Issue 1

MIMLINK a journal of the MALTA INSTITUTE OF MANAGEMENT

Issue 1, June 2013

Moving beyond Sharia governance towards a more sustainable financial system

p19

The future is now, e-learning is here to stay p7

Financial turnaround and how to achieve it p19

MALTA

INSTITUTE OF MANAGEMENT

THE UK’S CHALLENGE

TO THE FINANCIAL TRANSACTION TAX

by Dr.

Christiana HJI Panayi, Queen Mary University of London

Under enhanced cooperation, a minimum of nine Member States can adopt a legislative measure between themselves. Enhanced cooperation can only be used as a measure of last resort. The proposed measure has to comply with EU law and must not undermine the internal market, create barriers in trade or discriminate between Member States or distort competition. While the competences of non-participating Member States have to be respected and acts adopted in the framework of this procedure only bind participating Member States, at the same time, non-participating Member States are under an obligation not to impede the implementation of the legislation under enhanced cooperation.

The UK has recently challenged the Council’s authorizing decision to adopt a Financial Transaction Tax (FTT) through enhanced cooperation. This is a very interesting development in the field of European taxation. It follows a Commission proposal on 28 September 2011 for a Council Directive introducing a common system of a Financial Transaction Tax. The proposal was accompanied by an Impact Assessment.

The FTT was hailed as a levy which would ensure that the financial sector contributes to the covering of the costs of the crisis.

The FTT was also meant to dis-incentivise excessively risky activities by financial institutions but it was not meant to affect citizens and business. It would only apply if one of the two parties is a financial institution and if one of the two parties – whether the financial institution or the non-financial institution – is established in a Member State. A tax of 0.1% for most financial transactions other than derivatives and 0.01% for derivative contracts was envisaged. These are minimum rates and participating Member States are entitled to apply higher rates.

The term ‘financial transactions’ was defined broadly to include the sale or purchase of financial instruments, money-market instruments, units or shares in collective investment undertakings, transfers of financial instruments between group entities and the conclusion or modification of derivatives. Transactions on the primary market were exempt. Some other transactions were not included, for example, spot currency transactions, ‘consumer transactions’ (e.g. concluding insurance contracts, mortgage lending), the issuing of government bonds and transactions with certain bodies (e.g. central banks of Member States).

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‘Financial institutions’ were broadly defined and comprised of all financial institutions and SPVs, as well as certain non-financial companies where a significant part of their overall activities was financial. Some institutions (e.g. European Financial Stability Facility, national Central Banks) were excluded from being financial institutions for the purposes of the proposed Directive.

Very importantly, a financial institution and a person which is not a financial institution would be deemed to be established in a Member State under a number of criteria.

Therefore, under certain circumstances, non-EU financial institutions would also be deemed EU-established. There was an escape clause in that no FTT would be levied where there was no link between the economic substance of the transaction and the territory of any Member State.

Each financial institution that is a party to the financial transaction would pay FTT and there would be joint and several liability. The proposed Directive was meant to become effective on 1 January 2014. The Commission estimated revenues of approximately 57 billion EUR annually without clearly setting out how the revenue would be used. It was thought that some of it would be allocated to the EU Budget, thus reducing the contributions of Member States.

This proposal was not favourably seen by a number of Member States such as the UK, Sweden, Bulgaria, Czech Republic, Cyprus, Malta and Denmark. By June 2012 at the ECOFIN meeting, it became clear that the Commission’s proposal for an EU FTT had not amassed the necessary support to be unanimously adopted by the Member States. It could only be adopted through the enhanced cooperation procedure set out under the EU Treaties.

Member States wanting to adopt legislation through enhanced cooperation have to send the request to the Commission. The Commission may submit the proposal to the Council to authorise enhanced cooperation.

Consent must also be obtained from the European Parliament. So far, enhanced cooperation has been used to adopt conflict of laws rules in relation to divorce law in 2010 and to establish the unitary patent protection system in 2012. This system was recently challenged by the two nonparticipating Member States (Italy and Spain) but both the Advocate General and the Court of Justice dismissed the challenge.

As far as taxation is concerned, the mechanism is being used for the first time for the FTT proposal. The adoption of the FTT through enhanced cooperation was instigated mainly by Germany and France and was eventually supported by the Commission on 23 October 2012. The FTT proposal, backed by 10 Member States at the time and eventually 11 Member States (Austria, Belgium, Finland, France, Germany, Greece, Italy, Portugal, Spain, Slovenia and Slovakia) was approved by the European Parliament in December 2012. In the January ECOFIN Council, the adoption of the FTT through enhanced cooperation was approved by qualified majority.

The UK, Luxembourg, Malta and the Czech Republic raised concerns that the Commission had not provided any analysis of the impacts that an FTT through enhanced cooperation would have on individual Member States. The dissenting Member States abstained from voting.

Nevertheless, on 14 February 2013, the Commission adopted a proposal for a Council directive implementing enhanced cooperation in the area of financial transaction tax, accompanied by another Impact Assessment. The revenue estimate was adjusted to 30-35 billion EUR per year.

Part of this would be added to the EU Budget directly as an own resource, reducing the contributions of participating Member

States accordingly. This proposal needs to be unanimously approved by the participating Member States to be adopted by them.

The most important change compared to the 2011 FTT proposal is the introduction of the issuance principle, whereby financial instruments issued in the participating Member States will be taxed when traded, even if the parties trading them are not established in FTT Member States.

This principle is thought to be the most contentious recommendation and in certain circumstances it could have extraterritorial effects. For example, FTT will be due when a bank established in the USA buys shares originally issued in Germany from a bank in Argentina. Both banks would be subject to FTT as the shares were issued in Germany.

The Commission’s revised proposal was met with disapproval in the UK. In a letter published on 26 March, the House of Lords’ European Union Committee (the Committee) urged the UK to challenge the authorising decision, criticising the ‘paucity of thinking’

in the FTT proposal. The Committee asked for clarifications on the obligation of the UK authorities to collect the FTT tax and the ensuing costs. The Committee was of the opinion that under the FTT proposal, the UK financial institutions would be burdened with the obligation to pay the FTT tax when financial transactions are entered into with financial institutions in participating Member States. Another criticism levied against the revised proposal was the uncertainty as regards the use of potential revenue from the FTT. The Committee also commented on the fact that the Commission had not given much information about the implications of the proposal for non-participating Member States and argued that the Impact Assessment did not adequately address the potentially deleterious effect of the FTT on economic growth.

This highly critical letter must have had some influence on the UK Government’s decision shortly thereafter, on 18 April, to challenge the authorising decision to adopt the FTT through enhanced cooperation at the Court

THE GOVERNANCE

JOURNEY

Guidance on Board Effectiveness emphasises the importance of the role of the company secretary.

I was amused by Anthony Hilton’s remarks in last month’s Governance & Compliance about corporate life before Cadbury often being compared to the Wild West. I remember that soon after the Cadbury Committee began its work, the Bank of Credit and Commerce International (BCCI) collapsed and this was swiftly followed by the demise of Robert Maxwell’s empire. Maxwell, who chaired a dysfunctional board and then plundered the pension fund to try and save his own company, was a prime example of why boards needed to take more responsibility to look after the interests of the company’s investors.

