Corporate governance or just governance is the principles governing the structures, strategies, goals, rules, regulations, bylaws, standards, indicators and human capital rules including boards, CEOs and senior managers in fulfillment of organizational excellence, ethical economy and fair income distribution to establish a civil society, taking into account the benefits of all stakeholders. MAHMOUD ALLAHYARIFARD writes.
Transparency and disclosure of critical information, accountability, justice, risk management and observance of the principles of conflict of interest among all stakeholders are the main pillars of any decision based on governance. Although the principles of corporate governance in the monetary and financial sectors seem to be derived from the OECD, the Basel Supervisory Committee (BIS) and Bank Negara Malaysia as well, the principles lead back to the advent and teachings of all divine prophets and the saints.
In fact, human well-being, excellence and the establishing of a civilized modern society depend on the fulfillment of the benefits of all stakeholders, the eradication of poverty, benevolence, sacrifice and avoidance of amassing wealth, deception, lies, hoarding, slavery, gambling, irrational risks (Gharar), harm to others, usury and other moral vices.
In various verses, the Holy Quran explicitly invites people to do good deeds for others and avoid moral vices, some of which are mentioned, in order to achieve overall well-being and excellence. “Believe in Allah and His Messenger and spend (in charity) of that which He has made you successors. Whosoever of you believes and spends shall have a mighty wage.”
In the other verse, it is stated: “Avoid those who take their religion as playing and an amusement and are seduced by the life of this world. Admonish them hereby lest a soul be taken by what it has gained, for it has no guardian or intercessor before Allah, and though it offers every ransom, it shall not be taken from it. Those are they who are taken for that which they earned. For them a drink of boiling water, a stern punishment for their disbelief.”
Using a micro–macroeconomics foundation, the requirement to follow the principles of corporate governance can be explained through an example. Suppose two groups of producers (owners of capital) and consumers (workers) are producing and consuming a commodity called gross domestic product (GDP) that has a competitive advantage (a cheaper relative price than a foreign trading partner). For exports and imports in the case of surplus and deficit of goods and commodities (assuming the other countries are as a trading partner), where the balance of the government (public) sector (no deficit or budget surplus) is established, the price of each unit of goods is equal to the value of marginal product (VMP) of labor and capital.
As shown in Chart 1 (red descending chart as a function of aggregate demand and black ascending chart as a function of aggregate supply), the equilibrium price, P2, represents the producer and consumer welfare surplus of OCQ2 and P2PC respectively. Lack of proper corporate governance is shown in the two non-equilibrium price scenarios P1 and P3. The price declines to P1, assuming that wages rigidity are higher than the VMP, causes the consumer welfare surplus as much as the P1PE triangle to be greater than the producer welfare surplus of the OAQ1 triangle.
In other words, the consumer share of the GDP cake is greater than that of the producer. At the price of P3, the figure is the same as before. The welfare surplus of the ODQ3 triangle is much greater than the welfare surplus of the P3PB triangle; that means the producer’s share of the cake is far greater than that of the consumer.
Since the rules of Shariah are compatible with rational standards, therefore, the compliance of Shariah law in Islamic countries with the principles of corporate governance of the OECD as well as the BIS is not accidental; because ethics is an instinct, so the characteristics of ethical behavior based on the instinct are recognizable; however, it does not preclude legislation, regulations, bylaws, transparency and disclosure of information, accountability, risk management and the requirements of compliance with the principles of conflict of interest to achieve correct and desirable corporate governance.
Lack of uncertainty in the implementation of effective corporate governance is a clear reason for the increasing intensity of the trend toward new financial and banking technologies, decentralized cryptocurrencies and Shariah-based or conventional blockchain technology. A prominent and clear real example is the emergence of smart contracts on cryptocurrency platforms, according to which the terms of the contract are executed without any compromise and based on what has already been agreed, approved as well as based on each defined procedure event.
In case of any change, it will not be approved by the blocks and active members or it will come to a ‘hard fork’ (any change in the provisions of the smart contract and the platform procedure that will cause the previous platform to not continue operating and the stakeholders to migrate to the new platform) and will require a new version of the contract, and stakeholders will have to migrate to a new platform.
Thus, the widening gap between the interests of the people and the interests of governments around the world due to the lack of effective corporate governance has left societies in a dilemma: on the one hand, there are the opportunities and strengths from decentralized technologies and platforms in the proper implementation of corporate governance principles facing humanity and individuals in society, and on the other, there are the threats and weaknesses arising from crimes such as money laundering and the spread of terrorism and other illegal actions and immoral issues from the decentralization of technologies and platforms independent of governments.
Mahmoud Allahyarifard is the head of the Economic Studies Group at the Economic and Islamic Banking Studies Center of Bank Melli Iran. He can be contacted at [email protected].