2. Study Problem Problem The Study:
Despite the attention to governance in theory, but there is a dearth of empirical studies necessary; in addition to that recommended by many of the studies dealt with the subject of governance in different sectors and environments is environments that have been addressed,
such as a Alamama study (2006), the study of Awad and Katti (2011), the study Ekrayem (2010), the study of Zahra (2013); Based on the above study is a problem in the following main question:
– What is the level of application of the principles of corporate governance in banks Libyan commercial?.
Elements of Corporate Governance
There are few evidences which are suggested by literatures, practicing corporate governance in the corporation and other study results has been influenced by geographical locations (Klapper, Laeven, & Love, 2006; Chhaochharia & Laeven, 2009). Dissimilar results have been shown in different regions where the existence of cultural differences, and other factors, such financial accounting, factors of legalization, factors of regulations. Few studies have been done to identify the influence of corporate governance and financial performances steered on corporations in some countries which operating healthy economy and practicing a proper corporate governance regulation, variation on the corporate governance practice and legalized heavy regulation and which is rated more sophisticated than developing countries. Mostly the economy in developing countries, corporate governance regulations are weaker or else has the lacking and there are haphazard corporate governance practices (La Porta, De-Silanes, Shleifer, & Visny, 2000).
However, perceptions of the corporate governance elements that molds good corporate governance vary from country to country, as the business environment is not available in all countries equally. Nevertheless, some insights of the key elements of good and well established corporate governance are provided by different professional body and author such the Australian Stock Exchange Corporate Governance Council (2003), company report of, Cadbury Report (1992), Sarbanes-Oxley Act (2002) and The Business Roundtable (2002) in different times.
According to the Business Roundtable (2002), a relationship of CEOs of American enterprises, shorten the standards of good corporate governance as takes after:
‘ Board has a significant commitment of selecting and dealing with competent managers and other senior leaders.
‘ The organization of a connection has an obligation to act in a timely and proper manner at this time stretching shareholder level in the organization.
‘ It is essential for clear and advantageous tax reporting.
‘ The company must plan the game with are specialists in a sensible and reasonable way.
‘ A company should have a corporate governance trustees who embodies autonomous leaders and speeches problems, for example the selection of managers, procurement data to a board of directors and assessing the viability of a board of directors.
‘ Independent manager must meet a chance. Outside the region of a president and other executives organization.
‘ A company has an obligation to talk to its shareholders and stakeholders distinctive effectively.
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Factors to Implement Corporate Governance
Board of Director
Shareholders and Stakeholders
Audit Committee and Audit Oversight
Compensation Committee
Board of Director
Board of directors is a critical corporate governance mechanism set up to help mitigate conflicts of interests. The major purpose of setting up board of directors of a corporation is to monitor activities of corporate managers (Black et al. 2003; Brown & Caylor 2004). The responsibilities of the board include the establishment of long-term strategic policies for the corporation, determination of compensation packages for corporate managers, evaluation of managers’ performance, and enhancements of internal control systems (Drucker, 1954; Marciukaityte, Szewczyk, & Varma, 2009).
Board of directors is often seen as ineffective in carrying out their responsibilities for lack of independence. In order to improve the effectiveness and independence of the board some researchers have suggested the use of stock options to help align the interests of corporate managers with that of shareholders. They argued that appropriate stock ownership will provide incentives for corporate managers to take long-term perspectives of important corporate decisions (Eugene & Courtenay, 2006; Pergola, Gilbert, & Jenzarli, 2009).Arcay and Vasquez (2005) reported that board independence and stock option plans are positively related to transparency and full disclosure of information.
Shareholders and Stakeholders
Organizational and company shareholders should be ready to enter into a dialogue based on mutual understanding of objectives (Ponnu, Sarif, & Chan, 2007). The companies also should use the annual general meeting to communicate with private investors and encourage participation of all the stakeholders (Ponnu, Sarif, & Chan, 2007). According to Brown & Gorgens (2009), companies with better corporate governance performed better when looking into firm financial performance in areas of shareholder returns. Stakeholders can be instrumental to corporate success and have moral and legal rights (Donaldson & Preston, 1995; Ulrich, 2008). When stakeholders get what they want from a firm, they return to the firm for more (Freeman, 1984; Freaman &McVea, 2001).Therefore, corporate leaders have to consider the claims of stakeholders when making decisions (Blair, 1995) and conduct business responsibly towards the stakeholders (Manville & Ober, 2003; White, 2009). Participation of stakeholders in corporate decision-making can enhance efficiency (Turnbull, 1994) and reduce conflicts (Rothman & Friedman, 2001).
Audit Committee and Audit Oversight
The audit committee of the board is established to provide independent oversight of the company’s financial reporting, non-financial corporate disclosure, and internal control systems (Laux & Laux, 2009). This function is essential to ensure that effective corporate governance and responsibilities to stockholders are fulfilled. According to Laux and Laux (2009) the audit committee has major responsibilities of appointing, retaining, and even dismissing external auditors if they perform poorly. It oversees the internal audit function, ensures quality of financial disclosure, assesses auditors’ independence and determines the quality and transparency of financial reporting.
Audit committee members should have sufficient expertise in financial, accounting, auditing and legal matters to be able to adequately oversee and evaluate the control, compliance systems, risk management and the quality of financial disclosures (Bates & Leclerc, 2009). Financial expertise of audit committee members is positively related to earnings quality (Hoitash & Hoitash, 2008). Chen and Zhou (2007) also found that fraudulent firms have fewer financial experts on the audit committee. Audit committees that have financial experts are more likely to understand complex accounting issues and the need for auditors to perform inquiries to increase their level of assurance that the financial statements do not contain material misstatements.
