Sound corporate governance should be welcomed rather than resisted by shareholders of Islamic financial institutions as it ensures their rights are protected. In particular the board of directors is directly accountable to the shareholders, and not to the management. Having non-executive directors on the board of directors provides assurance to shareholders. In Islamic banks the investment Mudarabah depositors and the Shariah board are also important stakeholder groups. Again it is the responsibility of the board of directors to ensure that the Mudarabah depositors receive full information about how their profit shares are calculated, and that there is disclosure of the funds within the profit equalization reserve. The board also has a responsibility for the contracts governing Shariah board members and to ensure that there are adequate resources available for the Shariah board to undertake their work. The IFSB Guiding Principles on Corporate Governance for Islamic banks, collective investment schemes and Takaful are an obvious starting point for any Islamic financial institution seeking to improve its corporate governance arrangements. These can be freely downloaded from the IFSB website.
PROFESSOR RODNEY WILSON
Corporate governance has become increasingly important as businesses grow and management and ownership become increasingly separated. Management acts as an agent to run the corporation on behalf of its owners (the shareholders), which leads to what is known as the ‘principal-agent’ problem that occurs due to the fact that the interests of these parties are not necessarily aligned. There are multiple ways to incentivize the agent to act in the best interest of the owner such as contracts, monetary compensation and, most importantly, good corporate governance. The Organisation for Economic Co-operation and Development (OECD) has recognized that integrity of business and markets is vital to the stability of economies, and provides the following definition of corporate governance (2004): “…the rules and practices that govern the relationship between managers and shareholders of corporations, as well as stakeholders like employees and creditors.” This definition is accompanied by a set of principles that are regarded to be the international benchmark for corporate governance. These principles cover, among others, the rights of shareholders and key ownership functions, equitable treatment of shareholders, the responsibilities of the board and how these parties cooperate and disseminate information. Hence, good corporate governance is certainly advantageous for both managers and shareholders and they would do well to remember that these rules are in place to protect their interests. DR NATALIE SCHOON Head of product research, Bank of London and the Middle East
|