CO-ORGANIZED BY
BRANDICATE CONSULTANTS
&
AMR GROUP
CORPORATE GOVERNANCE IN FINANCIAL INSTITUTIONS
BY
Talal Abu-Ghazaleh
Chairman, Talal Abu-Ghazaleh Organization (TAGO), www.tagi.com
Chair, Commission on E-Business, Information Technologies and Telecom (EBITT),
International Chamber of Commerce (ICC), Paris, www.iccwbo.org
President, Arab Society of Certified Accountants (ASCA), UK, www.ascasociety.org
President, Arab Knowledge Management Society (AKMS), NY, www.akms.org
January 17-18, 2004
Berlin, Germany
Index
Page
o Introduction
o The Role of the Board of Directors, the Chairman, the Chief
Executive/General Manager and Components of
the Executive Management
o The Role of Committees of the Board and those of
Executive Management
o The role of the Central Bank in Corporate Governance
o Listed Companies
o Recommendations
o Conclusion
CORPORATE GOVERNANCE IN FINANCIAL INSTITUTIONS
By
Talal Abu-Ghazaleh
www.tagi.com
Your Excellency the Minister, distinguished guests, I am delighted to be with
you today and to have the opportunity of giving you my thoughts on the
very topical subject of Corporate Governance.
I was lucky to have had the opportunity to contribute to this public dialogue
about financial governance for the third time. The previous two events
were: A workshop on “Corporate Governance in Banks and Financial
Institutions,” organized by the Central Bank of Oman in June last year, for
the central and commercial banks in the GCC region, (for more information
on the workshop program, see Annex 1); and an international conference
on “Financial Safety: Stakes and Perspectives (La Securite Financiere:
Enjeux et Perspectives),” organized by Tunisia’s Chartered Accountants
Associations, on January 15, 2004, for financial, banking and accounting
institutions in the Arab World (for more information on the conference
agenda, see Annex 2).
The European Commission published two documents that were both related
directly to corporate governance. One was an “Action Plan on Corporate
Governance,” which stipulates that companies are required to publish an
annual corporate governance statement - describing their corporate
governance structures and practices. The second was “Reinforcing the
Statutory Audit in the European Union,” which requires much greater
disclosures by audit firms, e.g. about their international arrangements, and
also their internal quality assurance.
In the aftermath of the Enron debacle in the USA and most recently the
Parmalat of Italy along with other corporate failures and financial matters
including money laundering has raised a number of issues such as
corporate governance and the role and responsibilities of the banking
profession. Financial institutions (and auditors in particular) should be
specifically vigilant with respect to fraud, corruption, and misstatements.
As Chairman of the largest Arab national firm of auditors in the world - Talal
Abu-Ghazaleh & Co (TAGCO). I am deeply concerned about this latter issue
although it is the only one of many we have to discuss. Sometime ago I
instructed all of my offices not to accept any more bank audits. An audit
should assure that the financial statement shows a true and fair view, that
there was no suspicion of money laundering and that the bank had an
appropriate standard of corporate governance. This is a task that requires a
level of work well in excess of what is expected at present. The banks and
auditors are going to have to tackle this. It will not go away. The simple
solution of increasing audit fees to allow more work by itself will not be
enough in itself. Nor am I yet convinced of the case limiting the liability
for auditors, which is being argued for in many parts of the world. It does
need to be looked at perhaps as a symptom rather than a cure. All of the
interested parties - central banking authority, individual banks, auditors,
Chief Executives and finance officers need to get together to look at the
whole culture and attitude, which determine the environment within which
corporate governance is exercised.
Corporate Governance
It is clear that the absence of good governance causes extensive damage to
the economy and the society as well. Where controls are lenient, values of
diligence and integrity will decline.
While corporate governance was highlighted by the Enron affair, it had been
a matter of concern for many years before it is again largely instigated by
the collapse of major corporations. As a result of the collapse of Enron and
as a consequence that of Arthur Andersen, the accounting failure of
WorldCom and the bankruptcy of Global Crossing, the US congress enacted
a new law, the Sarbanes-Oxley Act of 2002, enforcing good corporate
governance and ethical practices on publicly traded companies. The
Congress described it as “an Act to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities law, and for other purposes.” (For a quick overview of the
Sarbanes-Oxley Act of 2002, see Annex 3).
