Presented in The 12th Sharia Economic Days 2013 Forum of Islamic Studies, Faculty of Economics University of Indonesia

What is GCG?

CG?
Refer to the structure and processes for the direction and control of companies It concerns the relationships among the management, board of directors, controlling shareholders and other stakeholders. In other word, CG is system of checks and balances that corporate management, including board committees, senior corporate executives, auditors and even corporate advisors, all carry out their fiduciary responsibilities owed to those they represent. CG refers to the defense of shareholders interests. CG structure specifies the distribution of rights and responsibilities among different participants in the corporation and spells out the rules and procedures for making decisions on corporate affairs. OECD principles of CG provide the framework for the work of financial institutions, identifying the key practical issues: the rights and equitable treatment of shareholders and other financial stakeholders, disclosure and transparency and the responsibilities of the board of directors

Purpose
maximizing shareholders value legally, ethically and on a sustainable basis, while ensuring fairness to every stakeholder (the companys customers, employees, investors, and vendor partners) - Wolfensohn, 2001 in fact GCG is a reflection of a companys culture, policies, how it deals with its stakeholders, and its commitments to values.

Impact of CG
Profitability Growth of corporations Access to capital Cost of capital

Influence decision -> wealth creation

Collapses linked to GCG

Bigest bankruptcies in US
Perusahaan Lehman Brothers Holdings Inc. Washington Mutual Worldcom Inc. Enron Corp Tanggal Bankruptcy 15 September 2008 26 September 2009 21 Juli 2002 12 Februari 2001 Total Aset sebelum bankruptcy $639,063,000,000 $327,913,000,000 $103,914,000,000 $63,392,000,000

Conseco, Inc.
Chrysler Texaco, Inc. Financial Corp. of America Refco Inc. Global Crossing Ltd.

18 Desember 2002
30 April 2009 12 April 1987 9 September 1988 17 Oktober 2005 28 Januari 2002

$61,392,000,000
$39,300,000,000 $35,892,000,000 $33,864,000,000 $33,333,172,000 $30,185,000,000

World Crisis in History

N o
1 2 3 4 5 6 Crash/Financial Crisis The Tulip Mania The South Sea bubble The Great Crash of October The Great Depression The Crash of October Argentinas Crisis Tahun 1637 1720 1920 1929 1987 1990s

7
8

Mexican Peso Crisis

Asia Financial Crisis

1994
1997

Investor B Investor A

Investor C

Business need funding to expand and growth Investors need to be sure the business
investors

Business entity

Financially sound Well managed

Shariah encouragement for Business

Prophet tradition

Zakah

Ibadah Ritual
Prophet tradition

Quranic encouragement

The Importance of Islamic Business

Agriculture & Basic Commodities Transport Military Equipment

Electronic & Media

Energy Exploration & Exploitation

Medical Equipment Industrial Machineries

Finance & Capital Market

AKTIVITAS EKONOMI Produksi Perdagangan - Jasa

Asset
Bank & Tabungan Masyarakat

Profit

Income

ZAKAT Infaq, Waqf, Hibah, Shadaqah

Pemberdayaan Pengentasan Kemiskinan

The Nature and Characteristics of the Islamic Theory of the Firm

Restrictions of the Islamic Firm Objectives of the Islamic Firm The Basic Characteristics of the Islamic Firm

Restrictions of the Islamic Firm

Achievement of Falah or welfare The Islamic producer thus ethically bound to those productive activities which conforms the goals of the Islamic shariah. In production: Maximisation of social utility of public interest (maslaha) Prohibition of inflicting injury on or causing grief to others (la darar wa la dirar) ; or the minimization of social disutility (mafsada) ; Primacy of social benefit over private benefit ; facilitating life for others and relieving them of difficulty and hardship (usr wa kharaj) especially under conditions of dire necessity and imperative need (darurat wa idterar)

Objectives of the Islamic Firm

Profit maximisation Welfare or falah maximisation. An Islamic firm will consider the benefit of the whole society as well as the other priorities of the Islamic state.

Problems Encountered
Religious commitment with secular reasons
Knowledge on sharia

Adequate fatwa from concerned board Ulama

Human Resources

Agency Problem

Agency Problem
By the word Agency we mean that conductive mechanism by which production firm or business enterprises are managed or conducted The divergence of interests and asymmetry of information between principal and agent may cause output to depend upon the contingent nature of the compensation contract. Different theories of agency show that correlation between remuneration and productivity determines the growth of the enterprises and behaviour of the agency.

