However, the contemporary wave of mergers, post-liberalisation failures, and anti-competitive practices has further raised the awareness of effective corporate governance practices to maintain competitive market conditions.

Competition is a very powerful force for implementing good corporate governance practices. The problems of asymmetric information, transaction cost and other capital market imperfections are ubiquitous in developing economies and most of them have no active market for corporate control. Despite intense competition, interests of managers and owners may differ on optimal strategies to deal with competition.

Effective competition with desired positive effects would be possible only with the adequate development of supporting structures such as sufficient and appropriate legal back up, regulatory policies and policies regarding good governance of firms. Sound corporate governance practices ensures that a firm is run by its management as well as by shareholders in the right direction which upholds the interest of owners and stakeholders.

Enhanced competition without improving the quality of corporate governance may create added opportunities for corrupt entrepreneurs and managers to embezzle people's hard earned savings.

Which survive intense competition are thought to have optimal governance structure and firms which fail to acclimatise their governance structures to changes in the business environment supposedly face extinction, leading to a natural selection of efficient organisations.

During the period of deregulation, the system of management incentives and monitoring needs to change significantly to avoid the chances of extinction due to bad decision, which is higher in a competitive environment. It has been proved that if the corporate governance practices and competition were complementing each other then the impact of product-market competition would be greater in firms with efficient governance structures.

This conceptual discussion underlines the need for strengthening corporate governance practices of firms as the markets are liberalised to enhance the nature and pattern of competition. One area of corporate governance which requires an immediate attention as a determinant to competitive market condition is that of the pattern of shareholding in firms.

The corporate sector in developing countries is typically characterised by heavily concentrated shareholdings in the hands of large investors such as families or the government. As large investors are often motivated by their own self interests such as possible expropriation of the investments when the large investors own equity with greater voting rights or through the pyramid structure, appropriate mechanisms that protect shareholders' right such as market for corporate control, effective audit and disclosure policies are important to encourage dispersed shareholding in a deregulated market environment. Or else, the controlling owners/executives of firms may misappropriate shareholders' wealth by taking advantage of small shareholders' lack of power and motivation to closely monitor.

Increased competition seeks the benefit of spreading products or services to a greater number of population at a reasonable price. In order to attain this vital goal, firms operating in the liberalised market must strictly conduct their business in ways which primarily aim at boosting the firms' efficiency. The shareholding pattern and structures have a determining role in the functioning of firms.

Although the large shareholders have been cited as efficient monitors, there are concerns that such block holders, taking advantage of their large voting rights, may direct the firms in a way which are only beneficial to themselves at the expense of other stock and stakeholders. Similarly, executives may be acting in a way which is most beneficial to them as well where shareholding is dispersed. In both cases self-dealing by owners and/or management could lead to the inefficient performance of firms and their possible extinction.

The other issue which needs immediate attention in deregulated environment is the changing dimensions of public-private and foreign firms. This issue becomes a sensitive one in many countries where the public/government ownership comes into focus. In most cases, private and western firms employ governance mechanisms better than public sector, to enhance or maintain high level of efficiency. However publicly owned firms still dominate with large market shares in most of the deregulated markets.

For example, in the banking sector which was liberalised in the early 1980s, four publicly owned commercial banks still control 50 per cent of the assets and deposits. The reasons for the large government ownership in the banking sector may be due to solving the inherent informational problems in developing financial system, aiding the development, or maybe supporting vested interests and distributional cartels. However, in absence of market-provided incentives, the administrtors/managers of the public sector organisations may be able to engage in opportunism at the taxpayer's expense, which supports the need for reforming the public sector organisations and their governance in developing countries in a time-bound manner.

As competition in the markets increases, more entrepreneurs invest in newly created or privatised businesses. Regardless of their size of investment, shareholders must be treated equally and each shareholder deserves protection from any potential embezzlement of funds by the executive or any other parties. This can be achieved through sound firm governance, and sufficient regulatory and legal back up.

In a deregulated era, enhanced competition envisages the growth of new businesses in developing economies which necessitates the need for an enhanced supply of funds primarily through financial markets. However, financial markets' interest and active participation in financing new businesses would largely be determined by the fact that how well the rights of investors and shareholders are protected.

Many experts are calling for performance-based incentives in the privatised firms, which could work as a measure to ensure good governance of the firms. In the long run, incentives through stock remuneration such as stock options may play a more effective role as the benefit flowing to the executives would only increase with the increase in share value of the company which would reflect an overall improvement in a firm's market and financial position.

But this is only possible where an active and strong capital market is present. The developing countries in general lack such equity market and as a result cash incentives may be the more effective way of motivating the corporate management of those countries until their capital markets reach a sound and efficient stage.

In a pre-reform era, the information of firms available to the public domain was very limited, a practice conducive to encourage corruption and hide failures resulting from wrong decision-makings, at least in the short term, which has changed later on as part of the reform process. The implementation of timely disclosure methods and regular auditing of the firms are essential for firms to become efficient, accountable, and transparent.

Competition, having gone through different evolutionary stages in the past couple of centuries, is now being widely perceived as a force, as a consequence of liberalisation policies, to achieve efficient production and resource allocation. The financial crisis in several developing and emerging economies has provided an opportunity to have a better appreciation of corporate governance and its role in national economies, particularly in boosting investor confidence, improving the quality of investment decisions and fostering the resiliency of corporate sector in competitive environment.

Although there is no one-size-fits-all system of corporate governance, some common features as discussed above are demanding attention in an era of competition, and such attention is urgent in developing nations such as Bangladesh which have adopted pro-competition policies in many of their vital economic sectors since the early 1990s.

M Masrur Reaz, PhD, an economist, teaches at North-South University, Dhaka.