Sample Accounting Thesis Paper on The Relationship between Business Ethics and Corporate Governance in Saudi Listed Banks Using an Accountability Framework

The Relationship between Business Ethics and Corporate Governance in Saudi Listed Banks Using an Accountability Framework

1.0  Topic

Saudi Arabia is located in a region heavily governed by Islamic religious and cultural beliefs. The financial sector in the country was among those adversely affected during the 2008 financial crises. Saudi Arabia being a developing nation therefore continues to strive formulating and implementing policies aimed at achieving social, environmental, political, and economic growth. The financial sector in the country has been undergoing various developmental changes in order to support national growth and development (OECD 2009, p. 22). According to Al-Hussain and Johnson, financial sectors in each nation are vital as they determine how a country develops and achieves financial independence. This topic therefore seeks to determine how the financial sector within the Islamic nation is being influenced through corporate governance and business ethics. It will seek to determine how diverse cultural and religious beliefs, values, and practices influence functions and operations undertaken by Saudi Arabian financial institutions (Al-Hussain & Johnson 2009, p. 113).

2.0  Summary

The 2008 financial crises and coupled with a crash in the stock market across Saudi Arabia affirms the nation faces challenges in implementing corporate governance and business ethics to achieve financial growth and independence (Ashraf 2015, p. 11). The research study will therefore discuss on Saudi Arabia has been performing across the nation’s financial sector. Consequently, it will define corporate governance and business ethics. The two definitions will be applied in the Saudi Arabian context in attempts to affirm that, social, economic, cultural, and religious strategies influence corporate governance and business ethics strategies. The research study will therefore differentiate between corporate governance and business ethics. This will prompt a literature review to be conducted discussing how Islamic religious and cultural practices as well as values are influencing the nation’s financial sector.

3.0 Problem Statement

The first code of corporate governance established in Saudi Arabia occurred in 2006 after experiencing stock market crash (Haniffa & Hudaib 2007, p. 117). As a result, Saudi Arabian corporate governance is regarded as the new system when compared to other countries that have applied the principle for a prolonged period of time. More so, such countries record improvements attributed to corporate governance that is consistent with any new circumstances in running an organisation. Saudi Arabia has therefore lacked researches and contexts conducted to explore corporate governance system. More so, Saudi Arabia has failed to examine the relationship between business ethics and corporate governance. As a reason, this research proposal strives to conduct a comprehensive study with regards to corporate governance and business ethics as applicable in the Saudi Arabia context. The research will focus on the Saudi Arabian financial sector in order to determine steps to undertake in restructuring and improving corporate governance practices and business ethics in the region.

4.0 Research Questions

This research primarily aims to develop and enhance corporate governance practices by exploring the relationship between business ethics and corporate governance. It will focus on Saudi Arabian listed banks using an accountability lens. Consequently, it will narrow the gap in the literature discussing corporate governance and business ethics especially among developing countries. As a result, the research will address the following two questions.

  1. Does the Saudi Arabian banking sector maintain a relationship between business ethics and corporate governance?
  2. How can the relationship be defined?
  3. Does accountability including Islamic accountability play a role in this relationship?
  4. How does the accountability play the role?

5.0 Aims and Objectives

The main aim in conducting this research is to explain the relationship between business ethics and corporate governance. The research will focus on the Saudi Arabian context by referencing various listed banks in the country. The research will be based on the accountability context by examining specific stakeholder groups’ perceptions among the diverse listed banks in Saudi Arabia. As a result, the study will respond to recent calls requesting a research to be conducted in order to affirm that it is crucial to incorporate ethical matters in corporate governance application. The research study will therefore develop the practice of ensuring corporate governance and business ethics are inclusive especially among developing countries such as Saudi Arabia.

6.0 Rationale/ Justification

The main reason for conducting this research study is to identify how Islamic values are influencing financial sector in Saudi Arabia. It will determine if Islamic values are either promoting or challenging accountability frameworks in the country with regards to the financial sector’s corporate governance and business ethics strategies. Consequently, applicable outcomes the developing nation can apply to achieve financial growth will be determined.

