Why implement more robust governance and risk management practices?
I was involved, last week, in a thought-provoking debate amongst regional experts, on the need for more robust governance and risk management practices in companies, and in particular where we are on this within the Middle East region.
The question was asked quite bluntly – why would a large, well-established and successful company in the region, whether public, private or state-owned, need to put significant effort into implementing better corporate governance practices?
It is often assumed that this question is most directly relevant for companies in the financial services sector. It is easy to see why this would be the case, as the sector’s reputation has been subject to comment, censure and increased regulation since the global financial crisis of 2008.
As you would expect, my view is that the argument for sound corporate governance systems is sector-and region-agnostic. There is a compelling business case for putting significant effort into this area, but mainly if it is driven by a fundamental belief in this business case from the top of the organization and is embedded in the company’s culture and values. I am talking here about the approach to governance, risk and compliance being at the very core of the way an organization does things, rather than it being a legislation-driven tick-the-box exercise.
In an excellent article recently published by the Center for International Enterprise (CIPE), John Sullivan and Anna Nadgrodkiewicz argue that corporate governance is becoming increasingly recognized as a key factor affecting businesses’ success in emerging markets, as well as in developed markets. The reason it is relevant across all companies and countries is that it addresses issues that are vital to a company’s performance, from board selection and decision-making, to operations and compliance. Corporate governance has traditionally been associated with large listed companies in developed markets, related to their ability to raise external capital. The bottom line is that, much more than this – and regardless of a company’s size, location or form of ownership – frameworks for efficient, transparent and accountable decision-making deliver business benefits.
Acceptance of these business benefits is becoming more widespread across the Middle East region, but many companies are stuck in determining exactly how to best implement such changes.
As we found in our recent research on Governance Practices in GCC Family Firms, at some point in the near to mid-term, many family firms are looking to hand over the reins of power to the next generation – and codifying and embedding values, rules and processes is key to preventing conflict and succession issues and ensuring a successful transition.
The linking factor that can address all these challenges is sound governance and risk management. Such practices would demonstrate a solid investment proposition, would ensure greater consistency of activities in different markets, and would provide a framework in which the interests of the business are clearly differentiated from those of the family.
I would suggest that strong leadership in a company is intrinsically linked to both business performance and sound governance practices. I see interest in the region in putting effort into making Boards more dynamic, for example, through introducing diversity and independent Board members. Amongst other things, a Board that performs is one in which Board members place the company’s interests above their own personal interests. They must also make informed decisions that responsibly account for the level of associated risk. Ethics, business conduct and managing risks are fundamental. As we have seen in much-publicised scandals, bad decision-making, lapses of judgement and conflicts, and as Warren Buffet said “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”