Since 2008, corporate governance has received an increasingly higher profile in global businesses. In April, a report by the Red Flag Group, a compliance consultancy, criticised the corporate governance procedures of UAE companies, suggesting that Dubai- and Abu Dhabi-listed companies were still operating to a ‘box-ticking’ model of corporate governance.
But there have been indications that this is a priority for the government; recent initiatives to develop anti-bribery and corruption legislation, as well as proposed changes to foreign company ownership, suggest recognition at the highest levels of the importance of corporate governance. This is sound policy; international trade and finance hubs such as the UAE need to command the trust and confidence of many diverse regions if they are to attract trade and investment.
Whilst globalisation has meant that companies, markets and ways of doing business have changes, contemporary thinking on corporate governance has not necessarily evolved at the same rate. Therefore the frameworks which guide how companies function are not always attuned to the environments in which they operate.
There are also pressures to harmonise systems internationally as there are diverse practices around the world. Overseas, scandals such as that over Libor in the United Kingdom mean that there are questions being asked about how companies are run, and other issues — like executive pay and the slow pace of diversity at board level — are making this an increasingly hot topic.
We therefore started a series of thought leadership papers examining what companies should be responsible for, and how they should go about fulfilling these responsibilities.
The first responsibility is to have a clear business purpose. It should be easy both to understand and explain, whether internally or externally. Every company aims to make a profit, and many to enhance shareholder value, but these on their own are not enough.
Companies that do not show respect to their customers and employers will quickly lose trust, confidence and even their workforce. Having a single, clear business purpose may prove a challenge for large conglomerates where their purpose could appear ambiguous, inconsistent, or even in conflict with aspects of their corporate identity.
Nevertheless, responsible companies must be able to explain what they are for. However, this should never be so rigidly focused that companies ignore significant changes to their working environment. All companies must be able to adapt and innovate if they wish to survive.
Socially acceptable
It is clearly important that companies behave in a socially acceptable way. However, this varies from region to region, and even from country to country. Moreover, whilst social norms set the boundaries for acceptable behaviour, they are often intuitive and far better understood than articulated.
Social norms can also change — this can happen slowly over time, or rapidly in response to a momentous event or revelation. Finally, to companies from a different culture such norms can sometimes appear unusual, perhaps even extreme. The only way that businesses can ensure they understand the acceptable mores in their environment is continuous engagement with the public, and constant monitoring of public opinion, especially as mediated though the press.
This should be a continuous activity; when the media focus on corporate behaviour it tends to happen very rapidly, meaning that companies are hard-pushed to react effectively in time to avoid criticism. Keeping a keen eye on trends and directions of opinion can help companies prepare to manage issues ahead of time.
The last thing to remember is that nearly all industries and sectors develop their own internal culture over time. However, if this means that some behaviour is seen as acceptable within the sector that may not stand up to less-informed public scrutiny then care should be taken. Organisations would do well to make the effort to consider how their working practices might look to people from the outside.
Meet legal and regulatory requirements
Needless to say, companies must meet the legal and regulatory requirements in their jurisdiction relating to issues like health and safety, employment, taxation and anti-corruption. These laws will be a matter of public record; failing to meet them will mean not only legal sanction but also reputational damage. But companies should remember that compliance is the minimum standard. To protect and manage company reputation many companies might want to go further than the bare minimum. Moreover, it will pay dividends to consider what might happen in the future.
Changing working methods takes time and is costly, so companies that anticipate change will be in a good position. As with public opinion, it is worth monitoring likely directions of travel so that organisations are not caught on the hop if the law is changed.
State how responsibilities are met
Being responsible also means being accountable. Companies should acknowledge their responsibilities in public and report on whether and how they are meeting them.
This may seem like additional work and it might appear counter-intuitive to set oneself extra objectives, but without this crucial communication, laying claim to acting responsibly will seem empty. Moreover, this sort of public engagement builds trust and enables organisations to gain a better understanding of public expectations, leading to longer-term, sustainable relationships. Moreover, it ensures that the considerable efforts put in to acting responsibly will pay off, since observers can see the business doing what it said it would.
A sound business decision
Acknowledging and fulfilling responsibilities is ultimately a business decision. It means companies are better able to identify changes to their operational environment, and to adapt and respond accordingly. It also makes it easier to avoid an ‘expectation gap’ where the public view or a company’s obligations is at odds with the internal one, which can be damaging.
Finally it mitigates against the risk of legislation being introduced, which can happen when there is a widespread view that companies are being irresponsible. Legislation is inevitably heavy-handed; it is usually a one-size-fits-all solution that fails to take into account individual circumstances, and can go further than necessary.
In the end, recognising responsibilities is a roadmap for building a sustainable business. Being open and accountable is the best way for companies to achieve public trust.
— The writer is regional director at ICAEW Middle East.
