Corporate governance is an internal system that operates controls and structures a firm so as to attain strategic goals to persuade employees, shareholders, creditors, customers and suppliers and fulfilling requirements which are legal and regulatory. It serves what shareholders and other stakeholders' demands for. It directs and controls management activities with a commendable business sense, subjectivity and integrity. Commitment to external market and legislation and a well structured board preserving all policies and processes are characteristics of a sound corporate governance system. Corporate governance system affects the share price and cost of increasing capital in the market and hence quality of the system must be maintained according to the determiners like legislation, financial markets, and other external market forces and not forgetting the international organizational surroundings. Company has only got the internal environment control in its hands i.e. the board culture; therefore structuring it properly will differentiate them from their competent. Corporate governance must exhibit transparency policies and avert deceptive activities thereby strengthening their market position and reputation amongst their share holders and stakeholders. Corporate governance is all about commitment to values, ethical prospective of business and differentiation between personal and corporate funds in company's management. With sound corporate governance socio-economic development and a strong economy can be attained. Proper transparency, disclosure of required information by the people and ethics must be maintained for a healthy economy. The reason for the need of such a system is to exhibit a control system which will help to tune in the incentives of managers of a corporation with those of shareholders. (Business Round Table, 2002)
Financial crises occur due to faulty corporate governance in financial systems. A good corporate governance system has justice, transparency, responsibility and accountability as its four primitive principles. Standards reflected by these principles provide legality to the corporate sector and a wide and deep access to the capital. As defined in many ways a corporate governance relates company's management, it's board, shareholders and stake holders and this relation is developed to improve access to capital ,to draw best valuations and financing on improved terms. It produces better-quality leadership, proficient information flows and work processes and better conformity, accountability, oversight and strategic direction and less conflict to improve company's performance. It implements better financial disclosure thus targeting shareholder and managerial interests. How Corporate governance affects economic growth is explained by the under mentioned factors:
Greater investment, higher growth and more employment can be achieved by an increase in access to external financing by organizations. Further growth and employment can be achieved by making cost of capital lower and the associated firm valuation higher thereby making investments more enchanting.
Improved allocation of resources and better management leads to superior operational performance and thus creation of wealth.
Better terms with stakeholders improve social and labor relationships.
Reduction in Financial crises if a good corporate system is enacted.
Economic growth of the GCC countries are positively affected by the concentration of bank markets because of scale economies. The recent developments in Banking sector were firstly accomplishment of regional and international binding promises for allowing more entries into the markets and secondly security markets standing as competitors particularly stock market. Growth can be achieved in Kuwait and UAE with the introduction of such concentration-reducing measures and therefore good corporate governance is a key factor in supporting economic growth and development in the GCC. (Mohamad, 2008)
What constitutes a Corporate Governance System
The authoritarian body of the system consists of Chief Executive Officer (CEO), The Board of Directors, Management, and Shareholders. Suppliers, customers, work staff, creditors constitutes Stakeholders.
The Board of Directors is a group of officials that has a prime role in maintaining corporate governance system. This group is responsible for appointments, supervision and payments regarding senior executives. Firm's directive policies and strategies are also set by this authoritarian group of members. Owners and authorities of an organization are dependent on The Board of Directors for any information on accountability of the corporation.
An Official at the highest rank who monitors efficacious operations, compliance and administration of the corporate governance is called Corporate Secretary or Company Secretary.
System comprises of these individuals who are either directly or indirectly involved in the effective working of an organization. The working group comprising the director, workers and management get wages, reimbursements and status while the shareholders get money or capital in return. Customers and suppliers are involved in buying and selling procedures. The participants indulge into the organization by investing their capital and are hoping to get a fair capital return and if the firm does injustice to them they may choose to withdraw their participation any further, which will hamper company's functioning and ultimately leading to collapse. (Gianni De Nicolò, 2006)
Corporate Governance Principles to be followed
Honesty, openness, performance orientation, ability to take lead and responsibilities, answerability, trust, mutual respect and assurance to the organization is important rudiments of good corporate governance principles.