When it was published in 1992, the Cadbury Report, which was titled A Report of the Committee on the Financial Aspects of Corporate Governance, was hailed as landmark thinking on corporate governance. With hindsight, it might be more accurate to describe it as a milestone on the corporate governance journey, to which ICSA has made a significant contribution along the way. Sir Adrian provided us with a much needed framework which has served us well, but policies and systems are not enough. The near collapse of the banking system towards the end of 2008 was a wake-up call which raised serious questions about the effectiveness of the Code and its application. Questions were asked about the benefits of a system that only seemed to work in good times, when it was least needed. The system had not operated as it should have done and, as Sir David Walker stated, there was a clear need to get back to basics.

It was at this point that ICSA’s work to add more colour and context to the Code began. We conducted a survey on boardroom behaviours with our Members and other stakeholders in the governance community, and the ensuing Boardroom Behaviours document, published in 2009,

of Justice. This challenge has been lodged because it is believed that the proposal does not meet the requirements for enhanced cooperation. At the time of writing, details of the legal arguments are yet to be published but it is thought that the challenge is based on the extraterritorial impact of the FTT contrary to Arts 326-327 TFEU. Another ground is thought to be the imposition of expenses on non-participating Member States contrary to Art 332 TFEU. This is going to be a very interesting case.

Not only is it the first time that enhanced cooperation is being used in the area of taxation but it is also the first time that it is being challenged by only one of the (many) non-participating Member States. It is not certain at the time of writing whether Malta or any of the other dissenting Member States will be joining the UK in its legal action against the Council. In any case, the FTT proposal is a very controversial project. It would have been preferable if it was not introduced through enhanced cooperation – a process full of uncertainties itself.

contributed to Sir David Walker’s report on failings in banks and other financial institutions. The Financial Reporting Council (FRC) had announced a review of the Combined Code in early 2009and, later that year, commissioned ICSA to establish a Steering Group to develop its Guidance on Board Effectiveness, which had been a key recommendation of our previous Boardroom Behaviours report. This is the only official document that really does develop in active and positive terms the essential role of the company secretary and, taken together with the revised UK Corporate Governance Code, gives boards the tools they need to define their purpose, tone and succession.

If we look at matters such as risk, it is clear that there is still progress to be made on the UK’s corporate governance journey.

Achieving quality boardroom discussion on risk remains a challenge for some organisations. Boards have to be constantly alert to new and emerging risks and be prepared to report these to their stakeholders. The winners of this year’s ICSA Hermes Transparency in Governance Awards for best strategy and risk disclosure – Tullow Oil plc in the FTSE100 and Shanks Group plc in the FTSE 250 – demonstrated how sectors as diverse as energy and waste management can communicate well on these business-critical processes.

On wider governance issues there is too much emphasis on remuneration in discussions between institutional investors and companies. This is preventing both parties from devoting sufficient time to arguably more important issues such as strategy, performance, development of directors and long-term returns to shareholders. The nature of shareholder engagement and ways to make it more effective is the subject of a consultation which ICSA recently conducted through a Steering Group chaired by Sir John Egan.

The UK is indebted to Sir Adrian Cadbury for providing it with a much-needed corporate governance framework, and I am proud of the contribution which the Institute has made to its further development. The FRC’s Guidance on Board Effectiveness emphasises the importance of the role of the company secretary in working with the chairman to ensure that this framework remains fit for purpose. As we face up to the fact that companies will continue to experience valuedestroying mishaps, it looks like our work is only going to grow in importance.

Issue 1 - May, 2013

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THE VALUE OF WOMEN IN MANAGEMENT

by Sandra

Pollock, National Chair, the Women in Management network

Despite living in one of the most highly developed, liberal countries in the world with a well-advanced equality movement, Britain is still afflicted by female inequality in the workplace. Whether it’s unequal pay – which research published by the Chartered Management Institute shows could be as much as £423,000 over the course of a female manager’s career – or the lack of women in senior roles, the question of women in management and the value of their leadership continues to afflict women’s professional development.

One of the biggest problems affecting women in the workplace is their presence on boards and in senior leadership positions despite the lack of a difference in ability between men and women in these roles. The question is more about the choices made by the people who are responsible for board appointments, the choices some women are making, and the reasons women are making their choices.

I recently spoke to a senior consultant in the purchasing sector and she shared with me a tale that will be familiar to women working throughout the business world – that there are many highly skilled and capable women leaving the corporate arena. Often this is to bring up their families, sometimes it is to start their own businesses but there are some who simply wish to escape the continued disappointment, inequality of pay, hostility or just plain frustration at the lack of proper and fair opportunities.

There is no doubt that girls across the UK, US and Europe broadly match boys in their academic ability and statistically, in the UK, they invariably exceed them. Adopting a purely economic perspective it makes sense to employ those who are the best, irrespective of their gender, if you want to ensure your organisation remains ahead of the competition. A frequently used excuse for women’s lack of senior representation is that they do not want senior roles; that instead they prefer to take positions which enable them to support their families. Progressive organisations accept that maternity leave and parental leave are facts of life for all the parents they employ. Organisations that choose to develop parent friendly ways of

working, that support both women and men, allowing both to take active part in their family and work life, reap the benefits in more highly motivated staff, greater levels of creativity, innovation and increase profits.

Women have consistently proven their leadership abilities in progressive organisations and institutions that allow them to excel in their field.

The technology sector in particular is led by many highly successful women such as Sheryl Sandberg, the COO of Facebook, and Merissa Mayer, the CEO of Yahoo. The evidence is clear that there is no question of the ability of women or the value they can bring to an organisation’s success; the problems that they face are those of institutional beliefs.

Many have argued that there appears to be a dividing line between the actions taken by older organisations and newer ones such as Facebook and Yahoo where it seems to be far easier to appoint women to senior positions.

These less progressive organisations are restricted by dated patterns of thinking; their resistance to change and their desire to maintain the status quo deny them access to a wealth of professional talent. These old habits can be hard to change for some and may in the longer term become a problem for their whole business model.

More progressive organisations have a better chance of identifying and recruiting the best talent available as they are prepared to make changes to improve flexible working for all.

For innovative businesses the ‘fit’ seems to be more on how the individual can help achieve the results required. Organisations that refuse to change may miss out on great talent as the number of women starting their own businesses in 2012 was 58% in the UK, in the US in the 5 year period (1997 – 2007) grew by 44% creating 500,000 jobs and contributing $1.2 trillion and across Europe Issue 1 - May, 2013

the number of business start-ups led by women are on the rise. In 2010 in the UK there was a 40% rise in the number of female self-made millionaires according to a Tulip Financial Research report.

As National Chair of the Women in Management network I’ve been privileged to work with women to help them tackle these barriers, for instance through our Horizons mentoring programme which has been going from strength to strength since its launch. But our network can only do so much; employers need to lead the way. In our recent White Paper, CMI and WiM called for employers to do more to measure and report on the proportion of workforces made up by women. Also, to do more to create supportive networks and, most importantly, to help the next generation’s business leaders by developing links with local schools to encourage aspirations in young girls.

The Government, of course, also has a key role, and has committed to developing a more flexible labour market “that draws on the talents of all and builds a stronger economy as part of our growth agenda”. CMI has backed the Think, Act, Report framework for voluntary reporting by employers on equality – but more could be done, for instance by bringing forward reforms on flexible working and shared parental leave.

The number of women starting their own businesses shows that more women are making a different judgement on their managerial value and finding new ways to achieve their business aspirations. If employers do not act to change out-dated practices, they will lose out on talented employees. It is not just in the interest of fairness that action is needed. The evidence is there for all to see: if you embrace diversity, your organisation will perform better. That is a message that we all must heed.

