Corporate Governance in Iran

8/8/2019 Corporate Governance in Iran

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Corporate Governance & Accountability in Iran

By: Gholamhossein Davani *

IACPA, NYSSCPA,CFE,AIA,IIA,IMA,CAAA

Corporate governance (CG) is a hot topic currently. It gets a lot of press, particularly in the areas of compensation and board activism.Corporate governance without accountability has no meaning. Itseems corporate governance is one part of Good governance (GG)and GG &CG prefect each other.

Good governance defines an ideal which is difficult to achieve in itstotality. However, to ensure sustainable human development,actions must be taken to work towards this ideal. Major donors andinternational financial institutions, like the IMF or World Bank , isincreasingly basing their aid and loans on the condition thosereforms ensuring good governance are undertaken. Goodgovernance can be understood as a set of 8 major characteristics:

participation , rule of law , transparency , responsiveness, consensus oriented, equity and inclusiveness, effectiveness and efficiency Accountability .

The most important above factor is accountability that is a concept in ethics with several meanings . It is often used synonymously withsuch concepts as answerability, responsibility , blameworthiness,liability and other terms associated with the expectation of account-giving. As an aspect of governance , it has been central todiscussions related to problems in both the public and private(corporation ) worlds.
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In politics , and particularly in representative democracies ,accountability is an important factor in securing good governance and, thus, the legitimacy of public power. Accountability differs fromtransparency in that it only enables negative feedback after adecision or action, while transparency also enables negativefeedback before or during a decision or action. Accountabilityconstrains the extent to which elected representatives and otheroffice-holders can willfully deviate from their theoreticalresponsibilities, thus reducing corruption . The relationship of theconcept of accountability to related concepts like the rule of law ordemocracy , however, still awaits further elucidation.

Social responsibility is a doctrine that claims that an entity whetherit is state , government , corporation , organization or individual has aresponsibility to society. This responsibility can be "negative," inthat it is a responsibility to refrain from acting, or it can be"positive," meaning a responsibility to act.

Corporate social responsibility (CSR) is an expression used todescribe what some see as a companys obligation to be sensitive tothe needs of all of the stakeholders in its business operations.Corporate Governance is the construct through which the provisionsof a business are put in place, the way of acquiring those objectivesare discussed and listed, the guidelines and expectations regardingperformance are measured and the structure of resource use isoutlined.

Corporate governance is truly concerned with promoting corporateevenhandedness, transparency and responsibility throughanswerability. This promotion of equality functions by clearly statinghow the rights and responsibilities, from the highest position in thebusiness to the lowest will be distributed and maintained through

accountability and how decisions and procedural operations shouldbe managed.

With this in mind, Corporate Governance can easily be viewed as avoluntary code of conduct by which company executives and thosein positions of authority regarding the use of corporate resourcesare expected to follow when managing a companys funds,employees and operations. This Code of Conduct then clearly statesthe requirements of operations and ethical behavior expected.

Today's faster-paced business environment, shifting economicconditions, volatile capital markets, and rising demands forenhanced corporate governance, corporate accountability, and
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transparency in light of recent business failures, as well as new risksassociated with a global marketplace, e-commerce, and evolvinginformation technologies, all are propelling the board's role incorporate governance into the spotlight. These new demandsrequire boards to be more involved, knowledgeable, and proactive.

The challenge today's boards face is finding the right level of involvement and the right approach in defining the company'sstrategic direction, and fostering long-term shareholder valuegrowth while ensuring companies remain resilient to both internaland external pressures. In meeting this challenge, boards mustdecide:

What is the optimum level and nature of involvement instrategic plans and implementation processes? What risks are on the horizon, and how can thecompany manage them and seize the inherent opportunities? How can executive performance best be motivated,measured, and monitored? How effective is the board? How can it improve?

Growing integration of corporate governance, risk management andcompliance (GRC) is pulling the finance function's attention awayfrom the past and turning it to the future. Instead of waiting untildisaster strikes and then asking, "Why did that happen?" leading

finance departments are facilitating collaboration with othercorporate functions to ask, "What if it happens?" Together they'reidentifying companywide risks and potential governance andcompliance shortcomings and evaluating ways to address andmanage them

In my view, there are many misconceptions surrounding the subject.

For example, I feel it is dangerous to conclude, as some have, that

Iranian firms have lost their edge, that inadequate corporate

governance is the villain, and that the large pension funds have a

magic key to success. Certainly there have been compensation

excesses and management failures, but overreaction to them

entails its own dangers. However Tehran Stock Exchange (TSEO)

has been published draft of CG Bylaw and Admission& Inspection

circular about audit firm registered. So it is important that

everyone, business and government alike, consider all sides of this

complex issue and learn everything we can, before adopting radicalchange. According to this draft all big listed Co. shall behave audit


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committee under responsibility of one of non-executive managers.

