Never before has so much been said by so many on the need to have a robust corporate governance programme and for the many layers making up the local economy to be seen as implementing it. But reality suggests that too little is actually getting done about it — even now.
"It is true to expect every organisation is in breach of its corporate governance policies on a daily basis, [hence] the key is to know where and how, and repair that damage before it goes on to impact your business," said Jesdev Saggar, regional director of capital projects advisory, Deloitte Corporate Finance.
"One cannot stop external forces, and corporate governance policies for one organisation may not match another's, therefore stimulating a breach, and even though small, a breach nevertheless."
In the recent past, corporate governance and its practices were more often than not a distraction for local companies. Yes, many corporate houses did pay a lot of lip service to having an overriding ethical programme that would determine how they would conduct their business.
Quite a few even went to the extent of actually scripting an active governance programme. It more or less ended with that as recent history bears testimony.
Businesses, and by extension their promoters, had more pressing matters to work on — sizable profits to be made, expansions to sign up for, acquisitions to be made and fat bonuses to be paid to themselves. This has been clearly highlighted by the many instances of obvious — and others that are less so — breaches that have come to light during the recession and its aftermath.
Top executives have been caught with their hands in the till, and others have been chastened with revelations of using corporate funds being diverted for their other ventures, not to mention private investments.
Conflict of interest
The bluest of blue-chip local corporate houses have thus been compromised, some irreparably so. And wherever such breaches have been sighted, invariably the board of directors at these companies has been found to be wantonly remiss in overseeing their responsibilities. And therein lies another tale, more or less unique to this region.
"Many board members represent multiple organisations, stimulating conflicts of interest issues," said Saggar. "Each director is essentially putting their reputation at risk by being a member of a board, but more importantly must add value. Or else we fall into a trap of employing ‘friends and family' which do not act/serve the company effectively as a board of directors."
The irony is that laws are in place to prevent just such an overlapping of interest among members of the board vis-à-vis the company — or companies — they represent.
"What is lacking is not the law and the protection, but awareness and, consequently, proper implementation," said Sanam Singh, associate at law firm Taylor Wessing (Middle East). "Federal Law No. 8 of 1984 [the ‘Commercial Companies Law'] has provisions which limit one individual's capacity to act as a director for a number of companies. Article 98 of the Commercial Companies Law stipulates that no director, either in his personal capacity or as a representative of a corporeal body, shall be a director in more than five joint-stock companies which have their head offices within the UAE."
While some skeptics would suggest that's four too many, in an economy with a preponderance of family-owned businesses, it is a given that multiple board representations cannot be wished away. Consequently, it is much more prudent to work out solutions that would take into account such local dynamics as well.
Cap on remunerations
An expanded board of directors — with independents and experts in their fields of expertise — is being trotted out as a possible alternative under the circumstances. But with companies preferring to keep a tight cap on remunerations these days, they may be chary of footing the increased expenses that a board member would entail.
But an expanded board is an idea whose time will come. "The establishment of institutes like Hawkamah and Mudara in the DIFC educating directors on their responsibilities shows that there is a shift in awareness, and, yes, in the local context, an expanded board of directors is a workable option," said Sanam.
"This is one of those instances where what is the most appropriate board structure and composition will depend on what ought to be considered on a company-by-company basis, as one approach does not necessarily apply to all."
"The issue is not necessarily the number of directors on the board, but how efficient and involved they are and how aware they are of their responsibilities," Sanam added.
Not to put too fine a point on it, even if they are aware of such responsibilities, board members must have the mindset to exercise it. Even if it means taking a stance that is at odds with the majority opinion. How many directors are willing to do that?
"Corporate governance in this region is by far the highest item in every boardroom agenda today," said Saggar. "Everyone understands the benefit of good corporate governance, the challenge is to balance that with established local practices and the commercial realities of the region.
"For instance, should a procurement manager offer a contract to a relative if that relative is the only supplier in the region. The practical answer is ‘Yes', but it is clear that a corporate governance protocol will be breached. The answer therefore is: a practical corporate governance policy needs to be tailored for each organisation that focuses on compliance without impacting on the business."
Only the future will tell how many businesses are willing to engage in the kind of intense self-introspection this will require. But what these companies should realise is that the future as far as corporate governance is concerned begins now.