the hawkamah · The Hawkamah Journal issue01 2014_v2.indd 4 4/21/14 11:50 AM Stephen Davis, Ph.D. ,...

issue01/2014

thehawkamahjournal

a journal on corporate governance & leadership

The Governance Journeyof a Family BusinessAn Interview with Fouad Makhzoumi,Chairman of Future Pipepages 06-12

pages 13-17

pages 51-56

A Family Business in the Second GenerationInterview with Vishal & Rajiv Mehta,Co-CEOs of Dimexon

Highlights from theHawkamah Annual ConferenceArticle by Peter Montagnon

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FOREWORDFamily businesses form the backbone of national economies worldwide. It is estimated that collectively they generate between 70 and 90 percent of global GDP. They often outperform their non-family counterparts as family values, loyalty, pride, cohesiveness, and meaning provide sustenance not available to other enterprises. But family businesses also face a unique set of management challenges stemming from the overlap of family and business issues. And these family governance challenges have a direct bearing on their survival rates: Only about 30% of family and businesses survive into the second generation, 12% are still viable into the third generation, and only about 3% of all family businesses operate into the fourth generation or beyond.

The challenges within family businesses are well known and usually predictable. It is therefore surprising that family businesses often pay insufficient attention to family governance.

The theme of this issue of the Hawkamah Journal is “governance in family-owned enterprises”. It focuses on the steps that family business leaders can take to avoid becoming caught up in the common pitfalls, while recognizing the solutions need to be individually formulated by each family business in order to fit their specific circumstances. We are privileged to feature two family businesses in this issue sharing their experiences of their governance journeys.

We are also privileged to introduce the Editorial Board of the Hawkamah Journal. The purpose of the Editorial Board is to support the development of the Journal as a source of high quality information for governance practitioners. The esteemed members of the Boards reflect the diversity of the profession, the geographical spread of the readership, and the practice areas of Hawkamah Institute for Corporate Governance.

I wish you a thought-provoking read.

H.E. Hamad BuamimChairman

Hawkamah, The Institute of Corporate Governance

The Hawkamah Journal issue01 2014_v2.indd 1 4/21/14 11:50 AM

EDITORIAL TEAMAlec Aaltonen

Saeed Bin Shabib

EDITORIAL BOARDPeter Montagnon

Hanan AhmedStephen Davis, Ph.D.

Alec AaltonenGrant Kirkpatrick, Ph.D.

Saeed Bin Shabib

HAWKAMAHTHE INSTITUTE FOR CORPORATE GOVERNANCE

LEVEL 14, THE GATE BUILDINGDUBAI INTERNATIONAL FINANCIAL CENTRE

P.O. BOX 506767DUBAI, UNITED ARAB EMIRATES

TEL: +971 4 362 2551FAX: +971 4 362 2475

EMAIL: [email protected]


TABLE OF CONTENTSTHE EDITORIAL BOARD

INTRODUCING THE HAWKAMAH JOURNAL EDITORIAL BOARDPAGE 04 - 05

THE GOVERNANCE JOURNY OF A FAMILY BUSINESSINTERVIEW WITH FOUAD MAKHZOUMI, CHAIRMAN OF FUTURE PIPES

PAGE 06 - 12

A FAMILY BUSINESS IN THE SECOND GENERATIONINTERVIEW WITH VISHAL AND RAJIV MEHTA, CO-CEOS OF DIMEXON

PAGE 13 - 17

INDEPENDENT DIRECTORS IN FAMILY BUSINESSESARTICLE BY MOSTAFA HUNTER

PAGE 18 - 21

INTERNALIZING CORPORATE GOVERNANCE IN FAMILY BUSINESSESARTICLE BY STEFAN S. HANDOYO

PAGE 22 - 26

COMPANY SECRETARIESADDING VALUE TO ORGANISATIONS

ARTICLE BY ALISON DILLON KIBIRIGEPAGE 27 - 30

THE LEADERSHIP SHOCK OF GOVERNANCEARTICLE BY NICOLAI TILLISCH

PAGE 32 - 35

EMOTIONAL INTELLIGENCE (EQ) AND BOARD PERFORMANCEARTICLE BY BRENDA BOWMAN

PAGE 36 - 39

RESTRUCTURING ARAB STOCK EXCHANGEIMPLICATIONS ON GOVERNANCE

ARTICLE BY ALISSA AMICOPAGE 40 - 43

GET READY FOR MORE INVESTOR SCRUTINYON ENVIRONMENT, SOCIAL AND GOVERNANCE ISSUES

ARTICLE BY STEPHEN DAVIS, PH.D AND JON LUKOMNIKPAGE 44 - 45

CLIMBING THE LEADERSHIP LADDERTHE OTHER SIDE OF GOVERNANCE

SPEECH BY SHEIKH HUSSEIN A. AL BANAWIPAGE 47 - 49

THE 7TH MIDDLE EAST AND NORTH AFRICA CORPORATE GOVERNANCE CONFERENCE

PAGE 51 - 56

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THE EDITORIAL BOARDPeter Montagnon, Chairman, The Hawkamah Journal.Peter is the Associate Director at the Institute of Business Ethics. Prior to this he was Senior Investment Adviser at the Financial Reporting Council, with responsibility for addressing corporate governance policy and strengthening the FRC’s understanding of the investor community.

Peter was a Senior Journalist on the Financial Times for twenty years, before becoming Director of Investment Affairs at the Association of British Insurers. After graduating in Modern Languages from Cambridge University in 1972, Mr Montagnon joined Reuters news agency as a financial journalist, completing assignments in Hong Kong, Zurich and Washington before joining the Financial Times.

