Case Study helpful for MBA students

1. Corporate Governance
“Corporate governance is the system by which companies are directed and
controlled, in the interest of shareholders and other stakeholders, to sustain and
enhance value.”
• Corporate governance signifies the manner in which business and affairs of the
corporations are directed and managed by board of directors (BOD) and senior
management.
• Corporate governance plays a vital role in financial institutions and banking
industry as a whole as the survival of the organizations depend on good
governance standards.
• Adoption and implementation of good governance standards allows the
organization to compete in the global market and help us to use resources
efficiently.

2. Objectives of corporate governance
The three primary objectives of corporate governance are:
• The motivation of value-maximizing decisions;
• To eliminate or mitigate conflicts of interest (particularly
those between corporate managers and shareholders); and
• To ensure that the assets of the company are used
efficiently and productively and in the best interests of its
investors and other stakeholders.

3. Fundamental pillars of corporate
governance
 Accountability :
Accountability ensures that management is accountable to the BOD and
the BOD is accountable to shareholders.
• Transparency :
Transparency ensures timely, accurate disclosure on all material matters,
including the financial situation, performance, ownership and corporate
governance.
• Responsibility:
Those in authority to make decisions shall accept the responsibility of
the consequences of the decisions taken.
• Fairness:
Fairness emphasizes on treating all shareholders including minorities,
equitably.
• Independence:
Independence means that the procedures and structures are in place so as
to minimize, or avoid completely conflicts of interest

4. Impact of good corporate
governance
• Good corporate governance has the potential to lead to a
win-win scenario if followed in its spirit.
• It doesn’t only prove beneficial for the shareholders (the
owners), but also for the corporation itself, the economy
and the overall society.

6. Code of corporate governance
Introduction:
Corporate governance principles and codes have been developed in
different countries and issued from stock exchanges, corporations, institutional
investors, or associations (institutes) of directors and managers with the support
of governments and international organizations.
Background:
A committee chaired by Sir Adrian Cadbury was formed in 1991 after
Polly Peck, a major UK company, went insolvent after years of falsifying
financial reports. The committee’s main objective was to limited financial
fraud.

7. UK corporate governance codes
The corporate governance codes in UK are based on principles based
approach and thus the directors need to use their judgments while applying the
relevant codes to their respective scenarios.
The UK corporate governance code is the amalgamation of the:
 Cadbury Report 1992 (comprise of general corporate governance guidelines).
 Greenbury Report 1995 (addresses concern about the level of director
remuneration).
 Hampel Report 1998 (the Report aimed to combine, harmonize and clarify the
Cadbury and Greenbury recommendations)

8.  Hampel Report 1998 (the Report aimed to combine, harmonize and clarify the
Cadbury and Greenbury recommendations)
 Turnbull Report (obligations of the directors with regards to keeping good
internal controls).
 Smith Report 2003 (concerned with the independence of auditors in the wake
of the collapse of Arthur Andersen and the Enron scandal in the US) and
 Higgs Report 2003 (duties of non-executive directors, in response to the
collapse of Enron in US).

9. US corporate governance codes
• The Sarbanes-Oxley Act of 2002 is a United States federal law that set new or
enhanced standards for all U.S. public company boards, management and
public accounting firms.
• Sarbox is based on rule based approach and the penalties for fraudulent
financial activity are much more severe.
• As a result of Sarbox the top management must individually certify the
accuracy of financial information.

10. OECD Principles
 One of the most influential guidelines has been the OECD Principles of
Corporate Governance – published in 1999 and revised in 2004.
 The OECD guidelines are often referenced by countries developing local codes
or guidelines.
 This internationally agreed benchmark consists of more than fifty distinct
disclosure items across five broad categories:
 Auditing
 Board and management structure and process
 Corporate responsibility and compliance
 Financial transparency and information disclosure
 Ownership structure and exercise of control rights

11. Islamic corporate governance model
The concept of corporate governance from Islamic perspective does not
differ much with the conventional definition, as it refers to a system by
which companies are directed and controlled with a purpose to meet the
corporation’s objective by protecting all the stakeholders’ interest and
right.
The two main dominant corporate governance systems along with the
Islamic corporate governance model.

