The need for proper governance is perhaps the paramount lesson of the 2008 financial crisis — one the regulators worldwide are now trying to address to prevent a repeat. Ludo Van der Heyden, a corporate governance and strategy professor at INSEAD business school, gave a talk on the subject at the American University of Beirut last month, having been invited by the Rami Makhzoumi chair in corporate governance. Executive sat with Van der Heyden to talk about corporate governance in the Middle East.
Is there a correlation between solid corporate governance practices and the financial performance of a company?
More and more research shows that good governance leads to good performance, but that is not always the case. Value creation is not typically done by the board [of directors] but by executives. The board’s first job is value preservation and making sure that no irrational decision is made. In the Middle East, governance is seen as a compliance issue but governance is at the root of sustainable performance.
Shareholder activism is on the rise. Several companies are reassessing merger bids and implementing changes to satisfy shareholder demands. JP Morgan has been pressured to separate the roles of chairman and chief executive officer. Do you expect shareholders to have a more significant say in the future?
The more there is good governance, the less room there is for shareholder activism, which is a consequence of bad governance. Some shareholder activists are there to make a quick buck. A great example of [harmful] shareholder activism is when Deutsche Börse Group wanted to buy the London Stock Exchange (LSE) in 2006, and the deal was prohibited by [LSE shareholder] activists who said it would destroy value. Lord Rothschild and other English activists didn’t create value as the LSE went out of the game. Deutsche’s board was not active because the CEO did not engage them and because they did not know much about shareholder activism.
So you are saying that having an active board of directors is key for a company to create long-term value?
The biggest risk for a company is CEO succession, and it’s the board that manages that. Whenever you see a company in trouble, people say, ‘We should fire the CEO.’ But I say, ‘Maybe we should fire the board,’ because with the right board, maybe they would’ve changed the CEO before. I’m not saying the board should fire the CEO, but they should make sure the CEO performs well.
There is still no internationally adopted standard for corporate governance. Do you expect a convergence toward a universal standard?
No, because governance is an answer to a question in a [specific] context. The Lebanese context is very different than the one in Dubai, which is different than the one in Abu Dhabi. There are common principles, but every country has a different context. It would be a mistake to cut and paste. The key issue is, ‘What is the quality of the debate between the CEO and the board members?’ The mutual confrontation should be very serious and it is a complex formula to get right.
Family businesses account for a large share of companies in the Middle East. If they are not listed and have no duty to report to shareholders, how would you convince these businesses to be corporate governance compliant?
Corporate governance is about value preservation. It is the value of your money and your mother’s and children’s money. If there is one case for good governance, it’s for family firms. The first thing to do in a family business is to create a council of family shareholders and ask, ‘What is the family project? Who is going to represent us? Do we have competence in the family to appoint directors?’ Families should also ask themselves, ‘Should we be on the board?’ The answer is ‘Absolutely.’ [For the question of] ‘Only us on the board?’, the answer is ‘Absolutely not.’
What is the most significant challenge when it comes to implementing corporate governance in the Middle East?
It is director competence and understanding that maybe in the family, we are not the best directors. Family businesses dislike independence. They want people to be honest but they want to be able to trust them so they hate independence. The best practice at least is to resort to specialists that can judge the quality of directors.