BOARDS CAN REDUCE CORPORATES MISBEHAVIOUR:
The recent scandals involving major corporations might have been prevented if effective corporate governance measures were being practised.
BASICALLY poor corporate governance is a poisonous pill to corporate survival. Over the last year, several large corporate scandals have come to light, such as the ones witnessed at Air Zimbabwe, Zimbabwe Power Company and the Chiadzwa diamond mines. In reviewing various similar cases, it appears that there are a number of measures corporate boards can do to help reduce the likelihood of illegal behaviour in their entities and focus on building a positive brand reputation.
The objective of good corporate gov- ernance is to promote strong, viable and competitive corporations.
Boards of directors are the stewards of the corporation and their behaviour should be focused on adding value to those assets by working with management to build a successful corporation and enhance shareholder value.
Hence it takes commitment by the board and the top management to focus on creating an ethical culture, sound strategies and an evolving assessment of the appropriate risk tolerance for the company.
The first step to an effective strong board is through adopting a sound code of conduct.
A code of conduct promotes integrity and observance of regulations in the actions of a company and is fundamental to how an organisation is governed. It prescribes the minimum standards of behaviour across the organisation and it also provides guidance on how decisions are made.
Chapter 3 of the National Code on Corporate Governance (“ZimCode principle”) Clause 85 (f), notes that the appointment of directors should be by written agreements between them and the company who should incorporate a code of conduct of directors and also set out the remuneration payable to and the terms the of the insurance cover provided for directors.
Chapter 7, principle 389 further states that compliance with laws, rules, codes and standards should be incorporated in the code of conduct of the company to entrench a compliance culture.
Employees should be encouraged to understand and as necessary implement the laws, rules codes and standards of good corporate governance.
Boards must keep close watch on the shifting nature of their role in today’s corporations and find the right balance between governance and management.
Greater responsibilities require increased commitments of time and energy, not only during board meetings but throughout the year to stay current and learn more about the industry, the company, its competitors, and its customers.
These responsibilities also raise the premium on carefully protecting the independence that makes boards valuable allies to senior executives, shareholders, and a diverse array of other stakeholders.
The board should develop measurable integrity performance indicators, reward good behaviour, and avoid creating misaligned incentives.
The process for performance evaluation of key executives must be well defined and the board must ensure that individual and collective performance is regularly and fairly reviewed against measurable and qualitative indicators.
The company’s governance and remuneration committee takes responsibility for evaluating the board’s performance. Also, the organisation should engage external consultants to periodically evaluate the performance of the board.
Principle 162 of the ZimCode recommends that the Board should promote a culture that supports enterprise and innovation which is complemented by appropriate short and long term performance related rewards that are fair and achievable.
Organisations should reward honesty rather than to merely encourage it, hence the code of ethics should put emphasis on honesty.
If the organisation’s incentive structure rewards employees who get results regardless of how they do it, some employees may use dishonest means.
Therefore, bonuses and performance reviews should be based on upstanding professional behaviour as well as results.
Once a dishonest corporate culture is established, it is very difficult to root it out.
Even honest employees will be under constant pressure to conform to the prevailing culture. One way to overcome this is by encouraging and rewarding disagreement. An honest employee in a dishonest office may try to keep quiet and mind his or her own business for some time to go along with the group.
Therefore, management should encourage employees not to always agree with their superiors or team members and stress that the organisation is open to criticisms or unpopular opinions.
This can provide an honest employee with the courage to speak up against a prevailing practice that could otherwise develop into a corporate scandal.
Organisations should engage in a continuous improvement process through educating and training board members.
Effective induction trainings should be done regularly, for example by conducting regular feedback and board evaluations with organisations such as the Zimbabwe Leadership Forum. This enables board members to challenge management with critical questions, as they will be equipped with a good understanding of the company they serve and be able to regularly compare internal performance data with those of their competitors. The board should also seek external advice to get an independent view from time to time.
Of late bribery and corruption has become endemic.
The legal department should show investors that it is possible to do business without falling prey to such customs. Local businesses need to be thoroughly briefed on the applicable anticorruption laws and sign a document in which they agree that failure to report an actual violation will result in the termination of their business license.
Organisations should also maintain a hotline for use by whistleblowers to confidentially report suspicions of wrongdoing.
Fraud will persist until boards of directors are held more accountable for their actions.
Hence companies should always try to mitigate these risks, but scandals are not entirely avoidable. In the real world, inevitable situations will rise where people act improperly.
Human nature is not going to change tomorrow, so we cannot avoid scandals, but companies through governance structures, whistle-blowing practices, setting the right tone at the top and so on, can do a good job of mitigating the risks of significant compliance issues.
The probabilities can certainly be reduced by creating and nurturing an ethical culture and sound enterprise wide risk management programs.
Organisations should engage in a continuous improvement process through educating and training board members. Effective induction trainings should be done regularly.