FOREWORD - Hawkamah | Home€¦ · The Region’s Corporate Governance Journey Article by . H.E....

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The Region’s Corporate Governance JourneyArticle by H.E. Hamad Buamimpages 11-14

Interview with Nicolas BoëlChairman of Solvaypages 04-09

The Next 10 Years in Corporate GovernanceArticles by Frank Dangeard, Nicolai Tillisch, Mak Yuen Teen and H.E. Dr. Maryam Al Suwaidipages 15-33

Hawkamah’s 10 Anniversary Issueth

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FOREWORDThe year 2016 marks the 10th anniversary of Hawkamah Institute for Corporate Governance. Throughout its history, Hawkamah has been at the forefront of corporate governance development in the Middle East and North Africa region by stimulating debate, sharing insights, providing guidance, acting as a catalyst for reform, and constantly seeking to further the thinking on corporate governance. To continue this spirit, this Anniversary Edition focuses on “corporate governance – the next 10 years”.

The MENA markets are undergoing changes which will affect the long-term prospects of regional companies. This issue of the Journal looks into how the boards will need to respond and what this means for them in terms of their own approach, practices and composition to add value to the business.

Continuous improvement and reflection are vital for businesses. It is no coincidence that some companies thrive for decades. Long-term sustainability is often an outcome of a conscious effort to maintain as well as regularly review and revise the organization’s corporate governance practices to ensure they address the current as well as future challenges. To explore this topic, we are privileged to feature an interview with Mr Nicolas Boël, the Chairman of Solvay, the chemicals multinational founded over 150 years ago by the brothers Ernest and Alfred Solvay.

I wish you a stimulating read.

H.E. Hamad BuamimChairman

Hawkamah Institute for Corporate Governance

EDITORIAL TEAMAlec Aaltonen

Saeed Bin Shabib

EDITORIAL BOARDPeter Montagnon

Hanan AhmedStephen Davis, Ph.D.

Alec AaltonenGrant Kirkpatrick, Ph.D.

Sophie L’HeliasSaeed Bin Shabib

HAWKAMAHTHE INSTITUTE FOR CORPORATE GOVERNANCE

LEVEL 14, THE GATE BUILDINGDUBAI INTERNATIONAL FINANCIAL CENTRE

P.O. BOX 506767DUBAI, UNITED ARAB EMIRATES

TEL: +971 4 362 2551FAX: +971 4 362 2475

[email protected]

TABLE OF CONTENTSINTERVIEW WITH NICOLAS BOËL

Interview by Peter MontagnonPages 04-09

THE REGION’S CORPORATE GOVERNANCE JOURNEYArticle by H.E. Hamad Buamim

Pages 11-14

THE NEXT CHALLENGE FOR BOARDS: FOSTER INNOVATIONArticle by Frank Dangeard

Pages 15-18

THE STRONGEST BOARDS ARE BECOMING SOFTERArticle by Nicolai Tillisch

Pages 20-24

FUTURE OF CORPORATE GOVERNANCEArticle by Mak Yuen Teen

Pages 25-28

ENHANCING CORPORATE GOVERNANCE THROUGH INDEPENDENT DIRECTORS

Article by H.E. Dr. Maryam Al SuwaidiPages 30-33

CORPORATE GOVERNANCE: THE PRESENT, THE FUTUREArticle by Michael Mascarenhas

Pages 34-38

CORPORATE PURPOSE THROUGH CORPORATE BEHAVIOURArticle by Philippa Foster Back

Pages 39-44

INTERVIEW WITH NICOLAS BOËL

Nicolas Boël is the Chairman of Solvay, the Belgian chemicals multinational founded over 150 years ago by the brothers Ernest and Alfred Solvay. Between them, the 2,400 descendants of the founding families today hold a total stake of 30% in the company. In this interview with Peter Montagnon, Mr Boël explains how the families’ participation is organised and how the present generation works to involve and retain the interest of a large number of individual family shareholders.

The families’ stake is held mainly through Solvac, a separately listed financial company, which creates liquidity for individual holders and adds flexibility when more capital is needed. Separately, family members operate an informal collective group which Mr Boël calls a “private Facebook” arrangement. This enables them to keep in contact, discuss issues around their holding and prepare the next generation to remain involved.

the hawkamah journala journal on corporate governance & leadership

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Nicolas BoëlChairman of Solvay


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Each of these three entities - Solvay, Solvac and the family circle – are headed by a different family member. As Chairman of Solvay Mr Boël is a descendant of one of the founding families, but the company’s Chief Executive, Jean-Pierre Clamadieu, is not, and Solvay follows all the norms of Belgian corporate governance.

How does the family shareholding work today?

The founding families were in fact five. We had Ernest and Alfred [Solvay], the industrialists. They had the support of business angels. So it’s not only one family that makes the shareholding, but all the offspring of these founding fathers. We estimate at our generation, which is the fifth generation, that we are 2,400 different shareholding individuals. We have tried and learned through time - including some difficult times – to adapt our organisation to reflect this diversity.

We have the company, Solvay SA, the industrial chemical company, which is listed and where the board is in charge of the strategy and includes some directors from the shareholders. There the key essence is competence. Second, we have Solvac, a holding company that holds 30% of Solvay shares on behalf of the families. It is also listed and its directors come from the family shareholders. Here the focus is naturally more financial.

And then we have the third circle which is an informal organisation of the shareholders coming from the families. It focuses on keeping the project alive. This means thinking about the next generation,

thinking about training, communication. It’s about finding the best way to keep 2,400 shareholders now - 10,000 probably in a decade –involved, and on making sure that you also have a good talent pool for the future.

How do you do that?

Communication which goes both ways. The set-up is basically the result of us working in a group organised by the younger generation. We’ve built a tool which is what we call a private Facebook which allows you to be immediately in contact and exchange information. The CEO of Solvay, as with any other investor group, will come and talk about the company, based only on public announcements. He briefs them on the results and there are Q and A sessions. We have plant trips. We organise debates and information sessions. We had one on entrepreneurship. We had one on gender diversity and we had some on philanthropy. We also organise some training, about what it is to be a good shareholder, how to read a balance sheet and all those type of things.

So this is a virtual club, but does it have physical meetings?

Yes because people meet physically when you organise a conference, or a meeting with the Chief Executive or when you organise a plant trip, but the tool that brings everybody together is basically an internet system.

Coming back to the governance. You are part of the family, while the CEO is not. Is there a convention that the Chairman is always part of the family?

It is based on what the company needs. We have gone from a situation where we had a CEO who then became the Chairman of the board and was usually an important shareholder in the company and usually came from the founding families. But to survive successfully for 150 years, the key requirement is competence to enable long term value creation. That’s sometimes going to need management that comes from outside the company, or management that is promoted from inside the company.

We believe that it is important to have some kind of representation of the family somewhere, but we have lived through periods where we did not have that, apart from directors around the table. Basically what is fundamental is the need of the company, based on priorities about how the organisation should evolve.

So are you the first Chairman not to have been the CEO?

Usually it has been the case but not always.

What is actually the role of Solvac? Does it have an important role in appointing the Solvay Board?

Solvay is not represented at the Solvay board. It is what you would call in Belgian law a “reference shareholder” which means it does not actually have control

but its weight in terms of general assembly voting rights is pretty important. However, the decisions concerning the company are made at the board of Solvay by its directors. There is a very strong firewall between Solvay and Solvac, both in terms of directors and in terms of governance. Solvac has a 30% share in Solvay and is charged with managing that 30% stake.

So Solvay is fully independent of Solvac in the way it runs itself?

Absolutely, it runs itself in the tradition of Belgian corporate governance and we fully respect that in terms of director independence, nominations, remuneration and gender diversity.

