Role And Importance Of Corporate Governance

Added on - 19 Mar 2021

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ROLES OF CORPORATE GOVERNANCECorporate governance in the IFIs implements several general concept of corporategovernance in other types of corporation. The principles of corporate governance aregenerally universal in character. Corporate governance main objectives are promotingcorporate fairness, transparency and accountability. A good corporate governance is vital inorder to protect the rights and interest of the shareholders. The context of corporategovernance in IFIs is its framework goes beyond the relationship between the shareholders,BOD, management as it includes maintaining the relationship with Allah (SWT). IFIs arerequired an additional framework that meets the guidelines of Shariah to safeguard andmaintain not only the relationship with Allah (SWT) but as well as the relationship withhumankind and the society.Grais and Pellegrini (2006) stated that there are two roles of corporate governance that areexclusive to IFIs which are a need to reassure stakeholders that their activities are fullyshariah compliant and secondly, they need to assure that IFIs are able to maintain andimprove 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 generatingcorporate 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 riskmanagement as a whole. Failure of the corporation in providing appropriate measures tomitigate risk might lead to corruption of the corporation. Corporate governance plays animportant role to identify risks of Shariah non-compliance. It need to identify the risks occursand 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 ofaccounting and auditing procedure. They should have a transparent in all businesstransactions to make sure they are preventing from corruption. By implementing this, itallows the corporation to compete healthier and preventing from any fraud or malpractices inthe organization. In IFIs, the Shariah committee are responsible to advise the IFIs in itsoperations, business, affairs and activities are all following the Shariah guidelines. Every IFIsshould have a transparency in disclosures as they should disclose in the annual report of itsinformation on Shariah governance. It is a guideline set by BNM for every IFIs to disclosetheir annual report.
On top of that, the role of corporate governance is to promote outstanding corporateperformance. It is important to continuously improving the governance structures andprocesses to ensure quality decision-making, encourage effective and efficient planning forsenior management and enhance the long-term prosperity of companies. It can also help inimproving the corporate’s in term of share price or profitability. In IFIs, it is the board’sresponsibility to promote sustainable growth and financial soundness of an IFI. The boardsmust monitor the IFIs accountability and transparency of the Shariah governance in thecompany and help them to manage the risks with coming up with appropriate strategies forthe IFIs. The director also plays an important role and they need to develop and strengthenhis knowledge and understanding on Islamic finance and aware of the developments in anIFI because his act may influence good shariah governance.Enhanced InvestorTrust: Investors consider corporate governance as important asfinancial performance when evaluating companies for investment. Investors who areprovided with high levels of disclosure and transparency are likely to invest openly in thosecompanies.Better Access to Global Market: Good corporate governance systems attract investmentfrom 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 andresponsibility of the board, the corporate governance framework should ensure strategicguidance of the company, the effective monitoring of management by the board and theboard’s accountability to the company and the shareholders.
FRAMEWORK IN CORPORATE GOVERNANCECorporate governance is an important concern that both conventional and Islamic servicessectors are related with. The key principles of good corporate governance in the OECDPrinciples are relatively relevant towards the IFIs. It includes the element of separation ofownership and control, transparency and market discipline, balancing the stakeholdersinterests and information asymmetries. However, there are several features of Shariahgovernance that makes it unique which is faith-based approach that requires all businesstransaction to comply with the Shariah principles and at the same time, recognition andacknowledgement of the profit motive and maximisation of shareholders’ wealth.In 2010, the Central Bank of Malaysia (BNM) had introduced a guideline for IFIs to ensureshariah compliancy which is the Shariah Governance Framework (SGF2010). The objectiveof Shariah governance framework (SGF2010) is to enhance the role of the board, Shariahcommittee and management in relation to Shariah matters to make sure it achieve a shariah-based operating environment. The framework outlined the fundamentals of Islamicgovernance framework for Islamic banks in Malaysia. Many Islamic Financial Institutionimplemented the SGF with modifications, known as internal SGF, to suit their institutions’organisational structure. The framework has outlined four main functions which are Shariahrisk management, Shariah review, Shariah research and Shariah audit. These functions playa key role in helping the Shariah committee in performing their duties by making sure theactivities of IFIs are Shariah compliance. It provides the basic requirement of Shariahgovernance that IFIs should have.The straight lines show that Shariah risk management, Shariah review, Shariah researchand Shariah audit report directly to their respective Board and Shariah Committees. Whilethe dotted lines indicate the respective teams that indirectly report to the Shariah Committeeand Islamic Bank Management Team. One of the roles of the Board of Directors is to act asthe 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 inachieving as well as maintaining its success in the industry. As mentioned above, the rolesof management in the framework is being responsible for observing and implementingShariah resolutions and regulations made by the Shariah Advisory Council (SAC) of BNMand Shariah Committee (SC) respectively, promote transparency by providing exactinformation to the SC in allowing them to deliver their obligations accordingly, providing
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