COMMENT: The challenge of corporate governance

By Michael S. Olympios, Chief Consultant

Allied Business Consultants

 

Bank of Cyprus’ annual general meetings have not lacked drama. Until 2004 shareholders demanded corporate governance reforms, an exodus from past mistakes and good performance.

Since then the biggest banking organization has managed to do all that and indeed to exceed expectations several times prompting rating agencies and investment banks to reconsider their ratings higher.

This year the biggest shareholder and rival – Marfin Group – demanded that the board present shareholders with a resolution calling for both banking organizations to consider “cooperation” in certain foreign markets and join forces.

The threat of a board takeover prompted the Competition Authority to take action and ask Bank of Cyprus not to put such a resolution before shareholders. But the threat mobilized the bank to take action, with the launch of a massive campaign to mobilize shareholders to the aid of the board. Although the effort proved unnecessary after the Competition Authority’s intervention, it gave an excellent opportunity for Bank of Cyprus to flex its investor’s relations muscle which resulted in a sensational success with more than 60% of proxies in favor of the board.

The vote of confidence for the board of Bank of Cyprus sent a powerful message both to its critics and its rivals. As the Chairman of Bank of Cyprus put it, “those who wish to acquire the bank either have to put up or shut up”.

That was a clear message to the chief of Marfin Group Andreas Vgenopoulos, whose reputation in takeovers and other successful ventures sent shock waves across the Bank of Cyprus board. Ultimately, the good performance of Bank of Cyprus saved its board.

Clearly, the challenge of corporate governance is to find a way to maximize wealth creation over time, in a manner that does not impose inappropriate costs on third parties or on society as a whole. Institutional shareholders know this principle very well and they are in constant search for clues that may point to the direction in companies they invest. These investors look for companies that take governance issues seriously and acknowledge their demands.

Wealth creation can be looked at from a macro perspective (including the wealth created for employees and the community as well as investors), although doing so requires rigorous and quantitative calculations to prevent vague “stakeholder” claims.

Inappropriate costs can include agency costs imposed on investors as reflected, for example, in excessive CEO pay. They also include externalized costs imposed on society at large.

Companies that take these issues into consideration can count on investor support. Bank of Cyprus did just that.