Corporate Governance: The National Bank of Abu Dhabi

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Table of Contents

Overview of the NBAD
Organisational structure
The NBAD’s corporate governance strategy
Problem identification and analysis: Poor internal Control
Analysis of the weak internal control system at the NBAD
Recommendations
Conclusion
References

Overview of the NBAD

History

The National Bank of Abu Dhabi was introduced in 1968 and has grown to be the largest in the Abu Dhabi banking industry. It is a government owned banking firm. The bank has 125 branches scattered across the United Arab Emirates with more than 585 ATMs. The international branches of the company are located in 18 countries within the five continents of the globe.

The expansive network makes the NBAD a regional leader in comparison to other banking institutions in the UAE. The bank has maintained its top 50 position in the category of the safest banks in the world.

Products and services

Specifically, the NBAD specialises in banking services such as retail, Islamic banking, and financing investment projects within the Islamic Sheria. The Sheria are the Islamic laws governing business activities between the bank and its clients. The finance models it adopts include the Ijara.

Ijara is a contractual agreement in which the bank purchases an asset from the owner for a defined amount as demanded by the client. Murabaha is another finance model practiced by the company. In this model, the bank enters into a contract with a client following a mutual agreement based on the promise made by the client to honour the pledge. In addition, the Istisna’a finance model is offered to the private real estate developers.

It is an agreement with the client in which the bank erects a premise in line with the particulars defined in the requirement blue print, which automatically becomes valuable upon completion as per the set deadline. The company also participates in staff assistance programs that are aimed at instilling moral suasion in business. As part of its policy, this institution specialises in customer based vis-à-vis in line with the Islamic Sheria provisions.

The mission and core values

The mission of the NBAD is “to maximise shareholders value and become the first choice finance provider through securing home base, product and service differentiation and regional expansion” (National Bank of Abu Dhabi, 2014, par. 4). The core values in financial service provision are “caring professionalism, reliability, teamwork, preserving confidentiality, and inclusively Islamic services” (National Bank of Abu Dhabi, 2014, par. 4).

Organisational structure

Products

As mentioned earlier, the bank offers services such as retail, Islamic banking, and financing investment projects within the Islamic Sheria. Currently, the company offers five key products. The products offered by this financial institution are distributed across the major region of United Arab Emirates.

People

The board of directors is made up of seven members. Five of the seven board members make up the management team. The highest ranking manager is the Chief Executive Officer. Other members of management are the Chief Business Development Officer, Chief Financial Officer, Chief Operating Officer, and Chief Risk Officer.

Besides, the institution has several specialists in the fields of accounting, actuarial science, finance, and economics among others. These employees work under the departments of development, finance, operations, and risks.

Clients

The main clients of the NBAD organisation are government institutions, business developers, and the general public. The organisation has managed to expand its clientele base to 18 countries besides the UAE. The company targets clients who need financial services within the Sheria laws.

Shareholder

The NBAD is owned by the government of the Abu Dhabi.

Financial performance

A comprehensive analysis of the financial performance for the 12 months ended December 31, 2013 shows that the institution made a net profit of AED 102 million.

This is a 242.3% increase compared to AED 26 million net profits earned in 2012. This is in consideration of all the global economic hardships that had hit businesses all over the globe. The aim of pursuing geographical expansion has been experiencing a series of financial constraints since over reliance on the already congested Dubai market has put the company in a tricky situation.

The NBAD’s corporate governance strategy

The bank’s corporate governance strategy operates on the pillars of transparency, accountability, leadership and strong standards of corporate management. The board of directors has the responsibility of managing the affairs of the bank in addition to setting the short term and long term objectives.

The board also creates the risk management and mitigation policies besides ensuring that the bank is compliant with different regulatory obligations. Within the five departments of the bank, there are teams that allocate the responsibility of full material disclosure, governance, and direct engagement of the community in the business activities. The community engagement initiatives include an education trust, health financing, and supporting different cultural events.

The bank has three building blocks of learning consisting of a supportive learning environment, concrete learning processes, and practices leadership that reinforce innovation. The managers are expected to play a significant role in setting up the learning environment for their employees. This culture is meant to create an ideal climate for innovation and communication among the employees.

The NBAD’s team work culture spells the rules of engagement, expected behaviour, and repercussions for misconduct. These rules appreciate diversity and uphold integrity in judgment as enshrined in the company’s vision and mission statement. Generally, the bank is committed to compliance and adoption of standard business practices such as the “Ministerial Resolution No. 518 of 2009 concerning governance rules and corporate discipline standards” (National Bank of Abu Dhabi, 2014, par. 4).

