Corporate governance

Answer

Introduction

            Corporate governance refers to the effective control of corporations and organizations through the regulation of responsibilities, processes and mechanisms within the system (Subramanian, A., & Subramanian, K., 2014). It is also a control processes that ensures the interests of all stakeholders in a corporation are balanced on (Subramanian, G., 2015). In Bahrain, corporate governance in banking organizations is monitored and regulated by the Central Bank of Bahrain (CBB). This is a corporate entity formed in 2006 under the Financial Institutions Law and develops policies within the country to ensure it is financially stable. However, for broad monitoring of banking organizations, the Basel Committee on Banking Supervision (BCBS) monitors and develops polices related to the supervision of these organizations. Formed in 1974, the international body has consistently developed and regulated the corporate systems in banks for three decades. This body therefore defines a banking organization as an institution that handles financial transactions mainly through savings and investments as a way of improving the standards of living and for the institution's profitability. In this regard, these systems have a management structure supported by a team of qualified staff and clients who are mainly considered shareholders since they are allowed to influence certain decisions in the institutions.

Banking Regulations by BCBS

            Since the Central Bank of Bahrain was established, it has developed and implemented a number of regulations that are still being applied in the country's banking organizations. However, corporate banking in the country has mostly been affected by the corporate governance principles established by the BCBS. For instance, during the 2007 global financial crisis, BCBS developed a set of principles that would help to ensure effective banking practices. In essence, these principles were focused on: the responsibilities of the board, structure of the board and the qualifications of its members, the introduction of a risk management process and manager, the relevance of risk monitoring throughout the organization or in an individual basis, the improvement of the compensation system based on the board's oversight role and finally, the management's ability to interpret all operations and risks in the organizations. In 2014, these principles were revised in order to strengthen the efforts towards risk governance and management, to offer more insight on the management's oversight role, to remind the management of their collective and individual responsibilities, to encourage supervisors to scrutinize the management better and finally, to emphasize the role of compensation systems in governance.

Good Versus Bad Governance and an Assessment of their Impacts

            Based on the BCBS principles, good corporate governance refers to the development of mechanisms or management structures that fulfill the requirements of the set corporate governance principles. Without these mechanisms and structures, it is referred to as bad governance. Both practices have impacts on the profitability, accessibility to capital and credit, stakeholder privileges and earnings, and finally, the organizational culture. To understand the impact of corporate governance, it is important to assess how different corporate governors have utilized their responsibilities over time. In the 1990s, WorldCom, a leading telecommunication company operated on a speculative bubble which allowed its CEO, Benard Ebbers to acquire assets and manipulate financial records together with his CFO Scott Sullivan in order to attract more investments through the stocks (Thornbugh, 2014). Under the watch of the Board of Directors, WorldCom, manipulated its financial records, the CEO acquired unnecessary assets and the auditors fraudulently allowed the company to sink into bankruptcy. According to Thornbugh (2014), these WorldCom problems can greatly be attributed to the bad corporate governance as exercised by the Board of Directors which did not audit the company's expenditure, failed to query the management's decisions, did not set up an effective monitoring system, promoted the "culture of accommodation" instead of "due diligence" and finally, doubted certain transactions of the company but did not seek clarification. Basically, the BOD at WorldCom failed to exercise all the principles of good corporate governance.

            Similarly, Enron, a well-established company dealing with energy products fell into bankruptcy in 2001 under due to poor governance just like in WorldCom's case. In fact, these two companies practiced similar mistakes to the extent that they had a common external auditor-Arthur Andersen who helped them cover their fraudulent activities until the companies became bankrupt (Wilson & Key, 2013). Today, the shareholders of these two companies are regretting their losses since the companies had to cease operations due to lack of funds. In another recent case, Damas, an international jewelry company with shops all over the world was found guilty of malpractices and bad corporate governance which were being fostered by two of its board members (Namatallah, 2010). According to the Dubai Financial Services Limited (the country's financial regulator), Tawfiq, Tamjid and Tawhid (lead company owners) were guilty of spending the company's money without the authorization of the shareholders or other investors. This was a serious violation of the corporate regulations that prompted the regulator to take tough actions against the company so that "other company directors would learn from this" (Namatallah, 2010). This is a clear commitment by financial regulators to ensure effective corporate governance in all financial transactions.