The CMI/WiM white paper, Women in Leadership, can be downloaded at http:// womeninleadership.managers.org.uk

Find out more about Women in Management at http://wimuk.co.uk

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THE FUTURE

IS NOW PART ONE OF A TWO PART CONTRIBUTION

by Stephen

P. D’Alessandro - M.A. (Mrktg.), B.A. (Hons.) Bus. Mang., FIM, MCIM, MIoD

The author is the managing director of E-Business Systems, the Malta based company that developed and operates the EB-Learn platform as an SaaS solution.

EB-Learn was the winner of the 2011 eBiz award for best use of Technology in Education and Training awarded by the Malta Communications Authority.

Part 1 of this article looks at the continued growth of elearning, the current most popular elearning platforms and the emerging trend of Software as a Service. It concludes by outlining the implications of such a challenge to the established practice.

Part 2 of this article will then identify the key challenges to elearning. By referring to the author’s own experience in the development and implementation of an elearning platform that operates on the SaaS framework, it will focus on identifying the challenges and implications of higher value added elearning solutions.

Abbreviations CMS Content Management System CPD Continued Professional Development ICT Information Communication Technologies ISO International Organisation for Standardisation LCMS Learning Content Management System LMS Learning Management System MOOC Massive Open Online Course OSS Open Source Software SaaS Software as a Service SCORM Shareable Content Object

Reference Model The continued growth in the use of web based e-learning platforms

e-Learning is here to stay! There is such a volume of on-line learning material that the move away from traditional classroom based lecturing is steadily gaining ground amongst the most important stakeholders – the students. There is wide range of simple content management system (CMS) sites which basically serve as repository for files, documents, resources and data. At the other end of the spectrum are fully integrated

learning management systems which combine full functionality self-learning and collaborative learning tools which include course authoring, assessment tools, social learning and a mobile learning platform, often all integrated with e-commerce options.

Fuelling this growth is the continued growth of MOOCs, which is defined by Wikipedea as “an on-line course aimed at large-scale interactive participation and open access via the web.” MOOCs typically offer quality on-line courses free of charge or at token rates, but they do not offer personalisation or access to tutors. To many very well established universities and higher educational institutions, developing and operating MOOCs has become an important part of their pro-bono activities and an integral source of funding which can then spill over onto other internal programmes and services. Names such as Stanford University, Harvard University, Duke University, UCLA, Yale University and others immediately come to mind. The numbers of on-line students flocking to MOOCs is indeed impressive. One of the larger MOOCs, Udemy recently claimed more than 100,000 on-line registered students for a single course!

So, is online learning already a closed shop with mega universities flooding the market with FREE courseware? I would argue that elearning is still coming of age, and the recent growth in MOOCs a reflection of the dissatisfaction of many undergraduate students with the value for money that they are being offered by many top universities for their traditional on-campus degree programmes. Elearning presents a particular challenge to established higher education institutions that over the past decade have focused on developing campus facilities without a corresponding investment in upgrading their course content and deliverables.

The traditional model of getting students under one roof and then serving them with packaged content has been a convenient model, for the service providers, certainly not for the students (dare I say it - paying customers!). The traditional model was cost effective to the service provider, but imposed may constraints and restrictions on the student. Now, today’s ICT technology allows Issue 1 - May, 2013

the paying customer to demand improved value for money, particularly in higher education.

Moodle – the most widely used platform in higher educational institutions Most higher education institutions today offer their own ‘on-line courses’ many of which are developed on what is widely regarded as the most diffuse oss elearning platform, Moodle. Moodle is an open souce system which allows for continued development and customisation by the host organisation. Over the past ten years, I have had some experience in discussing such Moodle system refinements and customisations with various higher educational institutions. On the basis of this experience, I am convinced that the fine tuning and customisation of an opensource Moodle solution is not a quick fix solution. It requires a team of highly skilled programmers and developers to translate business or learning requirements into Moodle system deliverables. This level of experience and expertise in Moodle development is often underestimated, often resulting in junior programmers and developers, or lesser experienced staff, being recruited to handle what ‘should be’ minor enhancements and improvements.

Inevitably, these turn out to be major system developments and enhancements often stretching the development team to their limits and beyond. This increases development time which immediately increases set-up costs. It also results in lost business opportunities as internal ICT teams valiantly try, but fail to cope with such developments within the specified timeframes. All this, in addition to their many other ICT support roles within the institution.

Yet, to be fair, if sufficient resources are available and are suitably allocated, it is a model that has delivered within the larger educational institutions.

Another hurdle often encountered by higher education institutions that go the Moodle root and opt for the hosting and customisation of their own system, is what I often refer to as the “IT-ification” of the project. Rather than the technology being seen as a platform to serve a particular need within a particular time frame, it now

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THE FUTURE IS NOW - E-LEARNING IS HERE TO STAY (cont.) becomes an IT-project within the IT department’s set of projects. In such circumstances, the tendency is often for the IT Department to demonstrate its technical competence and ‘overspec’ the system, particularly where hardware is concerned.

This often results on a focus on funding the hardware and the software development as opposed to a focus on funding the content development, delivery and on-going support of on-line students following the programmes.

The concept of Software as a Service (SaaS) In contrast to the use of open source software which needs to be hosted, secured, backed-up and developed and maintained at the user’s cost, Software as a service, has become a viable option to so many firms, large and small. Benlian et al (2011) confirm that Software-as-a-service (SaaS), which describes software applications delivered as a service over the Internet is quickly becoming an important model of software delivery for companies of all sizes and in all industries. They maintain that for software users, SaaS provides numerous benefits, including IT cost reductions, operational elasticity, faster upgrade cycles, and ease of implementation. For software providers, SaaS is an increasingly significant channel for selling software services and challenges conventional business models of software firms. They cite a 2009 Gartner survey which estimates worldwide software revenues for SaaS delivery forecast to grow by 19.4% overall from 2008 to 2013, which is more than triple the total market compound annual growth rate of 5.2%. This is specially true in those application markets where low levels of system customization are required (e.g., office suites, collaboration).

Benlain et al contend that despite the need to better understand how customers of Software-as-a-Service (SaaS) solutions perceive the quality of these software services and how these perceptions influence SaaS adoption and use, there is no extant measure that comprehensively captures service quality evaluations in SaaS. They maintain that based on previous SERVQUAL and SaaS literature, field interviews and focus groups, a card-sorting exercise, and two surveys of SaaS using companies, they developed, refined, and tested SaaS-Qual, a zones-of-tolerance (ZOT)–based service quality measurement instrument specifically for SaaS solutions. Besides validating already established service quality dimensions (i.e., rapport, responsiveness, reliability, and features), they identified two new factors (i.e., security and flexibility) that they contend are essential for the evaluation of service quality of SaaS solutions. SaaSQual demonstrates strong psychometric properties and showed high nomological validity within a framework that predicts the continued use of SaaS solutions by existing customers. In addition to developing a validated instrument that provides a finegrained measurement of SaaS service quality, Benlain et al also enrich existing research models on information systems continuance.

Moreover, they contend that the SaaS-Qual instrument can be used as a diagnostic tool

by SaaS providers and users alike to spot strengths and weaknesses in the service delivery of SaaS solutions.

Fox and Petterson (2012) maintain that via a remarkable alignment of technologies, the future of software has been revolutionised in a way that also makes it easier to teach.

