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Corporate Governance: Cyprus’ Disastrous Experiment
By Petros Florides
Cyprus has found itself on the brink of economic collapse due mainly to decades of bad governance in both the public and private sectors. But this did not happen in a void.
Only as recently as 2004, Cyprus satisfied the European Union’s demanding conditions of membership known as the ‘Copenhagen Criteria’. These include, inter alia: stable institutions guaranteeing democracy, the rule of law, a functioning market economy, the capacity to cope with competition and market forces in the EU, the ability to take on and implement effectively the obligations of membership, and adherence to the aims of political, economic and monetary union.
Cyprus has also adopted the United Kingdom’s voluntary “comply or explain” system of corporate governance, in line with most of the European Union. Furthermore, Cyprus law related to directors duties and obligations is more or less aligned with the United Kingdom prior to it passing the Companies Act 2006. On top of this, Cypriots tend to be well educated with many being members of professional bodies or associations that have their own demanding professional standards and code of ethics. On the face of it, therefore, everything was in place for good governance to prevail.
So, how did it go so wrong?
Cyprus has enjoyed uninterrupted economic growth since in the 1980’s until the recent financial crises. As our economic fortunes steadily improved, we slowly turned our backs on the ethics and values that sustained our forbearers with dignity through the hardships of yesteryear. A reputation for honesty, integrity and reliability became subject to economic expediency. Like many other nations during this time, we lost our moral compass as the economic party was in full swing. Just a few examples are how we gained a reputation for money laundering and tax evasion, and how our literal double-dealing has left the Cyprus property market an investment option reserved only for the brave or foolish.
But as long as we continued to enjoy ever increasing economic benefits, we didn’t see a need to take stock of our methods. From once having a justified reputation for prudence and stability through conservative practices, Cyprus’ banking industry is now a case study in recklessness and incompetence. For years, the international economic community was urging Cyprus to live within its means and remedy the State’s growing financial incontinence to restore productivity and long term solvency. Instead, we relied on populism and tribalism to defend our largesse, motivated purely by short term self-interest and cowardice. As more of us gained employment in the public or banking sectors, we lost any desire to hold these industries accountable for inefficient and unsustainable policies and practices.
Directly or indirectly, we all became part of the dysfunctional and self-serving system. This allowed the formation of a psychological environment that encouraged a “What can we get away with?” attitude to become entrenched in our collective psyche. Whilst form and structure related to governance was adopted, it was done with little genuine commitment to the underlying principles of good governance including: transparency, accountability, probity and sustainability. Governance was tolerated only to satisfy the demands of the international community, with the threshold set at the lowest level acceptable. In the worst cases, weak governance was exploited to legitimize reckless behavior.
Cyprus’ experiment with implementing governance based purely on form, with virtually no substance, has proven to be a disaster. As everybody was aware and tolerated this charade, a collective mea culpa is in order for everybody to work together now that we have come to realize the folly of our ways. This should also spur the right motivation to base our recovery on exemplary governance and earn a reputation for high standards and integrity. In this way, confidence in our country and economy can be restored. This is the only way to attract the long term investment required to achieve sustainable economic development and rising living standards we all desire. It will also encourage an environment for a more efficient and effective public sector in support of the country’s revival.
A wide cross section of professional bodies, academia, civil society and individuals are collaborating on a new “New Governance for a New Cyprus” initiative. This will include promoting the concept of a “Governance Charter” of ethics, values and principles reinforced by new laws if necessary for all systemically important, too big to fail, or public interest entities. A holistic approach to good governance is also being advocated, with each stakeholder group exercising their rights and responsibilities to collectively contribute to a comprehensive and robust governance process.
Any organization, institution or individuals interested in joining the initiative for a better Cyprus through better governance are invited to contact Petros Florides ([email protected] ).
The views in this article represent those of the author and not any other individual or organization.
Petros Florides is Regional Governance Advisor for World Vision International, and Executive Officer of World Vision Cyprus. Petros 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.
