Top 4 Challenges of Corporate Governance

Updated: Dec 29, 2020



A tale of Governance and the elusive Enterprise!

With stories of misconduct dominating international media, one could be forgiven for believing that the Enterprise and Governance are the proverbial odd couple.


Miss Governance and Mr Enterprise

Consider these headlines


“Brazil’s carwash scandal reveals a country soaked in corruption”


“Outgoing Central Bank Governor says CLICO was ‘a massive fraud on the people’


“Fake Oil allegation turns out to be true”


"Nigeria will lose $6 billion in 'corrupt' oil deal with Shell and Eni, report claims"


 “JP Morgan Chase to pay $264 million to settle China bribe scandal”


When one wades through the stories, key elements predominate.


Greed! Sleeping guardians! Financial wreckage!


1.One group of stakeholders benefiting at the expense of others

2.Poor regulatory oversight

3.Financial and reputation damage

4.Taxpayers footing the bill


You should be concerned!


Wherever you sit, you should take an interest in such matters. When issues of mismanagement are left unchecked, it eventually trickles throughout value chains and the surrounding community. Corporate citizenship has enabled a greater connectivity between businesses and their communities. So if corruption is left unchecked, a society of no accountability and mediocrity remains.


In the case of the car wash scandal, the wreckage was significant. The aftermath was stagnant growth for the world’s 9th largest economy (Brazil). Besides a $3.5 billion corporate fine, one president was impeached and another former president jailed alongside other implicated powerful people. More than 77 company executives also agreed to plea bargains.


In Nigeria, the impact was equally alarming. In December 2018, Nigeria filed a $1.092bn lawsuit against oil companies Shell and Eni over alleged fraudulent practices and cases of corruption. Nigeria contended that Shell and Eni engaged in bribery and conspiracy against the country. They also claimed that the companies diverged billions of dollars of potential revenue from the Nigerian people.

Flawed business decisions, breaches, negligence and fraud are examples of an enterprise gone rogue! These “bad boys” indicate not only lack of control processes but a laissez faire culture either creeping in or dominating the enterprise.




What can be done to redesign Governance and the Enterprise as the perfect match?


1.     Committed Leadership


Poor Leadership often gets the results it deserves.


Sometimes it is a scandal!


When the Deep Water Horizon oil spill occurred, it was labelled the largest spill in the history of the petroleum industry. This resulted in 4.9 million barrels of oil seeping into the Gulf of Mexico. Subsequent investigations revealed problems in BP’s administration. The US presidential commission published a report pronouncing that the root cause was a failure of management. They were accused of willful misconduct, gross negligence and of having conscious disregard to known risks.


Strong Leadership serves as a beacon. It informs employees of accepted behaviours and expectations with respect to their responsibilities. Paper based Leadership with heavy reliance on a plethora of reports cannot replace true engagement. Rather than being passive, leaders should leverage their authority to be the change agent for proper management and corporate governance. When employees fall short, they should be trained and developed to address the gaps. If there is no senior buy-in or value based leadership from senior members of the organization, all ideals such as ethics, integrity and transparency wither away very quickly


2.Values based Decision making

Have you ever witnessed actions that flouted corporate values being justified on the basis of enhancing the bottom line?


According to the ASX Corporate Governance Guidelines, management must instill a desired culture that acts lawfully, ethically and in a socially responsible manner.


Well……Not everyone gets it right.


In 2017, the Paradise papers revealed that nonprofits were using offshore companies and undisclosed investments to obscure where their tax-exempt dollars were allocated. The investigation also showed evidence of nonprofits lobbying the state to increase the secrecy surrounding their investments.

What made this story sensational was the revelation that a few prominent environmental organizations were investing in oil and gas groups. One organization in particular invested $US 2 million in an oil and gas equity firm. The World Wildlife Fund, which was implicated was noted for their stance of “we must urgently reduce carbon pollution”.


The conflict here is that these organizations were behaving in a manner that contradicted their missions. On the face of it, there may be nothing wrong with nonprofit organizations participating in the equity market however the lessons learnt from this story should serve as a warning.

Stakeholder’s eyebrows WILL always raise when decisions are perceived to be at odds with the brand or values articulated to the public.


3.     Adaptive Public Engagement




Enterprises have to be in tune with the community they serve. According to Professor Mervyn King, “the essence of any business is to invite people into a relationship as investors, customers, employees or suppliers and to make such relationships more valuable”. In order to do so, companies’ policies must be informed by the problems, issues and trends that will impact their stakeholders.  Mc Donalds was an early mover in the 1990’s when it changed its packaging from plastic to paper. A move that signaled a more sustainable approach to management. Some companies are still struggling to respond to societal pressures, 20 years later. This is currently playing out with Exxon, who is seeking to block an investor proposal calling for it to set targets for lowering its greenhouse gas emissions.


Whilst Exxon views this step by their investors as an attempt to micromanage the company’ operations, one can’t help but wonder why the company didn’t see such a move coming. Global temperament on such matters has been evolving for some time. Some of its peers have already started to adapt to the expectations of the public especially as it relates to achievement of climate change mitigation goals. Total SA has adjusted its energy portfolio to be half natural gas, one third oil and the rest in low carbon electricity. Shell and BP PLC have made similar steps by acquiring electric vehicle infrastructure and clean energy companies.


When an organization becomes unresponsive to the values and expectations of the community it serves, it prompts regulators or civil society to step in to steer the organization in the desired direction. Enterprises therefore need to be seen as operating responsibly. Ignoring this can mean the loss of social license.


4. Prune Your Culture!



While most people would agree that a healthy culture is important to business success, there is often a struggle to create that environment. A road map is often missing and more fundamentally, leaders and employees fail to either identify or see themselves as part of the problem.  

Take for instance a profit chasing culture with no established boundaries nor clear articulation of unacceptable actions. This could drive certain individuals to cross the line.

To preempt such practices, pay particular attention to your culture and ensure that your recruitment and performance management processes reflect your ideal cultural values. Your values are best demonstrated in how you hire, fire, reward, promote and train.


Takeaways.


Governance and Enterprise can cohabitate but not without some ground rules.


Lead with Integrity and demonstrate commitment.


Ensure that your decisions are indicative of your values and can withstand the scrutiny of your stakeholders.


Proactively discourage unethical behavior.


AND Remember,


Financial sustainability will not exist if your culture is chomping away on your reputation for breakfast, lunch and dinner.


If you think rules are meant to be broken….brace yourself!


It could get messy…….


If this article has helped you, share it with your colleagues. Like and share your experiences in the comments below!

Insights are based on my observation &experiences as either a formulator, implementer or cheerleader...


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