7.0 Literature Review

Gulf Cooperation Council constitutes of six oil-producing states across Middle East. The states are namely Qatar, Kuwait, Bahrain, Oman, United Arab Emirates, and Saudi Arabia. The total population is estimated at forty-two million ensuring the banking industry is widely owned by persons that are natives due to the extensively implemented foreign ownership restrictions. This affirms that, several Islamic financial institutions operate across Saudi Arabia as the main sources of financing for Islamic banking transactions. International literature will therefore be applied in discussing corporate governance and business ethics with regards to Islamic banking sector in Saudi Arabia. The literature review will affirm that, corporate governance and business ethics are related in ensuring the banking industry across Saudi Arabia develops accountability frameworks resolving various issues being faced in the sector (Abdur 2011, p. 27).

7.1 Introduction

Corporate governance and business ethics have been applied for decades in the Saudi Arabian context to ensure stakeholders, employees, customers, shareholders, vendors, and community at large across listed banking organisations survive and thrive. The listed banking organisations therefore have to ensure they produce and supply products and services to provide financial information and assistance. More importantly, the products and services have to be safe, high quality and reliable in order to fulfill consumers’ needs and demands. Listed banking institutions in Saudi Arabia operate under unique and specific Islamic-based principles. As a result, they apply business ethics to ensure corporate governance address business dilemmas while controlling ownership and accountability frameworks of the firm. For example, Saudi Arabian banking institutions have to operate under the major objective of Islamic financial institutional reporting affirming transactions comply with Shariah principles and regulations. Financial reports across Saudi Arabia therefore emphasize that, principles promoting accountability and full discloser to fulfill societal needs are upheld. For instance, they are required to provide required financial information to the society with regards to particular transactions. This has encouraged Ummah to ensure their rights to know issues affecting banks’ operations and functions impacting the society’s welfare are respected. Ummah also ensures Saudi Arabian listed banking institutions comply with Shariah.

7.2 What is Corporate Governance

Corporate governance is defined as the set of relations developed and maintained by organisations’ management, boards, shareholders and stakeholders. Corporate governance strives to seek and achieve justice for an organisation’s stakeholders in order to develop and increase levels of transparency and accountability in the firm. Consequently, it monitors and controls management in attempts to increase and maximize the organisation’s value. Components of corporate governance should therefore include investors and stakeholders’ relations which comprise of employees, creditors, debtors, clients, suppliers, and customers among others.

Corporate governance with regards to Saudi Arabia involves reviewing the Islamic perspectives. Banking institutions within Islamic regions have a unique corporate governance framework ensuring the organisations uphold sets of principles developed under the Holy Quran and the Sunnah. The sets of principles are applied in ensuring social justice and accountability is achieved (Bhatti & Bhatti 2009, p. 71). Thus, achieving corporate social responsibility is a crucial primary condition to be fulfilled by Islamic banking organisations desiring to function and operate in Saudi Arabia. Thus, the Code of Best Practices for Corporate Governance in Islamic Financial institutions, and Guiding Principles on Corporate Governance for Institutions Offering Only Islamic Financial Services were developed to enhance transparency and accountability (Alotaibi 2015, p. 17).

7.3 What are ethics and Business Ethics, Ethics (Applying Saudi Arabian Context)

Defining ethics can be challenging as the term lack a precise description. Ethics are therefore codes of values, morals and principles applied to govern behaviors among people and organisations by determining right from wrong. According to Rehman and Mangla (2012, p. 87) business ethics refer to codes of morals and principles applied in running a business venture. They are inherent in all aspects of corporate governance as board decisions and actions have to pursue, formulate and implement business strategies achieving the venture’s goals and objectives. Business ethics with regards to the Saudi Arabian context are therefore applied to ensure principles and standards guiding banking institutions’ behaviors are balanced. They are also utilized in maximizing profits against stakeholders’ needs which often requires tradeoffs which can hurt individuals and Ummah at large (Aribi & Gao 2010, p. 75).

