How boards can fight corruption

In recent days, one has read various news reports on the government's crackdown on white collar crime in the UAE.

This has been long over due. I want to share some observations on areas that I think need to be carefully monitored, and the role the board can play in preventing such behaviour.

The discussion is not about what is clearly unethical or corrupt. Taking a personal cash payback from a supplier for granting an order is clearly illegal, and you don't need me to tell you that. If you do that and are found out, you go to jail.

Plain and simple. It is the other stuff that is in the grey area, or that many boards aren't informed enough to identify the problem when it starts.

The biggest area is executive compensation at the top three levels. For example stock options are new forms of compensation in Dubai. Since most board members don't fully understand the mechanics, senior management has been designing option programmes as a "get rich quickly scheme".

Foul play

Issuing themselves large amount of options with short vesting periods, and often issuing options at par or discount. Some have become multi-millionaires overnight, without generating any value to the shareholders.

For example if the par value is Dh1, and stock is at Dh4, and you issue the option at par, you have given Dh3 of free money to the employee without one iota of value being added. This also hits the profit of the company and therefore dividend.

Then it's the area of fixed & variable compensation. Fixed compensation, in some industries like real estate has reached unusual levels. The excuse is shortage of people. Not totally true. Most executives come from the financial sector, and there are plenty of them around. True some specialists are required and a premium is due but selectively.

To be blunt, an HR manager is an HR manager, no matter which industry. Recent analysis shows that senior compensation in many cases has crossed the US and some European benchmarks. This is not sustainable.

Variable compensation

Also variable compensation is being giving wildly. For example, sales incentives often has no baseline targets, and is being giving to senior management while it is meant for junior to middle executives doing the selling.

Additionally there is the 'friends and family (F&F) syndrome' in full play. In the selection of vendors, prospective employees, special deals for select customers -the list goes on.

While regulatory agencies will create stricter laws and enforcement, the first line of defence is the board. Clearly ensuring that all decisions that senior management could take where they could be conflicted must move to the boardroom. If the board is unsure of what is the right answer, unbiased advice needs to be sought. Additionally corporate governance guidelines need to be documented and implemented immediately.

If you love wearing your Ralph Lauren shirts with a horse on it, and don't want to switch to black and white jail stripes or taint your career track record by being involved in unethical decisions with your bosses, put your hand on your heart and do the right thing.

- The author is the managing director of Cedar Management Consulting International.