            During the 2007-2008 global financial crisis, it was clear that banks had also fallen victim of poor corporate practices (Subramanian, 2015). This greatly contributed to their financial challenges which formed part of the crisis. For this reason the Financial Stability Board (FSB), a body that maintains financial stability through the development of financial regulations and policies decided to create a list of most important banks which should always be monitored and regulated due to their contribution to the global financial sector. The main regulator in this case is the BCBS which aims at streamlining the corporate governance in these important banks for efficient management. According to the list of important banks, Bahraini banks have also been featured through the Central Bank of Bahrain and thus affected by the corporate governance principles by BCBS. This fostered the bank to develop its own principles on corporate governance and emphasized that the board in any company should understand its roles and responsibilities right from the company formation. CBB further explains that the board's role is independent from that of the shareholders and therefore its fiduciary duty is to protect the interests of the company and the shareholders.

            Second, the CBB acknowledges that the ultimate decision-making process lies with the board and therefore they should base these decisions on their experiences. This deliberate judgment should also focus on ensuring the shareholder is the main benefactor. Third, the board's decision should be unanimous. In this regard, no single opinion should be used as a representative of the board's decision unless the entire board seconds it. Fourth, membership in the board is for the representation of all shareholders. Representation of groups or individual interests will be regarded a breach of the regulations. Additionally, directors will be allowed to seek independent counsel on important matters related to the operations of the company. However, the board should be notified of these actions through the company secretary. Sixth, the regulator introduces a new concept that encourages directors to be in contact with the management. Although these two groups do not meet in any case, Bahrain's financial sector believes that corporation between the two will contribute to effective at monitoring of the weaknesses in the system. However, the regulator warns that the system will only be effective if the managers meet the board members through the CEO as it will ensure co-operation in the management system. Next, the board should create an audit, remuneration and nominating committees to execute their related roles throughout the system. Finally, the organization should be structured to ensure it has a strict evaluation process where the board and all committees are evaluated continuously.

            These Bahraini regulations are similar to those by BCBS. Relating them to the corporate governance practices at WorldCom, Enron and Damas, it is clear that the board of these institutions lacked proper management and evaluation structures, the management did not respect the principle on financial separation where they are not allowed to use the company finances for personal interests and most important, consult the entire directorate before making any decisions on behalf of the company. These therefore led to financial instability in the institutions due to decreased profits, limited access to capital and credit as the institutions lack creditworthiness while the shareholders and investors begin to sell their stocks. Despite all these, other institutions have been able to utilize these principles for a stable financial environment. For instance, in 2010, the CBB manager acknowledged that there was a need for banks in the country to restructure their management. In this regard, the CBB requested all banks to provide their management policies and structures for analysis through secrecy. Through this audit, it was realized that retail institutions had the worst management structures which contributed to their poor performance during the financial crisis. Specifically, managers in these institutions did not have a clear objective on how to meet the set goals. On the other hand, the managers implemented newer strategies but did not follow the process adequately to measure the performance.

            Another institution that closely believes and practices good corporate governance is the Chartered Institute on Securities and Investment. This is a London based institution that sets the base operational standards and moral values to be upheld by participants in the securities exchange and investment. This institute works in collaboration with other organs like the Bahrain Stock Exchange which was established in 1987 by Amiri Decree No. and officially commenced operations on 17 June 1989, with 29 listed companies. Currently, there are 50 companies listed on the exchange and therefore both organs are regulated by the BCBS. Based on this similarity, both institutions made it compulsory for all interested institutions to exhibit the highest levels of professional competencies before qualifying as members. On the other hand, since the introduction and revision of the principles, the members are obliged to make ethical decisions and exercise integrity in their decisions in order for them to earn the confidence of their customers. Besides, the CBB believes that integrity based on professionalism is the surest way of promoting customer satisfaction and thus a sustainable economy. Furthermore, the Federal National Council of the United Arab Emirates believes that transparency in financial institutions will ensure improved access to capital. Therefore, in 2010, this body improved the financial laws in the United Arab Emirates in order to ensure the board, management staff and auditors are more accountable to the organizational operations (Namatallah, 2010). Furthermore, the body increased the privileges of the Securities and Commodities Authority in order to ensure better scrutiny of financial institutions.

Guidance Note to the Senior Management

            This part of the essay identifies two principles and describes various ways in which the organizations can implement changes in order for the principles to be effected. According to the Central bank of Bahrain Rulebook, "All Bahraini Convectional Bank licenses must be headed by an effective, collegial and informed Board of Directors ('the board')". To this effect, the board is the overall governing body in the banking institution and therefore protects the interests of the company and its customers, implements all strategic objectives of the bank, develops operational frameworks for the achievements of its goals, designs the bank's culture, oversees all operations including those of the committees, makes and influences important banking policies in the institutions and structures the oversight committees in the bank. According to the CBB website, the banking industry majoring on the retail sector is still the least performing due to weak governance structures. Subramanian (2015), proposes that understanding the individual responsibilities of the board and the impact of their jurisdiction will help improve the sector.

