Operation of CG and CSR in the

Institutions Offering Islamic Financial

Services

Abdur Rashid Mirza

University of Lahore
School of Accountancy & Finance
Subject Name: Corporate Governance Transparency and Risk
Management
Lecture
no.04
1

Definition of OECD
Organization for Economic Cooperation and
Development
Established in 1961, Head Quarters Paris France.
Corporate Governance is the system by which business
corporations are directed and controlled. The corporate
governance specifies the distribution of rights and
responsibilities among different participants in the corporation,
such as the board, managers, shareholders and other
stakeholders, and spell out the rules and procedures for making
decisions on corporate affairs. By doing this, it also provides
the structures through which the company objectives
are set, and the means of attaining those objectives and
monitoring performance. (OECD, 2004)

Principles of Corporate Governance

The concept was properly articulated only in

the early 1990s with the Cadbury Report
(1992). Subsequent reports continued to
improve the Cadbury report, eventually taking
shape as the OECD Principles of Corporate
Governance 2004. These Principles were so
sound that they were straightaway adopted by
the EU, World Bank, USA and other OECD
and non-OECD countries (Morck, 2005).

OECD Principals

It provides guidance for stock exchanges,

investors, corporations, and other parties
that have a role in the process of developing
good corporate governance.

OECD Principles 1

Ensuring the basis for an effective corporate

governance framework:
The corporate governance framework
should promote transparent and efficient
markets, be consistent with the rule of law
and clearly articulate the division of
responsibilities among different supervisory,
regulatory and enforcement authorities.

OECD Principles 2-3

(ii) The rights of shareholders and key ownership
functions: The corporate governance framework
should protect and facilitate the exercise of
shareholders rights.

(iii)

The equitable treatment of shareholders: The

corporate governance framework should ensure
the equitable treatment of all shareholders,
including minority (equity holder of a firm who does
not have voting right) and foreign shareholders. All
shareholders should have the opportunity to obtain
effective redress for violation of their rights.

OECD Principles 4
(iv) The role of stakeholders in corporate
governance: The corporate governance framework
should recognize the rights of stakeholders
established by law or through mutual agreements
and encourage active cooperation between
corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound
enterprises.

Principles 5
(v) Disclosure and transparency: The corporate
governance framework should ensure that timely
and accurate disclosure is made on all material
matters regarding the corporation, including the
financial situation, performance, ownership, and
governance of the company.

Principles 6
(vi) The responsibilities of the board: The corporate
governance framework should ensure the strategic
guidance of the company, effective monitoring of
management by the board, and the boards
accountability to the company and the
shareholders.

Basis of Principles
The above six OECD principles of corporate
governance are based on the following three basic
principles:
(i) The mechanism of decision-making and its
transparency
(ii) Accountability in roles and responsibilities
(iii) Adequate disclosure of results

Corporate Governance and Islam

While as a term corporate governance is relatively

new, what it names is not unfamiliar in Islam.
Islam stresses the practice of justice and equality,
truthfulness and transparency, and protection of
minorities, accountability and adequate disclosure,
just as it prohibits all forms of exploitation, in all
walks of life, including business dealings: in Islamic
law. The three underlying principles (transparency,
accountability and adequate disclosure).

Islam and Corporate Governance

Islam strongly advocates all forms of positive
governance. Rules of corporate governance derive
from the underlying principle of assuring the
economic well-being of the whole community on the
basis of universal brotherhood, justice, mutual
accountability, truthfulness and transparency, Islamic
values have always advocated good corporate
governance. Islam always encouraged trade and
commerce as long as it is conducted within the
framework of Quran, and the word of Allah as
revealed to His Prophet Muhammad (Lewis, 2005).

Islam and Corporate Governance

Decision-making
Besides the implementation framework, Islam is very
clear on the principles of corporate governance:
And consult them on affairs [of moment]. Then, when
you have taken a decision, put your trust in Allah. (Al
[Imran, 3:159)
Abu Hamzah Anas ibn Malik (RA), who was the
servant of Gods Messenger (PBUH) reported that he
said: None of you truly believes [in God and in His
religion] until he loves for his brother what he loves
for himself. (Reported in al-Bukhari and Muslim).

Disclosure and transparency

Disclosure and transparency
The Quran, in verses 282 and 283 of Surah al-Baqarah, makes
an explicit and detailed requirement in respect of good
practice:

O you who believe! When you contract a debt for a

fixed period, write it down. Let a scribe write it down in
justice between you...
You should not become weary to write your contract down,
whether large or small, for its fixed term, that is more just with
God, more solid as evidence, and more convenient to prevent
doubts among yourselves Take witnesses whenever you
enter into a commercial contract.

Accountability
O ye who believe! Fulfill [all] obligations.
(al-Maidah, 5:1)
The Quran requires the honest fulfillment of
all contracts (5:1) irrespective of whether these
are written or oral, explicit or implicit; it prohibits
the betrayal of trusts

Islam and OECD Principles

The rules for corporate governance therefore do not
apply only to the Board of Directors (BOD), and senior
management but also to every person connected to the
organization.
By contrast, OECD rules make senior management
accountable to the BOD and the BOD to shareholders.
Islam makes the responsible people accountable not
only to stakeholders, but also to God the Ultimate
Authority. Again, the OECD rules make persons
accountable for all written and defined obligations;
Islam requires accountability of oral promises too.

Comparing Islamic Corporate

Governance and the OECD Principles
Comparing Islamic Corporate Governance and the OECD
Principles
We can now set out the comparison between corporate
governance in Islam and OECD Principles in the form of a table, as
follows:
Basis of Difference OECD Principles Islamic Principles
Authority
OECD: Directors have authority for decision making.
They follow the principles of OECD.
Islam: Sole authority belongs to Almighty God; all decisions are to
be made by keeping in view Shari[ah.

Comparing Islamic Corporate

Governance and the OECD Principles
Decision-making
OECD

Decision-making rests with the CEO and senior management.

Voting is required just for the selection of a BOD and few other decisions.
Islam

Consultation and consensus are required for every decision from

concerned stakeholders.
Goal
OECD

Maximization of profits and shareholders value.

Islam
Commitment to equity, fair distribution of wealth, and consideration for
the whole community.

Comparing Islamic Corporate

Governance and the OECD Principles
Accountability
OECD
Senior management accountable to shareholders.
Islam
Accountability not only to shareholders but also to God.

Ethics
OECD
Transparency, accountability and disclosure.
Islam
Justice, equity, truthfulness, transparency, protection of minorities, wider accountability,
written as well as oral disclosure.

Application
OECD
Principles are not equally applicable all over the world.
Islam
Equally applicable all over the world.

Conclusion
The OECD recommended a set of very effective corporate
governance principles a decade ago and these principles have
been efficiently implemented. The Islamic principles of good
practice, in place for fourteen centuries, are very similar if not
the same, but have not been efficiently implemented. The
comparative study in the foregoing pages found that the OECD
Principles cover six different issues and rights related to
corporate governance, whereas the Islamic principles
necessarily have a wider horizon, and place obligations beyond
shareholders, financiers, suppliers, customers, and employees.
They make reference to the well-being of humanity as a whole,
not just material well-being and not just the Muslim
community.
Finally, the Islamic principles rest accountability ultimately on
God, whose knowledge and authority are absolute.

Thank you