Thus, “the board acknowledges that NBAD is operating in an evolving global environment of diverse expectations, constant regulatory change, and increasing focus on stakeholder engagement and accountability” (National Bank of Abu Dhabi, 2014, par. 4).

Problem identification and analysis: Poor internal Control

Internal control background

Weak internal control is very common in financial companies all over the world, UAE companies included. For diverse reasons, financial companies such as the NBAD often have weaker internal controls than other industries. This is alarming because these companies are at great risk, they might lose up to or greater than 5% of their annual income to poor systems of control.

Due to weak internal control system, companies in the United Arab Emirates have lost large sums of money due to misappropriation, lack of accountability, and inadequate support systems that monitor progress and use of company resources. Internal control assists in making transactions and business processes more efficiently, and it improves accounting functions (Madsen and Vance, 2009). Reflectively, an efficient and systematic accounting system acts as a shield against misappropriation and monitors the same.

In the financial industry, internal control is necessary due to the diversity of financial services offered by these companies. This diversity makes bookkeeping vulnerable due to lack of sufficient personnel to handle every hitch in the bookkeeping. The vast number of customers served by these companies makes it necessary to establish a strong internal control unit. Generally, committees in charge of the internal control do not act in a swift manner to deal with incompetence and other internal vices.

Lack of Internal Control in the NBAD

Ford (2009) describes NBAD as a company with unlimited financial operations. This makes it prone to suffering from lack of internal control. Ford notably emphasised that even though there is a steady growth in Dubai’s business and financial companies, NBAD face a struggle with several internal corruptions suggesting lack of internal control. The magnitude of corruption is worrying and beyond negligence. Specifically, this suggests that the company has weak or unreliable internal control models or systems (Ford, 2009).

The irony in the fight against lack of internal control in UAE comes with the fact that The Dubai Financial Authority (DFA) has no responsibility for any financial organisation/company that fails or is not able to maintain its internal control (Ford, 2009).

In response to the earlier sentiments by the whistle blowers, NBAD in 2009 outlined what they described as an effective risk management structure. This report gives the responsibility of maintaining internal control, to an effective internal control system that is managed by The Risk Management (RM) Committee. The success or failure of ARM Committee can only be evaluated through a well-structured research and this is the essence of this research.

Analysis of the weak internal control system at the NBAD

Objective of the analysis

The objective of this analysis is to provide sufficient information to the management of the NBAD institution on the real management problems that have facilitated occurrence of poor governance as a result of business malpractices.

This objective substantiates differences between management, employee behaviour, and professionalism in monitoring control system. Thus, the management may find this information vital in improving monitoring systems, investor’s confidence, and inclusive structuring as the market may demand. The procedure can be applied to other branches across the region of UAE.

Significance of internal control to the NBAD business

Internal control function is of essence in a financial institution. In many jurisdictions, it is mandatory to have independent internal control functions in financial institutions. A well-structured institution consists of an expertise mandated with the responsibility of systematic knowledge gathering from which testable and definite condensed results are achievable (Madsen and Vance, 2009). NBAD has a weak system which is prone to manipulation by the employees.

The risk committee is expected to offer adequate support to internal control to ensure that internal controls are adhered to. Unfortunately, there are scenarios within the NBAD where the internal control committee is not efficient and therefore fails to take up key control issues in time. In fact, the current artistry approach is neither quantifiable nor precise since it only interprets experience on basis of components that can be appreciated, understood, and felt simultaneously (Madsen and Vance, 2009).

The responsibility and accountability for the Group’s risk management rests with the Board of Directors. Management of risk is driven from the top down by those charged with the whole responsibility of managing the risks. Currently, the actual status of internal control at the NBAD is not certain as suggested by different literature.

Since the literature is speculative, implying that it lacks the backing of a conducted scientific research, aiming at establishing the lack of internal control, estimating its extent and finally suggesting the preferred solution is a big setback to its public relations and financial performance.

Challenges in the management of the internal control system

The challenges that the NBAD faces include limited political, cultural, social freedoms encircled in a religious parameter and its Sharia laws based business platform. This arrangement concentrates on the moral aspects of doing business and controlled profit maximisation. Therefore, some employees are likely to take advantage of the loosely functioning monitoring structure to take care of fraud and other under dealings.

Besides, there are legal restrictions and poor information infrastructure challenges which are encountered. For instance, the law protects employees even when accused of fraud as long as the legal system has not given a verdict. These restrictions make investigations and prosecution expensive in terms of finance involved and time (Ford, 2009). However, the legal avenues for prosecution available outweigh the challenges.

Recommendations

Putting into consideration the external and internal dynamics, the NBAD should create a flexible, self-regulating, and consistent monitoring structure in order to reduce loses as a result of inconsistency in decision science and misappropriation of company resources.