7.4 Accountability (Including Islamic Accountability)

Accountability involves applying business ethics to enhance performance levels. Islamic accountability is achieved when listed banking institutions display clear commitment towards ethical actions consistently performed in listed banking institutions. The business ethics are also applied to ensure Islamic accountability attracts and retains talents. This is because Islamic believes coupled with ethical values applied across listed banking institutions in Saudi Arabia attract the best talents equally dedicated in fulfilling organisation, employees, and shareholders’ needs. As a result, listed banking organisations have to be accountable in creating working environments promoting levels of trust, motivating staffs, and supporting managerial decisions and policies aimed at maximizing profits while achieving corporate social responsibilities in Ummah. Consequently, the reputation earns investors’ loyalty levels as Islamic regulations provide foundations for effective productivity and maximized profits. Accountability also enhanced customer satisfaction crucial in a venture’s success. Listed Islamic banking institutions are therefore required to evoke trust and respect among customers for persistently growing success. As a result, they adopt ethical beliefs, principles and values able to resolve crises among the financial institutions at customers’ tolerable levels (BIS 2010, p. 13).

7.5 Relationship between Corporate Governance and Business Ethics

The ethical nature of effective and efficient corporate governance is emphasized through national codes. The codes are applied in affirming diverse ethical values determine if corporate governance is either good or ineffective (Chen, Patten & Roberts 2008, p. 132). The most valued ethical codes promoting good corporate governance involve accountability, transparency, probability, and responsibility. The ethical values permeate diverse aspects of corporate governance that ought to be displayed by policy and decision makers at managerial levels. For example, they ensure boards across financial institutions in Saudi Arabia comply and function in accordance to accounting and Islamic principles. They also ensure risk management is instrumental for an institution to realize cardinal values attributed to good corporate governance (Fallatah & Dickins 2012, p. 10027).

Corporate governance is also made of specific moral obligations an organisation ought to abide by to ensure the firm acts in high ethical standards protecting reputational values and shareholders’ rights. For example, some organisations achieve recognition after board members are involved in a scandal due to abuse of office and executive corporate powers as well as taking part in criminal activities such as money laundering (Hussainey & Al-Nodel 2008, p. 47). Effective corporate governance should ensure provisions for civil and criminal prosecutions of persons involved in unethical and illegal actions are held accountable. Consequently, national codes of corporate governance should be emphasized in Saudi Arabia for managements to actively participate in managing ethical performances. Ethical codes recommended and endorsed by boards across diverse listed banking institutions in the country should therefore guide processes of developing business ethics in reference to religious and cultural issues influencing corporate governance (Anderson, Mansi & Reeb 2004, p. 317).

It is evident corporate governance and business ethics impact organisations’ operations and functions. This is because corporate governance is the internal framework designed and implemented to govern and protect an organisation (Meshaal 2014, p. 31). Conversely, business ethics referring to values, characteristics, and principles regulate how an organisation operates and functions. Owners of an organisation as well as the executive managers should therefore create governance while deciding ethical principles and values staffs will uphold. Corporate governance being philosophical and moral in nature should be applied for business ethics achieving diverse financial, legal, and public obligations to be effective (Abdullah 2015, p. 511). Between 2008 and 2013 for example, Saudi Arabian listed banks were negatively affected after corporate governance was adversely affected. Poor legal protection and weak information requirements did not safeguard banks’ shareholders, employees, depositors, and stakeholders. This affirms Saudi Arabia lacks robust corporate governance focusing on mechanisms enhancing performances recorded by listed banking institutions in the country (Al-Hussain & Johnson 2009, p. 113).

The claims asserted by Al-Hussain and Johnson are applauded by Mohammed who asserts that, eleven banks in Saudi Arabia listed in the stock exchange suffered due to lack poor performances attributed to ineffective corporate governance.  He therefore believes financial institutions that collapsed during the 2008 financial crisis suffered from poor corporate governance. Saudi Arabia being a developing nation should therefore strive in strengthening and enhancing confidence in nation’s financial systems. This should involve corporate governance coupled with business ethics to regulate and monitor financial institutions to prevent deterioration of banks’ financial positions and loss of creditors and stakeholders. Consequently, the country’s banking institutions can participate in ensuring Saudi Arabia grows economically amidst financial crises affecting small and large financial markets (Mohammed 2013, p. 13)

Douma, George, and Kabir (2006, p. 639) as well as Stepanova and Ivantsova (2012, p. 22) also assert that, corporate governance and firm performance produce mixed and interdependent results. For example, some effective corporate governance strategies applicable in engineering cannot be implemented in the financial industry. Thus, industrial characteristics should determine corporate governance and business ethics to be formulated and endorsed. Consequently, the financial industry in Saudi Arabia can be implement strategies addressing the institutions, stakeholders, creditors, depositors, and other stakeholders’ needs. This is because they intervene and control managerial behaviors and disciplinary mechanisms for the banks’ intensive nature to endorse specialized corporate governance and business ethic strategies (Ibraheem 2015, p. 4).

