It’s 8.15 a.m. and Dr Abou Bahlawan (he has an unfinished doctoral thesis from the University of Fun and Games, San Antonio, CA) makes his entry at Bank al Nile, Dajla wal Litani (BNDL). You see, Dr. Abou Bahlawan is the chairman and general manager and the majority shareholder of BNDL. His grandfather founded the bank 60 years earlier to provide full-time jobs for his descendants. The rest of the shareholders are former ministers, MPs, prime ministers and a former president, all of whom have been brought in at minimal cost.
These minority shareholders generally attend one board meeting every three years and take the opportunity to reminisce about the good old days. At some point, a director—whoever is in favor with the chairman at that time—is invited to brief, in less than five minutes, the effect of the external “situation” on the financial health of the bank.
Micro-managing run amok
But back to the daily grind. For the first three hours, Dr. Abou Bahlawan obsessively goes through the employee attendance sheets, checking on tellers, office boys, tea ladies and the like. He notices that one young lad has been arriving fifteen minutes late but staying on an extra hour. Dr. Abou Bahlawan is furious and scolds the culprit vigorously for forty five minutes. This puts the chairman-CEO-CFO-etc. in a bad mood and he takes out his frustration on the team of external advisors and consultants he has hired to build up internal systems and procedures by firing them before the expiration of their contract. Naturally, Dr. Abou Bahlawan is not concerned about ensuing law suits.
For the rest of the day (and the week), Dr. Abou Bahlawan fulfills very important functions. These include long working sessions with his accountant (who should be the CFO but who’s had his wings clipped in order to not pose a threat to the Chairman-CEO) to massage the financial figures and present a “nice” image to the central bank and the public. He will also do his utter best to philosophically dismiss as a “bloody nuisance” and “irrelevant” any new and decisive banking laws (e.g. Basel II). He will place family members in strategic positions. He will wine and dine the judges and lawyers representing parties filing law suits against BNDL and will accept significant cash deposits from dubious people that he calls “friends” and “allies.” He rewards handsomely all managers and directors that have been “nice” to him throughout the year and will think nothing about going on a one-day “business” trip to Venice at the bank’s expense. In essence, he makes all the decisions necessary for the running of the bank, even down to the ordering of paper clips.
Sound familiar? Although a grotesque picture of absolute no-nos in management and board memberships, our pastiche nevertheless represents almost all the basic mistakes of lousy corporate governance.
Corporate governance becoming hot topic
The corporate governance (CG) dragon is stirring. Throughout the region CG has become the latest buzz word—Hawkamah, headed by former Lebanese Economy Minister Dr. Nasser Saidi, is the region’s first organization whose sole purpose is to promote CG—and is seen as the next step in the corporate evolution ladder if regional companies are to maximize efficiency and play (and behave) on a level (and transparent) playing field with Western companies.
Regional managers, shareholders and directors are all aware that good CG is the key for developing a successful business characterized by financial performance and where everybody is protected, respected and motivated. However, the majority of institutions are still not truly aware of the importance of CG and what it means. There is an endemic lack of ability and capacity to implement and enforce proper CG regulations, and there is little willingness from family or single individual owners of businesses (the vast majority of Lebanon’s private sector is family- or individual-owned and run) to go into the CG route. They regard it to be a threat to their dominance and fear the more staff and management become aware of their rights and of the need of better governance, the more uncomfortable family and single individual owners will feel, as their managerial weaknesses are gradually exposed.
The key elements of good CG principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect and commitment to the cause. The most commonly accepted principles of CG include respecting the rights of shareholders and helping these shareholders exercise those rights. Although this aspect of CG is a hotter issue in developed markets, it is worth the consideration of some of the larger Lebanese institutions, such as Solidere; the larger banks, which are all listed companies and have a diversified shareholder base; and some of the larger family companies, which have many family members as shareholders. The main right of shareholders is to have the management (when it is not comprised of family members or of some shareholders themselves) communicate information that is understandable and accessible and encourage shareholders to participate in general meetings.
Companies should realize that they have legal obligations towards all corporate participants—managers, employees, directors, shareholders, external consultants, and so on. In Lebanon and other countries in the Arab world, many people are employed on a contract with a fixed duration. It is not unusual to see employers terminating these contracts for no obvious reasons prior to their end date with no compensation. In this case, the firm is failing on its CG.
The board should have de facto a range of skills and capabilities to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. This means that there must be a balance between non-executive and executive directors and that the CEO (or general manager, as he is often called) and the Chairman should not be the same person, particularly in banks. Furthermore, the board should have a clue as to how the business of the company should be run. Too often they involve family members who barely challenge their senior managers, either because the same senior managers are other family members, or because they have been politically appointed.