Why does Solvac need to be listed?

Being listed gives you the advantage of liquidity, which with large shareholders is important, as well as the ability to raise extra funds to support the shareholding, although one of the trademarks that we have at Solvay is the long-term relationship between the stock and its owners and where the dividend policy and the value creation are the two most important factors.

Over time Solvay has raised additional money through rights issues. How does that work when family members might or might not wish to put up extra money?

It’s very important that there is a long tradition of information so the strategic context is understood. The CEO needs to


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inform and communicate with his investors, whoever they are, about what’s happening in the world, what is going to happen to the company and what is the strategy. Then investors can decide to remain, leave or in some cases increase their stake in the company. When you have a major project it’s very important for the investor base that it fits in the global strategy that has been presented, implemented and discussed year after year.

The acquisition that we did in the US of Cytec [the aerospace materials company bought last year for $5.5bn] is exactly such a case. A family investor is no different from any other investor. You need to spend time and effort on communication so all the questions can be raised and answered. The consequence was that the $1.5bn equity increase [to part fund the acquisition] was fully subscribed.

What’s been the advantage to the company of the family connection maintained for 150 years? And what have been the problems or challenges?

We have built over 150 years a very strong DNA of values which permeate the company as a whole. It gives you a very strong long term commitment which enables the CEO and the board to focus on the long term and maybe come up with some projects which can fit in the longer term but may be a private equity fund would reject.

The complexity is that the long history also means accepting a lot of changes. We need to be very agile and flexible

while maintaining a very strong long term view. You need at the same time a strict governance arrangement where the rules of the game are very clear, and you need an information and communication flow, both formal and informal.

Where do the 70%, the non-family shareholders come in. They are obviously treated equally but they may have short term priorities compared with family shareholders. Is that the case?

When you have a shareholder base like we have you have very different shareholders. Since the governance is the same for everybody, the communication is the same for everybody, within that people are free to make choices.

So your model has enabled you to attract shareholders with a similar mind to the family in terms of long term approach?

Absolutely. We know our individual shareholders who are maybe not from a founding family but have exactly the same perspective and the same interests. At the same time we also have an investor base relationship which is more institutional, and maybe have another horizon. For the CEO and the management to be able to give a very clear view on the trajectory gives everybody the same opportunity.

It’s the critical mass of support, I suppose, but presumably the 30% belonging to the family makes it unlikely that anyone would mount a hostile bid.


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What is important is the success of the company as a whole. A 30% shareholding is not a target or an objective. Should the success of the company depend on something else that could mean a different structure. The purpose of the shareholding and the purpose of management is to make the company successful. We were a small start-up company in 1863. We were by 1911 the biggest multinational in the world. Then the world wars came. So we’ve gone through various stages and, basically what is important is to always be able very humbly to define where you are and what needs to be done and then accept to take the necessary steps to get there.

You talked about the values. How far do you think this system has preserved the values of the founders?

The company was founded by people who were industrialists, with strong beliefs. Ernest was a real believer in all the work that he did with his Institut de Physique et de Chimie to try and promote science over the frontiers and borders at times when it was difficult. It is that industry can help mankind. He set up education for workers, housing, and social security. He believed that entrepreneurship and industry and science was really the best way to make humanity progress. That has remained over time and is very important for management and for the shareholders. It is the sense that chemicals today can be part of the solution and not part of the problem.

It means also that, having been in the industry for 150 years, we know our field. Every few years there is a reflection over what are we doing. Maybe we should go in for bio-tech for example, but the chemical industry is what we know.

Sometimes the founding fathers pass on the company to their heirs who decide to sell but you’ve kept this alive. But you’ve kept this going for a century and a half. This is unusual, isn’t it?

It is. There are a few factors. The first one is that competent people are promoted. People had been hired based on competence and no other factor.

That was right from the outset?

That was right from the outset. The second factor is again that we keep people involved in the project. You do not keep people involved just by paying a dividend. The dividend may be an important part, but the fact of getting together, of remaining involved, of remaining interested in a company is based on the project and the values of the company.

That’s where the third circle, the private Facebook, is very important.

Absolutely. Solvac is a financial holding company. Solvay is the industrial company whose task is to create long term value, and the third circle is the only circle where the members of the founding families can get together just because they are family shareholders. That’s where the whole project can live.


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Will that continue when there are 10,000 family shareholders?

The way that governance is exercised organisationally is not set in concrete. We have an organisation today which is different from what we had twenty years ago, and will certainly be different in ten to 15 years. We will need to remain humble, flexible and open because, yes, we will have challenges of dilution and we need to see what is going to be the right answer to that. When you understand that what is key for the shareholders is the pursuit of the success of the company, then you understand that we can live with dilution.

I suppose it is critical to be able to hand on to the next generation.

Yes. We are not doing this only for our generation, but how do you get the

next generation involved. That’s work in progress.

The other aspect is keeping the workforce involved. That is also part of the long term success.

Yes, and that’s something that the chief executive and the executive committee work on. The board sets the tone, but on a day–to-day basis it is the CEO and the executive committee who do this. Finding the CEO who has the right efficiency and at the same time the right mind-set for the soft skills of communication and human resources is fundamental.

And do these values also bind the family to the project?

Yes.


issue08 09

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THE MENA REGION’S CORPORATE GOVERNANCE

JOURNEY: THE PAST 10 YEARS

Hawkamah the Institute for Corporate Governance is celebrating its 10 year anniversary this year. The institute was set up with the grand vision to “bridge the corporate governance gap” in the Middle East and North Africa (MENA) region. What this has meant in practice is that Hawkamah’s activities have ranged from awareness-raising to research, from policy work to standard setting, and from capacity building of board directors to providing

advice to companies and regulators. The range of activities reflects the rapid development of corporate governance in the region. This article looks into the region’s governance journey over the past 10 years.

Hawkamah was established at a time when corporate governance was a relatively new concept in the MENA region. In 2006, for example, Oman was the only

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issue08 11

H.E. Hamad BuamimPresident & CEO of Dubai Chamber of Commerce, Chairman of Hawkamah

Gulf Cooperation Council (GCC) country to have issued a corporate governance code. A 2007 joint study by Hawkamah and the International Finance Corporation (IFC) found that while companies recognized corporate governance to be important, very few could credibly claim to have undertaken broad scale governance reform. The same study also found that only 3% of the surveyed companies could be rated as following “good practice” and none following “best practice”.

Disclosure practices, even by listed companies, was extremely weak. Prior to 2009 it was very difficult to obtain any publicly disclosed information of listed companies beyond the names of the board members and basic financials. A 2008 Hawkamah’s joint study with The National Investor found that the contact details of investor relations officers were available for only a handful of GCC listed companies, only 3% of them held analyst calls, 90% of them did not pre-announce their result publication dates, and it was not unusual to come across instances of interim financial results which were handwritten, often illegibly.

Boardrooms were largely populated by insiders, appointed on the basis of trust, who were, more often than not, sitting in multiple other boards. The expectations placed on board members were unclear and there was little regard to issues such as independence and time commitment. Board evaluations were non-starters.

Discussions on corporate governance were often centered on why corporate

governance was needed, or indeed, whether it was not needed at all. The term itself was often mistaken to mean the same as corporate social responsibility or even corporate management, as our 2007 joint study with the IFC indicated.

The governance landscape has changed drastically in 10 short years. Corporate governance codes have been issued by regulators across the region for listed companies, and many of these codes have already been revised and improved. Some countries have issued such codes for state-owned companies, and numerous frameworks and guidelines are in place for family-owned businesses, banks, Islamic Financial institutions, and even SMEs. The discussions on corporate governance are now focused on how to best implement governance.