12. The Anglo-Saxon model or “Neo
Liberal” approach
 Anglo-Saxon model is based on the corporate concept of
fiduciary relationship between the shareholders and the
managers, motivated by profit-oriented behavior.
 This is the reason why in the Anglo-Saxon system, the
corporation really needs strong legal protection to protect
the shareholders.

13. The European / stakeholders model
 Another approach of corporate governance was introduced known as the
European or the Stakeholders model.
 In this system, companies raise most of their external finance from banks that
have close, long term relationships with their corporate customers.
 The European model or stakeholder theory rejects the three main propositions
of the American model namely:
 All stakeholders have a right to participate in corporate decisions that affect
them
 Manager’s fiduciary duty to protect the interest of all stakeholder; and
 The corporation’s objective to promote the interest of stakeholder and not only
shareholders.

14. Islamic Corporate Governance
Model
Why Islamic model is different?
• The main objective of corporations including the Islamic corporations is to
maximize the shareholder’s value of wealth.
• Therefore, it has been suggested that particularly IFIs should come up with an
alternative models of corporate governance.
• The foundation of Islamic faith is Tawhid and the basis for the corporate
governance framework also emanates from this concept.
Allah says in the Holy Quran:
“who remember Allah standing and sitting, and (lying) on their sides, and
ponder on the creation of the heavens and the earth (and say) “Our Lord, You
have not created all this in vain. We proclaim Your purity. So, save us from the
punishment of Fire.”53

15.  This verse provides fundamental principle of governance where everything
created by Allah has a purpose and human being is created to be the world’s
vicegerent. By putting a trust to mankind as a vicegerent, Allah plays actively
roles to monitor and involve in every affairs of human being and He is aware
and knowing everything all the times.
 As Allah knows everything and all mankind is answerable to Him, the principle
of Tawheed shall be the foundation of the corporate governance model in Islam
as the parties involved in the corporation are answerable and accountable to
Allah.

16. Key factors in corporate governance of
Islamic Financial Institutions (IFIs)

18. Introduction to AAOIFI governance
standards
Introduction:
Accounting and auditing standard for Islamic
financial institution (AAOIFI) was established in 1990
under Article of Association by Islamic Financial
Institutions (IFIs), with an aim of developing
accounting, auditing and governance standards for
IFIs.
AAOIFI have issued 25 Islamic Financial
Accounting Standards, 5 Auditing Standards, 7
Governance Standards and 2 standards on code of
ethics

19. The governance standards issued by the
AAOIFI are termed as Governance
Standard for Islamic Financial
Institutions (GSIFI) are:

20. Shariah Supervisory Board (GSIFI-1)
 Shariah Supervisory Board (SSB) is an independent body of specialized jurists
in fiqh almua malat (Islamic commercial jurisprudence).
 SSB is entrusted with the duty of directing, reviewing and supervising the
activities of IFI in order to ensure that they are in compliance with Islamic
Shariah rules and principles. The fatawas and rulings of the SSB shall be
binding on the IFI.
GSIFI-1 focuses mainly on the following matters related to SSB:
 Appointment of SSB members;
 Composition of SSB members;
 Dismissal of SSB members; and
 SSB’s Report and its elements.

21. Shariah Review (GSIFI -2): From
Chapter F-02.
 Shariah review is an examination of the extent of an Islamic financial
institution’s compliance, in all its activities, with the Shariah. The objective of
the Shariah review is to ensure that the activities carried out by an Islamic
financial institution do not contravene the Shariah.
The standard provides guidelines on the following:
 those who are responsible for the Shariah review;
 planning and designing Shariah review procedures;
 execution review procedures;
 preparation and review working papers; and
 quality assurance.

