The Influence of Shariah (Islamic Principles) Corporate Governance on Cross-Border Merger and Acquisitions Involving Islamic Companies in the Gulf Countries
The central aim of the research is to examine whether cross-border Merger and Acquisitions (M&A) involving Islamic financial companies in three Gulf countries and non-Islamic financial companies from the Western countries is influenced by Shariah Corporate Governance (CG). Cross-border M&A is a corporate level strategy to achieve organisational growth and expansion through accessing new markets and additional strategic resources (knowledge, technology and complementary skills). Islamic financial companies in the Gulf region are keen to engage with non-Islamic financial companies beyond the Islamic world to benefit from the cross-border M&A. However, for Islamic financial companies to operate at global scale and attract resources, investors, regulators, customers, and other stakeholders should trust that strong CG principles are embedded in the organisation’s core. CG theory suggests that good corporate governance enables corporations’ access to external financial resources if CG mechanisms provides a clear enforceability of stakeholders’ rights with complementary robust legal system. Existing literature suggest that both Islamic and non-Islamic financial companies operate in different institutional, political, cultural, religious, and regulatory environments; which adversely affect the extent to which these two sets of companies could mutually engage in a successful cross-border M&A. In the context of Gulf countries, for example, there is no distinction between the state and religion and there is a stringent requirement to comply with the Shariah, however, the existence of conflicting opinions on Islam has resulted in varying views with regards to what qualifies as Islamic finance that has led to a latitude of multiple interpretations of Shariah principles by Shariah scholars and Shariah Supervisory Board. Also, Islamic financial companies are more likely to be considered as social entities than a commercial enterprise, which differs from the Western view. Consistent with the above context-based literature and drawing on the stewardship, agency and stakeholder theories, this study seeks to answer the key research question ‘how Shariah corporate governance influences cross-border M&A between Islamic and non- Islamic financial companies? The study employs a qualitative approach to obtain and analyse data from interviews with 40 respondents (Board of Directors members, Lawyers and Shariah Scholars) mainly selected from nine banks and six insurance companies in the three Gulf countries - Saudi Arabia, Kuwait and United Arab Emirates. The key findings were: 1) there are variations between the three countries in terms of how the conventional CG model is practised, the extent to which Islamic CG model is adopted, and in the level of employees’ awareness of the CG principles; 2) Incorporating Islamic principles in business practices is primarily determined by the interpretation of Shariah by Shariah scholars and Board but these tend to be non-standardised and at times problematic; 3) In Saudi Arabia and Kuwait, companies tended to have weaker system of disclosure (in particular Zakat) and smaller Board dominated by family and less qualified members than the UAE; 4) Sukuk is the most widely used but costly, Islamic financial instrument in cross-border M&A activities as it fully complies with Shariah principles where as Tawarruq is considered questionable in terms of Shariah; and 5) there are several barriers, identified in Chapter five, which need to be addressed when considering cross-border M&A between these two sets of the companies. The study makes several contributions to theory, policy and practices. Its significant theoretical contributions includes: a) as far as existing literature is concerned, this study is the first to examine the influence of the Islamic CG principles on cross-border M&A between Islamic and non-Islamic financial companies; b) Prior research on corporate governance has addressed M&A in developed and emerging countries, however, this is the first study to develop a CG model which seeks to improve our understanding of the complex issues involved in the process of cross-border M&A between Islamic and non-Islamic financial companies; and c) very limited studies have addressed agency, stewardship and stakeholder theories in the context of the development of behavioural Shariah CG model in a critical manner. The study has policy implications, for instance, it highlights the need to create stronger standards of Islamic CG and more standardised interpretation of the Shariah in these companies to enable them to operate on a global scale. In terms of practical contributions, the study offers implications and recommendations for management and investors alike based on the study findings.
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