Models of Corporate Governance

The basis of the dumbfound of somatic governance potty be identified in their approach to the three dimensions of closing making which ar considered as the essence of unified governance. The decisiveness making is concern round the three basic questions (a) by whom the terminations ar to be made, (b) for whom the decisions atomic number 18 attempted to be made and (c) what are the resources that back up the decision making approaches. The ultimate aim of analyzing the decision making process through with(predicate) these questions is to at a lower placepin the agency to whom the accountability is due to be directed1This part of the ruminate deals aims to contrast the Moslem corporate governance with the western approach which is exhibited by at least two models which this paper considers. arrangement Framework in westerly PerspectiveThe European system of corporate governance encompasses a socially responsive potty where the shareholders and others are encouraged to exert work turn out over policies that are being adopted to the extent that they are non in conformity with a socially responsive attitude. Similarly the gore members and managers are non discouraged either to follow their view points so that the decisions make the firm a socially responsive one2. However such(prenominal) a direct influence over the functioning of the firm is non provided for in all the market systems. For instance in Germany and other countries interchangeable 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 carrousel management and the members of the supervisory board is composed of outside professionals and in round illustrations employee representatives just to oversee and discipline the executive board. Even in the plate of managed association model widely prevalent in the united States directors and managers put up it worth to ta ke the advise of the inventional shareholders in the conduct of the pipeline of the firm. When this relationship is further expanded it gets to the formation of a stakeholder model of corporate governance which protects the stake of all stakeholders.3Managed Corporation ModelThe model of managed corporation final results the question of by whom. This model is underlined by large public companies with a dispersed shareholding4. downstairs this model managers occupy the central role with the agency to strategy formulation and setting the policies of the company. While the Board takes the responsible of hiring the managers the managers lead the directors and shareholders.The Board is also given the responsibility to monitor the performance of the mangers institute and remove them in case of unsatisfactory performance. The shareholders role is limited to tack the Board in case of poor performance of the company. Thus the mount of corporate governance under this model is limite d to the extent of appointing the reform managers and keep backling their performance.Socially Responsive Corporation ModelThis model takes the gear up to answer the question for whom. This model presupposes the spare-time activity of the shareholders as the foremost teaching of corporate governance as laid down by the OECD Principles of corporeal giving medication 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 have a wee market directive to enhance the returns on the existing capital. 6 account statement and bodily governmentThe process of make outing, measuring and communicating information for facilitating the substance abuser to make meaningful decision is provided by bill. gibe to Baydoun and Willet (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 tolerate be addressed and explained by detailed financial statements since these issues are commonly concentrated on the agencies having a wider financial stake in the entity. This explains the cost with what resources and to whom the accountability is directed. Moslem Perspective of incarnate GovernanceThe important principles of easily corporate governance and the codes of beaver practice developed during the last decade, inculpate 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 clear 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 which particularly wreak the nature of Muslim corporate governance. The first one is concerned with the sharia law uprightness 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 accomplished and criminal jurisdiction.sharia law lays down the principle that every believer of Islam moldiness conform to the basic principles of Moslem Law. Each one of them is expected to save 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 many specific governance standards (Mervyn K. Lewis, 2005).Secondly, Shariah has also provided almost specific Moslem economic and financial principles along with t he business ethical standards, which have a larger influence upon the corporate practices and principles. Included here are the institution of zakh (the alms tax), the ban on rib (usury) and the prohibition on speculation, art for the development of an economic system based on profit and wrong 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 persuasion is answered in the following wayBy WhomAccording to Mervyn K. Lewis (2005) the question of by whom the decisions are to be made the Holy volume is providing a correct response by promoting mutual consultations and once decision is taken then there has to be a firm teaching 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 con sultation is made the key word by Shariah and this implies thatAn employee would be expected to contribute his or her knowledge to the formulation and murder 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 come to the human beings are to be considered as being done to the good will of Allah and the ways and means employed 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 inadvertence is undertaken.The objective of this supervision is to ensure that the operations, contracts, and procedures of the enterprise are in conformity with the Islamic code. Algaoud and Lewis (1999)11 let on that the process covering the religious supervision is explicitly illustrated in the case of Islamic financial Institutions.In addition the religious tenders provide a comprehensive subject area on the adherence of the Islamic principles across the near 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 new products(2) the blurb function of the religious auditor is to make a comprehensive report to the sharehold ers as to the compliance by the management the Islamic principles in the caterpillar track of the organization and(3) the audit of the creation of Zakah fund to ensure that the fund is created after(prenominal) a proper assessment of the amount to be contributed and the administration and diffusion of the funds 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 bit adopting the best corporate governance practices.(1) Under the Western approach to the corporate governance the business morality is primarily based on unsanctified humanist values governing 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 culture predominantly considers the self interest and ev en 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 possibility 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 Association for Islamic EconomicReview of Islamic economic science 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. capital of Belgiu m Centre for European Policy Studies. 4Pound, J. (1995). The Promise of the Governed Corporation, Harvard Business Review, March-April, reprinted in Corporate Governance (2000), Harvard 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 heed Practices The Case of the Islamic Religion, Accounting, calling &F inance 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, International Journal of Business Studies, 7(1),pp.56-86. 12 Haniffa, R. and Hudaib, M. A. (2002). A Theoretical 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.