An Introduction to Islamic Finance: Theory and Practice

323

CHAPTER

15

Corporate Governance

T

he issue of corporate governance and the search for an optimal govern-
ance structure has received considerable attention in the economic litera-
ture and in public-policy debates. This increased attention can be attributed
to several factors such as:

■ The growth of institutional investors — pension funds, insurance compa-

nies, mutual funds and highly leveraged institutions — and the role they

play in the fi nancial sector, especially in the major industrial economies

■ Widely articulated concerns and criticism that the current monitoring

and control of publicly held corporations, particularly in the UK and the

US, is seriously defective, leading to sub - optimal economic and social

development

■ A shift away from the traditional “shareholder value - centered” view of

corporate governance, towards a structure extended to a wide circle

of stakeholders

■ The impact of the increased globalization of fi nancial markets, deregu-

lation and the liberalization of the activities of institutional investors.

Although each of these factors provides compelling reasons to examine
corporate governance structures, the current fi nancial crisis has unearthed
new governance issues, some of which were either ignored, not taken seri-
ously, or were never even discussed earlier. Lapses in corporate governance
were cited as one of the reasons why managers and policymakers failed to
avoid the fi nancial crisis, which caught everyone by surprise.
The concept of corporate governance is diverse and, over a period of
time, the defi nition of the term has oscillated between two extremes — from
a narrow concept of a mechanism for safeguarding investors’ interests, to a
broad concept advocating the protection of all internal and external stake-
holders’ rights. This wide spectrum of the concept stems from two divergent
views: (i) how the entity of a “fi rm” should be perceived in an economic
system, and (ii) the form of the incentive system to protect the rights and
preserve the obligations of the economic agents in the environment in which
the fi rm operates. Whether one views the fi rm as a bundle of assets and

An Introduction to Islamic Finance: Theory and Practice, Second Edition

by Zamir Iqbal and Abbas Mirakhor

Copyright © 2011 John Wiley & Sons (Asia) Pte. Ltd.