It is true that the Sarbanes-Oxley Act is only applicable to US publicly-traded companies; however, all companies around the world, the Arab
countries in particular, should take note of its implications. Sooner or later,
more countries will follow the US example.
The phrase "Corporate Governance" emerged in the 1980s. There are many
definitions of corporate governance but perhaps the simplest and best is
still the one given in the 1992 Report of the UK Cadbury Committee on
Financial Aspects of Corporate Governance:
"Corporate Governance is the system by which companies are
directed and controlled."
Every organization/group/corporate body is directed and controlled so we
are not talking about introducing something which has not existed before.
The question is not, therefore, whether you have corporate governance but
rather whether it is good or bad as judged against what is seen as the best
practice. We will be later discussing what is currently regarded as best
practice, but two words can perhaps sum up what this is - "Independence"
and "Stakeholders." The system should allow for the exercise of
independent objective judgment without fear or favor by competent
individuals who are aware of the legal and ethical responsibilities of the
corporate body, not only to its shareholders but also other stakeholders
such as employees, suppliers, customers, government and society at large.
Advantages of Corporate Governance Standards
It can be, and indeed has been, argued that even without the pressures of
government and its agencies through legislation and other means, the case
for good corporate governance is strong. A company with good corporate
governance is much more sensitive to the needs and objectives of its
stakeholders and builds greater confidence with them. It is a powerful
weapon in the prevention of fraud and overall makes the company much
more sensitive to the risk factors which affect the carrying out of its
business. By reducing the perceived level of risk in the business it
facilitates access to capital markets and improves the market acceptance of
those who buy its goods and services. Investment risk is a function of
political, security and business risk and is of crucial importance to our
region. Anything which improves the situation i.e. reduces the perceived
investment risk must be given serious consideration. Too high an
investment risk leads to a lack of inward investment and an increase in the
flow of outward capital. We all know that for many years our region has
been a net exporter of capital. What might our social and economic
position have been today if the reverse had been the case?
Good governance means better organization, more internal discipline,
efficient internal and external auditing and ethical conduct. It is the best
cure for internal control weaknesses and lack of compliance with applicable
internal control procedures.
Acceptable Standards for Corporate Governance
There is, of course, no single recognized best model of corporate
governance. However, the key factors in assessing corporate governance in
any organization usually involves an examination of (a) the appointment,
roles, responsibilities and accountability of the Board Of Directors and those
of the Chief Executive and other senior management, and the authority,
experience and independence of all. For ease, I will call these people the
Directors whether they are legally such or not, and (b) the compliance,
control, and audit arrangements - both internal and external.
Corporate governance standards and principles in financial institutions
would be adequate if they equitably protect and cater for the interests of all
stakeholders, including the public, shareholders, investors, creditors, and
employees. Good governance is simply to ensure accountability, reliability,
accuracy and transparency.
The Directors
Underlying all the various comments and suggestions on this issue, one
core theme emerges. All individuals should be accountable and no one
individual or group should be able to dominate decision-making in the
organization. This can be achieved by firstly establishing clear lines of
responsibility and authority. Those for the Chairman should clearly
distinguish his role from that of the Chief Executive. It should be
exceptional that these two posts are held by the same individual. If so,
good reason should be given and the other directors should review and
report on this.
Secondly, every board should have Independent Directors with special
responsibilities. We need to clearly distinguish between Independent
Directors and Non-Executive Directors. An Independent Director, by
definition, must be non-executive. But a Non-Executive Director need not be
independent. The father or son of the Chairman might well be non-executive
but could never be independent. Independent Directors should be
appointed for their ability and expertise, and not simply because they are
important customers or suppliers or "friends." They should always be
particularly conscious of the obligations to stakeholders. It is clear from
developments in the USA and the UK that enhancing the role and quality of
the Independent Directors is seen as a very important tool in the creation of
good corporate governance. However, it has also caused much controversy
about how you determine independence and what precisely the independent
director’s role should be. The appointment of large numbers of independent
directors is not an elixir, which will instantly cure the ills of corporate
governance. They have an important role to play and it may be a
necessary condition for improving corporate governance but it is not a
sufficient one. We must beware that we do not create a system of
schizophrenic management. Every organization needs clear and decisive
leadership.
Thirdly, the Independent Directors, or a committee of them, would be
responsible for the remuneration packages of the chairman, Chief Executive
and other Executive Directors. In terms of stock options, the potential
impact on profits of such options would have to be made clear on an annual
basis.
