Models of Corporate Governance

The radix of the exercise of bodied brass section can be identified in their approach to the trey dimensions of finale making which atomic number 18 considered as the essence of bodied governance. The decision making is centered round the one-third base passs (a) by whom the decisions atomic number 18 to be made, (b) for whom the decisions are attempted to be made and (c) what are the resources that hold up up the decision making approaches. The ultimate aim of analyzing the decision making process through these questions is to hold the agency to whom the accountability is due to be directed1This part of the study deals aims to contrast the Muslim corporeal governance with the Western approach which is exhibited by at least deuce imitates which this paper considers. plaque Framework in Western statusThe European system of corporate governance encompasses a socially responsive stomach where the shareholders and others are encouraged to exert influence over policies t hat are being adopted to the extremity that they are not in union with a socially responsive attitude. Similarly the board members and managers are not discouraged either to follow their view points so that the decisions make the firm a socially responsive one2. However such a direct influence over the functioning of the firm is not provided for in all the market systems. For instance in Germ each and other countries like Austria and Switzerland the governance is administered by a two tier board consisting of a supervisory board and an executive board.The executive board represents the outgo anxiety and the members of the supervisory board is composed of outside professionals and in some cuttings employee representatives just to oversee and rectification the executive board. Even in the nerve of managed passel model widely prevalent in the unite States directors and managers found it worth to take the advise of the institutional shareholders in the conduct of the business o f the firm. When this relationship is notwithstanding expanded it leads to the formation of a stakeholder model of corporate governance which protects the interest of all stakeholders.3Managed Corporation sitThe model of managed spate answers the question of by whom. This model is underlined by large public companies with a disperse shareholding4. Under this model managers occupy the central role with the authority to strategy formulation and setting the policies of the company. date the Board takes the responsible of hiring the managers the managers lead the directors and shareholders.The Board is to a fault given the responsibility to monitor the instruction execution of the mangers prescribed and remove them in case of unsatisfactory performance. The shareholders role is limited to replace the Board in case of poor performance of the company. Thus the scope of corporate governance under this model is limited to the extent of appointing the right managers and controlling the ir performance.Socially Responsive Corporation ModelThis model takes the position to answer the question for whom. This model presupposes the interest of the shareholders as the foremost principle of corporate governance as laid smooth by the OECD Principles of integrated Governance 5 Thus the concept of shareholder value has been made the yardstick against which the performance of the management need to be measured.This is the practice in the United States, the UK and several other Anglo-Saxon countries and has also been recognised as a matter of prominence in Europe and Japan too. Under this model the institutions view the firms eligible for potential investment in their securities to shake off a clear market directive to enhance the returns on the existing capital. 6Accounting and bodied GovernanceThe process of identifying, measuring and communicating instruction for facilitating the user to make meaningful decision is provided by accounting. According to Baydoun and Wille t (2000) 7 accounting disclosures in managed corporation model is often limited to the extent the individuals that control the resources needs the disclosure. However the fact remains that the corporate governance issues can be addressed and explained by detailed financial statements since these issues are normally backbreaking on the agencies having a wider financial stake in the entity. This explains the terms with what resources and to whom the accountability is directed.Muslim Perspective of Corporate GovernanceThe important principles of good corporate governance and the codes of best practice developed during the last decade, intimate that directing the companies and controlling them to function according to defined moral standards which are acceptable to the community in general8. The principles do not just recognize achieving the economic efficiency or earning maximum profitability as the best practice.According to Mervyn K Lewis (2005)9 on that point are two aspects whic h particularly shape the nature of Muslim corporate governance. The first one is concerned with the shariah which claims sovereignty over all the aspects of life of any human being. It is so extensive it covers honorable and social issues and also it talks about civil and wicked jurisdiction.Shariah lays down the principle that every believer of Islam must conform to the canonic principles of Muslim Law. all(prenominal) one of them is expected to observe the ethical standards derived from economic principles irrespective of the status or social position. These ethical principles define what is true fair and just, the nature of corporate responsibilities, the priorities to society, along with some specific governance standards (Mervyn K. Lewis, 2005).Secondly, Shariah has also provided some specific Islamic economic and financial principles along with the business ethical standards, which have a larger influence upon the corporate practices and principles. Included here are the i nstitution of zakh (the alms tax), the outlaw on rib (usury) and the prohibition on speculation, calling for the development of an economic system based on profit and loss sharing (Mervyn K. Lewis, 