Business | Opinion
Regional conference on corporate governance timely
Holding a regional conference on corporate governance in the Qatari capital of Doha last week could not have been more timely in view of the on-going financial crisis.
- By Dr Jasim Ali, Special to Gulf News
- Published: 23:41 November 15, 2008
Holding a regional conference on corporate governance in the Qatari capital of Doha last week could not have been more timely in view of the on-going financial crisis.
The Institute of Corporate Governance (Hawkamah) led other entities in organising the event under the theme, "Is the region becoming a global player?: Corporate governance & the financial crisis?" To its credit, the conference produced a set of recommendations that deserve discussions.
Amongst others, the Doha Declaration called for extending the regulatory and supervisory powers of central banks to investment banks and other financial institutions. The recommendation deserves support noting that activities of investment banks triggered the financial crisis. In essence, investment banks notably in the US extended property loans to clients who could not honour their financial obligations, thereby setting the stage for an extraordinary financial crisis since the Great Depression.
Even within the Gulf Cooperation Council (GCC) countries, central banks apply light supervision on investment banks. Not surprisingly, these institutions proved to be amongst worst hit by the financial crisis. For instance, Gulf International Bank reported suffering a hefty loss of $148 million (Dh543.66 million) in the first nine months of the year.
Conversely, central banks have an established record for applying restrictions on lending practices of retail banks. Monetary authorities in Bahrain limit repayment to seven years with monthly installment, not exceeding half of borrower's income with regards to consumer loans.
Another recommendation urges training for board members in banks and other firms.
Likewise, the call deserves endorsement, as board members ought to stay abreast with risk level involving innovative products in order to make the right decisions. The latest financial crisis revealed the dangers associated with financial derivatives notably securitisation of products, something board members in some investment banks conveniently overlooked.
Yet, another noteworthy recommendation emerging from the conference concerns linking remuneration packages to sustainable and long-term potential success of firms. The financial crisis revealed that top executives in some banks managed to earn generous rewards from short-term returns, with borrowers not defaulting in early repayment schedules.
Still, another declaration stressed creditor rights and insolvency systems besides developing effective rescue and restructuring measures. The financial crisis took depositors by surprise, denying clients of some financial institutions unrestricted access to their funds.
By contrast, central banks in GCC have revealed no such initiatives to strengthen creditor rights.
Separately, a joint study by Hamkamah and International Finance Corporation (IFC) had revealed some disturbing facts about absence of adherence to best practices.
Entitled "Corporate Governance Survey", the study explored weaknesses about best practices of banks and listed companies in the Middle East and North African (Mena) region.
Amongst other shortcomings, the study uncovered that some 42 per cent of firms combine the functions of chairpersons and chief executive officers. The notion of best practices calls for separating the roles of chairperson and CEO.
- The writer is a Member of Parliament in Bahrain
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