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. It
seems 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 its

totality. However, to ensure sustainable human development,
actions must be taken to work towards this ideal. Major donors and
international financial institutions, like the IMF or World Bank, is
increasingly basing their aid and loans on the condition those
reforms ensuring good governance are undertaken. Good
governance 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 with
such 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 to
discussions related to problems in both the public and private
(corporation) worlds.
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 from
transparency in that it only enables negative feedback after a
decision or action, while transparency also enables negative
feedback before or during a decision or action. Accountability
constrains the extent to which elected representatives and other
office-holders can willfully deviate from their theoretical
responsibilities, thus reducing corruption. The relationship of the
concept of accountability to related concepts like the rule of law or
democracy, however, still awaits further elucidation.

Social responsibility is a doctrine that claims that an entity whether

it is state, government, corporation, organization or individual has a
responsibility to society. This responsibility can be "negative," in
that 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 to

describe what some see as a company’s obligation to be sensitive to
the needs of all of the stakeholders in its business operations.
Corporate Governance is the construct through which the provisions
of a business are put in place, the way of acquiring those objectives
are discussed and listed, the guidelines and expectations regarding
performance are measured and the structure of resource use is
outlined.

Corporate governance is truly concerned with promoting corporate

evenhandedness, transparency and responsibility through
answerability. This promotion of equality functions by clearly stating
how the rights and responsibilities, from the highest position in the
business to the lowest will be distributed and maintained through
accountability and how decisions and procedural operations should
be managed.

With this in mind, Corporate Governance can easily be viewed as a

voluntary code of conduct by which company executives and those
in positions of authority regarding the use of corporate resources
are expected to follow when managing a company’s funds,
employees and operations. This Code of Conduct then clearly states
the requirements of operations and ethical behavior expected.

Today's faster-paced business environment, shifting economic

conditions, volatile capital markets, and rising demands for
enhanced corporate governance, corporate accountability, and
transparency in light of recent business failures, as well as new risks
associated with a global marketplace, e-commerce, and evolving
information technologies, all are propelling the board's role in
corporate governance into the spotlight. These new demands
require 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's
strategic direction, and fostering long-term shareholder value
growth while ensuring companies remain resilient to both internal
and external pressures. In meeting this challenge, boards must
decide:

• What is the optimum level and nature of involvement in

strategic plans and implementation processes?
• What risks are on the horizon, and how can the
company 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 and

compliance (GRC) is pulling the finance function's attention away
from the past and turning it to the future. Instead of waiting until
disaster strikes and then asking, "Why did that happen?" leading
finance departments are facilitating collaboration with other
corporate functions to ask, "What if it happens?" Together they're
identifying companywide risks and potential governance and
compliance shortcomings and evaluating ways to address and
manage 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 radical
change. According to this draft all big listed Co. shall behave audit
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 company’s stakeholders are all those who are influenced by, or

can influence, a company’s 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 sole
owner).

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
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 the

information needed to judge a firm’s financial performance,
condition, and risks.
2. Each investor should have prompt access to critical
information.
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 profit
from erroneous financial statements.
5. CEOs or other officers who clearly abuse their power
should lose their right to serve in any corporate leadership
positions.
6. Corporate leaders should be required to tell the public
promptly whenever they buy or sell company stock for
personal gain.
7. Investors should have complete confidence in the
independence and integrity of companies’ auditors.
8. An independent regulatory board should ensure that the
accounting profession is held to the highest ethical standards.
9. The authors of accounting standards must be responsive
to the needs of investors.
10. Firms’ accounting systems should be compared with
best 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,
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 with
diverse backgrounds and experience, can be a valuable ally to the
CEO. This was certainly the case during Texaco's crisis period. The
backing 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, public

company audit committees have gained popularity over the most
recent years. With this increasing popularity the role of each
individual audit committee is being better defined and understood.

The key responsibility/duty of the audit committee is to ensure the

financial statements are accurate, complete, reliable and easy to
understand. All-in-all this responsibility sounds simple enough but
audit committee’s responsibility does not end with the financial
statements. Other more comprehensive activities required by the
audit committee is to oversee the risk management process of
company including all identified risks, the internal control
environment and internal control procedures, compliance
procedures and special investigations.

Each audit committee member should have a good understanding of

the business of its company and should be kept informed through its
timely communications from management, external auditors,
internal auditors, compliance auditors and other parties playing a
role in the accounting and regulatory matters of it organization.
Each communication is significant in and of itself in gaining a
complete understanding of the financial reporting of the company;
however, the audit committee should also consider not only the
content of the communications but how these communications
relate to the accuracy of the company’s financial reporting.

To help achieve your audit committee responsibilities consider:

1. Predetermine the dates of the audit committee

meetings for the next year.
2. Establish an agenda.
3. Ensure reports to the audit committee are distributed
prior to the meeting to allow each member time to review the
report.
4. Maintain well documented minutes.
5. Have an executive session (excluding company
management) with the external, internal and compliance
auditors.
6. Understand Risk.
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, peopled
and 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 represent
shareholder interests, to oversee management and to hold it
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 all
subjects 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 to
analyze a situation, must know how to raise concerns without being
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 this
regard, 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
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 have
served 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 or
wide-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 marketplace
and is thus unfair both to the shareholders and to the customers. It
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 under
governmental 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 got
tough, 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. 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.

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

am not sure that STE can executive some of these matters so TSE
encounter with many difficult in process of establish Corporate
Governance 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 governmental
institutional which don't interest

Accountability and corporate governance but we don't have any

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

Auditor's inspection

According to the Admission & Inspections circular all audit firm

registered 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 two
years 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 Public
Accountants (IACPA)
• Members shall keep appropriate records and submit copies of
such on request of the TSE
 In the other hand according to this manual TSE establish Joint
Cooperative committee with IACPA to Inspection and supervision
of quality control of audit reports. This committee requires
conducting a continuing program of inspections of registered
public accounting firms. In those inspections, the Committee
assesses compliance with the Act of capital market and
professional standards, in connection with the firm’s performance
of audits, issuance of audit reports, and related matters involving
issuers.

Assurance and reporting

The combination of events associated with companies such as

Enron, and significant practice and standards-based innovations
in sustainability reporting and assurance (e.g. the Global
Reporting Initiative and Accountability's AA1000 Series Assurance
Standard), will shift the basis on which assurance and reporting is
done globally ( Accountability 2002). A further driver will be a
growing concern that many aspects of enhanced disclosure
(e.g. Non-financial) are not providing the expected accountability
gains. Needed and expected will be major methodological
breakthroughs that will both strengthen robustness and extend
scope. As important, however, will be an opening-up of the
assurance professions in terms of the basis on which they can
continue 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)