 

7.6 Theoretical Review

Normative theory focuses on statuses of actions, rules, and dispositions influencing the virtue of ethics. This theory should therefore be applied to focus on virtue of ethics or inherent character without being influenced by their specific actions. Organizational decisions should therefore be formulated to enhance morality, firms’ welfare, foster knowledge and ultimately economic growth within the Saudi Arabian banking sector (Cavalier 2014, p. 7).  

Agency theory is applied when agents make decisions impacting other people and entities. For example, financial industry in Saudi Arabia has often made decisions impacting people and organizations in the sector. The developing country should therefore acknowledge agents and principals exist in the Islamic context striving to achieve corporate growth and development. Consequently, both parties with differing interests will ensure they are not exploited. Consequently, business ethics in the banking sector across the country will be applied to achieve corporate governance (Laffont & Martimort 2002, p. 102).

The stakeholder theory influenced organizational management and business ethics. It strives to enhance values and morals in an organization. For example, it is applied to ensure corporations adopt managerial strategies giving due interests to people and groups sustaining a firm or industry. Saudi Arabia should therefore adopt the stakeholder theory to integrate resource and market based views under social political influence to achieve growth in the banking industry. Consequently, conditions such as Islamic regulations influencing how banks are management will be examined and reviewed guarantying stakeholders’ needs are addressed meticulously (Laplume, Karan & Reginald 2008, p. 1155).

8.0 Research Methods

The research method applied to conduct and complete this research study will involve application of a questionnaire survey. The questionnaire survey will be utilized to ask diverse questions providing insights on how corporate governance and business ethics affect operations and functions in an organisation. More so, different questions discussing differing issues and perceptions faced by financial institutions will be explored. The study will therefore focus on issues influencing existing literature. Supplementary arguments such as the significance response and fulfillment of strong corporate governance as well as the efficiency of the code of Saudi Arabia will be considered. Additionally, research questions will provide insights in order to understand how business ethics impact concepts on banks’ practices. In order to insure the relationship between corporate governance and business ethics actually exists, questions to determine how it works and maintained will be posed through the questionnaire survey. The questionnaire survey will also examine implications of accountability in context to Islamic accountability and Shariah principles within the Saudi Arabian banking sector.

9.0 Ethical Issues

The research study aims to focus on the financial industry. As a result, the outcomes should neither be applied nor endorsed to other industrial sectors. It also focuses on Saudi Arabia prompting a discussion on how Shariah laws influence corporate governance and business ethics. The discussion therefore may not be based on full comprehension of the country’s cultural and religious values. This is because the questionnaire survey is not likely to provide comprehensive information. As a result¸ published archival secondary data materials will be used.

10.0 Timescale

The timescale in conducting the research study is adversely affected by various factors. For example, the resources required for a thorough and comprehensive research study to be published are limited. This will therefore be challenging as it will hinder how the research will determine financial performances in Saudi Arabia. It will also be challenging to travel to various financial institutions to acquire answers for the research questions due to limited resources. As a result, the research study will be completed in approximatelytwo months. The timescale is sufficient to utilize the available resources in gathering enough data discussing how corporate governance and business ethics influence listed banks across Saudi Arabia. As a result, a further study should be conducted in future to address the various aspects that will not be addressed due to limited financial and timely resources.

11.0 Resources and Cost

The resources required to conduct a comprehensive research study on how corporate governance and business ethics influence performances among Saudi Arabian banks are diverse.  Foremost, travelling resources are vital as they will facilitate the research method. As a result, a motor vehicle should be provided and fueled for use in passing and gathering questionnaire surveys across Saudi Arabia’s financial institutions. The cost of leasing a car however is higher in comparison to use of a taxi. Each researcher should therefore be funded with fifty dollars each day to cater for transport. Foodstuffs are also vital resources. As a result, researchers should be provided with meal vouchers amounting to thirty dollars. More importantly, researchers should be provided with personal insurance cover. Lastly, funds to address emergencies during the two-month period amounting to fifty dollars are imperative. The research study is therefore likely to cost approximately two hundred and fifty dollars.

