Recommendations for Effective Corporate Governance

This assignment provides a comprehensive analysis of the importance of good corporate governance in modern business. It highlights the potential consequences of poor governance, including profit loss, corruption, and a damaged reputation. The report emphasizes the need for transparency, accountability, and effective communication with stakeholders. Recommendations include improving transparency through accurate reporting and disclosure of CSR activities, establishing positive interactions with investors and stakeholders, and ensuring the board of directors promotes strategic goals and ensures accountability.

ROLES OF CORPORATE GOVERNANCE
Corporate governance in the IFIs implements several general concept of corporate
governance in other types of corporation. The principles of corporate governance are
generally universal in character. Corporate governance main objectives are promoting
corporate fairness, transparency and accountability. A good corporate governance is vital in
order to protect the rights and interest of the shareholders. The context of corporate
governance in IFIs is its framework goes beyond the relationship between the shareholders,
BOD, management as it includes maintaining the relationship with Allah (SWT). IFIs are
required an additional framework that meets the guidelines of Shariah to safeguard and
maintain not only the relationship with Allah (SWT) but as well as the relationship with
humankind and the society.
Grais and Pellegrini (2006) stated that there are two roles of corporate governance that are
exclusive to IFIs which are a need to reassure stakeholders that their activities are fully
shariah compliant and secondly, they need to assure that IFIs are able to maintain and
improve growth as well as showing efficiency, stability and trustworthiness in the corporation.
These are the the role of corporate governance to make sure it is a profit generating
corporate and at the same time still meeting the requirements of Shariah to promote growth,
efficiency, stability and trustworthiness.
Other than that, corporate governance in the IFIs is an important aspect in improving risk
management as a whole. Failure of the corporation in providing appropriate measures to
mitigate risk might lead to corruption of the corporation. Corporate governance plays an
important role to identify risks of Shariah non-compliance. It need to identify the risks occurs
and provide appropriate measures and monitors as well as control the risks in the corporate.
In addition, a good corporate governance should have a transparent and sound disclosure of
accounting and auditing procedure. They should have a transparent in all business
transactions to make sure they are preventing from corruption. By implementing this, it
allows the corporation to compete healthier and preventing from any fraud or malpractices in
the organization. In IFIs, the Shariah committee are responsible to advise the IFIs in its
operations, business, affairs and activities are all following the Shariah guidelines. Every IFIs
should have a transparency in disclosures as they should disclose in the annual report of its
information on Shariah governance. It is a guideline set by BNM for every IFIs to disclose
their annual report.

On top of that, the role of corporate governance is to promote outstanding corporate
performance. It is important to continuously improving the governance structures and
processes to ensure quality decision-making, encourage effective and efficient planning for
senior management and enhance the long-term prosperity of companies. It can also help in
improving the corporate’s in term of share price or profitability. In IFIs, it is the board’s
responsibility to promote sustainable growth and financial soundness of an IFI. The boards
must monitor the IFIs accountability and transparency of the Shariah governance in the
company and help them to manage the risks with coming up with appropriate strategies for
the IFIs. The director also plays an important role and they need to develop and strengthen
his knowledge and understanding on Islamic finance and aware of the developments in an
IFI because his act may influence good shariah governance.
Enhanced Investor Trust: Investors consider corporate governance as important as
financial performance when evaluating companies for investment. Investors who are
provided with high levels of disclosure and transparency are likely to invest openly in those
companies.
Better Access to Global Market: Good corporate governance systems attract investment
from global investors, which subsequently leads to greater efficiencies in the financial sector.
Based on the OECD principles of corporate governance number five which is the role and
responsibility of the board, the corporate governance framework should ensure strategic
guidance of the company, the effective monitoring of management by the board and the
board’s accountability to the company and the shareholders.