Classification and Characteristics of Agency

Asymmetric information Adverse selection Moral hazard Arise where the principal can not costlessly observe or monitor the agents characteristics and/or actions

Implications of Agency Problem in Islamic Contracts

Firstly, such a bank would face difficulties resulting from ex-ante information limitations concerning project quality Secondly, in PLS contracts, borrowers have the every incentive to under-report or artificially reduce declared profit. Thirdly, an Islamic banks susceptibility to moral hazard and adverse selection would probably make it uncompetitive with conventional rivals

Solutions to Overcome the Agency Problems in Islamic Banking

To incorporate ignored behavioural consideration in the contract, principal-agent problem can be solved in the PLS banking system. Because, reward attached to co-operation might induce the agent to behave honestly. The formats of contracts should be designed as honestycompatible The redeeming PLS can be effectively used for the promotion of entrepreneurs and projects. Long-standing bank-borrower relationships would improve the efficiency of PLS banking in other ways. Actively supervised credit by the branch banking system is an opportunity to minimize the information asymmetries that result from distance

Effective CG
Promotes the efficient use of resources Helps ensure that the company is in compliance with the laws, regulations and expectations of society; Provides managers with oversight of their use of corporate assets Supports efforts to reduce corruption in business dealings; and Assists companies in attracting investment capital

Iman

Aqidah

Ihsan

Islam

Akhlak

Syariah

GCG
Transparence

fairness

Accountability

Independence

Responsibility

CG Basic Rules in Islam

Protection and safeguarding the contracts Paying attention to responsibility and accountability Transparency and truthfulness Paying attention to expertise Considering ethics and value system Forbidding corruption and unproductive activities

Fairness (adalah)
Adil adalah menjaga hak-hak orang lain Zalim adalah merampas hak-hak orang lain Adil adalah memberikan hak kepada yang berhak menerimanya Menjaga hak seseorang merupakan keadilan, merampas haknya merupakan kezaliman Adil merupakan competitive advantage yg mempengaruhi suatu organisasi Adil menjaga titik keseimbangan

Reliability
Amanah

kepercayaan

Ketenangan batin

Tidak ada iman bagi yang tidak memiliki amanah (Hadits)

Serahkan kepada ahlinya!

Sesungguhnya Allah menyuruh kamu menyampaikan amanah-amanah kepada ahlinya (pemiliknya) QS 4:58 Jika suatu urusan diserahkan kepada orang yang bukan ahlinya, maka tunggulah saat kehancuran. (HR Bukari)

Transparence
Finance decisions

policies

Business

Transparency
Transparansi adalah keterbukaan dalam komunikasi dan pertanggungjawaban Transparansi adalah nur, zalim adalah kegelapan Tidak transparan menimbulkan information asymmetry

Why not transparent?

Dishonest mentality Coward Hidden agenda Unreliable Ignoring transparency

Tidak halal bagi seseorang menjual sesuatu dan dia tidak menjelaskan sesuatu itu. HR at-Tabrani

Independency
Allahu al-Shamad (Allah tempat bergantung segala sesuatu) Teladan Rasulullah SAW Teladan para pahlawan dan tokoh-tokoh besar -> independency Bahkan independen terhadap diri sendiri (nafsu) -> teladan Nabi Yusuf AS

Accountability and Responsibility

Akuntabilitas: kejelasan fungsi, struktur, sistem, dan pertanggujawaban organ perusahaan sehingga pengelolaan perusahaan terlaksana secara efektif Responsibilitas: kesesuaian (kepatuhan) di dalam pengelolaan perusahaan terhadap prinsip korporasi yang sehat serta peraturan perundangan yang berlaku

Some basic rules

Jangan melempar tanggung jawab Akuilah kesalahan jika ada Pendelegasian Tanggung jawab ada di setiap orang

Why not Independent?

Utang budi Hubungan pribadi Suap

Intervensi

Concluding Remarks
Theres enough on earth for everybodys need, but not enough for anybodys greed

For further Information, please contact Nuruddin Mhd Ali +rayreligi@gmail.com

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