They maintain that cloud computing and the shift in the software industry toward SaaS using Agile development has led to tools and techniques that are a much better match to the classroom than earlier software development methods. They contend that instead of binaries that must be installed on a local computer, SaaS delivers software and associated data as a service over the Internet, often via a thin program on client devices such as a browser.

The SaaS model is particularly attractive since it is more customer-driven and is thus far more likely to see innovations and added facilities upgraded on a regular basis.

Such developments are shared by different institutional users, and the very frequency and extent of the upgrades is a measure of that service provider’s expertise and competitiveness.

Implications to the challenge The relevance of this challenge is particularly critical to the smaller more specialised institutions and training service providers.

Unlike the most established major players which have large ICT departments with major infrastructure and comparable budgets, the small institutions may not have Issue 1 - May, 2013

this option. Many are coping with drastic cuts in state subsidies and increased competition for paying students. Both of these tend to focus the organisation’s efforts on minimising fixed overhead cost and moving to a model of operation that is based more on flexible costs. In this way, costs are incurred as student numbers increase, this allows for operation at lower costs if student numbers are down and allows for higher costs when student numbers are up and the revenues justify such costs. In this way, the focus on the sustainability of the elearning operation is not based on the extent to which overhead and operating costs are allocated to the particular project. On the contrary, they focus on funds going towards course content development and operations, and elearning programmes driving revenues which allow for increasing operational budgets as student numbers increase.

References Benlian, Alexander; Koufaris, Marios; Hess, Thomas. 2011, Service Quality in Softwareas-a-Service: Developing the SaaS-Qual Measure and Examining Its Role in Usage Continuance. Journal of Management Information Systems. Winter, Vol. 28 Issue 3, p85-126. 42p.

Fox, Armando; Patterson, David. 2012, Crossing the Software Education Chasm.

Communications of the ACM. May, Vol. 55 Issue 5, p44-49. 6p.

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The state of affairs of certain enterprises in Malta may be of concern. Although, the enterprises facing financial distress are of concern there are other things that are definitely not assisting these businesses. The responsibility on whether these businesses will turnaround their financial position lies on not only the business person or the investor himself.

Causes of decline There are various reasons for companies’ decline such as inadequate financial controls and high costs, new competition entering the market, unforeseen demand shifts, over expansion and poor management.

In certain sectors, the increase in labour cost is effecting the competitive advantage.

Family friendly measures, ifnot addressed properly may result in further costs to the employers. On the other hand if addressed through education and not regulation these may decrease business costs. One may also argue that the costs are relatively higher because the investment in technology is still relatively low.

Businesses, particularly micro businesses, still fail to understand the need of thorough financial control. Some may have had the necessary systems in place but their business grew beyond the capability of their original systems.

Over expansion could result in being a major issue. Companies and/or Groups that have expanded too far find that they are stretched in both managerial and financial terms.

One may fall also into the trap of over confidence in his own abilities. This usually arises from a period of success, which causes an atmosphere of infallibility and screening of information. In some it might be purely poor management.

During the decline one must ensure that there is sufficient management talent.

Decline needs action Various studies show that managers tend to initially deny there is a crisis on the grounds that the signals are an extraordinary factor.

Others try to hide the reality by “massaging, delaying and even hiding figures”. The first step is usually to ensure that the financial statements do not show the true picture as otherwise the main source of funding, usually banks will start making call ins.

Financial and behavioural criteria need to be monitored for declining trends. Strategic health requires proactive management rather than reactive and false financial reporting.

In spite of the warning signs there must however be triggers to initiate action. Studies have identified a change in top management as a main trigger for change. Other triggers identified were intervention from external bodies, change of ownership, recognition by management of problems and perception by management of new opportunities.

If a business has poor earnings it needs turnaround. The steps in the survival process are quite straightforward. Honest communication of the situation to the employees is essential. One needs however, to be positive, clear and candid about the situation and the objectives. One would need to emphasise on what efforts and actions are expected from all. Then ask and listen for the input of the employees. Pride or nonacceptance of reality may lead many to try to hide and/or cover facts which may in turn lead to degeneration of the situation.

In a typical turnaround one would have approximately a week to get organized and about three weeks to put a plan together.

In a period of financial distress or in situations mentioned above it cannot be the management from within the enterprise to prepare such plan as it needs to:: Have one main objective; Be realistic; and Sustainable .

The first step towards such plan is the identification of the problems and determining their sources and severity.

It is critical to get the root causes whilst being careful of the temptation to address symptoms rather than causes. Strict accountability in such plans is a must.

The only expenses the company should incur are those necessary for the business to be profitable. In order to identify the unnecessary expenses one would need the help of the employees. Hence the importance of good communication with the employees as they need to understand the importance of such plan for the enterprise to be competitive, stay in business and safeguard their jobs.

When crisis becomes too obvious to ignore there is usually a reactive behavior. Managers tend to react in a sequential way which may be perceived as taking the least risky actions first and then becoming progressively more daring if the crisis worsens.

Issue 1 - May, 2013

Financial Turnaround… and how to achieve it

by Reuben

Buttigieg

The first challenge put to light by a troubled company is creditors’ persecution. There are various ways in which creditors can be addressed. The worst thing one may do is avoiding creditors or not returning their calls. The examination of the creditors’ accounts is a must in a turnaround. One will almost certainly find errors in his favour.

Having identified these one should ask for prompt refund and accept a credit note only if applied against already due invoices.

The cardinal rule of the troubled company is that customers, suppliers, banks and so on will benefit more from the company staying in business than from the closing down. So the troubled company has leverage. The only commandment is to negotiate with everyone.

Turnaround strategies The above suggests the need of a turnaround strategy. Grinyer et al suggest a time ordering of actions to achieve a turnaround although not all organizations need to go through all stages. This will highly depend on the conditions of the company and the causes of the crisis.

There are basically five main strategy/ stages for recovery that are: Restructuring leadership and organizational structure; Cost reduction; Asset redeployment; Selective market strategy; and Repositioning.

We need to ensure that businesses are adapting themselves to the rapid changes that are happening in the world. Government has its own responsibilities in giving the direction to the country and in ensuring that the economy is in a healthy state to face such directions. Constituted bodies and professionals have various responsibilities in order to ensure that their specific sectors or clients are made aware of the risks that new realities open to them. They also need to be encouraged to face and act upon such new challenges that can be turned into opportunities.

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RETHINKING

THE MBA BUSINESS EDUCTION AT A CROSSROADS

by Srikant

M Datar, David A Garvin, Patrick G Cullen, Harvard Business Press 2010 The book addresses concerns about MBA education, particularly in light of the failures that contributed to the financial crisis. The authors identify eight unmet needs, examine the change programmes introduced in the major schools (Chicago, Harvard, Yale, Stanford, INSEAD) and end by developing four themes around which change could be implemented. The objective of this paper is to assess the implications for the EBS MBA, given that the major business schools have initiated major changes in their approaches.

It is worth noting that before 2008 up to 60% of the graduates of these schools were destined for the financial sector; the failure of the financial sector has had a significant impact on their reputations and has caused them to evaluate exactly what they

THE EIGHT UNMET NEEDS A global perspective The syllabuses of the major schools have paid little attention to the emergence of economies such as China, India, Brazil, etc and treat the US as the cultural norm. The concern is that the major schools have produced MBAs who are not equipped to manage outside the US or Europe.