Fourthly, the Board of Directors and its committees should be supplied with
timely, relevant and appropriate information relating to all of the company's
activities. Meetings should allow for sufficient time to discuss this
information adequately. While the Chairman of the meeting will set the
agenda, all Directors should have the right to comment on the agenda and
request the inclusion of any matter. Directors should not be denied access
to any employee, if they so wish.
Compliance and Control Arrangements
A key factor in corporate governance is the monitoring of and the reporting
on the internal control system.
Every board of directors should have an Audit Committee. This committee
would be formed from the independent directors. It has been suggested
that at least one of the members should be a qualified accountant. I would
not like to be thought of as trying to create employment opportunities for
one of my own profession, but certainly the members should be financially
literate.
The Audit Committee would recommend to the Board of Directors the
appointment of the external auditors, and such appointment would be
reviewed regularly. The external auditors and the internal auditors would
report direct to the Audit Committee, which would in turn report annually
on the state of the internal control system and its adequacy in light of the
then current circumstances.
Many countries, e.g. the USA and the UK, are reviewing the external
auditor's responsibilities and whether this should include a requirement to
include in their report formal comments on the system of corporate
governance. In some countries, auditors are recommended to consider
whether this should be reported on. While in other countries, consideration
is being given to making this a statutory requirement. In order to ensure
the auditors are truly independent, it has been suggested in the USA that
for certain corporations - the very large and major financial institutions - the
auditors should not be appointed by the company shareholders or directors
but rather by a special body established to carry out this task. This is not
unusual in the public sector where some form of independent commission
appointed by the government determines who shall audit e.g. local
governments and state-owned enterprises.
The Importance of Communication
Underlying all our discussions will be the presumption that there is good
communication between all of the interested parties, i.e. the stakeholders.
This is easy to say but difficult to achieve. All businesses and banking in
particular, have a long tradition of confidentiality and of concern about
disclosing valuable information. Trust, including financial trust, is built
around this. I am, of course, not suggesting that this should be weakened.
“My word is my bond” is a principle I have always strongly adhered to.
However we do need to spend more time considering transparency and
what and how we communicate. The answer is not producing longer
annual reports. Many are far too big already. We live in an
electronic age where recording, updating and indexing of information can be
done in an efficient manner. I have been advocating for many years for the
need for the Arab World to be able to participate in the digital revolution,
and governance communication should be considered as part of this. This
of course also applies as to how governments and their agencies
communicate with all stakeholders.
The Impact of Culture
The main work on, and consideration of corporate governance, has taken
place not surprisingly in the industrialized nations in the developed world.
While it is always wise to learn from such nations, it is not wise simply to
copy without giving consideration to the different cultures which exist
elsewhere and how this might affect the acceptability and success of what is
being considered. How would we in the Arab nations regard the views
which have been put forward on the role and responsibilities of the
chairman, the Chief Executive Officer and non-executive or independent
directors? An interesting study was carried out recently by the UK
Chartered Association of Certified Accountants (ACCA) in China and South
East Asia. Two hundred chief financial officers out of the top three hundred
companies were surveyed on their views of the development of corporate
governance. The results showed that more needs to be done to develop
best procedures despite the growing awareness of the need for this.
Progress had been made but the most significant barrier was culture and
adherence to the concepts underlying the traditional corporate model. This
inhibited the application of many of the characteristics of good practice for
example, the role of independent and non-executive directors, the power
and authority of the Chief Executive. This view was further endorsed by the
report of the Asian Corporate Governance Association entitled “Faking It:
Board Games in Asia,” which concluded that the response to demands for
better corporate governance have led to cosmetic changes that do not
translate into true improvements.
Much play has been made about statements in annual reports with no real
substance behind the scenes:
“A policy statement that says corporate governance is important and
a few paragraphs in an annual report that give lip-service to
corporate governance can be just that - lip-service.”
The report claims that the core areas such as accountability, responsibility,
and independence are lagging behind.
It would be interesting to have a similar survey done in the Arab World to
see what the current position is and should there be sufficient interest. I
am sure the Arab Society of Certified Accountants (ASCA), of which I am
President, would be willing to do this.
Section 2: The Role of the Board of Directors, the Chairman, the
Chief Executive/General Manager and Components of
the Executive Management
In looking at the perceived best practice for the roles and responsibilities of the
Board of Directors, the Chief Executive Officer/General Manager we have
seen that there is one overriding theme - all individuals should be
accountable and no one individual or group should be able to dominate the
decision-making in the organization. A system of checks and balances
should be in place based on clear lines of responsibility and authority.
