Attributes of Sound Shariah Corporate Governance Criteria From Investor Perspective

1557
3rd INTERNATIONAL CONFERENCE ON BUSINESS AND ECONOMIC RESEARCH ( 3rd ICBER 2012 ) PROCEEDING
12 - 13 MARCH 2012. GOLDEN FLOWER HOTEL, BANDUNG, INDONESIA ISBN: 978-967-5705-05-2. WEBSITE: www.internationalconference.com.my
ATTRIBUTES OF SOUND SHARIAH CORPORATE GOVERNANCE CRITERIA FROM INVESTOR PERSPECTIVE

Memiyanty Abdul Rahim Faculty of Administrative Science & Policy Studies Universiti Teknologi MARA, Malaysia memiyanty@salam.uitm.edu.my Mohd Sirajuddin Siswadi Putera Mohamed Shith Centre for Islamic Thought & Understanding Universiti Teknologi MARA, Malaysia sirajuddin@salam.uitm.edu.my Associate Professor Dr. Muhamad Rahimi Osman Centre for Islamic Thought & Understanding Universiti Teknologi MARA, Malaysia mrahimi313@salam.uitm.edu.my
ABSTRACT Malaysia Islamic market has progressed tremendously in terms of size, efficiency and range of instruments. This has been highlighted by Chief Executive Officer of Bursa Malaysia Berhad, Dato Tajuddin Atan that as of February 2011 close to 60 percent of the total market capitalisation of listed securities on Bursa Malaysia is Shariah-compliant. Thus, Islamic institutions and instruments in Malaysia have now gained universal acceptance and been recognized as one of the fastest growing areas in banking and finance. First, this paper reviews the importance of governance for Islamic Financial Institutions (IFIs) where it would demand unique feature from conventional corporate governance and highlights similarities between them. Second, it suggests Shariah governance criteria that can be applied to IFIs to attract potential and existing investor. This paper contributes to the body of literature of Shariah governance that would lead to better signal to investors investment decisions.
Field of Research:
Shariah Governance, Islamic Financial Institutions, investor, investment decision.
---------------------------------------------------------------------------------------------------------------------------------1. Introduction Internationally, corporate meltdown in recent years has spawned much interest in the role of board of directors in monitoring or controlling corporate performance. Corporate scandals worldwide and locally may lead stakeholders to question the effectiveness of monitoring mechanisms on the management. Various parties such as regulators, stakeholders of financial information of the company have long debated on pushing the important of an effective corporate governance model. Thus, this raises a
1558
question whether corporate governance system failed to detect any fraud or mismanagement in the corporation? An effective monitoring mechanism is essential for every corporation in ensuring managers action is in accordance with the stakeholders interest. The separation of managers and shareholders somehow rather contributing to the conflict of interest as the shareholders are people who own a firm and the managers as the other parties who manage the business (Jensen and Meckling, 1976). Failure to monitor the management may lead to many problems and to some extent, corporate scandals. The dynamics and the effectiveness of corporate governance have been questioned due to the high profile corporate debacles internationally (Enron, WorlCom, Parmalat) and locally (Transmile Bhd, Sime Darby Berhad, Kenmark Industrial Co). Specifically, it was shocking when Enrons accounts prior to the failure had appeared to be healthy and prosperous (Wearing, 2005). Do these evidences show that the conventional system for corporate governance failed to detect any fraud or mismanagement in the corporation? Even though there are a lot of regulations in governing the corporation and financial institutions such as MCCG (2000 and revised 2007), guideline from Bank Negara and Bursa Malaysia. The number of corporate failures keep increasing from time to time (Wearing, 2005) hence, it does give signal to the stakeholders that something is wrong with the management of the business. Therefore, it is time to review whether institution that governed by the Shariah governance structure can be seen as an ideal model for good governance and also as an attractive signal to the investors in investing for the institution. Islamic financial institutions (IFIs) were initially developed to fulfill the needs of Muslims. The increasing number of Muslims who wish to lead their lives according to the