Perhaps the best way to visualize the governance developments in the region is to pick up a 2006 annual report of a regional listed company and compare it to this year’s annual report. Today, the average annual report issued by a listed company in the region is 102 pages in length and this is increasingly supplemented by information disclosed on the company website and even in a separate sustainability report.

Regulators in several parts of the region have also begun reforming the overall legal frameworks. The United Arab Emirates and Qatar, for example, have issued new company laws. Both countries have also been upgraded from frontier market to emerging market status by the MSCI. Similarly, insolvency laws are under review


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and are forthcoming in some countries.

The role of boards has received much attention from the regulators and companies alike. Delegation of authority matrixes are now widely in place, detailing the decisions the boards need to take and approve. Board committees are now the norm and even board evaluations are becoming accepted (approximately 13% of the 150 largest MENA listed companies conducted such evaluations in 2012). The regulators have played their part too. Oman’s code requires new directors to go through corporate governance training. The UAE now mandates female representation in the boards of listed companies and government-owned entities. The UAE’s recently issued corporate governance regulations also provide a comprehensive list of key processes – ranging from strategy to risk management, from internal controls

to stakeholder management – which the board needs to be proactively overseeing.

We, as a region, should be proud of these developments. Governance frameworks are now largely in place and companies have taken significant steps in governance implementation. This, however, is no time for complacency. In many ways, we have accomplished the easy part, the next challenges are far harder to accomplish. Our achievements have largely been focused on structures, now it is time to focus on the substance. For example, it is far easier to set up an audit committee than it is to ensure that the audit committee works effectively and adds value to the business.

What this requires is leadership and self-awareness, i.e., soft skills, and for the region to move to the next level, we need


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to change our approach to corporate governance. There is certain eagerness in the region, most notably in the GCC, to utilize international best practices, to seek certification to various international standards and to use international benchmarks as guides. Companies often have a tendency to follow the same logic when looking to improve corporate governance practices but this mentality is unlikely to yield desirable results.

Firstly, most of the international theories on corporate governance stem from the UK and markets with similar characteristics. The UK Corporate Governance Code represents an extremely well thought out set of governance principles, which have evolved and been revised numerous times since 1992. However, the UK Code addresses the governance issues arising in the UK corporate ecosystem where there is a prevalence of fragmented ownership. This is a market where shareholding of 3% is considered significant. The nature of the ownership structure means that the relative power rests with the board and the management, as opposed to the shareholders. A typical governance issue in the UK relates to excessive executive remuneration, which is a logical outcome of such power dynamic.

The MENA markets are markedly different, where companies are controlled by bloc holders. In this power dynamic, the power rests squarely with the majority shareholder. This situation raises a number of potential governance issues such as conflicts of interest, related party transactions, lack of independence and scrutiny mechanisms,

protection of minority shareholders and etc., but the problems are not the same as in the UK.

Secondly, the international-certification mindset often misses the point about governance. Governance, like strategy, should be uniquely tailored to the company’s business, circumstances and vision, within a clear framework of principles. We need board members who understand the thinking behind best practices and we need to empower them to reflect on the purpose of their company/organization. The boards should then formulate the overall vision and identify the key values for the business, while linking these with its stakeholders. The optimal governance approach for the company is derived from this process. This also forms the basis on which the board, in partnership with the management, develops the company’s strategy and risk appetite. Deriving from these, the company should set objectives, embed these in the incentive structures and control practices, and keep them under regular review. Boards need to shift their focus from merely providing (financial) oversight of the business to becoming actively engaged in directing the company. This means that it is the boardroom that should be driving corporate governance practices if the region is to continue its progress on the governance journey.

To reuse the German proverb often quoted by Hawkamah in its early years, “when sweeping the stairs, you need to start from the top.” Ten years on, the proverb continues to apply.


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THE NEXT CHALLENGE FOR BOARDS: FOSTER INNOVATION

No sector, nowhere in the world, can durably shield itself from the disruptions and uncertainties brought about by technology change and the digitalization of activities and business models. Only relentless innovation, combined with an

appetite for growth, can have some hope of offsetting these risks. Innovation can be anything from incremental to disruptive. It affects manufacturing, design, products, services, distribution, customer care, back-offices, supply chains, corporate


issue08 15

Frank DangeardManaging Partner, Harcourt

functions and business models. For most companies, it is both the main threat and the main opportunity of the next 10 years. Every board and every management know that if their company does not innovate, it will disappear. But when was the last time you heard a board of directors say to its management that they needed to be more innovative? That the company should take more “innovation risk”, despite uncertain outcomes? That the failure of some of the company’s new business initiatives was expected and tolerated?

Boards are about risk oversight, mitigation and control, aren’t they? A typical board agenda covers the business update (the last 3 months), the financial review (the last 3 months) and forecasts for the next period (3 months, and perhaps up to the end of the fiscal year). A few times a year, a board will also review controls and risks in the past and current periods (say, over 6 months), bonus criteria and realizations (on a semi-annual or annual basis), and various operational programs. Little time will be spent on strategy, and no time at all on innovation and new business development. In any event, directors will rarely be technology-savvy or informed enough to dare ask far-reaching questions about innovation, let alone encourage a discussion about the threats and opportunities of innovation for the company. Even if they were, the board agenda would already be too busy.

Really good boards will try to overcome these problems. They will hold a serious strategy retreat at least once a year, and will

have strategy discussions multiple times during the year. They will think about where the company is going, what its competitors are doing, and what technology and innovation mean for its businesses. They will spend time on new business initiatives. They will try to build longer-term objectives into management’s compensation, and will accept to direct investments into R&D, test new business models or acquire innovative and potentially disruptive companies. For all their efforts these boards are likely to be criticized by shareholder, who will complain about wasted financial resources and insufficient board oversight. Shareholders will demand that “financial discipline” and “good corporate governance” be brought back, through appropriate changes to the board and management. Other stakeholders (employees, politicians, the media, etc.) will be equally critical for their own self-centered reasons.

So what is a board to do, if anything, to overcome the lack of “innovation risk” appetite at stakeholder, director and management levels? It might worry about the threats, and see the opportunities, of innovation, but should it bother at all? And if it wants to, how does it go about fostering innovation and taking well thought-out “innovation risk”? There are, unfortunately, no silver bullets. However, a board can at least take action in three areas: on and within the board itself, towards outside stakeholders, and on management and the company culture.

First, the board can act on and within itself. A board can adapt its composition, improve its strategy process, insist on


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adequate information, and ensure that the board agenda covers strategy and innovation.

A director does not need to be a technology expert to raise questions about innovation, nor be able to “write code” to challenge a presentation on R&D or digital transformation programs. Directors with experience in running technology, telecom or life-sciences entities (companies, divisions, etc.) can get the discussion going, and help colleagues overcome their inhibitions, as discussing innovation in the boardroom is really no different from any other discussion about business. The chairman (or vice-chairman/lead-director/senior independent director) should ensure that the board is composed appropriately to enable these types of discussions.

Product roadmaps, three-year financial projections or short-term crisis action plans are no substitutes for a proper strategy. Relatively few companies have an agreed view of what strategy actually is, conduct a robust strategy process and end up with a fully engaged board. Conversely, good strategy processes consider client, market, technology and competition trends, new business ideas, and necessarily take innovation into account. They have the added advantage of ensuring that the board fully supports and really “co-owns” the strategic outcome.

The information deficit at board level (vs. what management have at their disposal), and the over-reliance on financial information as a proxy for assessing a company, is a major reason for the dearth or mediocrity

of discussions about innovation. Financial data is a useful, but highly simplified and biased, view of the current and future health of a company. A board should insist on more holistic information, whether in the form of KPIs or not.