            To begin with, the board of these retail institutions should supervise the generation of financial statements so that the accuracy of this process is guaranteed. On the other, in case this role will be allocated to other qualified staff, the management should monitor the process to detect and reduce errors. As a follow-up process, the board should periodically host the management team so as to receive update of the progress or challenges encountered in the filling of financial statements. While setting the institution's goals, the companies should focus on the growth of the company through efficient delivery of services, accuracy in documentation and setting up of sustainable structures. This is an important role of the board and will only be effective if these goals are measured continuously to ensure they are being accomplished. Monitoring of the banking institution should not be limited on the qualification of goals only, but also the detection of conflicts within the system and attending to raised concerns. Just like any other institution, the banking retail sector faces challenges like poorly generated financial statements, delay in service delivery and inadequate provision of information on the available data. The board can help to handle such cases by recording the number of conflicts raised, analyzing how the management attends to these issues and the customer feedback in relation to the corrective measures taken. As an institution aimed at growing shareholder earnings, the board should be keen to ensure the shareholders' interests are prioritized against their own.

            Risk, a probability of loosing something is a common aspect in the banking sector since these institutions seek property or trust clients with the hope of making a good return. In the retail sector, risk is even more crucial since the bank offers most of its products like loans and mortgages through this sector. The board should therefore be aware of all the risky transactions and take the lead in examining the probability of securing the bank's assets despite any failures in the system. One of the ways of monitoring risks is establishing a risk assessment committee. Just like the audit committee that ensures that the financial records are free of errors and fraudulent figures, the risk committee determines the reasons for the failures of a risky investment. In summary, the CBB acknowledges that the board is the main organ of a banking institution and therefore all its decisions, processes and contributions should be keenly accessed. In fact, the regulator insists that all board meetings should be fully attended and any absentees should be noted in the minutes. The regulator also outlines the allowable amount of absenteeism since the decision making process should be done unanimously. Failure to emphasize on these responsibilities, the business is likely to lose its finances on unnecessary projects and assets as witnessed through WorldCom and Enron. On the other hand, without proper regulations like the CBB regulations, governors misuse their authority and spend on personal obligations like the "Damas brothers".

            Another important principle is the requirement that committees must be set and structured to monitor the most important transactions of the retail sector. Apart from the remuneration, audit and nomination committees, the CBB also recommends that establishment of the Executive and Risk Committees. According to the regulator, an Executive committee is one that analyzes and reviews all transactions within a bank and reports to the board. It also offers suggestions and recommendations based on the analyzed data. To a retail sector, this committee essentially monitors the service delivery and products being offered in order to identify the weaknesses or areas to be improved. On the other hand, the risk committee identifies any available risks in the process and develops solutions that would help to minimize the risks. In terms of the compositions of these committees, the CBB recommends that majority of the participants should be representatives from the shareholding group. This means they should be independent so that to promote  better transparency. By analysis, WorldCom and Enron had only one oversight committee, the auditing committee. Failure by this department led to the careless expenditure of resources that contributed to the company's bankruptcy. The Damas case is relatively different since the directors spent the company's money from 2008-2009 without the knowledge of the auditors until later when the Dubai Financial Services Limited noted the fraudulent acts. In this case, it is possible to conclude that their auditors might have ignored the existence of the fraudulent activities or were not aware of it. No matter the case, the oversight team should be more vigilant on their responsibilities since they determine they contribute to the goal attainment process.

Conclusion

            Corporate governance is a mechanism that contributes to the growth of organizations by ensuring all the management structures are effective. This concept has existed for a long time but was mostly championed during the global financial crisis between 2007- 2008 and in 2010. The main facilitators of corporate governance are institutions like the Financial Stability Board through the Basel Committee on Banking Supervision. The main aim of these institutions is to identify banks of great importance through the FSB and the BCBS would enforce good corporate governance practices in them to ensure they remain effective during the low financial periods. In Bahrain, these important banks and other financial institutions are regulated by the Central Bank of Bahrain which oversees all their operations to ensure they are in line with the principles of corporate governance as described by the BCBS. In general, the principles emphasize on the board taking full charge of their responsibilities and fostering organizational growth through setting objectives, pursuing them, structuring monitoring groups, protecting the shareholders' interests and maintaining proper organizational culture. To date, companies that have gone against these principles have failed thereby signifying the importance of these principles. Nonetheless, by restructuring to adopt the principles effective, all sectors, including Bahraini's weak retail sector can be able to improve.