All analysts agree that a major task for the Board of Directors is policy
formulation so that a clear set of policies is available to the management.
The purpose of such policies is to achieve value for the owners and
other stakeholders by operating in an effective and ethical manner. Policy
formulation is for the Board but policy implementation is not. This is the
role of the Chief Executive/General Manager and the senior management
team and the Board of Directors should not seek to duplicate this. The
directors are of course required to monitor policy implementation to ensure
that its policies are being followed. Many believe that this cannot be
achieved if the roles of Chairman and Chief Executive are combined even if
this is common in practice as in the USA. In France, until 2001, under the
code Napoleon, the chairman was de facto CEO or General Manager and
could appoint on his own authority and responsibility another person to
those positions. However company law was changed to prohibit the same
person holding these two positions except in two cases. Firstly, if the Board
of Directors appoints the Chairman as General Manager it can only be for
one year and has to be renewed annually. Secondly, if the founders decide
that the Chairman is the General Manager, then it must be stated at the
foundation of the company and written clearly in the company’s articles. If
the same individual holds both positions, then there should be a clear
statement as to why this is the case and what other steps have been taken
to ensure that proper checks and balances are in place.
It has been suggested that the main function of any Board of Directors is to
appoint a Chief Executive/General manager and if this is so, it would then
seem odd that once appointed and until his departure the Chief Executive
should then assume the mantle of Chairman. Much of Corporate
Governance in may parts of the world seeks to find some way of stopping
too much power being vested in one individual. Nevertheless, we have to
recognize that many commentators in the USA believe that the
shareholders’ interests are best served when these two positions are indeed
combined.
We will now look at some of the detail of what is regarded as best practice
much of which is of the balanced score card type. However, I believe that
in terms of corporate governance at least equally, if not more important is
the role of the directors in creating a climate of integrity, transparency,
social responsibility and compliance within which the profit making process
takes place. There is nothing improper about the making of profit and
indeed I have always voiced my support for this. How it is made and how it
is used, however, have not to be improper as well.
The role of the Chairman of the Board of Directors is to ensure, through his
chairmanship, that the Board carries out its duties and responsibilities
efficiently, ethically and legally. However, it has to be emphasized that
each individual director has to exercise his function as a general director in
a diligent and professional manner and has to ensure that timely and
relevant information is received for this to be done. He should not be
restricted in any way. While the Chairman may well set the agenda for
meetings any director must have the right to request that certain items
should be included and the right of access to senior management. This is in
addition to any specialist work a director is required to do on behalf of the
Board such as serve on a Board Committee. We will deal with the question
of independent Directors later. Many analysts and regulators list various
functions and responsibilities. For comparison we can look for example at
the recommendations of the USA-based Business Roundtable which is an
Association of Chief Executive Officers Committed to Improving Public
Policy. In summary, they say the Board of Directors monitor management
on behalf of the stockholders, select and compensate and evaluate a well-qualified and ethical Chief Executive Officer, should not represent the
interests of particular constituencies, act with integrity and commitment to
the corporation, exercise diligent oversight over a corporation’s affairs.
Specific responsibilities include planning for management succession,
understanding, reviewing and monitoring implementation of strategic plans,
understanding and reviewing annual operating plans and budgets, focusing
on the integrity and clarity of financial statements and financial reporting,
engaging outside auditors and considering independence issues, advising
management on significant issues facing the corporation, reviewing and
approving significant corporate activities, nominating Directors and
committee members and overseeing effective corporate governance.
All of us will have one view, and I suspect it is a common one, of the
detailed role and responsibilities of the Chief Executive and Senior
Management with different emphasis being placed on individual aspects.
The Business Round Table concluded that the first is to operate the
corporation in an efficient and ethical manner and to be aware of the major
risks and issues that the corporation faces. They are responsible for
implementing the policy decisions of the Board of Directors and carrying out
the strategic objectives within annual operating plans and budgets which
have been reviewed by the board. They take the lead in fashioning
strategic plans, which will achieve the board’s objectives and present them
to the Board for approval.
