Corporate Governance - Quantity Versus Quality - Middle Eastern Perspective

By Saleh Hussain

The books deal with various issues relating to Corporate Governance "CG" from a Middle Eastern Perspective with emphasis on Quantity Versus Quality.

The books covers the following topics:
- CG Quantity Versus Quality
- CG for Government Companies
- CG for Family businesses
-Corporate Social Responsibility
-CG in Islamic Banking
-CG and Democracy
-Board Committees
-Directors compensation

The books gives ways and means to apply best practices in Corporate Governance.

• Language: English
• Publisher: eBookIt.com
• Release date: Apr 26, 2016
• ISBN: 9781456603953

Book preview

contents.

Author's Note

This is my fifth book. on the subject of corporate governance. The first three were in Arabic and the fourth was in English. The subject of corporate governance, on its own right, attracts the attention of many writers and researchers around the globe who publish studies and books. The subject itself evolves continuously and worldwide business developments accelerate such an evolution. I started to take an interest in the subject in 1998. In 1999, in collaboration with Henley Management College in UK, I started my first study entitled Corporate Governance in Bahrain which was completed in 2001. I followed that with another study also on corporate governance in Bahrain but with an emphasis on Dynamics and Operational Process of CG.

As this book. was getting ready to go to the printing press, the state of the world amidst the financial crisis can be categorized as follows. We have seen world stock markets melt down , long-established banks and financial institutions disappearing and some rescued, nationalized and large multinational companies and organizations vanishing or being bought by investors at a fraction of their value before the start of crisis in 2008. These landslides were not limited to one economic sector but affected banking, insurance, motor industry, construction and real estate. Certainly the retail sector was not spared either. More about the crisis and its impact on the world can be found in various chapters of the book.

There were many reasons that led to this grievous situation that the world found itself in. Poor corporate governance was certainly not the only reason, but in many cases it played an important role in companies getting themselves into trouble. This book touches on the various reasons that impacted the financial markets and world economies.

This book contains a number of chapters from my earlier book Corporate Governance - Middle Eastern Perspective duly updated to take into account developments and recent changes in the governance practices worldwide. In addition the book contains a number of new chapters on specific issues of direct relevance to CG practices.

In total the book has 10 chapters dealing with following subjects:

Chapter one deals with the common practice of corporations investing a lot of time on the quantitative requirements at the expense of qualitative requirements. Such an attitude causes corporations to lose sight of the importance of human behavior and the unsatisfied needs of stakeholders.

Chapter two details the role, responsibilities and importance of key committees of the board. The Executive, Audit, Remuneration, Nominating and Risk Management committees have extensive coverage on their formation, membership and scope of activities.

Chapter three deals with the compensation of Directors and Executive Management. It gives various views on issues relating to the total compensation and the transparency and disclosure of relevant information in annual financial reports. The current cases of excessive incentive payments, even during a severe financial crisis, are also discussed in this chapter.

Chapter four discusses extensively corporate succession plans, which is a subject that receives little attention from the boards of directors and executive management. This results in exposing the corporation to an absence of cover when a major post becomes vacant.

Chapter five covers the issue of corporate social responsibility CSR which attracts the attention of all stakeholders and various interest groups. The relevance of CSR and the current financial crisis is explained in detail.

Chapter Six covers corporate governance and democracy. CG flourishes better in democratically governed countries and vice versa for countries that are less open to democracy.

Chapter seven gives examples of the contents of CG codes from a number of countries such as the UK, Belgium and Pakistan. It also provides an update on the draft CG combined code of Bahrain, which is in the process of being issued.

Chapter Eight talks about corporate governance in government companies also termed State-Owned Enterprises - SOEs - and sheds light on the difficulties these companies face in having to comply with the remits of good governance as well as compliance with government bureaucratic requirements.

Chapter Nine examines corporate governance in family-owned businesses or FOBs. Given the fact that over 80% of companies worldwide are owned by and run as family businesses, the importance of corporate governance cannot be over-emphasized.

