Grant Thornton: Governance vs Corporate Governance

When we hear the term “corporate governance”, we instantaneously parallel the phrase with
rules and procedures, stock market regulations, codes, standards, compliance, etc.
Corporate governance is perceived by many publically-listed companies as a burden that
limits their freedom because of the strict reporting and operating requirements that they
believe are imposed. However, this perception is deemed by many as a misapprehension.
Governance is related to doing the “right things” in the “right way” by following a framework which
is ultimately designed to achieve the desired goals of any organisation. Governance is not only
required for publically-listed companies, but also for other companies of different types and sizes.
What all these entities have in common is their aim of maintaining ongoing and profitable operations
that meet their long term strategic goals and which ultimately satis-fy their stakeholders.

Business governance, whether for governmental, public or private organisations, eventually aims
to ensure the following:

 Business processes, either technical or supporting, are functioning in an efficient, ef -fective, and
consistent manner.

 All types of business risks are identified, monitored, and managed.

 Internal controls are in place and functioning as designed to minimise the probability of a risk
occurring.

 Owners, board of directors, and management have the appropriate tools that enable the
organization to make the right decisions in an effective manner.

So why does the GCC (Gulf Cooperation Council), specifically the UAE seem to be lenient
when it comes to corporate governance?

The majority of the business capital is held by government and wealthy families. Companies owned
by these parties tend not to have an independent board of directors, a sense of busi-ness
transparency and hence lack of information disclosure. In the GCC region, the govern -mental
institutes tend to run a bureaucratic business with many senior stakeholders, in com-parison family
owned businesses tend to have a tight knit structure. In both cases, continuing such practices may
expose their business to major unforeseen risks.

If we consider large family business groups as an example, we have observed that the sec -ond
generation have realised the risk which is of a growing concern for them. They are definite that in
order to ensure a successful business, an appropriate governance framework must be adhered to,
implemented and executed irrespective of who is leading the company. As the market dynamics
and competition changes, it is imperative to have a stringent gov-ernance framework to safeguard
the business and its assets given the number of increased internal and external risk factors.

Governance, if applied appropriately, can protect organisations against decay caused by poor
performance, financial crisis, fluctuations of market trends, and change in leadership styles.
 What does good corporate governance require from the organisation in order to support growth,
sustainability, and profitability? We believe the following is required to build an infra-structure of an
organisation based on appropriate policies and procedures:

 Enhance independence of directors who oversee the organisation’s affairs. In case of family
businesses, independent experienced, and knowledgeable individuals should be added to the
board of directors.

 In case of governmental entities, only highly competent officials should be appointed to sensitive
positions that can have the vision to direct, monitor, evaluate, and take the appropriate actions.

 Establish specialised committees to oversee certain vital activities and functions, such as: the audit
committee, investment committee, budget committee, executive committee, etc.

 Roles and responsibilities of each of the board and committee members or senior management
should be specified and formalised, agreed upon and signed by each position holder so that he/she
becomes accountable for decisions and results which establishes a base for measuring
performance.

 Develop comprehensive and integrated policies and procedures for all processes and sub -
processes to ensure consistency and standardisation of flow of operations in the most efficient and
effective manner.

 Establish a firm-wide ongoing risk management process to identify, assess, monitor, and mitigate
all types of strategic, financial, operational, informational, and reputa-tional risks.

 Encourage and support the establishment of an independent internal audit function eithe r in house
or outsourced to continuously examine and evaluate the system of internal controls and the process
of risk management.

 Develop a business continuity plan and crisis management plan to ensure the organi -sation is
protected under any scenario or circumstance.

 Develop a succession plan to avoid gaps and failures in certain functions and posi -tions.

 Develop a code of ethics to encourage certain styles of behaviour in certain situations and with
various parties.

 Develop fraud prevention policies and a whistle blowing system to define what is considered an
un-desired / illegal act and explains the related disciplinary actions.
The above are just some of the elements which need to be adopted by organisations to dis-tinguish
and establish corporate governance within the organisation. This will provide meas-urable results
which leads to business success and long term prolific success for organisa -tions. The practice of
corporate governance is embraced in Europe and the western world, whereas the GCC continu es
to make steps towards embedding these practices which will eventually promote business
efficiency and ultimately contribute towards business success.

So how do you put these practises into action?

Without getting senior stakeholder buy in, change is difficult if not impossible to implement. The
owners, directors, or senior management should realise the need for having certain management
processes, tools, and mechanisms embedded within their entities operations and aligned with the
overall operating style of the entire organisation. The return on invest-ment would be enhanced
 business sustainability, profitability, and safeguarding the business for any adverse external and
internal influences.

With anything, management philosophy and operating style are the main drivers of any or-
ganisation. However, people are known to resist change. If senior management drive the change
it is known that the engagement will be enhanced and in due course change will be embraced.

Governance cannot achieve the aimed results unless the following values are embedded in the
organisation culture and encouraged by senior management on a regular basis:

 Transparency

 Integrity

 Accountability

 Competency
The introduction and implementation of corporate governance is dependent upon manage-ment
who then filter the message down to ensure the organisation embraces the level of change
management that is required. Once done, it becomes the responsibility of each and every internal
stakeholder within the business to continue raising internal awareness on best practice methods
and specifically governance. Adopting corporate governance has a two-pronged approach, as it
enhances a company’s efficiency which results in increased profits and therefore benefits the wider
economy.

Today’s fast-paced business environment, shifting economic conditions, access to the global
marketplace, evolving information technology and increased demand for enhanced corpo -rate
governance and accountability are all contributing factors in propelling the board’s role in corporate
governance. These new demands require boards to be more involved, knowl-edgeable, and
proactive.