The Central Bank of Oman issued its BM 932 Circular on Corporate
Governance, and I was particularly interested in Section 5 of the Circular
which specifically relates to the CEO/General Manager and which for
convenience I quote in detail:
“The CEO/GM is accountable for proposed policies, evolving and
adapting implementations strategies in respect of Board-approved
policies, initiating measures for profit growth in short-term (my
italics) without sacrificing the long-term profit and networth
enhancement potential. The CEO is expected to provide leadership
by establishing style and spirit that enhances the image and
reputation of Licensed Institutions.”
I do not disagree with what is said but wonder how the caveat about short
versus medium/long-term is to be judged and if needs be verified. Like
many others, I have always been concerned about the problems of
sacrificing the future for the present and the “stock option push for quick
profits, take your money and run philosophy” which has characterized so
much of contemporary business attitudes and led to many of the problems
we face today. I suspect that this reference in the circular is more of an
exhortation than a regulatory requirement.
Section 3: The Role of Committees of the Board and those of
Executive Management
Before we look at this subject, we should first of all spend a little time on
the concept of the Independent Director. In recent years and in terms of
corporate governance, much emphasis is being placed on having on the
Board of Directors a number of well-qualified people who are non-executive
and totally independent in a personal and business sense of the
organization and its executive Directors and management. Indeed, this
seems to be the foundation upon which the whole concept of the monitoring
of good governance is to be based. Some authorities argue that indeed a
majority of the board should be independent, and that one of them should
be nominated as the senior independent director who would chair meetings
of independent Directors and would also be available to for example
shareholders to hear any points of concern that they had. While an
independent director has to be non-executive the other independence
requirements have often been left to judgment and good sense. However,
there is a growing tendency to seek a definition for independence more
rigorously and incorporate this into regulations and/or codes of conduct.
For example, the recent proposals of the Higgs Committee in the UK have,
in addition to judgment, set out the following characteristics which would
deem a person to be unsuitable as an independent director,
i. “a former employee of the company or group until five years
after employment, or any other material connection, has ended;
ii. has, or has had within the last five years, a material business
relationship with the company either directly or as a partner,
shareholder, director or senior employee of a body that has such a
relationship with the company;
iii. has received or receives additional remuneration from the company
apart from a director’s fee, participates in the company’s share
option or performance-related pay scheme, or is a member of the
company’s pension scheme;
iv. has close family ties with any of the company’s advisers, Directors
or senior employees;
v. holds cross-directorships or has significant links with other Directors
through involvement in other companies or bodies;
vi. represents a significant shareholder; or
vii. has served on the board for more than ten years.”
Quite a list! While the business community in the UK has accepted the
general tenor and principles of the Higgs report on corporate governance it
has reacted strongly against the detailed points listed above. It does not
like the concept of a senior independent director; the required minimum
number of independent Directors; and the detailed characteristics, which
debar a person being regarded as independent. There is concern about
creating a board within a board and the disunity this might bring. A note of
caution has also come from the USA, where in an address to the Stern
School of Business, New York University, in March 1992 Mr. Alan
Greenspan, Chairman of the Federal Reserve Board of the USA said:
“In a further endeavor to align boards of Directors with shareholders,
rather than management, considerable attention has been placed
with filling board seats with so called independent Directors.
However in my experience, few Directors in modern times have seen
their interests as separate from those of the CEO, who effectively
appointed them and presumably, could remove them from future
slates of Directors submitted to the shareholders. I do not deny that
laws could be passed (the proposed UK approach- my words) to force
selection of slates of Directors who are patently independent of CEO
influence and thereby significantly diminish the role of the CEO. I
suspect that such an initiative, while ensuring independent Directors
would create competing power centers within a corporation, and thus
dilute coherent control and impair effective governance.”
I have to admit I share some of Mr. Greenspan’s and others reservations.
However, we have to accept that the Higgs disqualification factors listed
above, even if they are not incorporated into regulations or mandatory
codes of conduct, are going to be used by auditors if and when they are
required to test this as part of their audit requirements. It is an issue which
inevitably we will all have to face.
Boards of Directors and Senior Management are always authorized,
explicitly or implicitly, to establish committees with delegated
responsibilities. Good corporate governance will usually require at least the
following - an Audit Committee, a Remuneration Committee, and a
Nominating Committee.
