TOWARDS the end of last year, while the United States was still reeling from the aftermath of the Sept 11 tragedy, the country was rocked by another shock in the form of a cor-porate scandal.
The Enron scandal has sparked numerous debates on issues relating to transparency, accountability and disclosure. For a country like the US a strong proponent of good cor-porate governance a scandal like Enron is certainly an embar-rassment.
Last October, the energy giant surprised the market by announcing that it was taking non-recurring charges of US$1.11 (RM4.22) loss per diluted share which amounted to US$1.01 billion (RM3.838 billion) in the third quarter of 2001, for the period ending Sept 30.
Subsequently, it was revealed that a material portion of the charge related to the unwinding of invest-ments with certain limited partner-ships were controlled by Enron’s chief financial officer, and that the company would be eliminating more than US$1 billion in shareholder equity as a result of its unwinding of the investments.
This led to the filing of a securities class action lawsuit on behalf of all persons who acquired Enron’s secu-rities between January 2000 and October 2001.
As a result, a chain of events was triggered that highlighted the lack of corporate governance in the energy giant. The lawsuit alleges that the defendants, who were directors and officers of Enron, issued false and misleading infor-mation to potential investors.
The lawsuit also claims that Enron failed to disclose material infor-mation necessary to make its prior statements not misleading. Enron insiders have been alleged to have disposed of over US$73 million (RM277.4 million) of their personally-held Enron common stock to unsuspecting investors.
What transpired next sounded more like plot lines for a corporate soap-opera bankruptcy, suicide, political patronage, cronyism, more allegations and even more denials.
Nonetheless, what is clear to those following the Enron saga is that there was indeed a lack of good corporate governance in the US energy giant.
Transparency, accountability and disclosure are three essential ingredients in corporate gover-nance.
The concept of corporate gover-nance was put forward as a result of increasing awareness on the importance of the need to protect the rights of all stakeholders, including minority shareholders.
While the term corporate gover-nance is relatively new, the concept is actually not alien to Islam.
The Quran for instance, in a lengthy explanation in verses 282 and 283 of Surah al-Baqarah, states a detailed step-by-step process that
should be taken when carrying out a transaction.
The verse highlights the impor-tance of proper record-keeping so no party involved suffers injustice.
The message behind this verse is the need for transparency and dis-closure in business dealings.
These in essence are two of the important underlying principles of ‘contemporary’ corporate gover-nance.
Another important ingredient of corporate governance is accoun-tability. On this matter, the Prophet of Islam was reported in one hadith as saying that: ‘Each one of you is a guardian, and each guardian is accountable to everything under his care.
As such, if this tradition of the Prophet were to be translated into modern business dealings, all persons involved in business transactions are indeed accountable for all their actions.
In the practical sense, corporate governance involves the nuts and bolts of how corporations should fulfil their responsibilities to their shareholders as well as other stakeholders.
The definition of corporate governance as adopted by Malaysia is “the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long- term shareholder value, whilst taking into account the interest of other stakeholders.”
It is interesting to recall that Malaysia and others affected by the Asian economic crisis were lectured by Western scholars, international fund managers and international financial institutions on the need to improve standards of corporate governance.
Unless this was done, it was prophesised that none of these countries, which were once dubbed the Asian Economic Tigers, would be able to get out from the economic doldrums.
As Datuk Mustapa Mohamed, the Executive Director of the National Economic Action Council (NEAC), put it in a seminar held at Ikim in 1999, “The need for enhanced corporate governance has been bandied in front of us at every turn that we had taken, as if good corporate governance is something alien and unknown to us”.
In actual fact, Malaysia’s efforts to improve standards of good corporate governance began well before the 1997 economic crisis that besieged East Asia. However these efforts went largely unnoticed until the crisis began.
Nevertheless, the impression that was given was that Malaysia embarked on this exercise to create a healthy and conducive corporate environment only after receiving the rude shock of the crash of the stockmarket and currency market that began in Bangkok before spreading to other countries like a malignant cancer.
Naturally, some of the efforts undertaken by Malaysia against the backdrop of the financial crisis were perceived as a reaction to short-comings exposed during the turbulent period.
One of these efforts was the setting up of the Financial Reporting Foun-dation and the Malaysian Accoun-ting Standards Board under the Financial Reporting Act 1997. These bodies were founded in order to improve the standards of financial reporting and accounting.
Many amendments were also made to existing laws to improve corporate governance. These include the introduction of Section 166A of the Companies Act 1965 as well as changes to Section 99B of the Securities Industry Act 1983.
The Code of Takeovers and Mergers which came into effect in 1999 further highlights the Malay-sian commitment towards enhan-cing disclosure and transparency.
It is apparent that Malaysian companies, the directors and officers are subject to a rigorous set of laws, rules and regulations governing their conduct.
It can also be said that there is already in place a firm legal and regulatory foundation for the pro-tection of shareholder and stake-holder right.
However, what is important to realise is that, even with these laws, rules and regulations, good corporate governance could not be instilled within corporations if the persons regulated by these laws are not aware of their responsibilities.
In other words, it must be remembered that a comprehensive code together with state-of-the-art legislation would not achieve much by ways of enhancing standards of corporate governance, unless and until company directors, share-holders, senior management and members of the audit committee are all mindful of their roles and responsibilities.
The concept of corporate gover-nance in actuality is a code of conduct of best practices. It is worthless if this code remains only as ink on paper.
From the perspective of Islam, deeds are more important than mere words, slogans, rhetoric or lectures, as highlighted in one verse of the Quran: “Why do you say that which you do not do?”
Thus, corporate governance should be practised in the form of deeds and actions. Only when actions speak louder than words, will a good corporate culture that looks after the welfare of all stakeholders materialise in today’s corporate world.