Chapter Ten deals with corporate Governance and Islamic Banking. Islamic Banking has been growing at an unbelievably high rate of growth. The governance practices of Islamic banking institutions need to be strengthened and aligned to the standards of corporate governance regulations applied to all other forms of corporations. The issue is discussed in detail with an emphasis on recommendations for improvement.

I hope that the reader finds this book of use either in its entirety or as an in-depth look at specific topics in Corporate Governance, and I welcome your comments and views.

Saleh Hussain

November 2009

Corporate Governance Now More Important Than Ever

Introduction

Humanity isn't a stranger to corporate governance and so aren't human beings. Governance as a system is imbedded in the way people, families, companies and even government affairs are conducted and run. Good governance stems from simple principle of behaving within acceptable standards of ethics. These ethics have a very simple principle to follow treat people the way you wish them to treat you. Simply put, any governance system must be built on the principles of honesty, fairness, accountability, responsibility and transparency.

These principles apply in the dealings of individuals with each other, between families and by corporations with all their stakeholders. To manifest good governance, the government must be the undisputed leader. The government sets the tone from the top by ensuring that public governance is conducted in an accountable and transparent manner.

Democratically run countries are expected to manifest and demonstrate the highest principles of good governance through their governments. However, if governments fail to discharge their responsibility in abiding by principles of good governance then hopes of other organizations doing so is questionable.

Looking closely at the stakeholders under any governance regime, we find them virtually the same for individuals, families and corporations with varying degrees as regards their size and sophistication. Any corporate governance environment is basically constituted by individuals who lead and direct any enterprise. If individuals are raised with a high degree of integrity and ethical standards, and the family business is conducted within these standards, the businesses will benefit from these qualities.

The parties responsible for the establishment and implementation of a corporate governance standard are the various stakeholders: shareholders, directors, senior management and other members of staff. Other groups of stakeholders include but are not limited to:

• Customers of all kinds

• Suppliers of various goods, commodities, raw materials and services.

• Creditors and all parties who provide credit or financial facilities to the company such as banks, financial institutions and others.

• Supervisory and regulatory authorities whether government or non-government bodies.

• Public services, interest groups and consumer protection associations.

• Distributors and sellers of the company's products.

• The company's auditors and lawyers.

Why Corporate Governance Now

The collapse of high profile international businesses, giant banks and mega­multinational companies over the past several years, the current unprecedented worldwide financial crisis, the power shift from public to private through converting state-owned enterprises to joint stock publicly­owned companies, the transfer of technology and globalization are compelling reasons for good corporate governance practices to be applied. In fact these developments have helped corporate governance to shift from the backroom to taking central stage in every boardroom around the world. More than ever, governments everywhere are very keen to revamp their corporate governance laws and regulations to address the shortcomings that surfaced. It is obvious that the majority of business failures can be attributed, in a large part, to poor corporate governance and lack of adherence to its standards and practice.

Corporate Governance has become the famous buzz word around the world, particularly as a result of the financial crisis of 2008/2009. A fundamental shift in the way corporate governance is viewed will be made and no country can afford not to revisit its existing laws and regulations.

Expected Future Actions

Out of necessity, countries around the world have already started looking into amendments needed to their existing laws and regulations on corporate governance. For those countries that did not implement them, there will be no reason or excuse to miss the train now. The cost will be very high.

The developed countries will have to live up to their responsibility by first setting their own house in order and then extending their support, financial and otherwise, to the rest of the world to ensure a complete upgrade in CG regulations. Globalization and the presence of corporations of developed countries in other corners of the world, make the support to other countries more conducive in the business of their own corporations.

Banks and financial institutions had their large share of failures and losses; in good measure due to lending to corporations with little or no corporate governance. Hopefully, they have learnt that lesson. They will now have to exert efforts to ensure that their clients are compliant with good corporate governance practices. Such action will give a much needed boost to improving CG practices.

