MIDDLE EAST

Corporate governance: Doing the right thing is not easy

In recent years, we have had a parade of blue chip companies mired in scandals of one sort or another across a whole spectrum of industry and not from the usual banking sector everyone loves to bash.

These involved, to name but a few, Enron, Arthur Andersen, Tesco, Volkswagen, BP, Toshiba and now Samsung. What ties them all is corporate governance and a realization that their corporate culture needs to be reexamined unless they are destined for extinction like Enron and Arthur Anderson.

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Given that Gulf countries are encouraging their own blue chip companies to go international, the issue of corporate governance is also important for the region’s big players to avoid future problems. It all starts with ‘corporate culture’, something very hard to define and maybe impossible to measure, but what is it that make seemingly decent corporate managers decide to bend the rules?

To simplify it, corporate culture is a collection of intangible and tangible factors that drive behavior in an organization and if the company leadership can define the explicit behavior it wants and embed them in their organizations then the risk of future crisis diminishes.

Constant compliance

In this way, constant compliance reminders become less of a problem because it is not something that is forced on employees, but instead there will be an instinct to do the right thing and that this is natural.

Many of us have worked with different organizations and we instinctively feel differences in corporate culture and what is deemed the right thing to do. This makes us sometimes uncomfortable to compare other corporate cultures and governance that we felt more at ease with, and leading to either successful acceptance of the new corporate culture or alienation.

Given that Gulf countries are encouraging their own blue chip companies to go international, the issue of corporate governance is also important for the region’s big players to avoid future problems

Dr. Mohamed Ramady

Corporate governance is normally good at asking questions of why things went wrong after the event and the immediate scramble of management is to try and find out what happened, who is to blame and find scapegoats.

This is natural, as organizations need to know what happened, learn lessons and bring those responsible to account, but establishing a corporate culture that is sustainable needs to ask the question about why they got there in this situation and answer the uncomfortable results with honesty.

This is often psychologically difficult for senior managers to do, as it will often mean that management was to some degree complicit in what went wrong.

Betraying company values

Sometimes overambitious employees take matters in their own hand and betray company values, like the VW emissions scandal, or it could be that ambitious management impose unreal targets on their employees who then worry what would happen to them if they do not meet these targets and end up not doing the right thing.

The imposition of unrealistic performance targets on a stressed out work force is one of the classic factors leading to corporate scandals, and was a common theme in all the blue chip companies mentioned earlier.

If the outcome is greater personal financial gain to senior management in terms of performance shares and bonuses, the issue then becomes worse and corporate governance loosens or those in charge of compliance start to turn a blind eye as was the case with accounting firm Arthur Anderson.

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Defining culture could start as being about behavior, and while culture cannot be measured, some type of behavior can and should be possible to define and differentiate behavior that is encouraged and those which are not acceptable.

Behavior then is driven by values and corporations, irrespective of their industry, need to establish clear set of values that form the basis of their operating business model and inform their employees what is expected from them in approaching business decision making and behavior.

Higher goal values

Setting these higher goal values is a matter for the Board of Directors and embodying them and embedding them throughout the organization is the responsibility of the Chief Executive Officer. Having agreed the corporate values, the boards need to track the actual process of embedding them so they can see that what they have got as results is what they wanted.

To do this effectively, boards need to select and to really understand a whole range of indicators and measurements that will tell them about behavior and pre warn them when things are in danger of going wrong.

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These indicators are ones that all companies have readily available such as exit interviews, whistleblowing reports, staff turnover and confidential employee surveys. Client feedback is also important, such as supplier satisfaction, customer satisfaction and adherence to payment deadlines for suppliers.

But sometimes these indicators might not tell the whole story. For example, a fall in whistleblower reporting might, on the surface indicate a happier work force when it might also indicate an atmosphere of reluctance by employees to take the risk and report wrongful activity and be blamed for doing so, leading to silence and not sticking their necks out when such events are happening.

Like-minded cronies

The composition of the guiding board of directors becomes essential in setting values. Are these composed of like-minded cronies and yes-men whose only qualification is that they are related to the owners or have indirect business association with each other, as seems to be the case of many Gulf companies today, although regulatory pressure is forcing many to change?

How truly independent are these independent board members and who are nominated to chair powerful committees like audit and compliance?

Following the spate of corporate scandals, the major listing bourses of the world are now insisting on independent board members. One must not forget that it takes decades to build up a brand that stands for honesty, integrity and high value, but that it takes a few moments of management greed and divergence from core values to set this back for a long time.
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Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.

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Last Update: Monday, 18 September 2017 KSA 13:22 - GMT 10:22
Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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