Audit Committee
The Audit Committee is seen as the key vehicle for monitoring and
reporting on corporate governance. It will usually be suggested that it be
composed entirely of independent Directors and that at least one should
have financial experience. Its role would include monitoring of the financial
statements, the internal control system, the internal audit function - with
direct access to the internal auditor who, if he does not report directly to
the Audit Committee, will be required to submit his reports to them and
provide an annual assurance report and an assessment of the external
auditor’s independence, effectiveness and their provision of non-audit
services. It will also recommend to the board the appointment of the
external auditors, and approve their terms of engagement and
remuneration. The Audit Committee should also include a report to
shareholders as part of the overall annual reporting system, and its
chairman should be available to answer questions on this.
One of the most controversial subjects, which over the years has
periodically emerged, is the extent to which the external auditors can be
truly independent, if at the same time they are providing other professional
services such as taxation advice, management consultancy and so on.
There is little doubt that, for many of these, the audit firm is best placed to
provide an economic and efficient service, and pragmatism has usually won
the day. The audit firms have also sought to alleviate the fears of
independence by setting up independent firms and making certain that
different people are involved. However, Enron and other corporate
disasters have brought this subject to the table once again and for example
in the USA, it was believed that strong action would be taken by the US
Securities and Exchange Commission (SEC) with a total ban on the
provision of tax services. However, the SEC has not gone that far and has
simply made it a requirement that such services should be pre-approved by
the Audit Committee.
There is concern that this will not be seen to be a sufficient safeguard. Some companies have restricted the type of tax work the external audit firm will be allowed to carry out and others have put a financial cap on non-audit work to substantially reduce its materiality. I have little doubt that the SEC will be revisiting this issue again in the near future.
The Sarbanes-Oxley Act called for the creation of the Public Company
Accounting Oversight Board, giving the SEC control powers over it. The
Board’s mission is to oversee the auditors of public companies in order and
“... to protect the interests of investors and further the public interest in the
preparation of informative, accurate, and independent audit reports ...”
The Act describes the Board as “The Board shall not be an agency or
establishment of the United States Government, and, except as otherwise
provided in this Act, shall be subject to, and have all the powers conferred
upon a nonprofit corporation by, the District of Columbia Nonprofit
Corporation Act. No member or person employed by, or agent for, the
Board shall be deemed to be an officer or employee of or agent for the
Federal Government by reason of such service.”
While in most parts of the world the external auditors are not required
explicitly to report on the system of corporate governance, they are
beginning to do so. For example in the audit report for 2002 of a leading
UK company it states:
“...We read the other information contained in the Annual Report and
Accounts…… and consider the implications for our report if we become aware of
any apparent misstatements or material inconsistencies with the
financial statements.
The other information comprises only … and the corporate governance statement.
We review whether the corporate governance statement reflects the
company’s compliance with … and we report if it does not. We are
not required to consider whether the Board’s statements on internal
control cover all risks and control, or to form an opinion on the
effectiveness of the Group’s corporate governance procedures or its
risk and control procedures.”
I believe that soon they will have to.
Remuneration Committee
The Remuneration Committee should again be composed entirely of
independent Directors and as its name implies is concerned with
determining the total remuneration package for the other Directors and
senior management. This would include targets for performance, related
pay packages, which do not reward failure, such as bonuses, share options,
pensions, expenses of the Chairman and Chief Executive and also
transparency in its activities by making public its terms of reference, the
frequency of its meetings ,and reporting annually to shareholders .
Nominating Committee
Lastly, there is the Nominating Committee where again there should be a
majority of independent Directors. It is concerned with the whole process
of how individuals are firstly appointed and then re-appointed to the Board
of Directors or as Chief Executive/General Manager. This also includes the
time requirements of the job and whether existing individuals are devoting
sufficient time to it.
Some of the most important aspects of its remit is succession planning, the
structure and composition of the Board of Directors, and the nature and
requirements of the position of Chief Executive.
Section 4: The role of Central Banks in Corporate Governance
The various regulations in the Arab countries clearly set out the
implementation and monitoring role of the Central Banks and the actions to
be taken if non-compliance appears to have occurred. I am sure that these
will be implemented and applied rigorously by the banks. However, I
believe that central banks has an equally important leadership role to play
in helping to create an environment within which good corporate
governance is the norm and where transparency and accountability are the
order of the day. Although it is perhaps old fashioned and out of touch with
contemporary thinking, I am still a great believer in the adage of
“leadership by example.” I would never ask of my staff anything, which I
did not practice or was not prepared to do myself. Corporate governance is
not just for banks, financial institutions or listed companies, rather it is for
all organizations. There are few more influential organizations in the public
and private sectors of a country than its central bank. When the governor
speaks, people in general, and the business community in particular, pay
attention.