Implications for the EBS MBA

The EBS philosophy is that the language of business is universal. The courses were written for an international audience and contain examples and cases drawn from many countries. The courses were intended to be studied by experienced business people who could apply concepts and ideas in their own cultural context. The fact that the EBS MBA was adopted in most countries, and has been translated into several languages, suggest that the ‘culture free’ approach is effective. The approach is that the EBS MBA enables a manager to operate in a global economy rather than attempting to teach about globalisation.

Leadership development

There is a widespread opinion in industry that the major schools do not produce leaders. The business schools respond that there is a limited research base on which to develop programmes, and no one knows how to develop leadership characteristics. Various

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are doing. The shift in emphasis from ‘doing’ to ‘knowing’, resulting from the Ford Foundation and Carnegie Corporation reports published in 1959, has led to the development of highly rigorous subject based curricula which produced MBAs with technical knowledge but little understanding of management in practice.

Another contributing factor to the downgrading of ‘doing’ and the consequent emergence of a gap between theory and practice is the ‘two cultures’ issue, where business schools have attempted to achieve scholarly recognition using the same criteria as standard University departments. This has resulted in a perverse incentive system, i.e. incentives that are not aligned with the objectives of management education.

suggestions have been made, for example the development of self awareness and involvement in team activities, but they do not amount to a definable course of action.

Despite this major business schools claim to be ‘training the leaders of tomorrow’. This is an ambiguous claim: it can mean either that individuals will be trained to be tomorrow’s leaders, or that tomorrow’s leaders come to business school to be trained in management ideas.

Implications for the EBS MBA

The EBS philosophy has been that leadership is situational and while it is possible to learn a great deal about leadership (as in the Leadership course by Berry and Dunning) it is not possible to teach MBAs to be leaders.

Integration

The focus on subject based courses and the employment of high powered faculty specialists has led to a situation where no one is equipped to integrate the disciplines; nor is there any interest in doing so because of the discipline based incentive system.

The major schools have found this to be an insurmountable problem in the past but they are now making efforts to run integrative courses with a limited degree of success.

Implications for the EBS MBA

This is one of the strongest aspects of the EBS MBA. The Strategic Planning course was specifically designed to integrate the

concepts in the Core Courses and to develop the ability to combine integration with evaluation. This is enshrined in the following Figure from the course.

In the major schools MBAs are located in the bottom left hand sector and are unable to think ‘outside of the box’. They are able to tackle any problem in Finance, Economics etc. but are at a loss when asked to handle complex issues, such as a new product launch, which involve all the disciplines.

The tool for applying ideas is the Strategic Process Model and many thousands of students have applied this structure in their practice of management. None of the major schools recognises that Strategic Planning is an integrative subject and focus on teaching ‘models’ (such as Porter’s five forces etc) without apparently realising that the construction of a meaningful SWOT analysis requires knowledge of all business disciplines.

The lack of a structure within which to implement integration and evaluation has led the major schools to the erroneous conclusion that an integrative course can only be taught by older and more experienced faculty members. The fact is that a well educated faculty member who understands the role of the Process Model can teach the integrative Strategic Planning course.

EBS has not capitalised on this innovative aspect of the programme. This is partly because of the philosophy of allowing students to study courses in the order that suits them best, although there is a strong recommendation to study Strategic Planning as the final Core course.

Organisational realities: power, politics and the challenges of implementation

It is a common complaint by executives that MBAs do not have an understanding of how businesses work. They are also poor at implementation.

Implications for the EBS MBA

This is another strong aspect of the EBS MBA. Historically, the least popular aspect of the strategic planning process to academics has been the implementation stage, yet this is the aspect of business education which practising executives have requested be improved since business schools were invented. Implementation has played a major role in the EBS MBA from the outset: Project Management deals with delivery trade offs in terms of time, cost and quality, Making Strategies Work shows how to make objectives achievable within an organisational setting, Influence and Negotiation show how to make things happen in an organisation, Strategic Negotiation shows how to align an organisation behind strategic thrusts.

The fallacy in much of business education is that understanding what has to be done (after much analysis of marketing, finance, economics etc) is sufficient. The real business problem is actually making it happen.

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Creative, innovative thinking There is little agreement on what this involves but the lack of it is an outcome of the focus on individual disciplines and the setting of tasks within them. The fact is that in real life management problems are never presented in terms of the single disciplines and, as noted under strategic thinking above, the MBAs produced by major schools are not equipped to deal with them.

Implications for the EBS MBA

The requirements of creative thinking and integration and evaluation outlined above are similar. The EBS philosophy is that creativity cannot be taught but MBAs can learn the principles of integration and evaluation.

A major strength of the EBS MBA is the separation of these issues. The Strategic Planning examination forces students to ask ‘what is this problem about?’ and identify which tools can be used to tackle it. This may not be creative thinking but it is a step along the way.

Oral and written communication

There is general agreement that the MBAs produced by the major schools have difficulty communicating whether in presentational form or in smaller group discussions. The large class sizes of the major schools mean that students have little opportunity for presentations and exposure to criticism from faculty and peers.

Implications for the EBS MBA

This problem is ‘old hat’ in relation to the EBS on-campus courses which focus on group work and presentations using cases and simulations. But the EBS approach is not shared by the majority of the 25 Learning Partners, who tend to teach the text in a conventional format; the Quality Director and the Partner Conferences go some way towards addressing this but the institutional context within which Approved Tutors operate is often not conducive to the value added approach.

The original target group for distance learning was mature, busy, experienced, ambitious individuals who wanted knowledge rather than to develop interpersonal skills. EBS has not competed seriously in the on-campus market; however, the Learning Partners see themselves as on-campus variants and are competing for students head-to head against established providers without really differentiating their offerings. EBS has been weak in the past in inducting Learning Partner teaching faculty; for longer term success it may be that EBS needs to be more proactive in training Learning Partner faculty but there are many obstacles in the way of achieving this.

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RETHINKING MBA BUSINESS EDUCATION AT A CROSSROADS (cont.)

Risk, regulation and restraint: understanding the limits of markets and models This focuses on the failures resulting from the use of models for estimating risk. Many deans feel that there is not sufficient instruction in macroeconomics and the cyclical nature of economic activity. It is felt that MBAs become so conversant with complex models that they overlook the fact that they are just models and not reality.

Implications for the EBS MBA

A salient outcome of Organisational Behaviour, Marketing, Project Management and Strategic Planning is that there are no clear answers to most management problems but there are tools which enable events to be interpreted and that risk cannot be quantified in most circumstances. The formal analysis of risk is contained in Financial Risk Management and Credit Risk Management; a full analysis of risk is contained in Strategic Risk Management and the recurrent nature of financial booms and busts is contained in The Practical History of Financial Markets.

From the outset the EBS MBA stressed that the ‘hard’ courses – Economics, Finance and Accounting were building blocks in understanding complex issues and that models provide the means for understanding problems rather than generating solutions.

We need to ensure that the EBS MBA does not gain the reputation of being purely technical.

Four themes for the future

The major business schools are making efforts to address the eight unmet needs in a variety of ways and with varying degrees of success; these efforts are documented at some length in the book. This is a period of experimentation which may lead to a new model of business education but on the basis of the accounts in the book this is unlikely.

Mostly the schools are tinkering at the margin with their existing models rather than rethinking their approach from scratch.

Theme 1: the growing imperative for change

The eight unmet needs, coupled with the views of business executives and the changing aspirations of MBA students, suggest that change is required to prevent the MBA degree being rendered irrelevant. As described in the book the major schools are attempting to introduce change but whether this is likely to be effective is uncertain.

