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By Petros Florides
Despite the growing influence of international investors demanding greater harmonisation of standards, “corporate governance” can still mean different things to different people. The continued use of a product or practice is based on history, culture and experience. A look at just a few countries demonstrates this is true of corporate governance as well, and Cyprus is no exception.
In the United States, a culture of individualism combined with entrepreneurialism encourages the phenomenon of the “Rock Star CEO” pursuing maximisation of shareholder wealth. Since the American Civil War, Federal Law does not intrude into areas considered more appropriate for individual States to determine. One consequence for corporate governance is legal limitations on shareholders’ control over the actions of executive management that differ between States. Federal Law relating to the financial services environment is often developed in response to a national crisis: the Financial Securities Act and Financial Securities Exchange Act followed the Wall Street crash in 1929, the Sarbanes-Oxley Act followed major corporate and accounting scandals in the early 2000s, and the Dodd-Frank Act followed the 2007 financial crisis. A legalistic “rules-based” system, based on a “comply or else” approach, has come to characterise corporate governance in the U.S. Companies listed on the New York Stock Exchange, for example, must comply with its corporate governance rules or face severe consequences.
The United Kingdom’s response to multiple corporate and accounting scandals in the early part of the 1990s was for the financial services industry to make recommendations on self–regulation. This was influenced by the culture dominating the City of London prior to deregulation, with its reliance on personal reputation and honour (“my word is my bond”). A “voluntary” system based on a “comply or explain” approach for implementing a Code of Corporate Governance was introduced for listed companies. This has since been replicated around much of the world. One interesting subsequent development was Section 172 of the Companies Act 2006. Apart from shareholders, this recognised a variety of stakeholders to whom the directors must now pay regard when promoting the long term success of the company. Referred to as the “enlightened shareholder” model, corporate social responsibility is now recognised as beneficial to the shareholders’ own longer term interests.
South Africa has gone further, adopting the “stakeholder inclusive” model as an antidote to its tragic history of apartheid. This reflects the African concept of “Ubuntu”, captured in the expression “I am because you are. You are because we are.” Consequently, directors need to consider, on a case by case basis, the legitimate interests and expectations of all stakeholders on the basis that this is in the best interests of the company, i.e. not merely as a means to serving the interest of shareholders, who have no special status in this model. South Africa has also enhanced the “voluntary system” with an “apply or explain” approach. This is intended to encourage more qualitative engagement by directors and deter a compliance-induced box-ticking mentality. Importantly, the Code of Governance Principles applies to all entities – regardless of the manner and form of incorporation or establishment – and whether in public, private or non-profit sectors.
So, what about Cyprus? Strongly influenced by our history as a colony, Cyprus Law on directors’ duties and responsibilities is more or less aligned with the United Kingdom prior to the Companies Act 2006. Cyprus has also adopted the voluntary “comply or explain” approach for companies listed on the main market of the Cyprus Stock Exchange. Unfortunately, this proved totally inadequate against the culture of imprudence, recklessness, deference, poor supervision, personal and political relations, cliques and unnecessary delay described by the recent interim report issued by the Independent Commission on the Future of the Cyprus Banking Sector.
So, what will be the response of Cypriots to this massive failure of corporate governance? Do we adopt a fatalistic attitude that nothing can be done? Or, do we ‘come of age’ and use this crisis to determine a new path, based on exemplary governance that also deals effectively with our cultural idiosyncrasies?
A wide cross section of professional bodies, academia, civil society and individuals are collaborating on a new initiative under the working title “New Governance for a New Cyprus”. This will include convening the first ever Cyprus Governance Forum later this year, whilst also promoting the concept of a “Governance Charter” of ethics, values and principles reinforced by new laws.
Any organisation, institution or individual interested to join the initiative for a better Cyprus through better governance are invited to contact [email protected] .
The views in this article represent those of the author and not any other individual or organisation.
Petros Florides is Regional Governance Advisor for World Vision International, and Executive Officer of World Vision Cyprus. He is also on the board of Institute of Directors (Cyprus), co-founder of the Cyprus National Advisory Council for the Chartered Institute for Securities & Investments, co-founder of the Institute of Risk Management Cyprus Regional Group, and a Chartered Management Accountant.