Organizations must develop a code of conduct for their directors, executives and employees. Rare are those companies that make their staff sign a document on a code of conduct at the time of recruitment. When these documents exist, they are generally not read and after a while are not respected. In other words, there is no proper CG that dictates staff, at senior and junior level, behave professionally and efficiently—a tall order for some private sector firms and virtually impossible for the dinosaur-like public sector, especially in countries like Lebanon.
Disclosure and transparency are desperately needed
Last but not least is the hot subject of disclosure and transparency. In principle, all organizations should clarify and make publicly known the roles and responsibilities of the board and the management to provide shareholders with a level of accountability. Independent procedures to verify and safeguard the integrity of the company’s financial reporting should also be implemented. The disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors and the public (in some cases) have access to clear, factual information. In Lebanon, disclosure and transparency is virtually non-existent in the corporate sector, with the exception of the few listed companies on the Beirut Stock Exchange. The banking sector is the most transparent, although the level of accountability of the board and the management is relatively low. Some senior managers are employed for life, no matter how many mistakes they make, and have a tendency to cloud their activities to such an extent that it is very difficult to hire experienced newcomers. This behavior has contributed and still contributes to the departure of young professionals to greener pastures, and prevents the return of many experienced and highly skilled Lebanese.
Other issues of CG include the oversight of the preparation of a company’s financial statements, internal controls and the independence of the company’s auditors, a review of compensation arrangements for the CEO and other senior executives and the procedure through which individuals are nominated for board positions. Then there is the issue of what resources are available to directors in carrying out their duties (a problem transformed into art form in Lebanon), oversight and management of risk (non-existent except in some banks that are trying to adopt Basel II) and dividend policy (a case of the sky’s the limit if shareholders and senior management are the same persons and to hell with organic growth).
So what are the benefits? Good CG contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital. Improved governance structures and processes help ensure quality decision-making, encourage effective succession planning for senior management and enhance the long-term prosperity of any company and its sources of funding. Well-governed companies also receive higher market valuations, particularly in emerging markets such as Lebanon, where companies are assessed principally by the experience and quality of their management, board and core shareholders. Improving corporate governance should improve capital flows to companies in countries such as Lebanon from domestic and global capital, equity and debt, and from public securities markets and private capital sources. A company that is seeking to expand internationally or regionally cannot achieve sustainable, recurrent earnings, assets and capital growth without the trust of the markets, be they international, regional or local. Only good and consistent governance can help build such trust.
The key is to try to gradually change the behavior of corporate fat cats over time. For the moment, shareholders and senior directors are gauging each other to see who is going to go the CG route first. What most concerned people in Lebanon still do not understand is that good governance implies corporate performance. With proper CG, companies and banks can enter the globalization process with comfort and confidence, can become more competitive, can attract investors, and above all boost productivity, as staff become more motivated.
What, then, must be done?
Most urgent in the region is the need to separate the roles of chairman, general manager (or CEO) and the board of directors. This holds true in banks and corporations and is not going to be achieved in the near future, as long as ownership is not institutionalized. Another task is to set up supervision, reporting and management information systems, and with more stringent internal audit and compliance controls and functions. While this has been carried out, more or less, within the larger segment of the banking sector, it remains a weak spot for most other companies. A third objective is to increase awareness among shareholders and senior management that human capital is key for the long-term financial and qualitative performance of an organization. Training is an absolute necessity, and while little is being spent by companies on training and professional courses, the regulators must make an effort to push for these aspects to be reinforced.
It is also vital is for board members to meet on a regular basis and to participate in setting up business plans and strategies for their organization. Involving as many competent managers as possible is also more important, as many board members are usually members of the same family and make their decisions alone. There is little dilution of decision-making in the region; and despite efforts by some banks to tackle this issue, the problem is still far from being sorted.
While recruitment strategies have to be changed, and staff (at all levels) must be chosen according to ability and what they can bring to the board and the company, creativity and innovation are also aspects that can clearly benefit from good CG. Regional firms in Lebanon must create an atmosphere that is conducive to creativity and innovation, by setting up reward schemes and proper staff quality assessment systems. In the latter’s absence, motivation can hardly be developed and the willingness to perform will dwindle over time. The absence of a long-term vision in most family and single-individual owned companies—and the existing lack of decision-dilution and sharing—can kill off creativity among all staff. And people wonder why there is a youth and brain drain, even in times of relative economic and political stability!