Undoubtedly, the financial crisis has unveiled, among other things, the fragility of CG practices within companies and poor monitoring by regulators. Hence, we expect that regulators and interest groups will become more active in rectifying the situation. However, we urge that more attention be paid towards the qualitative side of corporate governance. As reported most countries have CG codes with clear guidelines for the proper selection of directors and executive management on the basis of fit & proper, integrity, fairness, accountability and responsibility. All these preconditions were not respected and even violated. The regulators were preoccupied with too many regulations, the Boards were hard driven to achieve financial results (conveniently called value creation) and interest groups were either absent from the scene or their attention was directed towards achieving narrow-minded gains for their followers. The actual adherence of corporations to the requirements of corporate governance was not monitored or fully respected. The crisis at the end of the day can also create opportunities and challenges. We sincerely hope that regulators, boards of directors and all stakeholders treat the crisis as a wake-up call and make an honest effort to pay more attention to best business practices so that governance of all organizations is improved.

Chapter One

Corporate Governance: Quantitative Versus Qualitative Issues

Over the past fifteen years, corporate governance gained continued importance and attention from all stakeholders and those concerned with establishing good foundations. In other words corporate governance evolved from being a boardroom issue to a public concern.

Many countries introduced corporate governance codes regulating the desired corporate practices in companies of all types operating within their boundaries. Some countries opted for gradual introduction of laws and regulations dealing with various aspects of corporate governance, in the hope of adopting a complete code over a period of time.

Corporate governance seminars, conferences and many other forms of gatherings are the evidence of what we witnessed over the past years. The output of these gatherings gets intensified with every announced financial disaster around the world. Financial disasters cause countries to further tighten their corporate governance laws, regulations and compliance requirements.

Have all these actions - issuance of corporate governance codes, new laws and regulations and seminars - reduced failures in companies worldwide? This is a fair question to ask. An accurate response is more difficult to give. It is safe to say that failures would have been much higher in number and intensity in the absence of corporate governance regulations.

Let's think about the difficulties encountered in the practice and implementation of corporate governance regulations.

For corporate governance to succeed, we know that it is dependent on the cooperation of many stakeholders: shareholders, boards of directors, management, government, regulators, clients, financiers, external auditors, consultants and interest groups. With globalization the list of stakeholders also includes foreign investors, financiers and suppliers.

All these stakeholders need quantitative measures and elements of corporate governance but in the process do very little or, at worst, fail to address the requirements of qualitative elements of corporate governance.

We intend in this chapter to highlight both the quantitative and qualitative elements of corporate governance and draw lessons from differences between them for the betterment of relevant CG regulations.

Typically the regulators issue directives and CG codes dealing with the following quantitative issues:

• Laws and regulations of best practice

• Role of shareholders, annual and extra-ordinary assembly meetings

• Formation of the board and number of boards e.g. one or more boards or advisory committees

• Composition of the board - number of members and how many executive, non-executive and independent directors.

• Board charter, duties and responsibilities.

• Board members' responsibilities

• Board committees and number of meetings

• Board remuneration

• Monitoring, audit and controls within the company

• Corporate succession plans

• Risk management and compliance

• Performance indicators

• Reporting and communication

• Disclosure requirements

• Publication of periodical and annual reports

All of the above quantitative issues are important for the good governance of a company and indeed create many new but important posts within each company - financial controllers, risk managers, internal auditors, compliance officers and others. In certain cases these could add to the burden, financially and administratively, of the company and impact its efficiency.

In talking to a number of senior officers of companies about these requirements, some of them indicated that it is becoming difficult for them to strike the right balance between gaining the benefit of these requirements and the ability to implement them. In fact, some claim that their officers spend more time worrying about implementation than actually doing the work they are supposed to do. Some went so far as to say that their sales teams get bogged down in compliance at the expense of generating new business for their companies.

Certainly one cannot generalize such phenomena; nevertheless it is an issue for some companies depending on their size and sophistication.

Other questions that we ask: Are these quantitative regulations really addressing the