Finally, the board chairman (or vice-c h a i r m a n / l e a d - d i r e c t o r / s e n i o r independent director) should ensure that short-term pressures on the board agenda do not crowd-out presentations and discussions of strategy, technology, new business initiatives and innovation. Second, the board can act towards outside stakeholders. In particular, an innovative company needs “patient capital”, as the benefits of innovation can take years to materialize.

The board must insist on proper information of all stakeholders regarding the company’s strategy, its risks and opportunities. This is easier said than done, and the education of stakeholders is often frustrating, as shareholders in particular will always complain that the company innovates too much or not enough.

Capital is not naturally patient. It must be educated to become patient through communication, explanation and transparency. To be fair, these do not always work, and the board may have to consider more radical options, for example a “take-private” or dual classes of shares in the case of a listed company. Indeed, many successful innovative companies would rapidly fail if they were publicly listed. Third, the board can act on management and the company culture. The choice of the


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CEO is essential. The board is also justified in challenging the CEO on the members of its executive committee and on the talent management process.

With the right leadership and talent management in place, a key impact of the board is in the tone it sets regarding “innovation risk” appetite and long-term performance. A risk-adverse board will be all too easy to read by the entire company: focus on short-term financial performance, financial KPIs in bonus schemes, “business-as-usual” priorities of the board agenda. Conversely, remuneration plans that incentivize long-term performance, a higher proportion of equity vs. cash pay-outs (including for directors themselves – something that is often, and inexplicably, prohibited in many jurisdictions), long holding period requirements for insiders with “claw-back” provision (the ability for a board to “claw-back” bonuses a certain number of years after they have been paid), all point towards a board that wants to encourage innovation and balance long-term and short-term constraints. Even simple initiatives, like holding board meetings at R&D centers or innovation labs, or ensuring that on-line tools are commonly used for board meetings, will indicate clearly the board’s priorities.

Beyond KPIs and hard incentives, the board also should try to establish a working relationship with management that has as much to do with advising, supporting and encouraging, as it has with controlling, auditing and overseeing.

Finally, setting the “tone-from-the-top” is not only about giving time to management presentations on strategy, technology, new business ideas and innovation, however essential all of these are. It is also about looking out for tangible signs of an open and collaborative culture inside and outside the company. Even if large amounts are channeled toward R&D or digital transformation programs, a company affected with the “NIH syndrome” is unlikely to be sufficiently innovative.

In conclusion, the ability for a board to foster innovation is really only about co-owning the company’s strategy, setting the right risk appetite for growth and innovation, and balancing properly the traditional roles of direction and control. Unfortunately, these are neither easy to achieve nor do they come easily to most boards.


issue0818

THE STRONGEST BOARDSARE BECOMING SOFTER

If you take a sneak preview of the boardrooms in the GCC countries 10 years from now, you will see fewer PowerPoint presentations and more arguments. That is illustrative of the movement from a focus on what is “hard,” meaning everything that can be measured, to a view encompassing more “soft” considerations. This change comes along with the notion that many choices are neither inherently good nor bad. Decisions must, instead, be made based on the immediate circumstances and must be evaluated over time.

Soft vs. hard

There are several reasons why softness is gaining momentum in boardrooms. Corporations that make an effort to catch up on governance, as many pioneering businesses in the region have done or are currently doing, tend to excel more quickly in the hard aspects than in the softer ones. Policies and procedures can be formulated in less time than it takes to ensure the quality of board meetings. A chairperson can make shortcuts by recruiting people with outstanding CVs, but he or she must still


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Nicolai Tillisch Regional Partner of The Leadership Circle

make an effort to get strong personalities to sit down and work effectively together.

Moreover, there is increasing international attention on the soft aspects of the boards, which is self-fulfilling to some extent. Management theory is tying an even tighter knot with the field of psychology. Consequently, it is becoming softer than when it started out, inspired by the principles on which manufacturing plants are organized. Along these lines, the amount of research and publications on what is and what should be going on in boardrooms is growing rapidly. This development has been further stimulated by the trend towards splitting the roles of chairperson and chief executive officer in large U.S. corporations, thus cementing the board as a separate platform for leadership.

There are many examples of the emerging softness in boardrooms.

Example 1: Strategy conversations

Most boards in the GCC countries face a difficult question: How does our business make the transition from decades of steep growth to a future that will be dominated by more moderate growth and intensified competition? Not only has demand been much less buoyant in the wake of the oil price fall over the last two years, but the record years before that also attracted multinational corporations from all over the world and motivated local groups to enter neighboring markets. This new supply paradigm changes the market dynamics forever.

The question of how to make the transition is fundamental and requires that these boards take a more active role in strategy development, one in which it is not acceptable only to have a view on whether to trust the presented recommendations or not. Neither can the board assure itself that its new strategy is being executed optimally solely by regularly reviewing a set of key performance indicators. While a command-and-control approach to business can work reasonably well in emerging markets when they are going up steeply, it is weak at stimulating continuous learning in a rapidly evolving environment. Intensifying competition tends to change the market before any player can fully implement an entire strategy plan. Creativity and timely decisions, which both depend on ongoing learning, are needed to stay ahead of the game.

These changing needs are reflected in the subsidiary boards that the region’s most sophisticated groups are establishing. Even a capable board that effectively overviews a large, diversified conglomerate can struggle to add much strategic value to its most important businesses. On the other hand, a subsidiary board makes it possible to recruit board members with relevant experience and to enable the challenging discussions needed to help form bold strategies and follow up on them.

On a group level, another question has become pressing: How do we fulfill the government’s expectations of our contribution to the development of society? This challenge arises from the changing


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role of governments. Historically, there have been close ties between governments and major corporations, with great benefits to the latter. Several governments, not least that of Saudi Arabia, now want the private sector to play a more active and contributing role in society. For one thing, there is a serious need to create new and meaningful jobs for young nationals in the short to medium term, while environmental sustainability is becoming a major concern over time. Alarming examples of this are that the natural underground water table has significantly fallen in the entire Middle East, which, with its hot summers and large surfaces of sand, is particularly vulnerable to climate change.

A board cannot just come up with an answer once and for all and sign off on a plan for how to back it up. Ideally, the board should guide its decisions based on a well-articulated viewpoint about the future role of the corporation and ensure ongoing dialogue with the government and other important stakeholders.

Example 2: Corporate culture

The regional conditions have been a magnet for dysfunctional corporate cultures. The founder of a business normally has a strong view on how things should be done, and so might the next generation’s leaders. The immediate threat to this order is complexity, which expands non-linearly with the size of a business. Growth can surprisingly quickly transform a healthy business into a hybrid of anarchy and bureaucracy, leaving all major decisions to the person at the very

top. Senior executives are overextended by the need for approvals and firefighting. Attention is removed from the future of the business. The people working below, from line managers to frontline staff, experience this in the form of delayed or questionable decisions. As a consequence, their engagement suffers, together with customer satisfaction, which again pushes the relative profitability downwards. All of this was less of a concern when the top line leaped upwards year by year, and the bottom line followed suit in absolute terms. A corporate culture like the one described becomes problematic when the market changes its nature, as it has.

The flipside of the region’s massive growth over the last decades is that otherwise successful businesses have unintentionally given birth to counter-productive work environments. Several of the corporations that have taken on efforts to improve their ways of working realize that many people, including some close to the very top, react out of a fear of losing their jobs and privileges. The reluctance to change is deep-rooted.