Shariah, the legal code of Islam is undeniable. IFIs are governed by Shariah and regulations set by the respective country. Analyzing the governance criteria of IFIs from Shariah governance perspective is vital and relevant for Malaysia as the findings of the paper are expected to contribute towards improving governance and the financial performance of the financial industry as a whole. Moreover, as religion has been considered as guidance for a good conduct thus, this paper can contribute on the enhancement and improvement for governance area. 2. The Development of Shariah Governance in Islamic Financial Institution In Malaysia, IFIs covers Islamic bank licensed under Islamic Banking Act 1983 (IBA); a takaful and retakaful under the Takaful Act 1984 (TA); a financial institution licensed under the Banking and Financial Institutions Act (BAFIA) that participates in the Islamic Banking Scheme; and a development financial institution prescribed under the Development Financial Institutions Act 2002 (DFIA) that participates in the Islamic Banking Scheme. Shariah governance is peculiarly exclusive and unique to the Islamic system of financial management and it is found that little is written on the area of corporate governance in IFIs (Zulkifli Hasan, 2011). The most recent development in Malaysia is as on 1st January 2011, the Shariah governance framework (SGF) has been introduced and be fully implemented completely by the end of June 2011 for the Malaysia Islamic financial institutions.
1559
Prior to that (SGF implementation), financial institutions are governed by Bank Negara Malaysia Guidelines on Corporate Governance for Licensed Institutions (2007), BNM Guidelines on the Governance of Shariah Committee (2005) and also Islamic Financial Services Board (IFSB) (2009) on Guiding Principles on Shariah Governance Systems for institutions offering Islamic Financial Services and IFSB (2006) Guiding Principles on Corporate Governance Systems for institutions offering Islamic Financial Services. Bank Negara Malaysia developed the Shariah governance framework for IFIs with the ultimate objective to enhance the role of the board, the Shariah Committee and the management in relation to Shariah matters. There are three objectives of SGF for IFIs in Malaysia (Bank Negara, 2011): 1. Sets out the expectations of the Bank on an IFIs Shariah governance structure, processes and arrangements to ensure that all its operations and business activities are in accordance with Shariah; 2. Provides a comprehensive guidance to the board, Shariah Committee and management of the IFI in discharging its duties in matters relating to Shariah: and 3. Outlines the functions relating to Shariah review, Shariah audit, Shariah risk management and Shariah research. 3. Conceptual Definition of Corporate Governance and Shariah Governance Corporate governance is defined by the Finance Committee Report in 1999 as the process and structure used to direct and manage the business and affairs of the institution towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value, whilst taking into account the interests of other stakeholders. OECD Principles of Corporate Governance (revised April 2004) clearly emphasized that it involves a set of relationships between an institutions management, its board, its shareholders and other stakeholders. In addition for banking industry, BIS Guidelines on Enhancing Corporate Governance for Banking Organisations (1999, 2005 and revised 2006) elaborate more on corporate governance involves the manner in which the business and affairs of an individual institution are governed by its board of directors and senior management, affecting how an institution: sets corporate objectives, including generating economic returns to owners; runs the day-to-day operations of the business; considers the interests of recognised stakeholders; aligns corporate activities and behaviors with the expectation that the institution will operate in a safe and sound manner, and in compliance with applicable laws and regulations; and protects the interests of depositors. Shariah Governance system has been defined in IFSB (2009) as structures and processes adopted by stakeholders in IFI (from financial regulators to market players) to ensure compliance with Shariah rules and principles. Among the arrangements to ensure that there is effective independent oversight of Shariah compliance over the operations such as: 1. Issuance of relevant Shariah pronouncements/resolutions. 2. Dissemination of information on such Shariah pronouncements/resolutions to the operative personnel of the IIFS who monitor the day-to-day compliance.
