Company boards are facing immense pressure to maximise value in the aftermath of Covid-19 crisis. In these times, relevance of good governance rules is felt more than ever. Niranjan Gidwani, Consultant Director and Former CEO of Eros Group Dubai talks about the need to step up corporate governance rules which are critical to ensure success of any organisation in the long run.

In recent times, Corporate governance is one topic which has received much attention throughout our region as well as the rest of the world.

Corporate governance is all about maximising shareholder value legally, ethically, and on a sustainable basis, while ensuring fairness to every stakeholder, the company’s investors, customers, employees, vendors, the government of the land, and society at large.

Longevity is the best index of the success of an organisation, and good governance is one of the most critical conditions for ensuring longevity and growth. Tom Tierney, Former Managing Partner of Bain Consultancy has very correctly remarked, “Corporate culture is what determines how people behave when they are not being watched.”

Many companies have created corporate governance cultures that talk of one value system, while their processes, structures and incentives may reflect an entirely different value system in practice. Clearly, good governance requires that companies must learn to move more and more from the reactive and compliance mode of corporate ethics to the integrity mode where the functions of the entire organisation and its leaders are completely aligned with its value systems.

All of this is possible only when leaders believe in the values of the organisation they run and walk the talk. Leaders will not be able to inculcate good governance when they themselves clearly operate in ways where conflict of interests are clearly visible. If we look around, we realise that the last few decades have progressively tarnished the image of corporate leaders like never before.

Great managers and leaders are supposed to be simplifiers. They operate on simple and easy to understand business rules. Such rules are easy to communicate and easy to follow. After all, one cannot cheat people with simple rules. It is interesting to note that, without exception, every global or family company which violated basic governance principles did so by creating a web of complex and confusing rules.

Family firms are the backbone of the global as well as UAE’s economy. They account for a significant segment of the non-oil gross domestic product and employ almost 70-80% of the workforce in the private sector. Therefore, family firms’ contribution, and existence into the future is crucial and valuable to the economy.

Like all other organisations, family businesses in the region are not immune to economic challenges, particularly such as Covid-19, which has hit us as a once in a hundred years’ experience. Interestingly, the Covid-19, dropping oil prices, political instability and turmoil, de-globalisation have all come at the same time when a lot of family organisations, particularly in the region are transitioning through the process of handing over from one generation to the next. The phase is extremely crucial. The new generation which is taking over is highly intelligent and very capable. But will need time to understand the complexities and the game-playing.

Therefore, with all the global changes, the rapid digitisation, plus the covid-19 experience, it is now even more important than ever for these family firms to survive. One way they could navigate through this crisis is to put in place a robust corporate governance structure, which is essential for business continuity and to smooth succession from one generation to the next.

Having a formal family council and protocol is essential to promote family and business welfare, as well as to organise the relationship between family members and the business. Even during external shocks like the current global pandemic, a family council creates the formality necessary to establish well-structured decisions driven by family values and vision. Impulsive and rashly thought out business calls may yield short term gains, but need to be looked at in terms of long-term continuity of businesses.

One of the most basic corporate governance mechanisms is to share the boardroom with a professional, well-diverse, ethnically balanced, non-family board of directors. Having a well-structured board of directors not only ensures better accountability, it limits the risk of managerial opportunism, and prevents conflict of interests which senior management may have with their own business. It also helps in preventing family nepotism, and yet is also useful for navigating the socioeconomic consequences of the current global pandemic.

However, less than half of surveyed family firms in the UAE, or for that matter, within the Middle East and South Asia region have such a formal board of directors.

During the current global pandemic, such a board could adjust its role to scrutinise the risks of the crisis and monitor the associated effects and future consequences on both the family and the business. As such, being caught without a board of directors during a challenging time may adversely affect family firms’ ability to foresee risks and adjust procedures and policies to mitigate the challenges ahead.

However, merely having a board of directors in place does not guarantee success, the board’s composition and structure matter to ensure competitiveness in times of crisis. A report released shows that only 22% of family firms have external members on their boards. Unfortunately, not having independent members as a part of the board of directors implies that family members and extended relatives dominate board-table discussions. Only time will tell if family members’ personal conversations are enough to overcome the new reality.

The biggest concern about this crisis is uncertainty. Unlike previous crises that were financial in nature, the current global pandemic has brought drastic changes in almost all aspects of human and corporate life and behavior. One positive impact of the global pandemic for UAE business families is that some of them have acknowledged the need to have effective corporate governance structures in place.

The UAE and the region must institute awards for good, ethical corporate behavior, and promote a corporate governance ranking system. Senior managers and leaders must be ranked not only on the basis of their performance and leadership capabilities, but also on the basis of the standards of ethics and integrity they set, and on whether they are using their positions of power to further their own businesses and wealth.

In the ultimate analysis, we are all temporary custodians of the wealth we generate, be it financial, intellectual or emotional. We have all, at some time, eaten the fruit from trees we did not plant. In the fullness of time, when it is our turn to give, we must in turn plant trees that we may never eat the fruit of. Trees which will, and should benefit future generations. This should be our sacred responsibility. And good, honest corporate governance only helps in better fulfilling this responsibility.

Sadly, lack of adequate, ethical, balanced governance structures is causing immense amount of global bleeding at the bottom line, while ownership is made to focus on the top line.

Key takeaways

• Good governance is one of the most critical conditions for ensuring longevity and growth of any organisation.
• Every global or family company which violated basic governance principles did so by creating a web of complex and confusing rules.
• Less than half of surveyed family firms in the UAE, or for that matter, within the Middle East and South Asia region have a formal board of directors.