22. Internal Shariah Review (GSIFI -3):
From Chapter F-02.
The internal Shariah review is an integral part of the organs of governance of the
Islamic financial institution and operates under the policies established by the Islamic
financial institution.
The primary objective of an internal Shariah review is to ensure that the
management of an Islamic financial institution discharges their responsibilities in relation to
the implementation of the Shariah rules and principles as determined by the Islamic financial
institution’s Shariah Supervisory Boar
 emphasis of internal Shariah review;
 procedure of internal Shariah review;
 quality assurance of internal Shariah review;
 dependence and objectivity;
 scope of work;
 planning;
 examining and evaluating internal Shariah review information;
 reporting;
 management of the internal Shariah review;
 quality Assurance of internal Shariah review;
 elements of an effective internal Shariah review control system.

23. Audit and Governance Committee -
AGC (GSIFI -4)
• The importance of the AGC for an IFI emanates from its
role in achieving the fundamental objectives of an IFI, by
enhancing greater transparency and disclosure in financial
reporting and enhancing the public’s confidence of the IFI
as genuine in its application of Shariah rules and principles.

24. Independence of Shariah
Supervisory Board (GSIFI -5)
Independence of Shariah Supervisory Board (GSIFI -
5) This standard lays certain principles of governance.
Some of those principles are:
 Fair treatment of equity holders;
 Equitable treatment of fund providers and other significant
stakeholders;
 Fit and proper conditions for BOD and management; and
 Effective oversight.

25. Introduction to IFSB standards on
governance
Introduction:
• Islamic Financial Services Board (IFSB) was officially inaugurated on
November 03, 2002 and started its operations on March 10, 2003.
• It promotes the development of a prudent and transparent Islamic financial
services industry through introducing new, or adapting existing international
standards consistent with Islamic Shariah principles.
The list of members of the IFSB includes regulatory and supervisory
authorities as well as:
• International Monetary Fund;
• World Bank;
• Bank for International Settlements;
• Islamic Development Bank;
• Asian Development Bank;
• Islamic Corporation for the Development of Private Sector (Saudi Arabia); and
• key market players and professional firms operating in various jurisdictions.

26. Till date IFSB has issued 11 standards which
are listed as follows:

28. Out of the aforementioned 11 standards as issued by the IFSB the
following pertains to governance:
IFSB-3:
This standard sets out seven guiding principles of prudential
requirements in the area of corporate governance for Institutions offering
Islamic financial services (IIFS) excluding Takaful and Islamic Mutual funds.
The guiding principles are divided into four parts:
• General governance approach of IIFS;
• Rights of investment account holders (IAH);
• Compliance with Islamic Shariah rules and principles; and
• Transparency of financial reporting in respect of investment accounts.
An essential feature of IIFS is the requirement to comply with Islamic
Shariah rules and principles. These guidelines only contain the prudential
requirements that aim to ensure Shariah compliance by IIFS as a matter of
corporate governance.

29. IFSB-6:
This standard sets out the guiding principles for the Islamic Collective
Investment Scheme (ICIS). Under the guiding principle, Islamic Collective
Investment Scheme (ICIS) is defined as any financial scheme which meets all
of the following criteria:
 Investors have pooled their capital contributions in the fund where their share is
divided into units and the right to share profit or losses in the pool;
 Fund is established and managed in accordance with Shariah rules and
principles; and
 It is a separate entity in terms of financial asset and liability.
Examples of ICIS may include:
 Open-ended funds;
 Closed-end fund;
 Unit investment trust;
 An individual fund; and
 Profit sharing investment account.

30. IFSB-8:
This standard sets out the guiding principles for the Takaful
undertakings. As per the definition in the standard:
“Takaful is the Islamic counterpart of conventional insurance,
and exists in both Family and General Forms. It is derived from an
Arabic word that means joint guarantee, whereby a group of
participants agree among themselves to support one another jointly for
the losses arising from specified risks”.

31. IFSB-10:
 Shariah Governance System as per the standard refers “to the set of
institutional and organizational arrangements through which an IIFS ensures
that there is effective independent oversight of Shariah compliance over each of
the following structures and processes:
 Issuance of relevant Shariah pronouncements / resolutions;
 Information dissemination to the concerned personnel to assist in monitoring
compliance with such resolutions;
 Internal Shariah compliance review / audit to verify, record and report any non-
compliance of Shariah; and
 An annual Shariah compliance review / audit to verify internal Shariah
compliance review / audit and its finding are reported to Shariah board.

32. THANK YOU