The banking sector in general and Central Banks in particular, has an
important role to play in the stability of the financial markets and economy
at large. Hence, banks with good governance could be a critical success
factor for development efforts in the Arab region. Despite difficulties arising
from the ownership structures of some banks in the Arab world,
implications of corporate governance for the Arab banking are positive.
Section 5: Listed Companies
The principles for listed companies are no different from the principles we
have already discussed and most of the aspects of corporate governance to
which I have already referred are equally applicable. A good model was
prepared by the Omani Capital Market Authority (CMA) and is contained in
Circular No. 11/2002: “Code of Corporate Governance for MSM listed
companies”. I would draw particular attention to the introductory
paragraph:
“It has been CMA’s endeavor to ensure that the governance structure
of public companies in Oman provides basis for efficient functioning
with a view to give equitable treatment to all stakeholders and
maximize the value creation accruing to the shareholders. Proper
governance of the listed companies, leading to improved operational
and financial performance, is essential for restoring the confidence of
the investors in the market.”
This is what we all want. I am particularly interested in the reaction to
these proposals. In particular, how does the business community feel
about:
a) The definition of an Independent Director.
b) The definition of a Related Party.
c) The definition of a Non-Executive Director.
d) The composition of the Board Of Directors where the majority shall
be non-executive and at least one third shall be independent.
e) The functions of the board of directors.
f) The role of the Audit Committee.
g) Limitation of external auditor’s term of office and provision of non-audit
services.
g) The requirement for the Annual Report to contain a discussion
(without compromising the competitive advantage) on matters such
as industry structure and development, opportunities and threats,
analysis of segment and product wise performance, outlook, risks
and concerns.
i) The rules for Related Party transactions
j) The report on corporate governance and the auditor’s responsibility
thereto.
k) The remuneration of Directors and key executives.
The Sarbanes-Oxley Act imposes good corporate governance on publicly
traded companies, with particular emphasis on internal controls. The Act
provides for an independent audit committee be created to monitor the
external auditors’ function and review their reports, and prohibits the
external auditors from providing the company with non-audit services, such
as taxation. Under the Act, the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO) have to establish the company’s internal control and
monitor their implementation over the financial information.
There is much to discuss - have we gone too far or have we not gone far
enough?
Section 6: Recommendations
We, in the Arab world, need to adopt new policies, regulations, conventions
and declarations, at both public and private sector levels, to enhance
governance in general and corporate governance in particular, towards a
better future for our financial and banking institutions and our economy in
general. A strong commitment to good governance is indeed a strong
commitment to efficient and effective management.
There is also a real need for ongoing dialogue and round table discussions
involving public agencies, financial and banking leaders, and experts, to set
appropriate governance standards to our culture, economic environment
and sustainable development requirements.
A field survey of the current development of corporate governance in the
Arab world is highly recommended to come out with recommendations that
respond to the problems and needs as well.
Governmental agencies and the financial institutions should be kept updated
in regards to developments on governance in the developed world. It is
inevitable that we shall adopt and adapt new governance standards and
principles implemented by these countries, particularly as related to
transparency and accountability.
Section 7: Conclusion
No one would, of course, argue against good corporate governance in all
sectors in general and the financial sector in particular. The role of
banking, for example, is so fundamental to our economic and social
development. Anything that tarnishes it has serious consequences for
society at large. Social progress only becomes a reality when we have
economic progress and we are dependent largely on the banking and
industrial sectors for this.
However, this does not mean simply accepting the norms or standards that
are currently used elsewhere without questioning as to how they will fit into
our culture and our traditions. It is not that I am against the application of
international standards. I have never believed in reinventing the wheel and
indeed I have often been accused of being too much in favor of the
application of, for example, international accounting and auditing standards
in the Arab World. But this I have only done when I was convinced that
this was the best way ahead for the Arab nations in order to narrow the gap
between them and the developing nations. The same applies to standards
of good corporate governance. Let us not simply play lip service to this by
paying attention to the letter of what is introduced but ignoring the spirit.
We need a cultural change in how we perceive the responsibilities of Chief
Executives and Boards of Directors without impeding their
determination at the same time to succeed and generate successful growth.
This is the challenge that faces all of us - bankers, accountants and
government. Let us work together in meeting this challenge so that in the
future we are faced much more with the problems of success rather than with the problems of failure.