Implications for the EBS MBA

Implications for the EBS MBA

It has been argued above that the EBS MBA model is robust in terms of its original targeting and the development of courses that address the application and integration of ideas to real life management issues. Rather than pretending to change there could be an advantage in stressing the fact that the EBS MBA has always addressed the eight unmet needs.

There are no implications for the EBS MBA curriculum.

Theme 2: the need for rebalancing

It is now felt that the shift towards ‘knowing’ in the wake of the Ford and Carnegie reports has gone too far and MBAs need much more instruction in ‘doing’. But the perverse incentive system in business schools has resulted in very few faculty members who are equipped to achieve this. The descriptions of the attempts at change indicate that the major schools are uncertain themselves how to change their own organisations consistent with this new objective.

Implications for the EBS MBA

The design of the EBS MBA courses started with the mantra ‘concept and example’. No concepts were to be included in the courses that could not be justified on the basis of practice. Coupled with the integrative strategy course and the portfolio of implementation courses there is no need for the EBS MBA to be rebalanced. But again it is possible that there is an advantage to this in terms of marketing the EBS brand.

Theme 3: redesign of the curriculum

This largely centres on an increased focus on thinking skills; given the requirements of the subject based curriculum it is suggested that his should be tackled in the second year of the standard two year MBA programme. It is remarkable that the authors demonstrate little insight into the issue, i.e. that the development of these skills should take place within the teaching of the core subjects and not be seen as something tagged on at the end. The authors interpret ‘rebalancing’ as something built on the core ‘knowing’ rather than integrating the two objectives.

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Theme 4: the challenge of implementation

This challenge relates to the organisational structure and how this stands in the way of change. The problems include perverse incentives, faculty with limited managerial experience, inadequate faculty training etc.

As in any organisation there are barriers to change in business schools.

Implications for the EBS MBA None

What does the book tell us?

The major lesson is that the major business schools have demonstrated institutional inertia in the face of a changing market place.

Because of their reputations they were able to attract large numbers of highly qualified students who were eagerly snapped up on graduation. There is nothing wrong with acting as a filter, but if the filter is no longer doing its job then it is time to think again.

An odd feature of the investigation is that there is no mention of assessment or examinations. The measurement of output is ignored completely, as are the maintenance of standards and the avoidance of grade drift and dumbing down. The EBS assessment approach of testing students’ ability to apply concepts by cases, short scenarios and complex multiple choice questions is an integral part of the programme: before writing a course each author has to produce a sample examination to clarify what the course output will be. If the major schools are ignoring the issue of output measurement it is no wonder they are uncertain of how to proceed on the input side.

So far as EBS is concerned there are no implications for radical change. There could be potential to capitalise on the fact that we appear to be ahead of the pack in relation to relevance and the development of thinking skills.

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&

CHALLENGES OPPORTUNITIES

for local Micro enterprises on the International Market

by Omar

Micro and small and medium enterprises are the backbone of the Maltese economy.

Indeed small businesses represent the overwhelming majority of all business in Malta. The population of private business enterprises in 2004 comprised around 31,006 units, 96 per cent of which were classified as micro-enterprises . Micro Enterprises account for 39,000 employees and are active in all business sectors thus comprise diverse types of firms ranging from one-person businesses to cooperatives.

Whilst some micro-enterprises offer very traditional services or craft products, many others are fast growing high-tech companies.

Despite their critical role in the Maltese economy, micro businesses still face major challenges that hinder their growth on the international plane. Companies trading overseas are enjoying greater revenue and profit growth compared to companies focusing only on their domestic market.

However, only one in five Maltese Small and Medium enterprises (SMEs) are currently planning to expand their business on an international scale . Malta’s micro enterprise slow growth on the international plane stems from several factors.

Access to finance or the lack thereof, is experienced by small businesses as one of the most prevalent obstacles. The availability of finance is crucial for growth and innovation of companies. Effective marketing campaigns, research and development, as well as international certifications are prerequisites for any enterprise to access the international market. Yet such investment necessitates a financial muscle which is often beyond the capabilities of micro enterprises. Difficulty in accessing finance often puts micro enterprises at a disadvantage, constraining their options for carrying out the necessary investment to compete on the international market. Difficulty in accessing finance also effects EU funds since most schemes contain an element of co-financing, which tends to be relatively large for micro-firms. Micro

businesses are perceived as high risk element due to their volatile nature and structure which leads to limited or no access to funds.

Over the past years, access to finance has improved thanks to initiatives like ‘JEREMIE Microcredit’ yet further openness to financial support is required to ensure an increase presence of microenterprises on the international market. A better understanding by policymakers of this sector and of the constraints it faces, which are often different from those encountered by larger firms, is therefore crucial for the purpose of ensuring the growth of the micro business segment in Malta. In the current environment characterised by a reduced availability of credit and tighter lending standards, the financing needs of small businesses deserve particular attention.

Access to EU funds is also critical for micro enterprises ambitions on the international plane.

There a mixed feelings by micro enterprises on the accessibility of Malta Enterprise schemes and other EU funds.

Notwithstanding the work of the European Commission to provide financial instruments for micro businesses, EU funding is still perceived as inaccessible and complicated with too many red tape that confuse more than assist. Moreover, the application procedures are often lengthy processes for which most micro-enterprises simply lack the resources.

Red tape also hinders the day to day operations of micro enterprises. Too much precious time is spent on unnecessary paperwork instead of focusing on growing the business. In a recent report commissioned by the European Commission, it estimated that by dramatically reducing unnecessary red tape, the European Union Issue 1 - May, 2013

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would boost its GDP by up to 1.4% . Red tape is no stranger to local micro enterprises.

According to the 2009 edition of the World Economic Forum’s Executive Opinion Survey on Global Competitiveness, inefficient government bureaucracy is regarded to be the most problematic factor for conducting business in Malta.

Challenges for micro enterprises on international markets such as the EU also stem from Malta’s natural peripheral geographical location. While the single market has intensified foreign competition by larger companies in Malta, the same could not be said about local operators wishing to conduct cross-border business in Europe, as these find it harder to compete due to limited capacity and resources .

Every cloud has a silver lining. Although local micro enterprises face an uphill in their quest to venture on the international market, recent legislation and initiatives aim to provide a better working environment for Micro Enterprises. The Small Business Act (SBA) that aims to put the ‘Think Small First’ principle at the heart of policies in Brussels and across Europe is indeed a breath of fresh air for micro enterprises.

Its key role to cut red tape, simplify rules, and improve access to finance are a positive move towards the right direction. The Malta Enterprise ‘Gateway to Export’ aimed to encourage and assist micro-firms and small businesses with their exporting efforts, as well as transnational support services via the Enterprise Europe Network are also key initiatives aimed at helping micro enterprises to have better access to the international market. Yet such initiatives can only be seen as a first step towards a better environment for micro enterprises. Such initiatives need to be put better into practice at both local and European level and must be further supported by means of actions which will lead to a more micro enterprise friendly environment which will increase their competitiveness on the international market.

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Governance towards a more sustainable financial system

by Dr.

