Corporate Governance: An absence of principles is no laughing matter

By Petros Florides

Comedian Groucho Marx famously joked “Those are my principles, and if you don't like them… well, I have others.” A principle could be understood as a fundamental truth or proposition that serves as the foundation for a system of belief, or the motivation behind the behaviour of a group or individual.
A good reputation is one of the most important assets any person, organisation or country can possess. It mostly depends on adherence to sound principles. A bad reputation can mean disaster, as Cyprus discovered to its great cost after becoming known as a haven for tax evasion and money laundering. It could be argued this was due to an absence of commonly agreed principles to provide the right motivation and guidance.
Decades of bad governance, both in the public and private sector, has left this country in crisis. The demonstrable failure of ‘the way we do things around here’ has made the need for change obvious. This provides a golden opportunity for Cyprus to develop for itself a good reputation through exemplary governance. But to be successful, a set of foundational principles based on ethical values and moral duties is required. Just as important, a way must be found to ensure those people with their hands on the levers of power adhere to these principles. This applies to both the public and private sector.
The UK Corporate Governance Code states what it considers to be the underlying principles of all good governance, viz.: accountability, transparency, probity and sustainability. Whilst the Code applies only to listed companies, it is hoped that all organizations adopt its ethos. For central government departments, the UK has issued a Code of Good Practice that builds upon seven established principles of public life: selflessness, integrity, objectivity, accountability, openness, honesty and leadership. Furthermore, the Code of Good Practice acknowledges that whilst Government departments are not profit seeking, they still need to be “business-like and operate according to recognised precepts of good governance”, described as: leadership, effectiveness, accountability and sustainability.
The King Report on Governance in South Africa states how its philosophy revolves around leadership, sustainability and corporate citizenship. It explains how good governance is characterised by the ethical values of: fairness, accountability, responsibility and transparency. Furthermore, it states how good governance is also based on moral duties that find expression in the African concept of “Ubuntu” requiring sustainable economic, social and environmental performance.
Similar to Cyprus, both the UK and South Africa have a voluntary system of corporate governance that complements legal duties and responsibilities. The advantage of a voluntary system lies in the flexibility to apply principles in a contextually appropriate way. But the effectiveness of a voluntary system depends on shareholders’ active engagement with the company when there is divergence from recommended best practice and defined standards. It is not only in Cyprus where this has failed to happen.
For example, the UK considered it necessary to introduce the Stewardship Code following the recent financial crisis to encourage institutional shareholders to fulfil their responsibilities under the voluntary system. But since the Stewardship Code is also voluntary, its effectiveness is debatable. The phenomenon of disengaged institutional investors appears to be a general problem: the 2009 King Report on Governance in South Africa states that even though more than twenty asset managers and owners signed the United Nations Principles of Responsible Investment, few are actually voting or disclosing their votes.
For companies with an active secondary market, shareholders can exit the investment to send a clear message of dissatisfaction to management, including for reasons of diverging principles. But what about companies whose shares cannot be easily exited, especially when the board does not take account of minority shareholder concerns? Furthermore, does shareholder exit provide adequate protection for other stakeholders (e.g. creditors, employees, tax payers)? What about public organisations that have no shareholders?
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 to try and answer such questions as posed above. It is also promoting the concept of a “Governance Charter” of ethics, values and principles to be reinforced by new laws if necessary. This Charter would apply to all organisations, whether public or private, that are considered systemically important, too big to fail, or of public interest.
Working together to improve the governance of our institutions through commonly agreed foundational principles is vital to our economic future and prosperity. Any organisation, institution or individuals interested in joining the initiative for a better Cyprus through better governance are invited to contact Petros Florides ([email protected] ).