For the first time this draft have been review some matters as

follow:

Partner Rotation-Transition Questions Audit Partner and Partner Rotation-Other Matters Non-audit Services Audit Committee Pre-approval Audit Committee Communications Fee Disclosures "Cooling Off" Period

A companys stakeholders are all those who are influenced by, orcan influence, a companys decisions and actions. These can include(but are not limited to): employees, customers, suppliers,community organizations, subsidiaries and affiliates, joint venture partners, local neighborhoods, investors, and shareholders (or a soleowner).

The relationship among the CEO, top management and the board of

directors is a complex and a fascinating subject, which has

developed over many decades. As we know from reading the

papers, it continues to evolve. That's due at least partially to the

growing presence of big institutional investors. Pension funds,

mutual funds and insurance companies now own more than half of

publicly held stock in the Tehran Stock Exchange (TSE). Increased

globalization of business has also played a part. As the dimensions

of competition have changed, institutional shareholders have

demanded more accountability from management than in the past.

And that demand has given rise to definitional issues: ROE, ROIC,

total return, public responsibility, social responsibility, etc.

Also, individual investors' greater awareness of issues and events

has increased public scrutiny of management on both financial and

societal issues.

Boards of directors today are much more actively involved in

company matters than they used to be. Generally, I think increased
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board involvement is a positive development in company

management. If a board nominee is not prepared to be an active,

inquiring, participating director, he or she should decline the offer to

serve. But board members, who attempt to micromanage, assume

management's authority or exercise authority without attendant

responsibility can be a negative factor. CG bylaw in Iran is similar

Sarbense-Oxely that approved:

1. Each investor should have quarterly access to theinformation needed to judge a firms financial performance,condition, and risks.2. Each investor should have prompt access to criticalinformation.3. CEOs should personally vouch for the veracity,timeliness, and fairness of their companies public disclosures,including their financial statements.4. CEOs or other officers should not be allowed to profitfrom erroneous financial statements.5. CEOs or other officers who clearly abuse their powershould lose their right to serve in any corporate leadershippositions.

6. Corporate leaders should be required to tell the publicpromptly whenever they buy or sell company stock forpersonal gain.7. Investors should have complete confidence in theindependence and integrity of companies auditors.8. An independent regulatory board should ensure that theaccounting profession is held to the highest ethical standards.9. The authors of accounting standards must be responsiveto the needs of investors.10. Firms accounting systems should be compared withbest practices, not simply against minimum standards.

Demands on the chief executive have multiplied. A broad spectrum

of societal issues has become an important matter of everyday

business concern (the environment, diversity of workforce, etc.) At

the same time, competition has intensified and become global,


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increasing pressure on management for financial results, raising the

stakes on decisions, and narrowing the tolerance for mistakes.

These trends mean the CEO needs all the wise counsel he or she

can get. A board of directors composed of able individuals withdiverse backgrounds and experience, can be a valuable ally to theCEO. This was certainly the case during Texaco's crisis period. Thebacking of our directors, with their counsel, support and friendship,helped management through many a dark hour.

Primarily as a result of the Corporate Governance bylaw, publiccompany audit committees have gained popularity over the mostrecent years. With this increasing popularity the role of eachindividual audit committee is being better defined and understood.

The key responsibility/duty of the audit committee is to ensure thefinancial statements are accurate, complete, reliable and easy tounderstand. All-in-all this responsibility sounds simple enough butaudit committees responsibility does not end with the financialstatements. Other more comprehensive activities required by theaudit committee is to oversee the risk management process of company including all identified risks, the internal controlenvironment and internal control procedures, complianceprocedures and special investigations.

Each audit committee member should have a good understanding of the business of its company and should be kept informed through itstimely communications from management, external auditors,internal auditors, compliance auditors and other parties playing arole in the accounting and regulatory matters of it organization.Each communication is significant in and of itself in gaining acomplete understanding of the financial reporting of the company;however, the audit committee should also consider not only thecontent of the communications but how these communicationsrelate to the accuracy of the companys financial reporting.

To help achieve your audit committee responsibilities consider:

1. Predetermine the dates of the audit committeemeetings for the next year.2. Establish an agenda.3. Ensure reports to the audit committee are distributedprior to the meeting to allow each member time to review thereport.4. Maintain well documented minutes.5. Have an executive session (excluding companymanagement) with the external, internal and complianceauditors.6. Understand Risk.


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Corporate power is a trust

Corporate leadership carries with it the trappings of power-squads

of good people to direct, a handsome office, perhaps even a

corporate plane. But it is important that neither the CEO, nor other

employees, nor the public at large be fooled by these trappings into

thinking that this is untrammeled power.

