the chances of financial crises get reduced and hence the economy becomes more stable.