Corporate Governance principles should uphold with:
Rights and impartial conduct of shareholders: This can be achieved by imparting understandable and easily available information to the shareholders which will help them to exercise their rights and thus encouraging them to participate in common meetings.
Interests of other stakeholders: Organizations should not forget legal and other responsibilities of the stake holders which they have on their shoulders.
Role and responsibilities of the board: Board forms the internal structure of the corporate governance system and thus it should possess the ability and capability to deal with different business circumstances and to monitor the management activities. The number of executives and non-executive Directors in Board members should be in a proper ratio and CEO and Chairperson never should share same roles and duties.
Honest and Ethical behavior: Responsible decisions that are ethical also and are in favor of justice to all individuals must be taken by the directors and executives. Honest decisions avoid lawsuits, improve public relations and are important for risk handling.
Disclosure and transparency: Corporate governance is accountable for true transparency of all the directive policies and measures taken by the organization in front of its shareholders. Proper implementation of the procedures should be enacted by the organization to verify and safeguard the company's financial reporting integrity. Balanced financial disclosure reports must be timely dispatched to all the investors which will consists of clear and unambiguous information and facts.
Corporate Governance controls
There are two types of controls
Internal corporate governance control
External corporate governance control
Internal corporate governance control deals with monitoring and controlling activities and then encompassing remedial measures to bring about the organizational goals. Examples of monitoring can be stated
Board of directors and their authoritarian control: This team has got the power to hire and fire the apex managerial body. It protects the capital invested by the shareholders and thus takes steps that are ethical and just in eyes of every individual related to that firm. Board of directors examines the functioning of its executives which is an indirect access to the information which helps in making fair decisions. Who will be at the peak post is decided by this team of members and the decisional criterion is the quality of the decision that person takes which will give better financial outcomes. (Corporate Governance, n.a.)
Remuneration: Wages should be in proportion with the individual's performance. To value their performance the rewards can be of either cash or non-cash form.
External corporate governance includes examples of controls that stake holders practice over organization:
media force
competition
demand for and performance information evaluation
government regulations
debt agreements
managerial labor market
conquests
Current Trends and Developments in Global Corporate Governance
Board Composition
Peeking into 2009 trends, people who got retired constituted the greater proportion i.e. 33%, of independent directors. Investors or people working in the departments of finance or accounting constituted about 17% and 14% became the strength of corporate executives which was 33% of the independent director position in 2002. In 2002, the percentage of retirees was just 19%. The reason accumulated for such composition changes is that legislative reforms put greater responsibilities on directors' positions and examples of such legislative reforms are Sabanes-Oxely and other standard reforms.
Leadership Structure
There was a deep discussion on the issue related to separation of CEO and the board chairman roles. The authorized body SEC, in 2009, improved its proxy disclosure rules and asked companies to give the reason for the organization structure they have and why do they think this organization structure is good for the company. To the surprise of SEC, the number of companies that distinguish the role of CEO and the board chairman, for both S&P 500 and S&P 1500 companies, had reduced in 2008 and 2009, the percentage decrease in S&P 500 companies was from 38% to 35% and for S&P 500 companies the reduction was from 46% to 43%. From 2003 to 2008, there was a significant increase in the companies but after that number got reduced.
This decrease did not have an impact on the number of companies that have independent director. From 57% of S&P 500 companies having independent lead in 2008, it grew to 63% in 2009 and the S&P1500 companies grew from 49% in 2008 to 52%. According to experts, the roles of chairman and the CEO have taken the trend of separation because of the shareholders given more drift to corporations so as to get out of the financial crisis by gaining knowledge of independent roles of the executives. (Mohamad, 2008)
Director Elections
According to the experts, 2010 saw a greater force against the director's election because of the veto nature of rubber votes; uninstructed votes issued from the brokerage houses for the good of management or back management. Earlier what happened was that these votes were counted with the general votes but now SEC has restricted the count of ceto votes with general votes from January.