Accordingly, the board must actively engage in the nurturing of a new and healthier corporate culture and should not just delegate to its management team. The transformation of the corporate culture raises a significant question about what values and leadership behaviors should define the future. This question is relevant anywhere, but even more pressing in the GCC countries, where cultural confusion is common. During the decades of brisk growth, corporations hired professionals


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from everywhere and copied best practices from Western Europe and North America. It is not uncommon to have a distinctively Arab—and, in a couple of cases, Indian—spirit among the owners and senior executives, mixed with the application of undisputably western management principles. This resembles a marriage of convenience, in which happiness suffers when the arrangements are rushed. Unavoidably, messages from above can become contradictory. Combined with blue-collar and white-collar staff from all over the world, the situation fuels a disproportionate number of misunderstandings, disappointments, and blame games.

Culture eats strategy for breakfast, as a saying goes, so the board must get up early.

Example 3: Family affairs

Extraordinary privileges foster colorful personalities, so the governance of successful family-owned businesses tends to become more complicated for every new generation that comes along. There is a regional fashion of having family constitutions written, but that alone does not align all the interests and styles in play. Text written in black and white seldom changes how all members of a family feel, think, and behave.

The family-owned groups in the GCC countries that are furthest along in making corporate governance work have made a persistent effort to bring their family councils and other related activities to life. Examples of the latter are regular


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gatherings of all adult members of the family and offers of special educational programs to younger members. At the core of this are a couple of questions that can keep discussions going: What should be available to the next generations of our family? What should our impact on the world around us be? How willing are we to think differently and take risks? How do we ensure our ability to do what we aspire to do?

An effective board must pay close attention to the owner family and cultivate a way of working in which certain issues and proposals are forwarded to the family council. The board’s responsibility is to steward the long-term interest of the business, guided by the vision, values, and expectations of the owners. That requires attention to the soft details, as the exact borderline between the responsibilities of a board and those of a family council are so nuanced that a family constitution and corporate governance policies cannot draw it once and for all.

Example 4: Professionalism

For all of these reasons, board work has become less like an exam, where one reads the material received and says something intelligent based on it. Strong boards depend on deep insights and creative perspectives. They are composed of people who bring a range of experiences that benefit the corporation. Furthermore, these people invest relatively more time in each board they sit on compared to what has been standard in the recent past.

Likewise, the strongest boards are paying close attention to how they work, as does any high-performing team in any sphere of life. As a result, the number of boards in the region that undertake a board evaluation is growing. These evaluations are starting to address softer issues, such as how the members are working together, in addition to the traditional questions about compliance with governance standards. And more boards are joining up with their management teams for offsite strategy retreats, where the conversations are flowing more freely. Clearly, an effective board member does not merely bring knowledge but also consciousness and sensitivity to the moment.

Hard and soft

The distinction between what is “hard” and “soft” in business is odd. Most people have a bias towards either of them without seriously making an effort to strengthen themselves along the other dimension that comes least naturally for them. Meanwhile, greatness among business leaders is shaped by the combination of the two factors.


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FUTURE OFCORPORATE GOVERNANCE

Despite extensive reform efforts and increased awareness of corporate governance over the last two decades or more, there are no apparent signs of governance lapses becoming less common. Often, history seems to be repeating itself.

Consider the cases of unauthorised trading in banks. In 1995, there was the Barings Bank scandal involving unauthorised trading in futures contracts in Singapore that brought down the bank. This was followed by losses of A$360 million from foreign currency derivatives at National Australia Bank in 2004; €4.9 billion from

European stock index futures at Societe Generale in 2008; US$2.3 billion from exchange-traded funds at UBS in 2011; and US$2 billion from credit derivatives at JPMorgan in 2012.

Non-bank companies were not spared either. In 2005, China Aviation Oil, which was listed in Singapore, lost US$550 million from betting on oil derivatives; and in 2008, Citic Pacific in Hong Kong lost US$2 billion through foreign exchange derivatives.

In my view, there are three key factors that impose a continuing and increasing


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Mak Yuen TeenAssociate Professor, NUS Business School

stress on the corporate governance of companies and markets: weak corporate cultures, cross-border differences, and complexity of organisations.

Let’s start with corporate culture. The recently released publication by the United Kingdom Financial Reporting Council (FRC) titled “Corporate Culture and the Role of Boards” defines corporate culture as “a combination of the values, attitudes and behaviours manifested by a company in its operations and relations with its stakeholders”. While corporate governance codes and rules have increased compliance and adoption of corporate governance “best practices”, they have been far less successful in improving corporate cultures.

Whether we are talking about trading, financial, corruption, environmental or

safety-related scandals, they often occur in organisations with corporate cultures that put financial imperatives ahead of ethics, safety or environmental considerations. BP’s Deepwater Horizon environmental disaster, Takata’s airbag failure, Tepco’s nuclear power plant disaster, General Motors’ ignition switch failure, Olympus’s and Toshiba’s accounting scandals, Volkwagen’s emissions scandal, and GlaxoSmithKline’s (GSK) and Leighton Holdings’ bribery scandals would not have occurred with the right corporate culture. When Mary Barra took over as CEO of General Motors, she said that one of her immediate priorities was to change the corporate culture.

Boards have a key role to play in building a strong corporate culture. However, regulators can also play their part by holding companies, boards and senior


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management more accountable for actions of their employees. When things go badly wrong, regulators should determine if boards and senior management have done enough to ensure that things go right rather than allowing them to just blame what went wrong on “rogue employees” – a popular excuse used by companies.

Regulators can also facilitate the development of a robust “challenge function” within boards. In countries like the U.S. where ownership in companies is generally dispersed, management have often become so powerful that they control the board. However, improved proxy access has allowed shareholders more influence over board appointments.

In most other countries around the world where there is concentrated ownership, independent directors are generally appointed by controlling shareholders and are often beholden to these shareholders. Not surprisingly, they have often failed to do their part in challenging decisions that are not necessarily in the interests of the company and all shareholders. Regulators need to take bolder steps in allowing minority shareholders more say in the appointment of independent directors. Otherwise, I can foresee the concept of independent directors falling into disrepute and disappearing as a credible mechanism for ensuring good corporate governance. In fact, serious doubts about the value of independent directors are already being expressed in many countries.Next is cross-border differences, be they cultural norms, business practices, or laws and regulations. The bribery scandals

involving GSK in China, Leighton in Iraq and Walmart in Mexico have to do with a failure of companies to appreciate (or choosing to ignore) cross-border differences.

Some other examples are HSBC’s money-laundering scandal in Mexico, Caterpillar’s troubled acquisition of a Chinese company, OSI’s tainted-meat scandal in its China operations, Nathaniel Rothschild’s dispute with the Indonesian Bakrie family in Bumi Plc, BP’s joint venture in Russia through TNK-BP, and Shell’s highly questionable dealings in its oil venture in Nigeria.

There are also many companies listing overseas that have created problems for local directors, regulators, investors and other stakeholders. In Singapore, we have many cases of Chinese companies - called S-chips – listing on the local exchange which have been engulfed in scandals. In these S-chip scandals, regulators and shareholders have generally been powerless to take action against directors and senior management. However, Singapore is not alone in this regard. Elsewhere, we have cases like Boshiwa and Hanergy in Hong Kong, Rino in the US, and Sino-Forest in Canada which have posed considerable challenges for regulatory and private enforcement.

In Singapore, a big debate has erupted over a proposal to allow companies to list with ordinary shares having different voting rights – so-called dual class shares (DCS). To me, the fundamental issue is the mistaken belief of some that we can somehow transplant into Singapore something like DCS that is allowed in


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countries like U.S. without recognizing the legal and institutional environments that help mitigate risk of abuse which do not exist in Singapore. These differences may include contingency-fee class action litigation, fiduciary duties of controlling shareholders, and the regulatory approach to corporate governance.

However, this is symptomatic of a wider issue. When reforming corporate governance codes, rules and regulations, there is a tendency to adopt practices from other developed markets without a good appreciation of the wider context within which those practices exist. In fact, the widespread adoption of the “comply or explain” approach to improving corporate governance without sufficiently considering the state of market development and investor activism is a case in point.

