Companies’ culture a key consideration in adopting corporate governance practices

Companies and organisations across the globe are enthusiastically riding the wave of adopting and enacting good-governance practices. But following best practices is arduous and costly and might not be the right approach for every organisation.

Unfortunately, not all companies which embark on the governance journey really understand and appreciate its inherent value-added benefit to the organisation and its stakeholders. Strange as it may sound, some companies adopt the best practices for corporate governance principally to impress their stakeholders. Such actions might be essentially attributed to the board’s desire to gratify stakeholders, with complete disregard to their organisation’s cultural capacity to support and execute such critical initiatives.

Upon the implementation of extravagant and perhaps even unattainable governance schemes, any victory celebration is doomed to be short-lived. A few years down the line, frustration will set in and many will eventually begin to question the effectiveness of their governance programme. When the dust clears, the company will most likely be left with a perfectly drafted code of governance that is out of touch with its culture.

More often than not, companies tend to stretch their governance codes and programmes beyond what is acceptable by their organisations’ culture. They tighten the knot beyond their organisation’s tolerance level, rendering the governance programme inapplicable within the organisation.

The alternative course of action that should have been taken by the board is to assess how much and how far will the company stomach and perhaps embrace broad governance objectives such as transparency, accountability, fairness and responsibility? For example, the board has to carefully deliberate over what transparency means to their particular organisation. How transparent should the company be? What information should be disclosed publicly? In addition to that, the board needs to clearly articulate what sort of internal controls and risk management schemes the organisation is willing to adopt.

Other strategic factors that should be considered are whether the organisation has the right tools, robust policies and skilled staff to shore up and maintain the desired level of governance. The implementation of a robust governance framework entails a hefty investment, particularly in the form of staffing for various specialised functions including risk management, audit, and compliance. The organisation’s governance appetite determines to a large extent the breadth and depth of the required staffing, given the desired governance level accepted and approved by the board of directors.

One can easily spot signs of breakdowns in corporate culture and its intolerance and lack of support for corporate governance in almost every major corporate scandal that was recorded in recent times. Take for example Andrew Fastow, who as the chief financial officer of Enron, was the architect of one of the biggest corporate frauds in history. While he was cooking the books, the board was signing off on his schemes, knowing that something was seriously wrong but did not bother questioning him. Such entrenched culture, which is highly characterised by irresponsibility and unethical practices, brought down a company that was the seventh largest corporation in America in 2001.

Toshiba was recently ripped by a scandal involving accounting malpractice – a “deliberate” and “systematic” attempt to inflate profits (¥152 billion (Dh4.7bn) over a seven-year period dating back to 2008). A report issued by an external panel of lawyers and accountants described “a culture [at Toshiba] in which staff were afraid to speak up against bosses”.

In the United States, Volkswagen’s cheating in pollution emissions tests is the latest corporate scandal to rock the business world. Basically, VW installed devices in diesel engines that could detect when they were being tested, changing the performance accordingly to improve results. Consequently, about 11 million cars will be recalled in the US and other markets. Once again, corporate culture appears to be at fault. Either someone at the top knew about the installation of the “defeat devices” – and if they didn’t know about it – or they clearly should have.

Fause Ersheid is senior corporate governance analyst and researcher at the Abu Dhabi Center for Corporate Governance.

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