Also, this strategy will facilitate the restructuring effective employee awareness to develop structure knowledge and respect for law and order. If well merged with appropriate management mix, the strategy will secure a continuous quantitative increase of market by market share as employees will internalise moral suasion and respect the evaluation structure (Calder, 2008).

In order to enhance the achievement of the same, the company needs to introduce different internal control policies which in return will attract various types of control management, thus creating consistency and fear among employees who might be tempted to compromise it (Solomon, 2011, p. 56). Consequently, managers will be required to maintain the monitoring and success of the evaluation procedures and endeavours of the company.

In line with the management principles, this recommends the proper scrutiny of various factors creating direct or indirect impact on the economic trends and changes of the economy of UAE. The products of the NBAD need to be integrated into the achievement of various organisational goals through the distribution processes to ensure that the products reach all designated customers without incompetence.

This may be achieved through adopting of a secure online system of customer request and communication with the company (Madsen and Vance, 2009).

It is important to have an effective board committee to review internal control systems on a quarterly basis. Further, the board of directors may engage external bodies such as government regulators to review activities of internal control and the quality of their work.

In addition, the departmental managers should be attuned to events and people surrounding them and appreciate the essence of analysing forecasted turbulent turns and twists within the organisation. Generally, the art of internal control should be intrinsic of ambiguity, subtlety, and emotion (Flamholtz and Randle, 2011).

The critical elements of an effective corporate governance implementation strategy include management commitment, risks prevention and control, efficiency in production, and general operations (Yocam, 2008). An efficient corporate governance implementation strategy system must therefore include the evaluation procedure to help gauge its effectiveness and guide in the creation of the measures to correct flaws in the system.

When this is successfully assimilated, it is within desirable limits to roll out the integration procedure to include entire control and evaluation changes. The NBAD has a complex implementation and review strategies.

However, its internal control strategy has not been efficient in managing internal fraud and irresponsible financial reporting. Special attention should be directed towards measuring compliance and consistency indicators and matrixes of performance evaluation through integration of a proactive, objective oriented, and goal facilitated internal audit (Solomon, 2011, p. 112).

Litigation of securities is vital towards redeeming a company from corporate governance disappointments, especially in companies where the social pillar is stronger than the need to make profits (Yocam, 2008). Through voluntary disclosure, a financial company such as the NBAD is in a position to responsively introduce a simultaneous methodology of counterintuitive between litigation and disclosure.

There, the NBAD should incorporate evidence based counter-intuitive as a remedy for balancing the UAE’s government policy and efficiency in the corporate governance strategy by enhancing the board structure to improve the bank’s corporate culture (Solomon, 2011, p. 49).

Differentiation in management science is necessary and ethical towards the monitoring authenticity of audit records. Auditing is vital towards managing and tracking company’s financial performance over a period of time. These aspects assist the management to critically reflect on audit differentiation effects and pricing balance. This process is solely based upon the premise of informed prediction that is supported by evidence and accuracy in reporting the financial performance (Solomon, 2011, p. 61).

Conclusion

Although the NBAD has evidence based auditing unit that functions on a spatial audit market differentiation unit, its corporate governance strategy is limited to reviewing the presented audit reports. Besides, due to the complexity in its operations and high magnitude of returns, several loop holes within the internal control system has resulted in instances of incompetence. Therefore, the management should introduce a control system which ensures that audit reports are more detailed and accurate.

Incorporation of this recommendation will facilitate audit management at micro level, especially when implemented as a policy. In addition, the board should have its mandates expanded to enable it deal with market dynamics, without having to seek approval from the government of the UAE in micromanaging the audit function. Thus, the management team should create a self-regulating and consistency monitoring structure in order to reduce loses as a result of inconsistency in decision science within its corporate governance strategy.

References

Calder, K. (2008). Corporate governance: A practical guide to the legal frameworks and international codes of practice. London, UK: Kogan Page Publishers.

Flamholtz, E., & Randle, Y. (2011). Corporate culture: the ultimate strategic asset. Stanford, UK: Stanford business Books.

Ford, N. (2009). Saudi banking. Middle East, 37(6), 20-48.

Madsen, S., & Vance, C. (2009). Unlearned lessons from the past: an insider’s view of Enron’s downfall. Corporate Governance, 9(2), 216-227.

National Bank of Abu Dhabi. (2014). Corporate governance. Web.

Solomon, J. (2011). Corporate governance and accountability. London, UK: John Wiley & Sons.

Yocam, E. (2008). Corporate governance: A board director’s pocket guide: leadership, diligence, and wisdom. New York, NY: iUniverse.

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