1560
3. An internal Shariah compliance review/audit for verifying that Shariah compliance has been satisfied, during which any incidents of non-compliance will be recorded and reported, and as far as possible, addressed and rectified. 4. An annual Shariah compliance review/audit verifying that the internal Shariah compliance review/audit has been appropriately carried out and its findings have been duly noted by the Shariah board. Overall, the SGF is divided into six sections: first: general requirements of Shariah governance framework, second: oversight, accountability and responsibility, third: independence, fourth: competency, fifth: confidentiality and consistency and sixth: Shariah compliance and research functions. 4. Investor Perspective A strong corporate governance structure would eliminate or at least reduce the conflicts of interest between the shareholders and management. Empirical studies show mixed results on the relationship between corporate governance structure and corporate financial performance such as studied done by Stanwick and Stanwick (2010), Baptista et al., (2011), Kaserer et al., (2008), Barontini and Bozzi (2011), Dwivedi and Jain (2005), Welch (2003) and Tian and Lau (2001). Therefore as suggested by many researchers include Mallin (2010, pp.122) that as the findings is mixed and provide inconclusive evidence of such relationship between corporate governance and company performance hence, it is crucial to identify the investors investment decisions as they willing to pay premium for good corporate governance. As further highlighted by Mallin (2010) good governance can assist to ensure companies do not fail and it is more likely to attract external capital flows than one without governance. A survey by KLSE-Pricewaterhouse Coopers in 2002 also shows that institutional investors are willing to pay up to 10 per cent premium for firms with excellent corporate governance practices. The institutional investors through their block ownership can exert direct influence on management performance which leads to an increase in company performance as a whole (Abdul Rahman, 2006). Thus, institutional investors are considered the key players in most financial markets as they play a significant role in monitoring firms in which they own shares (Al- Najjar, 2010). The survey by McKinsey (2002) as quoted by Mallin (2010) also found that majority investors would pay 11 per cent for the shares of a well-governed Canadian company, 12 per cent more for the shares of a well-governed UK company, and 14 per cent more for the shares of a well governed US company, compared to shares of a company with similar financial performance but poorer governance practices. For a well-governed company findings, the premium rise to 16 per cent Italian company, 21 per cent for a Japanese company, 24 per cent for a Brazilian company, 38 per cent for Russian company and 41 per cent for Moroccan company. In the same vein for Malaysia, Part 4 of the Malaysian Code of Corporate Governance (2000 and revised 2007) outlines the importance of institutional investors in ensuring good governance practices in Malaysia specifically in monitoring the composition of the boards and the appointment of non-executive directors.
1561
Institutional investors in Malaysia (based on categories) include insurance companies, financial institutions, cooperation, pilgrim, state, foreign, government, local and non-government (Abdul Wahab, 2006). Major local institutional investors in Malaysia include Employee Provident Fund (EPF), Khazanah Holding (KH), Armed Forces Fund (LTAT) and Pilgrims Fund (Lembaga Urusan Tabung Haji - LTH). Theoretically, as stated by Shleifer and Vishny (1986) block ownership by institutional shareholders are more efficient to prevent managers to act based on their personal interest than individual shareholders because they can ascertain accurately more managerial performance or can oversee company operations may lead to increase company performance. In addition, Gillan and Starks (2002) posited that institutional activism arises when the owners (shareholders) are disappointed with the performance of the board of directors. In UK, the significant role of institutional investors in corporate governance has been highlighted in the following reports: the Cadbury Report (1992), the Greenbury Report (1995), the Hampel Report (1998), the Myners Report (2001), the Combine Code (2003), International Corporate Governance Network ICGN Statement of Principles on Institutional Shareholder Responsibilities (2007) and International Shareholders Committee Improving institutional investors role in governance and ICGN (2009). 