FRAMEWORK IN CORPORATE GOVERNANCE
Corporate governance is an important concern that both conventional and Islamic services
sectors are related with. The key principles of good corporate governance in the OECD
Principles are relatively relevant towards the IFIs. It includes the element of separation of
ownership and control, transparency and market discipline, balancing the stakeholders
interests and information asymmetries. However, there are several features of Shariah
governance that makes it unique which is faith-based approach that requires all business
transaction to comply with the Shariah principles and at the same time, recognition and
acknowledgement of the profit motive and maximisation of shareholders’ wealth.
In 2010, the Central Bank of Malaysia (BNM) had introduced a guideline for IFIs to ensure
shariah compliancy which is the Shariah Governance Framework (SGF2010). The objective
of Shariah governance framework (SGF2010) is to enhance the role of the board, Shariah
committee and management in relation to Shariah matters to make sure it achieve a shariah-
based operating environment. The framework outlined the fundamentals of Islamic
governance framework for Islamic banks in Malaysia. Many Islamic Financial Institution
implemented the SGF with modifications, known as internal SGF, to suit their institutions’
organisational structure. The framework has outlined four main functions which are Shariah
risk management, Shariah review, Shariah research and Shariah audit. These functions play
a key role in helping the Shariah committee in performing their duties by making sure the
activities of IFIs are Shariah compliance. It provides the basic requirement of Shariah
governance that IFIs should have.
The straight lines show that Shariah risk management, Shariah review, Shariah research
and Shariah audit report directly to their respective Board and Shariah Committees. While
the dotted lines indicate the respective teams that indirectly report to the Shariah Committee
and Islamic Bank Management Team. One of the roles of the Board of Directors is to act as
the Board Risk Management Committee and Board Audit Committee.
In a nutshell, under the ambit of SGF, the management acts as a key organ in helping IFI in
achieving as well as maintaining its success in the industry. As mentioned above, the roles
of management in the framework is being responsible for observing and implementing
Shariah resolutions and regulations made by the Shariah Advisory Council (SAC) of BNM
and Shariah Committee (SC) respectively, promote transparency by providing exact
information to the SC in allowing them to deliver their obligations accordingly, providing

sufficient staff who can support the SGF based on the size of IFI including other relevant
facilities such as training, research materials and others and lastly, notifying the BNM and
SC on any potential and actual Shariah non-compliance events or activities and ensuring the
correct rectification measures can be taken into action immediately.
Figure 1 shows the functions and responsibilities of each organ in the Shariah Governance
Framework.

DIFFERENCES COMPARED TO WESTERN APPROACH
.
ASPECTS THE ANGLO-
SAXON MODEL
THE EUROPEAN
MODEL
THE ISLAMIC
PERSPECTIVE
EPISTEME Rationalism and
rationality.
Rationalism and
rationality.
Faith-based
rationalism and
rationality derived
from the principle of
tawhid
RIGHTS AND
INTERES
To protect the
interest and rights of
the shareholders
To protect the right
of the community in
relation of the
corporation
To protect the
interest and rights of
all stakeholders, but
subject to the rules
of the Shariah
CORPORATE
GOAL
Shareholders
controlling
managers for
purpose of
shareholders profit
Society controlling
corporation for
purpose of social
welfare
Shariah objectives
or Maqasid Shariah;
balancing between
profit and social
welfare
NATURE OF
MANAGEMENT
Management-
dominated
Controlling
shareholder
dominated
Based on the
concept of
vicegerency and
shura; balanced
nature of
management
subject to the
principle of Shariah
and ethics
MANAGEMENT
BOARDS
One-tier board
comprising
executive and non-
Two-tier boards;
executive and
supervisory boards
Shariah board and
BOD are
responsible on

executive directors are seperate maintaining Shariah
compliancy
Source: Adapted from IFSB-10 2009
CORPORATE SOCIAL RESPONSIBILITY
Corporate social responsibility is an effort of a corporation to improve the company
reputation and social impact. Initially, the idea of CSR has started by a few wealthy
businessman as a charitable gesture. The way a company operates, shaped by
environmental and globalization forces affects the way a business is perceived. CSR is
defined differently, for some corporation, it has grown out of corporate charity with clear
vision on improving socials or strategic investment for long term goals. It can also be defined
as something that’s is related to the sustainable development and environment issues.
The concept of CSR initially is just mainly based as charity. As time passes, the phase has
shifted from a philantrophy-based model to a stakeholder-participation based model.in this
era, CSR is important and are fused into company’s Corporate Governance practices.
Corporate governance and CSR focus on ethical practices in the business and the
responsiveness of an organisation to its stakeholders and the environment which it operates.
both of this relates as when it is combined, it creates a better image and reputation and
could also affects the company’s corporate governance.
The main theme for both CSR and corporate governance is transparency, disclosure,
sustainability and ethical behaviour. The concept of CSR is based of self governance which
is related to external legal and regulatory mechanism, whereas Corporate Governance is a
widest control mechanism within which a company takes it management decisions.
Furthermore, the objectives and benefits of CSR and Corporate Governance are similar in
nature, some of them are rebuilding of public trust and confidence by increased
transparency in its financial as well as non-financial reporting and thereby increasing the
shareholder value, establishing strong brand reputation of the company, making substantial
improvement in its relationship with various stakeholders, contributing to the development of
the region and the society around its area of operation, addressing the concerns of its
various stakeholders in a balanced way so as to maintaining a strong market position.
An example for CSR activities is from KFC Malaysia. KFC uses its chain of buyers,
employees, and suppliers to spread their love to the world. One of their projects is the KFC
community impaired community stores (Matang (Sarawak), Sentul Raya (Kuala Lumpur),

