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FEATURE
August/September 2009 Print page

Governance, By Any Other Name

Corporate governance became the catchphrase of choice when companies like Enron and WorldCom, which practiced anything but, tanked at the turn of the millennium. Roughly a decade later, with the rise of Islamic financial institutions, the question surfaces as to whether these institutions require a separate set of guidelines. AYU AZIZ investigates. Corporate governance in Islamic finance is a thorny issue. Some feel that Islamic companies need their own set of guidelines. Others, that corporate governance is corporate governance is corporate governance. And that as Islamic finance becomes more mainstream, we dont need additional ways to separate it from conventional finance. The principles, after all, should be universal and all-encompassing. Still others think that both should be subject to the same set of corporate governance guidelines, with an additional component to address any Shariah-related issues. Firstly, lets try to get an idea about what corporate governance actually is. One of those terms casually bandied about by most industry players, it is also probably one of the least understood. Conventional corporate governance standards basically aim to address the separation of ownership and management by ensuring that actions of the management are kept in line with the interests of shareholders and stakeholders. Once upon a time, these stakeholders were the money people the shareholders, banks, creditors. These days, stakeholders encompass everyone from the guy who drives your trucks to the little old lady who buys your product to the community at large. So should Shariah compliant financial institutions be separately governed? Securities Commission Malaysia project leader Usama DeLorenzo (pic top), speaking in his personal capacity, points out that the Shariah provides a good source for a principles-based approach, which is arguably more effective than the rules-based approach taken by the conventional lot, in achieving good corporate governance. While many religions have general guidelines on ethics in trades, transacting and investment, not only are the guidelines set forth in Islam very detailed, but the industry also binds itself to following them, he notes He points out that Islamic finance firms have a unique set of advisors, in effect, a group of specialized scholars comprising the Shariah board. They are a unique stakeholder in the company and the governance of a board consisting of Shariah scholars would not be the same as a governance of an advisory board for any other type of institution. These groups require a different set of guidelines and principles. According to the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) governance standards, Shariah scholars must strive to deal with Shariah compliance issues faced by Islamic financial institutions to the best of their capability, without neglecting the ethics of their profession and with due consideration to God as well as to the public. It says that Shariah scholars should act independently at all times and be free from conflicts of interest. If a conflict of interest arises, the Shariah scholar should review the issue with the Shariah Scholars Board (SSB) and if it is still not resolved, the Shariah scholar in question should resign. The Islamic Financial Services Board (IFSB) recently adopted two new standards for Shariah compliant finance the Guiding Principles on Governance for Islamic Collective Investment Schemes (IFSB-6) and Capital Adequacy Requirements for Sukuk Securitizations and Real Estate Investment (IFSB-7). IFSB-6 is designed to reinforce existing international best practices in collective investment schemes while IFSB-7 covers the areas of capital adequacy which are not already covered by an earlier standard. The Malaysian Rating Corporation (MARC) plans to take the question of proper Shariah governance a step further by introducing Shariah governance quality ratings which assess how well an organization conforms to Shariah principles. CEO Mohd Razlan Mohamed points out that Shariah governance, like corporate governance, is a relative matter. Our Shariah governance ratings will consider the extent to which an entitys policies, procedures, risk management processes and internal practices promote compliance with Shariah principles. MARC will also assess qualitatively the extent to which management, corporate culture and organization values contribute to overall Shariah governance quality. Our rating is not a pass or fail Shariah compliance assessment of a ratee. What we are looking at is the degree of compliance. We will look at the internal processes, policies, guidelines and infrastructure they have in place to promote compliance on a sustained basis as well as the managements role in shaping Shariah governance over time. MARC will also look at the monitoring processes in place and their overall effectiveness. Basically, we aim to have the most comprehensive and holistic approach towards Shariah compliance and we will be able to flag issues and advise companies on how they can fine tune their approach to achieve a higher degree of Shariah governance as implied by its rating. Mohd Razlan feels there is a niche market for Shariah governance ratings, especially for those who want to position themselves as

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institutions with deep-seated Shariah values. We will be providing a benchmark which will eventually promote good corporate governance in a Shariah context. But Malaysia is not the only country all het up about the proper governance of Islamic financial institutions. Dubai-based Hawkamah Institute of Corporate Governance has set up a taskforce to introduce international best practices in the corporate governance framework of Islamic banks and financial institutions in the GCC. It is now engaged in documenting the preliminary findings of a survey it conducted across the Middle East North Africa (Mena) region. This taskforce was established as part of Hawkamahs regional work to advance corporate governance in Islamic financial institutions. It is looking to develop a policy brief on the corporate governance of Islamic financial institutions and propose concrete recommendations for implementation through a mixture of fact-finding questionnaires, meetings with Islamic finance industry experts and electronic consultations. Hawkamah says the taskforce would also conduct workshops, seminars and conferences on the governance issues and challenges faced by the Islamic finance industry across the Middle East and North Africa region. It will then present the brief to policymakers, Islamic banking regulators, supervisors and Islamic banks for possible adaptation. A senior Islamic banker, who spoke on condition of anonymity, is all for separate corporate governance: It is ideal if there is separate corporate governance for Islamic finance institutions. Regulators want us to have our very own risk management, asking us to avoid using the conventional method of managing our risks. This is difficult for us since most Islamic bankers today come from a conventional background. So, it is only natural for us to resort to the conventional approach when we are faced with a problem. Even board members who wear their Islamic hats gradually revert to their conventional hats as the meeting progresses, she points out. To DeLorenzo, the principles which make up the foundation of good corporate governance are the universal principles of good ethics and responsibility. These universal principles do not exclude those businesses that are not Shariah compliant but, if implemented correctly, would be a natural component of the guidelines of any Shariah compliant business. The concepts of unity and stewardship prevail in all Islamic thought including that to do with business and ethics. Stewardship is a trusteeship granted to a Muslim by God and invokes in us all a sense of responsibility toward resources. It is the duty of a Muslim that the resources provided by God are used wisely, he concludes. Copyright 2009 RED money Group. All Rights Reserved.

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