Corporate Governance and Organizational Culture

The last two years have seen a significant strengthening of industry regulation, across the world, aimed at bringing about greater corporate fairness and transparency in the way companies govern themselves. Last month, the US Securities and Exchange Commission (SEC) announced new rules that require the mutual fund industry to provide more details in advertisements and more timely information about fund performance – one of several measures introduced by the SEC to ensure greater disclosure. Many countries across the world have corporate governance codes drafted by their governments, and some, such as Russia, are in the process of converting their codes into a legislative act.

Legislative measures and industry regulations are certainly effective in curbing the incidence of malpractice. But are these means the real solution? The primary responsibility for good governance lies with the company itself. Corporate governance is really all about safeguarding the interests of the company’s employees and investors, and ensuring that all financial information is transparent and easily accessible. While it is the company’s key decision makers – its CEO, senior managers and board members – to ensure that these principles are put into practice.

For this to happen, senior management must feel a strong sense of commitment to act ethically and responsibly. They need to also be able to identify and establish the necessary policies, processes and structures that improve the company’s governance. These policies could range from establishing a good system of communication so that employees at all levels understand its code of ethics, giving greater powers to the audit committee to investigate financial reporting, and purchasing audit and non-audit services from separate providers.

A study conducted last year by the Economist Intelligence Unit (EIU), wherein 115 executives from a diverse range of countries and industries were surveyed on their views on corporate governance, had some very interesting results. According to 51% of respondents to the EIU survey, the largest obstacle to implementing corporate governance is cultural and managerial hostility towards whistle blowing. Thirty percent of the respondents said that the lack of financial acumen was the main reason for inadequate or improper implementation of corporate governance practices, while 21% respondents blamed technology constraints. This despite the fact that corporate governance is high on the agenda of the survey group – 32% respondents said that it was one of their company’s top three priorities, while 14% respondents said it was their top priority.

Corporate culture was viewed as an integral part of the governance mentality of a company. Instilling the appropriate corporate culture is generally the stuff of management bestsellers but the effects can be wide ranging. Once the head of an organization goes over the ethics line, others will follow. Just look at Enron where a culture of misbehavior became second nature.

Companies across the world are increasingly beginning to face up to the fact that, to implement good corporate governance, certain systems and practices need to be overhauled. This may mean that companies will need to weed out under-performing directors and “friends” of the CEO. Regular checks on the performance of senior management and board members are another way to improve corporate governance. Non-executive board members should also conduct meetings, from which executive members are excluded, to exercise “constructive dissatisfaction” with the management team. The board of directors should also hold annual meetings to assess its own performance over the last twelve months. Equally, if not more importantly, there must be systems in place to ensure full disclosure of off-balance sheet transactions and the like.

The hospitality industry, like any other, must ask itself what steps can be taken to dramatically improve corporate governance. To that end, together with Hotel Business Magazine, we are sponsoring a round table discussion at the January 2004 ALIS conference in Los Angeles, California. This forum will allow industry leaders to speak candidly and that tangible results will be forthcoming.