2005).Dimensions of Decision Making and Islamic Perspective of Corporate GovernanceThe three dimensions of decision making with respect to corporate governance under Islamic perspective is answered in the pursual moodBy WhomAccording to Mervyn K. Lewis (2005) the question of by whom the decisions are to be made the Holy script is providing a correct response by promoting mutual audiences and once decision is taken then there has to be a firm belief that it will do good to everyone concerned. He further adds that when the basic principles of Shurd are followed it requires the leaders to encourage others to take part in the process of decision making.Thus consultation is made the key word by Shariah and this implies thatAn employee would be expected to contribute his or her experience to the formulation and implementation of the organizational vision, and consultative procedures should be applied to all those affected, i.e. shareholders, suppliers, customers, workers and the community 10For WhomUnder Islamic perspective of decision making process there is the clear answer to the question as to for whom the decisions are attempted to be made. The answer is that the ultimate end of any business and economic activity that regard the human beings are to be considered as being done to the grace of Allah and the ways and means busy to accomplish the activities should never deviate from the law of Islam as quoted by Shariah in any way (Mervyn K. Lewis, 2005).With Whom and to WhomMervyn K. Lewis (2005) points out that the third requirement for ensuring corporate governance principles in an Islamic perspective involves the process by which an effective religious supervision is undertaken.The objective of this supervision is to batten that the operations, contracts, and procedures of the enterprise are in conformity with the Islamic code. Algaoud and Lewis (1999)11 observe that the process covering the religious supervision is explicitly illustrated in the case of Islamic Financial Institutions.In addition the religious auditors provide a comprehensive report on the bond certificate of the Islamic principles across the full spectrum of the business activities. The religious audit helps to improve the functioning of any corporation towards achieving the Islamic principles by undertaking the following distinct functions(1) the religious auditor advises the Board and the top management about the acceptability of the transactions and the contracts proposed to be entered by the firm and also on the development of raw(a) products(2) the second function of the religious auditor is to make a comprehensive report to the shareholders as to the entry by the management the Islamic principles in the running of the organization and(3) the audit of the creati on of Zakah fund to ensure that the fund is created after a proper assessment of the amount to be contributed and the administration and distribution of the bills are carried out as per the Islamic principles (Mervyn K. Lewis, 2005)Points of DistinctionHanifa and Hudaib (2003) 12 identify the following difficulties that the Islamic perspective of corporate governance face while adopting the best corporate governance practices.(1) Under the Western approach to the corporate governance the business morality is primarily based on secular humanist values brass the ethical foundations of the business while the Islamic perspective of corporate governance follows the principles laid down by shariah as the guiding force(2) The basic beliefs and values in the Western corporate ending predominantly considers the self interest and even with some modifications there may not be the case that the larger interest of the society will be considered. This is totally against the Islamic principles( 3) Thirdly the Western model of corporate governance is based on agency theory and there is no place for stewardship theory.13The basic difference lies in the actors who are agents with a self interested opportunistic approach who can not be motivated to be stewards to act in the best interest of the principals. In the case of Islamic perspective of corporate governance there is no place for self interest of the agents,1 Mervyn K. Lewis (2005) Islamic Corporate Governance International standstill for Islamic sparingReview of Islamic Economics Vol. 9 No 1 pp 5 29 2 Mervyn K. Lewis (2005) Islamic Corporate Governance International Association for Islamic EconomicReview of Islamic Economics Vol. 9 No 1 pp 5 29 3 Lannoo, K. (1995). Corporate Governance in Europe. CEPS Working Party Report No 12. Brussels Centre for European Policy Studies. 4Pound, J. (1995). The guarantee of the Governed Corporation, Harvard Business Review, March-April, reprinted in Corporate Governance (2000), Ha rvard Harvard Business School Press. 5 OECD (1999). OECD Principles of Corporate Governance. Paris OECD. 6 Lewis, M.K. (2003b). globalization and Corporate Governance in M. Shanahan and G. Treuren (eds.), Globalisation Australian Regional Perspectives. AdelaideWakefield Press. 7 Baydoun, N. and Willett, R. (2000). Islamic Corporate Reports, ABACUS, 36(1), pp. 71-89. 8 Gooden, S. (2001). Participation of Stakeholders in the Corporate Governance of Islamic Financial Institutions, New Horizon, 114, November, pp.12-15. 9Mervyn K. Lewis (2005) Islamic Corporate Governance International Association for Islamic EconomicReview of Islamic Economics Vol. 9 No 1 pp 5 29 10 Baydoun, N. Mamman, A. and Mohmaud, A. (1999). The Religious Context of Management Practices The Case of the Islamic Religion, Accounting, Commerce &Finance The Islamic Perspective Journal, 3(1 & 2), pp. 52-79. 11 Algaoud, L. M. and Lewis, M. K. (1999). Corporate Governance in Islamic Banking The Case of Bahrain, Internatio nal Journal of Business Studies, 7(1),pp.56-86. 12 Haniffa, R. and Hudaib, M. A. (2002). A divinatory Framework for the Development of the Islamic Perspective of Accounting, Accounting, Commerce & Finance The Islamic Perspective Journal, 6 (1&2), pp. 1-74. 13 Davis, J. H. Schoorman, F. D. and Donaldson, L. (1997). Towards a Stewardship Theory of Management, Academy of Management Review, 22(1), pp. 20-47.