Globalization and its Challenges 363
contracts that protect the interests of all stakeholders — is similar to that
of a stakeholder - based incentive system. The governance issues of IFIs are
similar to those experienced in an “insider” system of governance, where
the institutional investor plays an active role in the governance process.
While increased monitoring by investment account holders as a result
of increased transparency is highly desirable, their representation in the
organs of governance raises several operational and implementation con-
cerns. As the majority of investment account holders are individuals, who
may not organize themselves collectively to perform the necessary monitor-
ing, this places greater responsibility on regulators and Shari’ah boards to
ensure that an adequate monitoring mechanism is in place to protect their
rights. As the custodian and manager of investment accounts, the fi nancial
institution itself becomes an institutional investor with a vested interest in
the governance of the institutions with which it places funds. This issue is
not generally highlighted in current discussions of corporate governance.
Finally, the role of the Shari’ah boards in providing sound governance is
also critical. The current practice of each institution maintaining a Shari’ah
board or adviser leads to ineffi cient decision - making arising from a duplica-
tion of effort and a lack of standardization. As discussed earlier, a system -
wide Shari’ah board comprising religious scholars who are also trained
in Islamic economic and fi nancial principles would be more effi cient and
cost - effective.
This system could work closely with the regulators and supervisors to
ensure that effective monitoring and supervisory controls are devised to pro-
tect the rights of all stakeholders with whom the fi nancial institution has
explicit or implicit contracts.
ENDNOTES
- Raghuram (2005).
- Interestingly, in the same paper Mehra reported that one dollar invested in
equity in 1802 would have been worth nearly $560,000 in 1997, whereas the
real worth of the same dollar invested in Treasury bills over the same period
would have been $276. - For further details, see Minsky (1982) and Khan (1987).