It is important for companies to gaining a deep understanding of cross-border differences before they enter new markets. For regulators, it is equally important that they have a good understanding of differences in legal and institutional environments when formulating their corporate governance rules.

The third factor has to do with complexity of the corporate structure, specifically the proliferation of group entities such as subsidiaries, associates, joint ventures and special-purpose entities, often layered one on top of another. Boards of directors of group entities below the parent often have a very limited governance role, and at the same time, these entities are far from the line of sight of the group board and senior

management. Today, the conversation about corporate governance should include group corporate governance.

Corporate scandals often start from a group entity, sometimes several layers below the parent company. The BP environmental disaster is a good example. More recently, OW Bunker, a company listed on the stock exchange in Denmark, collapsed due to risk management failure and unauthorised transactions in its wholly-owned Singapore subsidiary.

Beyond the governance of the group entities, governance and management of other companies in the supply chain (or supply chain governance) is also important. The OSI tainted-meat scandal, the Takata airbag failure scandal and the OW Bunker collapse, for example, show how problems in one company in a supply chain can have devastating effect on other companies in that chain.

There is a need for companies and regulators to focus on group governance issues and to consider the governance and management of business partners in the supply chain.

In conclusion, in my view, the future of corporate governance revolves around the 3 C’s of culture, cross-border issues and complexity.


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ENHANCING CORPORATE GOVERNANCE THROUGH

INDEPENDENT DIRECTORS

The importance of good corporate governance in the economic landscape of a country need not be stressed more. Modern day economies are assessed as much by the quality of the governance standards of their legal entities as by the financial value they create. The fact that the UN Principles for Responsible

Investing, UNPRI, recommended the inclusion of the Environment, Social and Corporate Governance disclosures as part of corporates’ annual reports is a strong indicator of how much governments, regulators and investors increasingly recognize the importance of non-financial benchmarks to judge the performance of a


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H.E. Dr. Maryam Al SuwaidiDeputy Chief Executive Officer, UAE Securities & Commodities Authority

corporate entity and its contribution to the nation’s economy.

While Corporate Governance has been there through the history of corporate sector, in its earlier form of accounting standards and board disclosures, the reforms in enforcing stronger Corporate Governance standards gradually gathered pace with each corporate failure or scandal. This is evidenced by the enactment of the Australian, Hong Kong and Singaporean Corporate Governance codes after the Enron and WorldCom debacle, and the enactment of the OECD Principles of Corporate Governance after the Parmalat Fraud case. In the UK, the Cadbury report followed the famous Robert Maxwell case.The UAE issued its first Corporate Governance code in 2009 which was revised during 2016. The adoption and compliance with the UAE’s Corporate Governance code has been on the rise since its launch.

The responsibility for ensuring good governance and long term sustainability in companies lies squarely on its Board of Directors. The stronger, more efficient, diverse and independent the Board is, the better will be governance of the entity. However, in the MENA region, the governance has mainly been directed in the corporates by the promoters and owners of businesses.

The MENA region has high concentration of family owned businesses. Such businesses were historically limited in their operations to one or two countries. In such circumstances, it was justifiable

that owners appointed themselves on the Board of Directors as the role of Directors was seen to belong to the owners and no need was felt for independent people to be on the Board of Directors and for them to exercise the authority of the Board. Nonetheless, with the increasing diversity and cross-border nature of businesses’ activities, it has become increasingly challenging for families and promoters to provide sufficient direction to businesses. Therefore, the need for independent directors emerges as a must. Independent Directors, being experts in chosen areas, are better equipped and positioned to provide the required guidance to businesses.

The OECD Principles of Corporate Governance note that independent Board members can contribute significantly to the decision making of the Board. They can bring an objective view to the evaluation of the performance of the Board and management. In addition, they can play an important role in areas where the interests of management, the company and its shareholders may diverge such as executive remuneration, succession planning, changes of corporate control, take-over defenses, large acquisitions and the audit function, to name a few.

The opinion is divided however, whether the requirements for better corporate governance, including guidance for composition of the Board and its committees, meetings, quorum, financial audit, CSR, along with the criteria for being considered “Independent Director” should be mandated by regulators or


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should it be left to corporates to decide. In view of the growing and emerging nature of corporate world in the MENA region, in my view, government authorities are in a better position to analyze the global trends, assess their impact and customize them to local economies and the overall objectives of the country. While the guidance from the authorities may indicate the structural components for effecting stronger governance, it should be left to the companies to populate the structure.For appointment of Independent Directors, attention must be paid to confirming the eligibility of individuals in terms of bringing value to the Board as well as ensuring the independence of the selected individuals. To achieve this, especially in the regional context, the criteria of independence should not be limited to non-share-holders and non-family relatives of the directors and shareholders. Furthermore, the value which the individual brings to the company in terms of experience, expertise, and most importantly diversity, should be key determinants in the selection process.

Globally, the trend has been to make corporate Boards as diverse as their operating environments and to make diversity a key criteria for selection of the Independent Directors. Diversity is determined on the basis of nationality, age, language, ethnicity, gender, education, experience, etc. A Board built on such parameters not only provides a different dimension to its decision making process, but it can potentially lead the company towards greater business opportunities as well. Extending the reach of the company through its Independent Directors is an

advantage, which is further enhanced by the professional review and oversight which such Directors bring to the company.

Promoters should not feel uncomfortable with the presence of Independent Directors on Boards. Several studies have proved that companies with greater percentage of Independent Directors have better enhanced the value for their shareholders. Such companies have also been more sustainable in the longer term. There are several global corporates which have businesses spanning continents and have shown growth for several decades, which are fully managed by professional and independent Boards. The robust Corporate Governance frameworks put into practice by such companies, with the approval of shareholders in the General Meetings, become the guiding force to ensure the sustainability and growth of such corporates.

In terms of diversity, a lot of discussions also focus on maintaining the gender balance on company Boards. While traditionally, men have dominated the corporate Boards, it has been observed that women directors bring a fresh and different perspective to the decision making process, and thereby, enhancing it. When women have exposure to the frontline of economic activity through participation on corporate Boards, this enhances the general well-being of societies and boosts their future prospects. The UAE Government has shown a great deal of interest in gender parity and implements several programs to encourage women participation in boards. Hawkamah’s Women Director’s Program


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was launched in 2015 to train women who aspire for Directorial positions and enhance the capabilities of those who already sit on corporate Boards. In theory, Independent Directors are supposed to be the ones who speak their minds independently during board meetings. In reality, that depends to a large extent on whether companies really adhere to corporate governance or they merely follow a “box-ticking” exercise. In such case, while the number of Independent Directors may meet the regulatory requirements, by virtue of their selection and appointment to the Board, or for personal interests, the Directors feel indebted to the shareholders and hence tend not to voice their independent opinion. This goes against the very logic of making the Boards independent and does not contribute to enhancing the value of decision making within the board. Directors who speak their minds during board meetings are those who overcome this hesitation, voice their opinions and thereby, provide their own perspective during the Board’s decision making process.

While the idea of better corporate governance is well established, and the MENA countries have issued their own codes, mainly based on the OECD guidelines, the challenge reported by corporates is to find suitable independent candidates. To that end, Hawkamah has done some very good work over the last ten years. Its various Director Development Programs are instrumental in developing the required oversight and decision making skills of candidates who represent a rich pool from which Independent Directors can

be drawn by companies. Through board briefings and retreats, Hawkamah guides directors as to how to be truly independent thinkers and stresses the importance of this to create effective boards.