12.0 References

Abdullah, A. B 2015, The Effect of the Board of Directors’ Characteristics on Corporate Social Responsibility Disclosure by Islamic Banks. Journal of Management Research, 7(2), 507-519.

Abdur, R. M 2011, The Corporate Social Responsibility Disclosure: A Study of Listed Companies in Bangladesh. Business and Economics Research Journal, 2(3), 19-32.

Al-Hussain, A. H & Johnson, R. L 2009, Relationship between Corporate Governance Efficiency and Saudi Banks’ Performance. Business Review Cambridge, 14(1), 111-117.

Alotaibi, M. M 2015, The Importance of Corporate Governance in Saudi Arabia Economy. Journal of WEI Business and Economics, 4(1), 14-28.

Anderson, R. C., Mansi, S. A & Reeb, D. M 2004, Board Characteristics, Accounting Reporting Integrity, and the Cost of Debt. Journal of Accounting and Economics, 37, 315-342.

Aribi, Z. A & Gao, S 2010, Corporate Social Responsibility Disclosure: A Comparison between Islamic and Financial Institutions. Journal of Financial Reporting and Accounting, 8(2), 72-91.

Ashraf, A 2015, Does Corporate Governance Affect Financial Performance in the Banking Sector? Evidence from Saudi Arabia. International Journal of Economics, Commerce and Management, 3(3), 1-26.

Bank for International settlements (BIS) 2010, Principles for Enhancing Corporate Governance. Basel Committee on Banking Supervision.

Bhatti, M & Bhatti, M. I 2009, Development in Legal Issues of Corporate Governance in Islamic Finance. Journal of Economic and Administrative Sciences, 25(1), 67-91.

Cavalier, R 2014, Meta-ethics, Normative Ethics and Applied Ethics. Online Guide to Ethics and Moral Philosophy.

Chen, J. C., Patten, D. M & Roberts, R. W 2008, Corporate Charitable Contributions: A Corporate Social Performance or Legitimacy Strategy? Journal of Business Ethics, 82(1), 131–144.

Douma, S., George, R & Kabir, R. (2006). Foreign and Domestic Ownership, Business Groups, and Firm Performance: Evidence from a Large Emerging Market. Strategic Management Journal, 27(7), 637-657.

Fallatah, Y & Dickins, D 2012, Corporate Governance and Firm Performance and Value in Saudi Arabia. African Journal of Business Management, 6(36), 10025-10034.

Haniffa, R & Hudaib, M 2007, Exploring the Ethical Identity of Islamic Banks via Communication in Annual Reports. Journal of Business Ethics, 76, 97-116.

Hussainey, K & Al-Nodel, A 2008, Corporate Governance Online Reporting by Saudi Listed Companies. Research in Accounting in Emerging Economies, 8, 39-64.

Ibraheem, A. A 2015, The Relationship between Corporate Governance and Business Ethics in Saudi Listed Banks. University of Dundee.

Laffont, J & Martimort, D 2002, The Theory of Incentives: The Principal-Agent Model. Princeton University Press.

 Laplume, A., Karan, S & Reginald, L 2008, Stakeholder Theory: Reviewing a Theory That Moves Us. Journal of Management, 34(6),1152–1189.

Meshaal, J. A 2014, An Alternative Conceptual Corporate Governance Framework for High-Context Cultures: A Case for the Islamic & Arabian Middle East. Corporate Board: Role, Duties & Composition, 10(3), 28-37.

Mohammad, O. A 2013, Examining the Relationship between Corporate Governance and Banks’ Performance, and Risk in Saudi Arabia. European Journal of Economics, Finance and Administrative Sciences, 59(1), 6-20.

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Stepanova, A & Ivantsova, O 2012, Role of Corporate Governance in Banking sector: Evidence from all Over the World. Electronic Journal of Corporate Finance, 4(24), 80-86.