Murat Ünal M.B.A., LL.M – Funds@Work AG

Islamic finance still plays a minor role compared to conventional and ESG (Environmental Social Governance) related investments. Its principles though have the potential to form the basis of a global financial system that relies less on debt/leverage and is closer to real economic activity. The financial world needs to ‘connect the dots’ in network analytic terms and build on the best of all worlds from conventional, ESG and Islamic finance investments to make the system more stable and resilient. The mainstream conventional system has too long depended on easy money, high debt levels, and developed a detachment from real economic activity and there is a clear call for change.

Islamic Finance though has to become more socially responsible and apply ESG and other non-financial criteria in its investments. Islamic investors should not only care for Zakat but ensure that environmental, social and corporate governance criteria are considered too. Here both the conventional as well as Islamic investors can greatly learn from those that apply ESG criteria and who increasingly act as “active shareholders”, engage with the companies they invest into and take care of their fiduciary duties. This is particularly important in our modern capital markets where shareholders are generally detached from management, creating a corporate governance vacuum that needs to be more strongly addressed.

We all know the moral hazards that can arise from principal agent related issues but still today the level of control and incentives in order to align interests between principals and agents is very different among conventional, Islamic and ESG investors with the latter being most advanced and seeing themselves as active shareholders of the companies in which they invest and not just as “anonymous” investors in “financial instruments” which carry an ISIN (international securities identification number).

The Status Quo We know from network theory that the openness of groups to outsiders` views is a crucial element in being more innovative, so diversity pays off. The following simplified graph shows us the three groups, namely Islamic Finance (red), ESG (green), and conventional investors (pink) which are communicating more densely within their groups but less so between the individual disciplines. There are a few boundary spanners that connect the individual groups but that is certainly not enough. This can even be seen in major conferences which are either dedicated to “conventional”, “ESG” or Islamic Finance” topics but don`t provide an equal platform for all disciplines to engage in dialogues and learn more from each other. The mere communication with people that are alike does not help to move knowledge beyond individual networks which on the other hand could greatly profit from new perspectives.

So in order to advance mutual learning, people from the individual disciplines should look beyond their own borders, something though that is hardly being done. There is certainly more learning going on when we talk about the value added of Islamic Finance principles to ESG and conventional investors and ESG investors highlighting their tool sets to the other two disciplines. The lack of interaction, as usual, creates prejudices and leads to less sophistication for all. We should not argue about which system is more powerful than the others but look for common denominators which make all disciplines stronger. The middle of the road approach has always proven to be more successful.

A simplified network graph of “current” interaction between Islamic Finance, ESG, and conventional investors

ESG investors e.g. exclude companies that don’t meet their criteria, as do those in Islamic finance. But the latter should also develop a tool set to include “non-financial factors” in their decisions as investors do when they consider environmental, social and governance (ESG) criteria, and engage with companies as well as vote based on their shares.

A focus on ESG factors only however would not have prevented the current financial crisis as it is based on financial measures such as the level of debt, leverage, and mere speculation/short-termism of market participants with a major detachment from real economic activity. Of course, algorithmic trading and basket trades on behalf of exchange traded funds also add to the declined holding periods.

Our vision of the financial services industry is one which connects the dots between the conventional investment industry, ESG related investments, and Islamic finance. A system where investors use Islamic Finance related principles and start incorporating ESG factors on top of Zakat which can help create a more equitable system with greater transparency. To get there, conventional, ESG and Islamic finance should learn more from each other and combine the best of all worlds when it comes to using financial and non-financial factors.

Source: Funds@Work AG

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The desired state In the future a greater convergence and interaction among the three disciplines would be more desirable with the relevant groups being less distinguishable leading to a more “Sustainable Finance” industry.

Islamic, conventional and ESG investors should be more open to each other enter into a mutual dialogue and transfer learning for the sake of a more resilient and sustainable financial system. As the following graph shows we should no longer be able to distinguish the individual players and don`t create subgroups which are detached and act in an almost isolated fashion.

In such an environment the label “Islamic” or “ESG” will be less important as it is the value added that each discipline brings on the table from which all can profit leading to a more sustainable finance industry where the individual disciplines borrow greatly from each other.

A simplified network graph of a desired “future” interaction between Islamic Finance, ESG, and conventional investors

Source: Funds@Work AG The Best of all worlds In the following network graph we would like to focus on the distinctive approaches (green squares) which the individual disciplines, specifically Islamic and ESG Investors apply.

Here we treat conventional investments as an isolate that builds predominantly on financial factors in the investment decision making process. As you can see there is an actual link between Islamic Finance and ESG investors namely through the usage of negative lists where sectors or companies belonging to a certain industry are excluded. This applies to companies e.g. in the weapons, gambling, tobacco and other industries which both disciplines would avoid in their investments.

Whereas ESG investors focus mainly on non-financial factors when it comes to environmental, social, and governance standards, Islamic Finance’s focus is more on financial criteria such as the avoidance of debt/leverage. The emphasis on transactions that are backed by real assets is also a cornerstone. An important element is Zakat, the distribution to the needy based on a specific percentage of the profits made.

A simplified network graph of the “current” major approaches Islamic Finance, ESG, and conventional investors apply

Source: Funds@Work AG Our vision of a sustainable investment industry The individual disciplines (including the wealth of knowledge that the conventional investment industry created) need to converge more strongly to contribute to a more resilient, stable, and sustainable financial system. In the following graph we highlight what this system could look like where all the individual disciplines borrow from each other.

When it comes to exclusion of companies e.g. even conventional players should exclude weapon manufacturers as we all know the negative impact the industry has on our lives. Conventional, Islamic and ESG investors should become active shareholders and address the vacuum which has been created by modern capital markets.

Engaging with the companies in which they invest, voicing concerns at annual general meetings and entering into a dialogue with the companies invested into should be the norm, especially in Islamic Finance. We should move away from short-termism by not looking at companies whose equities and bonds we hold as mere financial instruments but see ourselves as active shareholders and fiduciaries on behalf of the ultimate beneficiaries. If ESG and conventional investors address the issue of leverage and debt more strongly, ensure that transactions are asset based and linked to real economic activity we can transition into an era where equity instead of debt is on the agenda again and the focus is on profit and loss sharing rather than central counterparts who provide guarantees and become too big to fail.

Islamic Finance investors should borrow from ESG and develop positive lists for sectors that are worthwhile to invest into. This could be a way to prioritize areas such as microfinance, alternative energy, health, education and other relevant sectors which are necessary for the societies in which they operate. And of course why shouldn`t the concept of Zakat be one applied by all three industries where we give back to society. Islamic Finance is not just a religious concept but should be rather seen from the perspective of the contribution it makes to a more resilient financial system, therefore it needs to educate ESG as well as conventional investors about its virtues.

It cuts though both ways as Islamic Finance can learn greatly from ESG investors, develop more sophisticated approaches in investing and at the same time move away from its focus on financial factors to become more socially responsible and highlight the importance of solid corporate governance.

A simplified network graph of the “future” major approaches Islamic Finance, ESG, and conventional investors should apply

ESG investors` interest is particularly in non-financial factors and apart from acting as an active shareholder by voting at annual general meetings of companies they are invested in, they engage actively with companies to minimize risks but also enhance value in the long term.

This active shareholder approach is one that Islamic Finance can greatly learn from. ESG investors also apply positive lists to consider sectors that are particularly worthwhile investing into or determine which companies are best in their class in terms of ESG standards.

The tool sets developed by sustainable investors are more varied and lend themselves ideally for conventional and Islamic investors alike.

