implementation of corporate governance regulations.
For corporate governance to succeed, we know that it is dependent on the cooperation of many stakeholders: shareholders, boards of directors, management, government, regulators, clients, financiers, external auditors, consultants and interest groups. With globalization the list of stakeholders also includes foreign investors, financiers and suppliers.
All these stakeholders need quantitative measures and elements of corporate governance but in the process do very little or, at worst, fail to address the requirements of qualitative elements of corporate governance.
We intend in this chapter to highlight both the quantitative and qualitative elements of corporate governance and draw lessons from differences between them for the betterment of relevant CG regulations.
Typically the regulators issue directives and CG codes dealing with the following quantitative issues:
•Laws and regulations of best practice
•Role of shareholders, annual and extra-ordinary assembly meetings
•Formation of the board and number of boards e.g. one or more boards or advisory committees
•Composition of the board - number of members and how many executive, non-executive and independent directors.
•Board charter, duties and responsibilities.
•Board members' responsibilities
•Board committees and number of meetings
•Board remuneration
•Monitoring, audit and controls within the company
•Corporate succession plans
•Risk management and compliance
•Performance indicators
•Reporting and communication
•Disclosure requirements
•Publication of periodical and annual reports
All of the above quantitative issues are important for the good governance of a company and indeed create many new but important posts within each company - financial controllers, risk managers, internal auditors, compliance officers and others. In certain cases these could add to the burden, financially and administratively, of the company and impact its efficiency.
In talking to a number of senior officers of companies about these requirements, some of them indicated that it is becoming difficult for them to strike the right balance between gaining the benefit of these requirements and the ability to implement them. In fact, some claim that their officers spend more time worrying about implementation than actually doing the work they are supposed to do. Some went so far as to say that their sales teams get bogged down in compliance at the expense of generating new business for their companies.
Certainly one cannot generalize such phenomena; nevertheless it is an issue for some companies depending on their size and sophistication.
Other questions that we ask: Are these quantitative regulations really addressing the requirements of CG within the companies? Do they help the corporations make quality decisions? To answer these, let's address qualitative elements of corporate governance and make a comparison to highlight what could be done to improve CG practices. However before doing so, let's examine what is happening in the world as a result of the current crisis.
Impact of the current Crisis worldwide
The year 2008 will be remembered for a very long time as the year when the world economy witnessed its worst downturn since 1929. Stock markets around the world lost more than 50% of their value. Collapse of some long established banks, insurance companies and financial institutions in a way that was not imaginable just a year ago are examples of the disaster.Let's look at several examples:
Sub-prime Loans
The mortgage loan problem that surfaced in the United States in late 2007 was initially thought to be an American-only issue.This proved not to be the case as it impacted many investors and banks outside the boundaries of the United States. Major banks and financial institutions have suffered great losses and needed to find the capital to cover those losses. Many banks in the GCC have also applied for fresh capitalization.
The sub-prime mortgage loan disaster proved to be the start of a greater financial collapse that would unfold in 2008 and beyond.
Stock Markets
All stock markets in the world without exception suffered great losses. In the United States alone more than US$10 trillions in value were destroyed. On average other countries' stock markets lost at least 50% of their value.
Banks and Financial Institutions
The financial market is the true mirror of any economy, and banks, financial institutions and companies are the reflection of such a mirror. Therefore, what the financial crisis brought to the surface is the collapse of many banks and financial companies, some examples of which are:
•Lehman Brothers - no longer in existence.
•Bear Stern - bought by JP Morgan
•Merrill Lynch - bought by Bank of America
•Goldman Sacks and Morgan Stanley - became commercial banks
•AIG, the biggest USA insurance giant - rescued by the US Government at US$85bn
•Citigroup - received a rescue package in excess of US$300 billion from the US Government.
•UBS - rescued / bought by the Swiss Federation
•Jerome Madoff, a fund manager in the United States - the disappearance of US$50 billion in funds.
State & Government Aid
Many countries of the world, including their respective Central Banks, had to come to the rescue of their economies by introducing measures designed to ease or reduce the impact of the crisis. Some of those actions and measures were:
•Ease the liquidity and credit difficulties - liquidity was injected into the market and made available to banks and financial institutions.
•Direct investment in the stock market through the purchase of shares in troubled companies.
•Deposit Protection Schemes were introduced.
•The U.S. produced an aid package of $700bn to assist troubled banks. In addition central banks around the world in Europe, China and the Middle East pledged sizeable amounts to help their banking sector.
•The U.S. provided a package in excess of US$200 billions to acquire Freddie Mac & Fannie Mae, the two largest mortgage loan companies in the United States.
•Foreign exchange control and interest rate cuts were among
