By Michael S. Olympios
Chief Consultant
Allied Business Consultants
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As annual reports cue to the printing houses investors and analysts await to read them. Not because they want to read the audit report – they have already read it – but because they want to see how companies are responding to the new corporate governance standards recently adopted by the Cyprus Stock Exchange.
Investors and analyst want to see how companies resolve agency problems and how they address important challenges such as serving simultaneously the interests of shareholders and managers. While improvements are more likely to be appear and investors will certainly welcome them, they are not likely to go very far.
By reducing the critically important issue of corporate governance to what amounts to a box-checking exercise, corporate directors and senior executives are addressing the symptoms, not the root cause, of the governance crisis. Our experience in advising boards and CEO’s as well as analysing corporate governance reports from public companies in Cyprus and elsewhere leads us to one conclusion; that effective governance begins from inside the boardroom and its embedded among the directors. It involves the implementation of best practices in a manner that addresses the real corporate governance issues of the company in the spirit and not just letter of the code.
But qualitative reforms to the behaviours, relationships, and objectives of the directors and the CEO are meaningless unless they are subjected to the “hard†mechanisms of performance criteria, processes, and measurements. This combination of soft and hard solutions can turn governance from a vague concept into a means to deliver organizational resilience, robustness, and continuously improved corporate performance.
What distinguishes superior performance among boards is the “qualitative†reforms that companies put in place between the structural boxes and the lines of legislative mandate. With tens of thousands of publicly traded companies around the world, the recipe for reforming the soft side of governance will need to be adjusted to the specific circumstances of an individual company.
Still, although governance regulations and management culture differ from firm to firm, our experience tells us that the following best practices can and should be the following:
– Select the right directors,
– Train them continuously,
– Give them the right information,
– Balance the power of the CEO and directors,
– Nurture a culture of collegial questioning,
– Gain from directors an adequate commitment of time,
– Measure and improve.
Although many of these principles may seem self-evident, in our experience, they too frequently are more honored in the breach. Too often, firms assume that “soft†reforms cannot be assessed, or even implemented, rigorously. But if a company aims to serve shareholders’ interests better and adapt to the rigors of an increasingly competitive global economy with integrated financial markets it must address board culture and behavior through a systematic and solution-oriented approach.
Of course, the measure of success in making boards accountable is not the removal of underperforming directors. Ideally, boards should put in place performance measures and evaluations that provide the group and individual directors the opportunity to correct course before real damage is done.
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