Corporate Governance in Banks and other Finanical Institutions
01 May 2003Risks and Corporate
Governance
Standards
On his part, Mr. Talal Abu-Ghazaleh, Chairman of Talal Abu-Ghazaleh Organization and Co. International, discussed the advantages of corporate governance standards. He explained that a company with good corporate governance is much more sensitive to the needs and objectives of its stakeholders and as a result; builds greater confidence with them. Standards are a powerful weapon in the prevention of fraud and make 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, these standards facilitate access to capital markets and improve the market acceptance of those who buy its goods and services. He pointed out that investment risk is a function of political, security, and business risk and is of crucial importance to our region. Abu-Ghazaleh confirmed that any solution that improves the situation or reduces the perceived investment risk leads to a lack of inward investment and an increase in the flow of outward capital. 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?” he asks. He further stated that we live in the electronic age where it is possible to record information, update it and index it effectively. Company’s communication should be considered as a part of this effort.
Aftermath of the
Collapse of Major
Corporations
Mr. Abu-Ghazaleh pointed out that the aftermath of the collapse of Enron Co. and some other major international companies and financial matters, including money laundering, has raised a number of issues such as corporate governance, the role and responsibilities of the banking profession, and the responsibilities of the auditing profession. It is only recently that the European Commission has published two documents both related directly to corporate governance: (Action Plan on Corporate Governance) where companies will have to publish an annual corporate governance statement, describing their corporate governance structures and practices, and (Reinforcing the Statutory Audit in the European Union) which will require much greater disclosures by audit firms, specially about their international arrangements and also their internal quality assurance.
He went on to say that the Enron debacle and the collapse of other corporations have highlighted corporate governance. It had been a matter of concern for many years before, largely instigated by the collapse of major corporations. The phrase “corporate governance” as such emerged in the 1980s. There are many definitions for corporate governance but the simplest and the best is perhaps the one given in a report issued by the UK Cadbury Committee on Financial Aspects of Corporate Governance: “Corporate Governance is the system by which companies are directed and controlled”. He added that the system should allow for the exercise of independent 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 to the other stakeholders such as employees, suppliers, customers, government, and the society at large.
Roles and Responsibilities of the Board of Director and the Executive Management
Regarding the best practices for the roles and responsibilities of the Board of Directors and the executive management, Abu-Ghazaleh said that all the individuals should be accountable and no one individual or group should dominate decision-making in the organization. This, he said, can be achieved by firstly establishing clear lines of responsibility and authority. He pointed out that one of the major tasks of the Board of Directors is policy formulation so that a clear set of policies should be available to management. The purpose of such policies is to achieve value for the owners and the other stakeholders by operating in an effective and ethical manner.
Lines of responsibility should clearly distinguish the director’s role from that of the chief executive. It should be exceptional that the same individual holds these two posts. If so, good reason should be given and the other directors should review and report on this. We need to distinguish clearly between independent directors and non-executive directors. Independent directors should be appointed for their ability and expertise and not simply because they are important customers, suppliers, or “friends”. They should always be particularly conscious of the obligations to stakeholders.
Mr. Abu-Ghazaleh stressed that no-one could, of course, argue against good corporate governance in all sectors in general, and in the banking sector in particular. The role of banking is so fundamental to our economic and social development that anything that tarnishes it has serious consequences for all of society. Social development and progress only become 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/or traditions. The same applies to standards of good corporate governance. He demanded that we should not only superficially accept this, but should pay attention to the spirit of what is introduced. We need a cultural change in how we perceive the responsibilities of chief executives and Board members without at the same time impeding their determination to succeed.
Internal Audit and
Control
Mr. Abu-Ghazaleh stressed that a key factor in corporate governance is the monitoring and the reporting in the internal control system. Every Board of Directors should have an audit committee. This committee should be composed of independent auditors. Its members should be financially literate and at least one of them should be a qualified accountant. The audit committee should recommend to the Board of Directors the appointment of external auditors and such appointment should be reviewed regularly. The external auditors and the internal auditors should report directly to the audit committee, which would in turn report annually on the state of the internal control system and its adequacy in light of current circumstances.
“Many countries in the world, including the USA and the UK, are reviewing the external auditors’ responsibilities and whether these should include the requirement to contain in their report formal comments on the system of corporate governance. In order to ensure that the auditors are truly independent, it has been suggested in these countries that for certain corporations, specially the very large and the major financial institutions, the auditors should not be appointed by the company but rather by a special body established by the company shareholders or directors to carry out this task,” Abu-Ghazaleh said.
The Role of
Committees
Mr. Abu-Ghazaleh then spoke about the role of the committees formed by the Board of Directors and those of the executive management such as the audit committee, remuneration committee, and Nomination Committee for the organization of the activities of the institutions and companies to create good management. He explained that the audit committee is seen as the key vehicle for monitoring and reporting on corporate governance. Its role includes monitoring of the financial statements, the internal control system, and the internal audit system with direct access to the internal auditor. The remuneration committee should also be composed entirely of independent directors. It is concerned with determining the total remuneration package for the other directors and senior management. It should be transparent in its activities and should make public its terms of reference, then frequency of its meetings, and reporting annually to shareholders. The Nomination Committee should again be composed of a majority of independent directors. It is concerned with the whole process of how individuals are appointed or reappointed to the Board of Directors as the chief executive or general manager. This also includes the requirements of the job and/or whether existing individuals are devoting sufficient time to it.
“Some of the most important aspects of its remit”, Mr. Abu-Ghazaleh went on, “is succession planning, the structure and composition of the Board of Directors and the nature and requirements of the position of chief executive”.
CONCLUSION:
Good Corporate Governance, A Challenge for All
In concluding his important remarks, Mr. Abu-Ghazaleh stressed that all individuals are faced with the challenge of good corporate governance in institutions whether they are employers, accountants, or governments. They are required to face up to the challenge and make it a success instead of drowning in confronting failure. He suggested that the central banks in the AGCC countries in collaboration with the national banks convene a joint seminar to discuss this topic and introduce the executives and members of the Boards of Directors of banks and financial institutions to the different aspects of this subject and the required actions to be done and the responsibilities to be shouldered in order to improve performance and bring these institutions they represent to success as well as preventing them from failure and collapse.
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