Varying trends were observed in Directors' election in 2008, 2009 and 2010. 72 directors got less than half of the support which can be seen as a drop from 77 directors in the year 2009 but an increase from 32 directors in 2008. Expert's words on that were: In 2009, corporate saw more directors without a greater support but the amount of resignations from the directors were less because of the decreased majority support but in 2010 two director resignations was observed at one company only under the same situations. The majority vote standard has been adopted by 70% of S&P 500 companies and 37% of the S&P 1500 companies. The predictions for 2011 is that companies will observe majority shareholder proposals because of the absence of any majority voting authorization in the most recent congressional legislation on finance related reforms.
Board Diversity
The diversity in the board is a crucial factors in Corporate Governance locally and globally. In order to achieve effectiveness, different ideas and thought are important and that can come up with different people with different mindsets discussing issues. Diversity of can be determined by either the composition of gender or presence of certain percentage of minority groups. If we see the trend, the composition of women or minority in the board members has not changed recently. In 2000, the composition of women in S&P 500 and S&P 1500 companies were 12% and 10% respectively. In 2008, the composition changed to 15% and 12% in S&P 500 and S&P 1500 companies respectively. When minority composition is analyzed, in 2007, 11% of the board composition was minorities and in 2008 and 2009 it grew to 12% for S&P 500 companies. For S&P 1500 companies, the percentage of minorities in 2007 was 9% which grew to just 10% in 2008 and 2009. (Corporate Governance, n.a.)
Board Size
Corporate Governance didn't go for any change in policies for the size of the board and thus the results of 2008 and 2009 remained consistent with those of 2010. Corporate Governance allowed organizations to find out the actual number based on many considerations.
Board Independence
There was no change in board independencies as well from 2008.
Future direction of Corporate Governance in UAE and Globally
In both UAE as well as globally, corporate governance customer oriented and will target their satisfaction because customer satisfaction is going to be the measurement system for adaptability of the firm over time. Corporate Governance should not only concentrate on financial records but also other will be more departments of the organization like Human Resource or Operations while it forecasts it's future success. World will definitely be benefited when new type of corporate information and control architecture will be established. If more diversified groups and an "advisory stakeholders council board" which will consist staff members, escort customers, suppliers and others will be formed than many big organizations can fill the gaps of corporate governance that are existing. Customer satisfaction and employee satisfaction should be taken care of in long terms. For example the firm can reduce cost and cut short the labor to go for long term success in input factors for corporate governance which are not related to finance. But to do that several questions have to be answered like who will do the audit of non-financial departments, what will be the guidelines and who will be charged for it and should not there exist an independent body for this to be appointed by SEC. (Corporate Governance, n.a.)
In UAE, the group of International Organizations that led their hands in the foundation of an Institute for Corporate Governance Hawkama in Dubai are- "the Dubai International Financial Centre (DIFC), Organization for Economic Cooperation and Development (OECD), Centre for International Private Enterprise (CIPE), UAE Ministry of Finance and Industry, International Finance Corporation (IFC), the Institute of Management Development (IMD), Dubai School of Government (DSG), Young Arab Leaders (YAL)", and the Union of Arab Banks(UAB). The objective and ideology behind the foundation of such an organization is the advancement in corporate sector and governance and to help the regional countries to set up Corporate Governance strategies. This move integrates economy and finance of the region with the remaining world. The main motto of the institute is to impart assistance and guidance to public and private sector in Middle East and Africa to accept good quality governance standards. Institute works for regional development and diversification.
It's important to know that the contribution made by the corporations in their economies is affected in terms of how it implements government practices. A healthy Corporate Government system comprises of laws and regulations, institutions and enforcement methods. Implementing these government practices leave an organization with confidence and provides measures that will increase international business and investments for them.
Hawkama aids countries of UAE and Africa in mounting well-organized and globally sound integrated corporate governance frameworks. It offers evaluation of the result of the corporate governance policies that are at the private sector level. It facilitates proficient coordination and the designing, planning and execution of corporate governance reforms.
The target sectors for Hawkama are capital markets and regulatory authorities like banks funds and financial bodies; public sector: media which raise awareness of corporate governance and private sector enterprise inclusive of family business, small scale enterprise.
Hawkama gives co-operation and technical aid to numerous countries in the GCC, including in the UAE, Oman, Kuwait, Bahrain and Saudi Arabia.
