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 either 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 continues 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 greater 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.

About the Author

Mohamed Nassar is the business risk services partner at Grant Thornton UAE and has over twenty years of experience. His professional portfolio includes ten years within professional services prior to joining Grant Thornton working in Cairo, Jeddah, and Dubai. He has also worked for some of the most reputable government agencies and one of the largest oil and gas suppliers in the world. Mr Nassar specialises in a wide range of industries, such as oil and gas, hospitality, facility management, and financial services, amongst others. Mr Nassar is a US-certified professional of CIA and CCSA. He is also a registered public accountant.