Islamic Finance: The New Regulatory Challenge, 2nd Edition

Chapter 20

Corporate Governance and Supervision: From Basel II to Basel III

Carol Padgett

1. INTRODUCTION: CORPORATE GOVERNANCE AND THE SPECIAL CASE OF BANKS

One of the best known definitions of corporate governance is the one used by the influential Cadbury Committee,1 which described corporate governance as “the system by which companies are directed and controlled.”2 Over time the definition has been refined in various ways by authors who are keen to draw attention to the relationships involved in the process of direction, and crucially to specify for whose benefit the organisation is being controlled. Any definition rooted in economics focuses on the relationship between managers (in practice the board of directors, as controllers) and shareholders (as owners of the business in whose interests it is run). Given that most businesses are not entirely funded by equity, other approaches include lenders alongside shareholders as beneficiaries of the process. A still broader definition, and one which is espoused by the OECD,3 is based on the idea that companies exist for the benefit of a range of stakeholders, so corporate governance is concerned with a set of potentially complex relationships between management, shareholders, lenders, employees, customers, and wider society.

This approach is useful in thinking about the corporate governance of banks because they play a pivotal role in the economy. We need look no further than the recent banking crisis for proof of this. Governments ...