5. The importance of Shariah Governance and its unique feature It is clearly written in the BNM Guidelines (2007) that IFIs are also aligned with the principles enshrined in The Malaysian Code on Corporate Governance (MCCG), the Bank for International Settlements (BIS) Guidelines on Enhancing Corporate Governance for Banking Organisations and other international best practices on corporate governance. The similarities between these two structures can be further scrutinised from the board structure such as the board composition, board ownership structure, board committee structure, board competency, boards compensation and board directorship (Bank Negara Malaysia, (2011) Shariah governance framework for Islamic Financial Institutions; BNM, Guidelines on Corporate Governance for Licensed Institutions, 2007, pp.11; Security Commission Malaysia, Corporate Governance Blueprint, 2011; MCCG, 2000 & revised 2007) . In addition to that, the operations and management also would be based on the nature of the institutions accordingly. The unique feature of Shariah Governance Structure is that Shariah governance system complements the existing governance in terms of three functions. Firstly, the key person involves in governance under typical financial institution only board of directors however, in IFIs the additions of Shariah Board takes into place. Secondly, for controlling purposes besides internal and external auditor however for IFIs they have Internal Shariah Review Unit (ISRU) and external Shariah review team. Lastly, to ensure compliance in IFIs the additional of Internal Shariah Compliance Unit/Department (ISCU) is required besides regulatory and financial compliance officers, unit or department. One of the unique features of Shariah governance structure is the Shariah Committee. Shariah governance does not work in the governance environment without Shariah committee. Shariah Committee competency in handling work in IFIs is also as a signal to the investor that the operation of the institution is properly conducted accordingly to the Islamic values.
1562
The board of directors cannot decide on the Shariah compliant matters without prior approval or decision made by the Shariah committee. Shariah governance structure requires both parties to work hand-in-hand together specially on the Shariah matters. 6. Conclusion Corporate governance structure based on the Islamic Governance Framework would be the ideal model to ensure the company financial performance as the welfare of the public are taken care off as a whole and accountable to the oneness, Allah S.W.T. This paper will add to the existing body of knowledge in the areas of corporate governance specifically on Shariah governance. If it is proven by future research that Shariah governance structure can give signal to the investors in making decision to invest in IFIs. Thus, this SGF can be used as guideline for other institutions in improving financial performance. Ultimately, this is expected to have a positive impact on the economic growth of Malaysia as a whole. The expected findings will have important implications to researchers, policy makers, corporate boards and investors. References Al-Najjar, B. (2010) Corporate governance and institutional ownership: evidence from Jordon, Corporate Governance, Emerald Group Publishing Limited, 10(2), 176-190. Abdul Rahman, R., (2006) Effective Corporate Governance, UPENA, Universiti Teknologi MARA, Shah Alam. Abdul Wahab, Effiezal (2006) Institutional ownership, corporate governance and firm performance, Working Paper, Curtin University of Technology, Australia. Bank for International Settlements (BIS) Guidelines on Enhancing Corporate Governance for Banking Organisations (September 1999) Bank for International Settlements (BIS) Guidelines on Enhancing Corporate Governance for Banking Organisations (July 2005) Bank for International Settlements (BIS) Guidelines on Enhancing Corporate Governance for Banking Organisations (February 2006) Superseded document Bank Negara Malaysia, (2005) Guidelines on the Governance of Shariah Committee. (BNM/RH/GL/005-6), 1 September 2005 Bank Negara Malaysia, (2007) Guidelines on Corporate Governance for licensed Institutions. (BNM/RH/GL 001-1, January 2007 Bank Negara Malaysia, (2011) Shariah governance framework for Islamic Financial Institutions. (BNM/RH/GL_012_3), 1 January 2011 Baptista M.A.A., Klotzle M.C. and Melo M.A.C.D. (2011) CEO Duality and Firm Performance in Brazil: Evidence from 2008, Revista Pensamento Contemporaneo em Aministracao UFF- 11, 36-55.