For corporate power is a trust. The CEO is and must be accountable

to a board of directors. And in turn both that board and the CEO are

accountable to the shareholders, employees, government and the

public.

The system that implements this accountability is what we call

corporate governance. And just as with civil government, there is a

diversity of views on how this system should be constituted, peopledand organized.

There is no one answers-nor is it always easy to determine if a

particular corporation's governance is working. When a company is

growing and profitable almost any system of corporate governance

works, or at least seems to do so in the short term. By the same

token, when things are going poorly in an industry, no system of

corporate governance alone provides an inexhaustible supply of silver bullets to cure whatever needs to be cured. The true test of a

company's system of corporate governance comes at other times-

when the firm has lost its way within its industry, or when the firm

has been jolted by outside forces over which it has no control. A

company's system of corporate governance includes the nature and

quality of its relationships and communications with shareholders,

employees and the public at large. But the heart of the governance

system is the board of directors, which is elected to representshareholder interests, to oversee management and to hold it


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accountable. In difficult times, when a strong signal from the top is

needed, the board can either be a tremendous force for the better--

or it can keep its eyes firmly shut, and represent a real obstacle to

productive change.

Arj Co. listed company in TSE faced a special crisis in 2000, with a

massive court judgment against it following the file for fraud and

corruption. The board of directors proved then to be a vital and

united force for the changes we made to protect shareholders and

to reengineer the company. And service for many years on the

boards of other well-known companies has brought me to the

conclusion that no firm is forever free of crisis-that corporate

excellence, competitive standing, ethics and reputation are allsubjects that will concern any board at some time.

For that reason, a good board of directors is like a two-- ocean navy:

You had better start building it years before you need it. Good

boards do not just appear overnight, nor do they spring fully blown

from the mind of some headhunter. They are conceived, nurtured,

trained, instructed, advised and rewarded over a period of years so

they will be there when they are most urgently needed.

The board of directors must above all be the conscience of the

company. It must ensure that shareholders' interests are

paramount. It must safeguard the company's assets. And it must

take particular care to safeguard the company's reputation. For a

good reputation is the company's most precious asset-one that

takes years of hard work to develop and one that can be destroyed

in an instant by illegal, unethical or merely thoughtless behavior.

A board's role is wide-ranging, which in turn requires individuals of

great depth. It has been said that being a corporate director is one

position for which no training is required. But the truth is that the

director brings his or her whole life's experience to the table. The

position requires an ability to learn what it is important to know

about a business, and a willingness to study hard, ask questions,

and form opinions. A director must have the intellectual curiosity toanalyze a situation, must know how to raise concerns without being


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argumentative, and must relate well to fellow board members. The

most helpful directors I have seen are those who study the

company, ask questions because they really want answers, and

provide supportive criticism.

A good director must also appraise the company's top officers and

its major hires and promotions with a critical eye. Even the best CEO

can use help with these decisions because they are not easy. It's not

terribly difficult to assess a candidate's record in his or her current

job, of course; but it is both more difficult and more important to

project how he or she will perform in a new, more demanding

position. The attainment of greater authority and responsibility can

sometimes change the behavior of the promoted manager. (In thisregard, my own inveterate optimism led me several times to make

the mistake of believing that known strengths in an individual would

more than compensate for known weaknesses. The tiger and the

leopard don't often change their stripes and spots.) Management

selection is an art as well as a science and outside directors can

therefore often be invaluable in giving the CEO a second opinion in

these matters.

For an industrial board, an ideal size is 7 to 9 outside directors. Any

number much greater than that becomes unwieldy, but a smaller

number doesn't allow committee participation without undue time

pressure. The majority of directors should be outsiders. It's

appropriate to have two or three insiders to add functional expertise

and to provide for succession planning.

Separating CEO and chairman roles

Some critics of current corporate governance practices have

suggested that the offices of chief executive officer and chairman of

the board should always be held by different individuals. The theory

seems to be that various complementary skills can be brought to

bear without too much power being vested in one person: The CEO


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runs the company while the chairman communicates with the

board.

While this system has worked well in some instances, it does not

guarantee good performance by itself. I was very fortunate to haveserved as CEO with an (executive) chairman whose talents

complemented my own, during a very difficult period in the history

of our company. The system worked well for us because we made it

work. It was particularly helpful at a time when there were many

balls in the air, each requiring immediate attention. But there is no

hard-and-fast rule here; the question of separating the offices of

CEO and chairman should be considered based on the situation at

hand and the personalities of the available candidates.

Whether the offices are separated or not, there must be no

confusion as to who is in charge of what, and there must be clear,

timely, complete and honest advice rendered to the board by

management.