Compensation Committee
Compensation may take the form of cash, bonuses, stock options, and long-term incentive plans such as pension funds (Brigham, 1999; Narayanan, 1996; Wheatey, Doty, & Harold, 2010). Compensation is used by directors acting on behalf of stockholders to attract, retain, and motivate the highest quality and most experienced managers for a corporation (Hawley & Williams, 1996; Kanagaretnam et al. 2009). According to Narayanan (1996), all-cash compensation may lead corporate managers to underinvest in long-term capital projects so compensation should include long-term incentives that will help meet and exceed corporate long-term goals.
Excessive board-approved compensation package is highly detrimental to the interests of stockholders and firm value. Bebchuk and Grinstein (2005) examined the growth of executive pay of sampled period 1993- 2003 and reported that executive compensation has grown geometrically that could not be explained by financial performance, changes in firms, or industry classification. Frydman (2008) agreed with Bebchuk and Grinstein, (2005) and reported that the growth of equity-based compensation has not led to reduction in non-equity compensation packages
Reda et al. (2008) believed that compensation committees can help in designing and implementing a compensation system that effectively rewards and encourages participation in the achievement of core business activities. Compensation committees also review and approve corporate objectives that relate to management compensation. Several studies have suggested that excessive executive compensation package is a sign of strong financial performance (Dominguez-Martinez et al. 2008). But no significant relationship was found to exist between executive compensation and financial performance in Li et al. (2007) and Zheng and Cullinan (2010) research studies. Li et al. (2007) reported that excessive executive compensation leads to poor financial performance.
For compensation committees to be effective members should be independent and free of undue influence from corporate managers in order to have the ability to offer impartial advice. Zheng and Cullinan (2010) noted that given the limited board size, the corporation must critically examine how to assign individual directors among different committees to ensure independence and effectiveness.
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4.0 THE COMPONENTS OF EFFECTIVE CORPORATE GOVERNANCE
a. Fairness
b. Transparency
c. Accountability
d. Responsibility
Gregory and Simms (1999) observed that corporate governances practices vary across countries and industries, reflecting both differing societal values as well as differing ownership structures, business and competitive conditions. It can also be due to differences in the strength and enforceability of contracts, the political standing of shareholders and debt holders as well as the development and enforcement capability of the legal system.
In the developed countries, the elements of effective corporate governance include well positioned and regulated securities markets; laws which recognize shareholders as the legitimate owners of corporations whilst at the same time ensuring the equitable treatment of minority and foreign shareholders; enforcement mechanisms protecting the rights of shareholders; laws to protect against fraud on investors; sophisticated courts and regulators; an experienced accounting and auditing sector and significant corporate disclosure requirements. In addition to this, the developed countries also have well developed private sector institutions such as organizations of institutional investors, professional associations of directors, corporate secretaries and managers, as well as rating agencies, securities analysts and a sophisticated financial press
On the other hand, many emerging countries have not yet developed fully their legal and regulatory systems, enforcement capacities and private sector institutions required for effective corporate governance. There is in many of these countries, a need for further development of the stock exchange, systems for registering share ownership, enactment of laws for the protection of minority shareholder interests, the empowerment of a vigilant financial press, the improvement of audit and accounting standards and a paradigm shift in the mindset against the widespread tolerance of bribery and corruption as an unavoidable cost of doing business in some of these countries.
On top of differences in the stage of development of each countries legal and regulatory system, they also differ remarkably in their cultural values, which underpin their financial infrastructure as well as their chosen model of corporate governance. Greenspan (1999) in his remarks to the World Bank and the IMF Seminar Program noted that the development of financial infrastructure and all the institutions that support it is ‘invariably molded by the culture of a society’. In the final analysis, corporate governance and the framework underpinning it must be pertinent to each countries unique legal environment and cultural values.
According to the Millstein Report (1998), corporate governance takes place within the corporation and as such it depends very much on investors, boards and managements for its successful implementation. The report noted that for corporate governance to be effective in attracting capital, it must focus on four important areas:
a. Fairness by ensuring the protection of shareholder rights in particular the rights of minority and foreign shareholders. These rights can be strengthened by ensuring the enforceability of contracts made by the providers of capital.
b. Transparency by the timely disclosure of adequate, clear and comparable information concerning corporate performance, governance and ownership.
c. Accountability by clarifying governance roles and responsibilities and by means of voluntary efforts to ensure the convergence of managerial and shareholder interests as monitored by the board of directors.
d. Responsibility by ensuring corporate compliance with other laws and regulations reflecting the extant society’s values.
In summary therefore, the Millstein Report (1998) urged the promotion and articulation of the four core standards of corporate governance: fairness, transparency, accountability and responsibility.
As a response to the Millstein Report (1998) recommendations to promote and articulate the four core standards, the OECD set up a Task Force to operationalize the findings. In April 1999, the Task Force issued a set of corporate governance principles building on the four essential components articulated by the earlier Millstein Report (1998). The principles provide useful working guidelines to countries seeking to further strengthen the foundations of their corporate governance practices by expanding on the core concepts identified earlier by the Millstein Report (1998).
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3.0 THE IMPORTANCE OF EFFECTIVE CORPORATE GOVERNANCE
As a result of globalization and the increasing complexity of business there is a greater reliance on the private sector as the engine of growth in both developed and developing countries. Corporations are legal entities created by societies because they are an efficient form of organization and society benefits from their existence. Corporations contribute to economic growth and development, which in turn leads to improved standards of living as well as the alleviation of poverty. The end result of all this activity is the creation of more stable political systems.
Furthermore as noted by Gregory and Simms (1999), the quality of corporate governance is important since it has a direct impact on:
a. The efficiency with which a corporation employs assets
b. Its ability to attract low-cost capital
c. Its ability to meet the expectations of society
d. Its overall performance
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Governance in banks:
Considers