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How Corporate Governance Can Help Finance Directors Build Sustainable Success Worldwide

November 28, 2011

We all have tales of doing business in emerging markets.  Nominal adoption or adherence to ‘western’ business etiquette, and sometimes scant regard to corporate governance, has always been a business and emotional challenge to many executives.

Especially challenged are finance and legal executives, who wake up daily to an ever-expanding rule book, and often feel they are turning a blind eye to working with organisations in countries whose rule book seems a lot shorter than ours.

In fact, sometimes countries seem only to have one rule; there are no rules!  Can we really expect emerging economies to follow our exacting standards?

We have undertaken corporate business in the west for hundreds of years, with good solid regulation.  Without being too condescending, we surely have to give these more immature businesses time to catch up.  It’s only fair to nod the odd transgression through; rules aren’t there to be broken, but the odd little bend here and there, you know how it is.

Well, think again.  Yes, finance directors must be able to see the cultural differences when doing business in emerging markets, but they cannot ignore that good business practice is an international currency, and that bending a rule is breaking a rule, irrespective how complex or flexible some corporate governance systems may seem.  BP probably rues its venture into Russia, even though it broke no rules itself.

Doing business in many of these economies may feel like riding a rather spirited horse.  However, many former flagship western corporations, whose executives acted as if the rules were a challenge set down by regulators to be circumvented, are not now topping the stock markets, but are instead business school case studies of how to kill a company;  BCCI, Enron, WorldCom, Tyco and Lehman Brothers, to name but a few.

These spectacular corporate meltdowns occurred because good business sense ended when producing strong, short term results took precedence over building a long term sustainable business and balance sheet.

The Enron story presents the ultimate test to any company’s finance director.  Does he question the litany of off balance sheet transactions and the clear manipulation of company revenues and debts, or does he look good on the quarterly earnings call in front of the rest of the board?

Perhaps everybody involved in Enron thought they were doing what was best for the company and its shareholders, bending the accounting rules and being less than transparent made the stock price rise quarter on quarter.

However, when the music stopped, the whole thing came crashing down in spectacular style on one of those famous quarterly calls, as happened recently at Circuit City.  So, finance directors must be able to work with a myriad of cultural governance approaches.

Not every country in the world is governed by our standards, nor have its directors been educated in British business schools, but cultural understanding doesn’t mean undermining corporate governance values.

Companies such as Infosys in India are models of corporate governance and are sustainably successful.  If you can master the interpretation of how different countries do business while maintaining the highest possible business governance standards, you will build market premium over balance sheet NAV and create a sustainable company reputation amongst stakeholders worldwide.

Written by Adrian Davies, Director at SAMI Consulting and author of ‘The Globalisation of Corporate Governance: The Challenge of Clashing Cultures’.  

Published by Financial Director magazine, 4th November 2011, Click here to view full article

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