Board committees are very useful in the areas of nomination, audit,

finance, pension, compensation and public responsibility. Serious orwide-ranging matters, however, should also be discussed by the

committee of the whole, so the thought never arises that some

members are more equal than others. An executive committee can

be maintained for emergencies-but in these days of advanced

communications technology "virtual" meetings of the whole board

can be held at almost any time and are generally preferable to the

use of an executive committee.

Special focus in recent years has fallen on the compensation

committee of the board. Attractive compensation packages are

needed to retain high-quality employees. But as firm after firm

seeks to pay in the top quartile of its industry or size sector, it is a

mathematical certainty that average compensation will increase

exponentially. Fair, competitive compensation practices can be

reflected in the price of the goods or services being sold; overly

generous compensation cannot be recovered in the marketplaceand is thus unfair both to the shareholders and to the customers. It


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is incumbent on the compensation committee to insist on

performance goals which, if achieved, will inure to the long-- term

benefit of all the shareholders-measured by the rate of change in

earnings per share, cash per share, total return to shareholders

versus one's competition, and results versus plan.

Given the importance of the company's reputation, a public

responsibility committee is increasingly vital to a board's work. It

must deal with a spectrum of issues, ranging from the environment

to diversity in the workplace, from educational philanthropy to the

question of a corporation's place in the funding of the arts. Its

responsibilities can include shareholder relations, political

involvement, women's issues and related subjects.

Boards must not become static. Having a retirement age is a useful

rule, although having one below age 65 is wasteful of talent and

experience. A director should offer his or her retirement from the

board whenever his primary job changes; the board may not accept

it, but the other directors should at least have the opportunity to

review the situation. Unfortunately Iranian companies haven't any

special retirement plan for directors and all staff is undergovernmental pension fund or Social security organization that their

benefits are very limited.

Whatever the exact structure chosen, leadership on a board must

be unequivocal. Committees can perform many useful functions by

analyzing, reviewing, comparing and reporting their findings. But

great companies are led by great people, not by great committees.

In the times of crisis we experienced, when the going really gottough, fifteen pairs of eyeballs swung to one end of the table as

though to ask, "OK, friend, what do we do now?" Leadership must be

prepared to answer.

For an industrial board, an ideal size is 7 to 9 outside directors. Anynumber much greater than that becomes unwieldy, but a smallernumber doesn't allow committee participation without undue time

pressure. The majority of directors should be outsiders. It's


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appropriate to have two or three insiders to add functional expertiseand to provide for succession planning.

Some of these terminologies are new in Iran economic area and I

am not sure that STE can executive some of these matters so TSEencounter with many difficult in process of establish CorporateGovernance in capital market of Iran because more than 85% of gross national product and all big listed investment companies,brokers, pension funds are each under hand of governmentalinstitutional which don't interest

Accountability and corporate governance but we don't have any

way to development privatization and public participated to capitalmarket and executive of article 44 of continuation law.

Auditor's inspection

According to the Admission & Inspections circular all audit firmregistered shall be have minimum conditions as follow:

Minimum 5 partners All auditors shall be member of IACPA Minimum total issued audit report before admission shall not

be less than 50 Quality control of audit firm with more than 10 listed clients

will be every year and between 5 till 10 clients every twoyears and less than 5 clients every three years

Prohibition of Audit & non-audit services for clients onetime. Auditors' Quality control and supervision will be done by joint

committee of TSE and Iranian Association of Certified PublicAccountants (IACPA)

Members shall keep appropriate records and submit copies of such on request of the TSE


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In the other hand according to this manual TSE establish JointCooperative committee with IACPA to Inspection and supervisionof quality control of audit reports. This committee requiresconducting a continuing program of inspections of registeredpublic accounting firms. In those inspections, the Committeeassesses compliance with the Act of capital market andprofessional standards, in connection with the firms performanceof audits, issuance of audit reports, and related matters involvingissuers.

Assurance and reporting

The combination of events associated with companies such asEnron, and significant practice and standards-based innovationsin sustainability reporting and assurance (e.g. the GlobalReporting Initiative and Accountability's AA1000 Series AssuranceStandard), will shift the basis on which assurance and reporting isdone globally ( Accountability 2002). A further driver will be agrowing concern that many aspects of enhanced disclosure(e.g. Non-financial) are not providing the expected accountabilitygains. Needed and expected will be major methodological

breakthroughs that will both strengthen robustness and extendscope. As important, however, will be an opening-up of theassurance professions in terms of the basis on which they cancontinue to do business.

*Gholamhossein Davani Managing partner of " Dayarayan Auditing

&Financial Services Firm" (RSMi in Iran) and member of high council

of Iranian Association of Certified Public Accountants (IACPA)

Corporate Governance in Iran

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