Having a centralized database of potential Directors makes it easier for companies and board recruitment agencies to assess the profiles of available candidates and to place the right person on the right board. It would be useful if such a database can be structured to also capture the performance of Independent Directors in terms of their contribution to the Boards on which they sit. This could be done for example through recording Independent Directors’ attendance in Board meetings, participation in Board committees, contribution to professional and academic institutions; accuracy of their disclosures of conflicts of interest, and the record of their voting in Board matters. The availability of such information, in addition to the financial performance of the companies on which they sit, can be a good tool to assess the directorial profile of any person. As the database gains acceptance and as it develops, it will become a key reference point to determine the reputation and the remuneration of the Independent Directors.

My expectation and aim towards looking forward to seeing the companies in the MENA region derive their value as much from operational performance as from their enhanced governance practices.


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CORPORATE GOVERNANCE:THE PRESENT, THE FUTURE

I recently attended a breakfast meeting with one of my peers, a CEO and Board Member of a listed company. Our conversation wafted towards the steps his company was taking towards corporate governance, the need for it today and how it would evolve over the next 10 years. His view was that corporate governance comes alive, when regulatory bodies step in to promote, impose, and even provide a framework to better govern corporates. That did not send the right signals to me on the role of boards and senior leadership in the modern day.

The conversation then continued to be

centered around the regulatory aspects, largely ignoring the inherent and organic need for corporate governance and its impact on performance, inspite of all the corporate failure and fraud in recent years. The question that arises is that, shouldn’t the Board and those in leadership positions make corporate governance a cornerstone if they want to ensure sustained performance and value creation? At this point a little self-reflection on the state of affairs within our own organizations would help. A reality check is needed I guess.

So why is corporate governance so important to ensure a sustained


issue0834

Michael MascarenhasCEO of Desert Group

performance graph? Let’s explore what really happens in businesses, be it SMEs, family owned enterprises, listed or state-owned enterprises, over time.

Any business has a simple structure around its goals when initially started. Systems and processes are closely monitored and managed through simple hands on controls. A strong start up mentality controls operations. Shareholders and members of the Board understand the nuances of its operations and govern easily. Risks are quickly identified and mitigated. There is regular contact with the leadership team and in many cases directly with the employees. However, and this is exactly where the dichotomy sets in, growth is an essential component in the success of any business.

Successful business will continue to grow and put growth as a prime goal year on year, but then business growth creates complexity. There are many plates being spun at one time and people, systems and processes intertwine to create a web which is difficult to govern and manage at times. With the advent of technology the sophistication levels has increased manifold. Even a simple wrong tweet could spell disaster for companies.

This ladies and gentleman is the paradox of growth. Growth creates complexity and a labyrinth within operations. Complexity in the absence of appropriate governance and controls leads to risk both known and unknown which could result in serious financial, reputational and business implications. Business could implode

impacting not only shareholders but all stakeholders alike. Employees, suppliers, customers, financial institutions, investors, strategic partners and even countries get severely hit when the lack of governance spells disaster. Poor governance eventually leads to poor returns and value destruction. There have been many an example and no sector has been immune to this destruction. SMEs, family businesses, private or public organizations have not been spared. Look around closely and you will know that the lack of corporate governance destroys value.

So let’s get down to what matters most and ask the question - do you think that your company ticks the boxes of an effective corporate governance system? Does your company have the required transparency, accountability, fairness and responsibility – the four pillars of corporate governance – in place? If you are left squirming in your seat then there is a problem that could impact company performance, foster risk through a poor risk management system and be exposed to corporate scandals that includes fraud.

So before we examine how the role of Boards will evolve in the next 10 years it will be important to take stock of the situation as it exists today. Many of my peers who act as Independent Directors have many notes to share. In turn, I would like to share these with you. One of the most common observations spoken about is that the Board structure and mix at times leaves much to be desired.


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A summary on the recent scandal at Volkswagen was provided by the Financial Times that highlighted the lack of diversity, expertise and independence at the Board level as the main causes of what happened in what is one of the largest car manufacturing companies in the world. Even the so called best are not immune to the problems at the board level. Companies in the Middle East be it SMEs, family owned enterprises to listed enterprises should take note of the above and reconsider the structure and the mix of skills they have within their Boards. In the SME environment, so many of us have the skills we require to start and build, but without increased management skills, competence and capability we would struggle to effectively take our businesses to the next level. The ideal solution to grow small businesses then is to ensure that each stage of development was matched with the relevant support, while simultaneously increasing management skills so that businesses are ready for the next step, risks mitigated and value enhanced. This needs a different mind-set and thinking. A degree of openness and realization too is needed to accept that you will need to step aside and let professionals take over. Professionals who are bound by a strong corporate governance framework.

I have to admit though that in recent times we have seen more SMEs seeking independent advice early on. Corporate governance comes in various forms. This advice could come in the form of mentoring or coaching from professionals. This is where bodies like Hawkamah in the Middle

East have started to play a major role and provide a pool of professionals certified in Stewardship.

One of the biggest topics doing the rounds is the acceptance of corporate governance in family owned business both regionally and globally. This is what David Feffer, Suzano, Chairman of the Board, speaking to his relatives after his father’s death said “…We have two options; there is no right or wrong decision, nor one that is better than the other. But whatever is to be done, will be definitive. There is no turning back. We can continue being a family business, like in my grandfather’s and father’s days, or become a professional company with a strong and clear capital market strategy.” Quite a shocking acceptance but this is where the world and the region is heading – professionalism.

Many of the large business in the world were and are family business. However with chances of fraud, scandals, financial losses and value destruction more companies are ensuring that there is a distance between ownership and management. Toyota, Bechtel, Mars, Cargill etc. are good examples. However family owned business would have to adapt or face a lack of professional stewardship in their business environment. The need for stewardship in the form of a professional board drawing on outside expertise will give them strategic capability to drive management, operations, manage ownership conflict and create succession plans.


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This needs a culture change. In a few years’ time with competition, the opening up of economies forced by efficient trade and capital flow, technological advancement and the complexity of market place, one will see a transition. Change will happen and family owned enterprises will have to face a tough realization to either adapt or see businesses eventually disappear. No one wants that. Family businesses are an important part of commerce and society. However, it’s in their interest to seek advice on furthering corporate governance.

I particularly like what I read in an OECD report. “I don’t know cases of families in Latin America that had become more united because of money, but I do know of many cases where families have destroyed companies because of money. The lesson to be learned here is that company value is what unites shareholders, irrespective of whether these are family members, institutional shareholders or investors who are external to the controlling groups.” This statement was made by Chairman Roque Benavides of Buenaventura in Peru. The conclusion? Regional barriers and geographical boundaries do not provide immunity and the progress towards better corporate governance is an absolute essential.

In my opinion the biggest challenge lies in listed companies which are most visible to society and business alike. For some strange reason however it’s an ostrich “head in the sand approach” that affects many of the listed and public companies. The Board gets powerful and CEO does as well. Both instances are a cause for worry.

Further, the composition and the skill mix at Board Level is something that leaves much to be desired. Being on the Board of a company is a trophy and expertise and merit is considered less of an essential.

As businesses become more complex, there is a need to build up a skill base within the boards to match that complexity. Yet you find that the range of both Independent and the rest of the elected members do not reflect the requirements of the current dynamic and ever-changing business environment they operate in. Board members continue for longer tenures than the business needs them and little change is seen at the top even though the business keeps changing. Further the respect and aura around the Chairman’s position takes precedence over real issues. This is a global phenomenon.

Another change that will become more visible globally and regionally is the coordination between the board and the employees in an organization. In some countries, such as Germany for example, labor representatives sit on the supervisory boards of companies. But fundamentally, it is important for the boards to look for ways to bridge the ever widening gulf between the Board and the members within organizations. There is much to learn and understand from the workforce which could give an indication of corporate culture and the state of affairs.