and Tanjung Aru (Sabah)) that has hired more than 350 individuals with disabilities. Other
KFC CSR initiatives include; Tabung Penyayang KFC Malaysia, KFC Greek Outlet, and the
Add Hope Malaysia Program, which has raised more than RM 25.5 million. Other than that,
KFC Green has gone to another level with the partnership of Eclimo Sdn Bhd. Eclimo is
providing KFC with Eclimo ES11 eco-friendly electric scooter for deliveries. The scooter is
powered by electricity. It, therefore, has no carbon dioxide and reduces noise pollution.
CONCLUSION
Corporate governance is important to the structures and processes for the direction and
control of companies. It is also about the relationships among the management, Board of
Directors, controlling shareholders, minority shareholders and other stakeholders.
Furthermore, it is also open to public Information disclosure, high transparency and
accountability are basic important elements of best corporate governance that strives the
sustainability of corporations and society. To avoid mismanagement, good corporate
governance is necessary to enable companies operate more efficiently, to improve access to
capital, mitigate risk and safeguard stakeholders. It also makes companies more
accountable and transparent to investors so as to minimize expropriation and unfairness for
shareholders.
A lack of corporate governance can lead to profit loss, corruption and a tarnished image, not
only to the corporation, but to the society, or even worse will influence global as a whole.
This form of corporate governance management is also designed to limit risk and eliminate
corrosive elements within an organization. This also will lead to transparency issues in the
company. If a company want to be transparent, a corporation must accurately report their
profits and losses and make those figures available to those who invest in the company.
Other than that, overinflating profits or minimizing losses can seriously damage the
company’s relationship with stockholders in that they are enticed to invest under false
information.
In addition, with lack of corporate governance it will lead to accountability issues in the
company. Accountability is crucial and necessary for the effectiveness of corporate
governance. The accountability must be examines from the highest level executives to lower
tier employees, each level and division of the corporation should report and be accountable
to another as a system of checks and balances. Above all else, the actions of each level of
the corporation is accountable to the shareholders and the public. Without accountability,
one division of the corporation might endanger the success of the entire company or cause
stockholders to lose the desire to continue their investment in the company.

RECOMMENDATION
The first recommendation is improving the quality of transparency of corporate governance.
Transparency is one of the pillars of good practice of corporate governance based on the
Islamic view of corporate governance. In regard to corporate social responsibility (CSR), a
good corporate governance requires the companies to disclose their CSR activities either in
the annual report or any other avenues. The disclosure on CSR initiative and activities will
gain the confidence of stakeholders upon the contribution made by the companies towards
the community at large. A transparent report is a key tool for communicating with
stakeholders in providing accurate and transparent information regarding the corporate
social activities of the company. In Islam, disclosing information for the reason of
transparency and accountability is perceived as social obligation. Hence, it is important to
disclose CSR initiatives as it is more of a religious obligation rather than moral obligation
based on Islamic perspectives.
In addition, communication and interaction by the company with its investors and
stakeholders should be established. It is vital to have a positive interaction between the
company and its investors and stakeholders in order the company to stimulate the growth of
its company. It will also help the company to be in a position where they can try to
understand the stakeholders demands and allowing the company to be competitive. This can
also create an openness and transparency between them so that investors and stakeholders
can evaluate the company’s performance by engaging with the internal information that they
gather. This allows stakeholders to gain relevant insights into the company’s potential and
policies and the board of directors are more aware of the stakeholder’s views, interests and
opinions on the company.
Lastly, the tasks and responsibility of the board of directors. It is important for the board of
directors to have a great mind in for them to promote the strategic goals of the company and
ensure caution and appropriate measures are being made in achieving the company’s goal.
The board of directors are responsible for ensuring the development, retention or dismissal
of the executive boards. The selection and nomination of candidates for board of directors
must be carried out with a thorough and transparent process. They should also assess by

searching new talents and look into broader diversity (age, international experience, gender)
for the nominated new candidates. It is recommended that the board of directors take at
least once a year to look into the position on matters related to the board’s performance and
responsibilities. They should review the performance and of each member of the board and
making sure they are performing legal activities on each project that they handle to avoid
immoral activities are being used such as fraud.