Source: Funds@Work AG

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Moving beyond Sharia Governance In our widely published paper “The Small World of Islamic Finance” where we applied looked at board membership of Sharia Scholars in Islamic Finance institutions across the world, providing an unparalleled level of transparency, we suggested multiple changes to corporate governance in Islamic Finance institutions (Sharia Governance) of which the following are still very relevant as of today: 1.

2.

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The introduction of country level, regional, and ideally a global register of Sharia scholars (similar to the Malaysian model) where a record is kept of who is joining and/or leaving a Sharia board would make life easier for market participants and create much greater transparency. This would also help to get, as in the case of our research, insights into Sharia scholars’ commitments to boards. It should go hand in hand with a change of the regulatory framework. Limiting scholars in their board membership, such as Malaysia is doing, has not led to the desired outcome as scholars look for other countries to engage themselves in.

Influence furthermore, as our research shows, does not just stem from the number of board memberships. We have many examples where limitations in the home country have led to dozens of assignments abroad. Unless you have a global rule it is not really going to work as it creates arbitrage opportunities.

An institution that advises on Sharia related matters should not at the same time be the one that audits Sharia compliancy as this might create potential conflicts of interest.

Furthermore there should be a rule to have a minimum of two young scholars on each board in order to break up established structures and allow for innovation and different/new views.

This apprenticeship model would also allow for better succession planning and assist senior scholars in passing their knowledge to the next generation. This could create potentially 1000+ new jobs immediately for very well educated students across the world with an interest in pursuing a career in Islamic Finance/Investments

Conclusion Apart from the importance of proper Sharia Governance in Islamic Finance institutions we also need to incorporate good governance when it comes to their investments. Whether an Islamic asset management company, a Takaful operator, an Islamic bank or any other Sharia compliant operation, there is a great need to act as active shareholders when it comes to their investments and ensure that sound governance standards not just apply to their own institutions but also those in which they invest.

In this context Islamic Finance can learn a lot from ESG investors who see themselves as active shareholders, engage with the companies in which they invest more strongly, exit if it is deemed necessary or voice their concerns. So Islamic Finance needs to move beyond Sharia Governance and also incorporate sound governance principles when it comes to investments undertaken.

Major Institutional investors or asset managers that invest in a Sharia compliant manner should generally develop a long term attitude to investing. When they buy a sizeable share in a company, no matter in what country or industry it is, they should ensure that good corporate governance mechanisms are being implemented in the target company in which they engage. This way Islamic Finance will start incorporating the tool sets developed and implemented by ESG investors. Ultimately Sharia compliant investors should, as mentioned earlier, move away from just thinking of companies in which they invest as an anonymous entity with a securities identification number. They should rather see themselves as active shareholders who can team up with other investors, through e.g. governance networks, to minimize risk and ensure that their interests as shareholders are more aligned with the executive management teams that run the organizations.

Therefore, for the sake of all beneficiaries, we need to move beyond just Sharia Governance.

Rotation of Chairman and board members would help better governance, such as minutes of meetings, publication of fatwa (legal rulings) and remuneration levels of scholars (especially at listed companies). We want to know who dissented from a decision and who was in favor so that we can learn and make the reasoning available to all; financial services institutions should not treat it as intellectual property. If the community had all the data that would come from greater transparency, more research could be done and greater standardization achieved for the sake of the industry`s future. There is a lack of empirical research in Islamic Finance due to the lack of transparency, which in turn affects innovation.

Our empirical research shows that almost 50% of all Islamic finance boards across the world (around 1500+) are occupied by Sharia scholars who are also involved in the rule setting at the Accounting and Auditing Organization for Islamic Finance (AAIOFI), these are “just 17 out of almost 500 currently active in boards across the world”. So over 750 boards of competing organizations are staffed by only 17 individuals who also set the standards in the industry”.

An important question is whether the scholars who set the standards and govern the industry should be the same as those who sit on the boards of financial institutions? Does having the most prominent scholars involved lead to better results? Our latest research suggests it doesn’t. There seems to be an inverse relationship between these kinds of dual roles for Sharia scholars and the performance of the Islamic finance institution they service.

We suspect that a board of senior as well as junior scholars could do an even better job leaving enough time for senior scholars to focus on complex issues and the young to learn new things and bring in their different perspective.

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INTERNAL AUDIT-A tool for management.

by Hector

J. Spiteri FMIT, MIM (Hon.), FIA, CPA

The Institute of Internal Auditors, defines internal auditing as “an independent objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes”.

This definition follows the 1998 Asian economic crises which gave a loud shout for better risk management, emphasising this as the single most important survival tool-kit for any business organisation.

The approach to internal audit has since been transformed, and the examination of business objectives and the associated risk have taken over the assessment of the adequacy and effectiveness of internal controls. Internal audit has now moved from the compliance-based approach, ticking as you go, to a thinking-approach of a risk based audit. This approach has been a challenging journey, so much so that we have moved from an internal auditor to an internal audit department and even further to an audit committee to stand side by side to the board of directors. It follows, therefore, that the internal audit function can be said to be a diligent strive to provide valuable information that management can utilise for strategic planning and other decision making.

It has been suggested above that risk management is one of the most important, if not the most important, processes of internal audit rendering the latter an indispensable tool for management. The question therefore arises as to:

WHAT IS RISK MANAGEMENT ?

The interactive process consisting of well-defined steps which when taken in sequence, support better decision making by contributing a deeper understanding to risk and its impacts is known as risk management. It is no great surprise therefore, that risk management is recognised as good management practice and when applied to a logical and systematic method of establishing the context, identifying, analysing, evaluating, monitoring and communicating risk, it lends itself as the tool for enabling organisationsminimise losses and maximise opportunities. Risk management is as much concerned with identifying opportunities as avoiding or mitigating losses.

When all this is done and results achieved, RISK MANAGEMENT becomes the business of everyone within the organisation. A final point to note on risk management is that it can be applied at different levels within an organisation. It may be applied at both strategic and operational levels, to specific areas and specific decision making.

Internal auditing knows its origins to that onetime isolated task of independent verification of bills prior to payment.

Since then, internal auditing has come a long way and now stands as a highly professional activity that extends to the appraisal of the efficiency and effectiveness of all operations, financial or otherwise, within an organisation. The now more progressive approach lends itself an indispensable tool for management and has become the back bone of risk management within an organisation.

Today’s internal auditor and future internal auditors have, and will no doubt have, their mindset towards the thinking audit rather that the ticking-audit of the past. The never ending changes and transformations within the business sector calls for dynamic internal auditors operating in every angle of work and thought. We have moved away from the traditional concern over controls, ensuring that these are operating in practice as described in theory to put management minds at rest that the business is operating in an orderly manner, thus ensuring, the safeguard of assets and secure the accuracy and reliability of its records. While basic controls, such as the segregation of duties, should still be validly applied, the above discussion has, needless to say, strongly hinted on the invaluable importance of internal audit. The internal auditorhowever, should never give management the impression that the audit function is a substitute to effective management control.

The internal auditors’ roles today include, amongst others, monitoring, assessing and analysingorganisational risks and controls, and reviewing and confirming information and compliance with policies, procedures and laws.

Working in partnership with management, internal auditors provide the board, the audit committee, and executive management assurance that risks are mitigated and that the organisation’s corporate governance is strong and effective... And, when there is room for improvement internal auditors make recommendations for enhancing processes, policies and procedures.

The author of this article is a partner at the audit firm Busuttil & Micallef, and is the audit committee chairman of 6pm Holdings plc.

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