The need to develop, adopt, and demonstrate a high level of corporate governance is far g reater
than it has ever been, it is therefore essential to choose a partner who is knowledge -able,
constructive and independent, which coupled with senior internal stakeholder en-gagement can
drive growth for any business.

Governance
Governance is all of the processes of governing, whether undertaken by a government,
a market or a network, over a social system (family, tribe, formal or informal
organization, a territory or across territories) and whether through
the laws, norms, poweror language of an organized society.[1] It relates to "the
processes of interaction and decision-making among the actors involved in a collective
problem that lead to the creation, reinforcement, or reproduction of social norms and
institutions."[2] In lay terms, it could be described as the political processes that exist in
between formal institutions.
A variety of entities (known generically as governing bodies) can govern. The most
formal is a government, a body whose sole responsibility and authority is to make
binding decisions in a given geopolitical system (such as a state) by establishing laws.
Other types of governing include an organization (such as a corporation recognized as
a legal entity by a government), a socio-political group (chiefdom, tribe, family, religious
denomination, etc.), or another, informal group of people. In business
and outsourcingrelationships, governance frameworks are built into relational
contracts that foster long-term collaboration and innovation.
Governance is the way the rules, norms and actions are structured, sustained,
regulated and held accountable. The degree of formality depends on the internal rules of
a given organization and, externally, with its business partners. As such, governance
may take many forms, driven by many different motivations and with many different
results. For instance, a government may operate as a democracywhere citizens vote on
who should govern and the public good is the goal, while a non-profit organization may
be governed by a small board of directors and pursue more specific aims.
In addition, a variety of external actors without decision-making power can influence the
process of governing. These include lobbies, think tanks, political parties, non-
government organizations and the media.

Corporate governance
Corporate governance is the mechanisms, processes and relations by
which corporations are controlled and directed.[1]Governance structures and principles
identify the distribution of rights and responsibilities among different participants in the
corporation (such as the board of directors, managers, shareholders, creditors, auditors,
regulators, and other stakeholders) and includes the rules and procedures for making
decisions in corporate affairs.[2] Corporate governance includes the processes through
which corporations' objectives are set and pursued in the context of the social,
regulatory and market environment. Governance mechanisms include monitoring the
actions, policies, practices, and decisions of corporations, their agents, and affected
stakeholders. Corporate governance practices are affected by attempts to align the
interests of stakeholders.[3][4] Interest in the corporate governance practices of modern
corporations, particularly in relation to accountability, increased following the high-profile
collapses of a number of large corporations during 2001–2002, most of which involved
accounting fraud; and then again after the recent financial crisis in 2008.
Corporate scandals of various forms have maintained public and political interest in
the regulation of corporate governance. In the U.S., these include Enron and MCI
Inc.(formerly WorldCom). Their demise led to the enactment of the Sarbanes-Oxley Act in
2002, a U.S. federal law intended to restore public confidence in corporate governance.
Comparable failures in Australia (HIH, One.Tel) are associated with the eventual
passage of the CLERP 9 reforms.[5] Similar corporate failures in other countries
stimulated increased regulatory interest (e.g., Parmalat in Italy).
Seven Characteristics of Good Corporate Governance

To be effective, your company’s leaders must take responsibility for their decisions and the
performance of the organization as a whole. For example, the leaders of a company should design
and adhere to a code of ethics that helps management promote each of the important characteristics
of good corporate governance.

 Clear Strategy

Good corporate governance starts with a clear strategy for the organization. For example, a furniture
company’s management team might research the market to identify a profitable niche, create a
product line to meet the needs of that target market and then advertise its wares with a marketing
campaign that reaches those consumers directly. At each stage, knowing the overall strategy helps
the company’s workforce stay focused on the organizational mission: meeting the needs of the
consumers in that target market.
 Effective Risk Management

Even if your company implements smart policies, competitors might steal your customers,
unexpected disasters might cripple your operations and economy fluctuations might erode the
buying capabilities of your target market. You can’t avoid risk, so it’s vital to implement effective
strategic risk management. For example, a company’s management might decide to diversify
operations so the business can count on revenue from several different markets, rather than depend
on just one.
 Discipline

Corporate policies are only as effective as their implementation. A company’s management can
spend years developing a strategy to push into new markets, but if it can’t mobilize its workforce to
implement the strategy, the initiative will fail. Good corporate governance requires having the
discipline and commitment to implement policies, resolutions and strategies.

 Fairness

Fairness must always be a high priority for management. For example, managers must push their
employees to be their best, but they should also recognize that a heavy workload can have negative
long-term effects, such as low morale and high turnover. Companies also must be fair to their
customers, both for ethical and public-relations reasons. Treating customers unfairly, whatever the
short-term benefits, always hurts a company’s long-term prospects.
 Transparency

Managers sometimes keep their own counsel, limiting the information that filters down to employees.
But corporate transparency helps unify an organization: When employees understand
management’s strategies and are allowed to monitor the company’s financial performance, they
understand their roles within the company. Transparency is also important to the public, who tend
not to trust secretive corporations.

 Social Responsibility

Social responsibility at the corporate level is increasingly a topic of concern. Consumers expect
companies to be good community members, for example, by initiating recycling efforts and reducing
waste and pollution. Good corporate governance identifies ways to improve company practices and
also promotes social good by reinvesting in the local community.
 Self-Evaluation

Mistakes will be made, no matter how well you manage your company. The key is to perform regular
self-evaluations to identify and mitigate brewing problems. Employee and customer surveys, for
example, can supply vital feedback about the effectiveness of your current policies. Hiring outside
consultants to analyze your operations also can help identify ways to improve your company’s
efficiency and performance.