If you want a truly responsible board focused on corporate governance then organizations will have to be flattened and the “those at the top” syndrome will have


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to go. This is where boards are headed 10 years from now. Rather be seen as located at the top in an organogram they will be seen at the center.

It is quite usual for boardrooms and the offices of the senior leadership to occupy the top floors of the company headquarters. This will have to change soon. The view from the top misses the view at the bottom and corporate governance becomes less effective. The focus of the board can only change if there is regular change in structure and mix that suits the new environment it operates in.

In conclusion each of those in senior positions and particularly those that matter most – the shareholders and board members - will have to self-introspect. It is absolutely essential that reform starts with each of one us. In ten years from now there will be more regulation and there will be more flattening of organizations. There will be more advice sought and corporate governance bodies that promote good governance will take center stage. There will be more certification for board members and the demand for skill sets will be extreme. Around the world, the skills gap is fast becoming a skills abyss and the Board is not an exception! It’s time we act voluntarily before regulations takes center stage.


issue0838

CORPORATE PURPOSE THROUGH CORPORATE

BEHAVIOUR

This is a prominent year for both the Hawkamah Institute of Corporate Governance as it celebrates its 10th Anniversary and the Institute of Business Ethics (IBE) as it celebrates its 30th Anniversary.

Such milestones cause institutes such as

ours to reflect on the current climate. There is the sense that the business agenda is at a crossroads. In some countries the public feel left out of corporate success and global advance that has taken place over the last 40 years and have voiced their opinions through the ballot box. One aspect of discontent is the lack of understanding of


issue08 39

Philippa Foster Back, CBEDirector, Institute of Business Ethics

what business is for. What is its purpose? How does it serve society, when it seems so self-serving, particularly for those running it?

To have a purpose is to have a clear goal of what the business is setting out to achieve in serving society by providing products or services that meet the needs of people. A business can only do this in a sustained way if it is and remains profitable, if it is managed in a legal way and if it meets its obligations to all its stakeholders in society, and does so responsibly.

In recent years, governance has focused on vision, mission and values rather than explicitly purpose. Some felt that vision was an articulation of purpose, though perhaps not clearly enough. But whatever

the language used, the wider connection to society was not made, and so we have found the business franchise weakened and trust in business eroded. How can this trust be regained?

It is the role of the board to give purpose direction. In the UK, this is specifically through Directors duties as made clear in S.172 of the Companies Act 2006. Once articulated, the board must bring the purpose alive, firstly to its employees and then its wider stakeholder group.

The IBE’s work demonstrates that supporting the purpose with a combination of business and ethical values is the best way forward. Values illustrate how the purpose will be delivered.


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Purpose, Values and Behaviours

Purpose

Helping people achieve their ambitions – in the right way

Values

Respect Integrity Service Excellence Stewardship

We respect and value those we work with, and the contribution that they make.

We act fairly, ethically and openly in all we do.

We put our clients and customers at the centre of what we do.

We use our energy, skills and resources to deliver the best, sustainable results.

We are passionate about leaving things better than we found them.

Behaviours

Build trust with the colleagues and partners we work with.

Seek out alternative perspectives and put our shared interests ahead of any individual or team.

Collaborate proactively with colleagues across all of Barclays to get the best results.

Embrace, and seek to increase, the diversity of our organisation.

Show the courage to do and say the right thing.

Act in private as we do in public, and honour our commitments.

Challenge things we believe to be wrong and be open to challenge from others.

Be accountable for failure as well as success, and not allocate blame.

Take the time to understand clients’ and customers’ needs, regardless of our role.

Always strive to surpass clients’ and customers’ expectations.

Create and provide solutions for clients and customers that balance the short and long term.

In serving our clients and customers, incorporate the perspectives of all our stakeholders.

Aim for flawless delivery and learn from our mistakes.

Take pride in both our individual work and that of our team.

Actively contribute to the performance, development and engagement of our colleagues.

Create the environment to attract and keep the best people who share our Values.

Pioneer innovative and better ways to do things.

Protect and enhance our reputation and legacy at all times.

Find ways to positively impact all of the communities we interact with.

Value sustainable progress as much as immediate achievements.


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Two companies who do this through their ethics and compliance programmes are Barclays and Diageo (see charts below). In both cases they highlight associated

behaviours to deliver the purpose. This delivers the ’licence to operate’ they seek from society.

Ethics programmes like these need to be supported through other activities in the business and especially through its leadership.The importance of leadership should never be underestimated. The culture of an organisation is set by the tone from the top, whether that is from the board, senior management or team leaders. Leaders who talk about ethical issues to supporting staff and behave in an open and transparent way, send the message to all employees, and the wider world, that ethics is taken seriously.

Leaders lead by example. Fine words are all very well, but these need to be backed up by actions. An example in today’s environment of particular concern is executive pay. While everyone else tightens their belts, there is a feeling that there continues to be global phenomena of bloated remuneration packages.

This ‘say/do gap’ of leadership also impacts upon middle management. Top leadership espouses ethical behaviour, but fails to ensure there are sufficient systems and controls in place to support that behaviour. The result is that middle-management, tasked with delivering business goals and targets set by senior management, have little incentive, or inclination, to deliver ethically.

There is pressure on all sides for companies to perform. The demand for profits means companies need to sell more, quicker, cheaper and retain more market share. Goal setting has long been seen as an effective management technique, and one

which helps companies to measure and improve their performance. The best way for organisations to measure and report on how they are doing, both internally and externally, is to create targets and drive to meet them. However, research indicates that, although most people are basically honest, those who are set specific goals were more apt to cheat than those who were simply asked to ‘do their best’, regardless of whether there was financial encouragement.

Although employees respond well to the motivational use of targets and goals, it seems that when there is a lot at stake, for example, if a job is on the line, or a significant bonus is in jeopardy, employees are more likely to behave unethically in


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order to achieve targets. If an employee cannot speak up or challenge then more is likely to be at risk and possibly, ultimate reputation loss. Corporate scandals such as VW or Tesco come to mind.

A climate of competition can encourage staff to put their personal goals (achieving the target, beating their colleagues) above those of the company or society at large. Micromanagement by managers under pressure to meet targets can create an atmosphere of mistrust. Staff do not feel trusted, and in turn are placed under pressure to achieve ‘whatever it takes’, but at what cost? PPI is a classic example of the downside of the pressure to reach targets. A lack of empathy for stakeholders, compounded by poor systems and controls meant that those tasked with overseeing operations did not understand what was going on in the organisation. This is the kind of bonus culture which needs to change.

However, we have seen two examples of bucking the trend in 2016. Sacha Romanovitch of Grant Thornton limited her pay to 20 times the average Grant Thornton salary and Neil Woodford, the well-known investor, cancelled paying bonuses. This may be the beginning of a realignment as those paid excessive fees think twice about receiving them – there are certainly more instances of bonuses forgone if there has been any corporate failure.

There is no escaping current increasing political pressure for exemplary ethical behaviour from those running our companies and institutions. The threat is

more rules and regulations. But these will never be sufficient as they can never cover all instances of behaviour. We are dealing with human nature and hearts and minds need to be won over to ensure all in society can benefit from globalisation.

This begins with business leaders being able to articulate clearly the purpose of their organisation, its role in society and how it will behave in delivering goods and services. A clearly articulated purpose will help all those in the business begin to restore the trust which society has lost.


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PUBLISHED BY HAWKAMAH INSTITUTE FOR CORPORATE GOVERNANCE

FOREWORD - Hawkamah | Home€¦ · The Region’s Corporate Governance Journey Article by . H.E....

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