1563
Bhagat S. and Black B. (1999) The Uncertain Relationship between Board Composition and Firm Performance, http://papers.ssrn.com/papers.taf?abstract_id=11417> Barontini R. and Bozzi S. (2011) Board compensation and ownership structure: empirical evidence for Italian listed companies, J Manag Gov (2011) 15, 59-89. Dalton D.R. and Dalton C.M. (2011) Integration of Micro and Macro Studies in Governance Research: CEO Duality, Board Composition, and Financial Performance, Journal of Management. 37(2), 404-411. Dwivedi N. and Jain A.K. (2005) Corporate governance and performance of Indian Firms: The effect of Board Size and Ownership, Employee Responsibilities and Rights Journal, 17(3), 161 172 Elsayed K. (2009) Board size and corporate performance: the missing role of board leadership structure, Journal of Manag Gov. Springer. DOI 10.1007/s10997-009-9110-0. Finegold D., Benson G.S. and Hecht D. (2007) Corporate Boards and Company Performance: review of research in light of recent reforms, Journal Compilation @ Blackwell Publishing Ltd.Oxford. Gillan S. and Starks L. (2002) Institutional investors, corporate ownership and corporate governance, discussion paper no 2002/9, WIDER, Helsinki. Islamic Financial Services Board (2006) Guiding Principles on Corporate Governance Systems for institutions offering Islamic Financial Services (excluding Islamic Insurance (Takaful)Institutions and Islamic Mutual Funds), December 2006 Islamic Financial Services Board (2009) Guiding Principles on Shariah Governance Systems for institutions offering Islamic Financial Services, December 2009 Jensen, M. and Meckling, W. (1976) The theory of the firm: managerial behaviour, agency costs and ownership structure, Journal of Financial Economics, 3(4), 305-360. Kaserer C. and Moldenhauer B. (2008) Insider ownership and corporate performance: evidence from Germany, RMS (2008)DOI 10.1007/s11846-007-0009-3 Kuala Lumpur Stock Exchange and Price Waterhouse Coopers (2002). Corporate Governance: Malaysian Survey of Public Listed Companies, independent Non-Executive Directors and Institutional Groups, KLSE Publication, Kuala Lumpur. Mallin C.A., (2010), Corporate Governance. Oxford University Press. New York. Mohd Sehat, Rahayu and Abdul Rahman, Rashidah (2005). Ownership of the firm and corporate value, working paper Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam. NST (2005), Bank Islam suffers RM500 m loss: new management takes big it to move ahead afresh, New Straits Times (Malaysia), October 7. OECD Principles of Corporate Governance (2004) Security Commisison Corporate Governance Guideline
1564
Security Commission Corporate Governance Blue Print (2011) Shleifer, A. and Vishny R. (1986) Large shareholders and corporate control, Journal of Political Economy, 94, 461-548. Stanwick P.A and Stanwick S.D. (2010) The relationship between Corporate Governance and Financial Performance: An empirical Study of Canadian Firms, The Business Review, Cambridge, 16(2), 35-41. Tian J.J. and Lau C.M. (2001) Board Composition, Leadership Structure and Performance in Chinese Shareholding Companies, Asia Pacific Journal of Management, 18, 245-263. Wearing R. (2005) Cases in Corporate Governance, SAGE Publications, London. Welch E. (2003) The relationship between Ownership Structure and performance in Listed Australian Companies, Australian Journal of Management, 28:287 Speech by Dato Tajuddin Atan, CEO, Bursa http//www.bursamalaysia.com [accessed on 2nd May 2011] Malaysia Berhad, 2 April 2011.

Attributes of Sound Shariah Corporate Governance Criteria From Investor Perspective

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Attributes of Sound Shariah Corporate Governance Criteria From Investor Perspective

Hochgeladen von

Copyright:

Verfügbare Formate

1557

ATTRIBUTES OF SOUND SHARIAH CORPORATE GOVERNANCE CRITERIA FROM INVESTOR PERSPECTIVE

Shariah Governance, Islamic Financial Institutions, investor, investment decision.

Das könnte Ihnen auch gefallen