Mr Montagnon has served on the European Commission’s Corporate Governance Forum since 2005. He is a visiting Professor in Corporate Governance at the Cass Business School of the City University, London, and a member of the Corporate Governance Advisory Board of Norges Bank Investment Management. He is past Chairman of the Board of the International Corporate Governance Network.

Hanan Ahmad, Editorial Board Member, The Hawkamah Journal.Hanan’s extensive résumé boasts several years of professional experience including a stint at Dubai Group from 2006-2010, where she held the positions of Assistant Manager followed by Marketing executive and Compliance Manager. It was in April 2010 that Ahmad first joined du as Corporate Governance & Board Relations Manager, a role which entailed reviewing matters of corporate governance and managing the Audit and Investment Committee of the Board. Her key achievements include launching a fully-fledged corporate governance section on the company’s website; ensuring the progress of governance; initiating a Board of Directors workshop; establishing an electronic platform for Share Dealing; and introducing new policies such as the Board of Directors Performance Evaluation, and the Disclosure Policy.

Since her debut at du, Ahmad has made a hefty contribution to the company’s fast-growing development, playing a pivotal role in helping it carve a market leader position. It was precisely Ahmad’s vital efforts in improving du’s corporate social responsibility which helped place the company at #1 in renowned United States-based Standard & Poor (S&P)’s 2012 Hawkamah Pan Arab ESG Index. Having gained peer and industry recognition for her efforts throughout the years, Ahmad was appointed as du Company Secretary in April 2012 by the Chairman of the Board of Directors.

Alec Aaltonen, Editorial Board Member, The Hawkamah Journal.Alec is an Associate Director at Hawkamah Institute for Corporate Governance. He has worked extensively in corporate governance across the Middle East and North Africa region, assisting governments, regulators and companies in their efforts to improve their corporate governance frameworks and practices. He is the author of several corporate governance-related studies, publications and handbooks. He is the developer of the Dubai SME Corporate Governance Code and he manages the S&P/Hawkamah Pan Arab ESG Index. Alec is also a licensed trainer of the Director development programs at Mudara Institute of Directors. Prior to joining Hawkamah, he worked for HSBC Global Asset Management and a corporate governance consultancy in London. He holds Bachelors and Masters degrees in International Relations, a Graduate Diploma in Law and a Master’s degree in International Commercial Law.

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Stephen Davis, Ph.D., Editorial Board Member, The Hawkamah Journal.Stephen is a senior fellow and associate director of the Harvard Law School Programs on Corporate Governance and Institutional Investors. He is also a nonresident senior fellow at the Brookings Institution, where he co-directs the World Forum on Governance, and a senior advisor at Teneo. From 2007-2012 he was executive director of the Yale School of Management’s Millstein Center for Corporate Governance and Performance and Lecturer on the SOM faculty. US SEC Chair Mary Schapiro named Davis to the Investor Advisory Committee, and as chair of its Investor as Owner subcommittee. He is a board member of Hermes EOS, the shareowner engagement arm of Hermes Fund Managers, and Trustee of ShareAction, the NGO focused on institutional investor accountability. Winner of the 2011 ICGN Award for Excellence in Corporate Governance, Davis co-authored The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda (Harvard Business School Press, 2006). Davis was a founder of the UN Principles for Responsible Investment, Chairmens Forums in North America and South Africa, the Conference of Fund Leaders, the (US) Systemic Risk Council, GMI Ratings and Global Proxy Watch newsletter. He earned his doctorate at the Fletcher School of Law and Diplomacy, Tufts University, and completed undergraduate studies at Tufts and the London School of Economics. Other books include Apartheid’s Rebels: Inside South Africa’s Hidden War (Yale University Press, 1987), which was nominated for a Pulitzer Prize.

Grant Kirkpatrick, Ph.D., Editorial Board Member, The Hawkamah Journal.Grant is a professional economist with 25 years’ experience in the OECD, academic research institutes in Germany, universities in UK and Australia and in chartered accountants practice, undertaking audits of public companies and management work. He supervised the OECD report on the Mexican state oil company PEMEX. This report also covered the important subsidiaries of the company as well as relations with the Ministries. Dr. Grant has worked closely with the International Corporate Governance Network in training investment analysts covering ESG issues of UK Listed Companies, which was a highly company specific assignment.

Dr. Kirkpatrick has experience of working on analysing economic problems in Papua New Guinea, Eastern European economies, Romania, Poland, in G20 countries such as India, Russia and Indonesia as well as in Japan and Germany. He was previously the Deputy Head of the Corporate Affairs Division of the OECD’s Directorate for Financial and Enterprise Affairs where he was responsible for overseeing the review of the Principles of Corporate Governance in 2004. He was also responsible for development of the Methodology to assess the implementation status of the Principles and was a member of the Basel Committee’s Corporate Governance Task Force to revise its Core Principles covering the corporate governance of banks.

Grant is a member of the Australian Institute of company Directors and Institute of Risk Management UK and has authored numerous books on Corporate Governance including “Linking Islands of theory and Techniques in Political economy”, Kirkpatrick and U. Widmaier. Most recently Grant has authored several consultation papers for the OECD and is a consultant to the OECD, World Bank and Hawkamah.

Saeed Bin Shabib, Editorial Board Member, The Hawkamah Journal.Saeed is the Head of Issuers Affairs at the Dubai Financial Market, providing ongoing support to existing Issuers and companies looking to go public. Prior to joining the Dubai Financial Market, Saeed Bin Shabib was Corporate Governance Analyst and Manager of Branding & Communications at Hawkamah, the institute for corporate governance working throughout the Middle East and North Africa region to aggregate data about family businesses, listed companies, government related entities to better understand and analyze the existing governance frameworks and benchmarking them against international best practices. During his time at Hawkamah, Saeed also published the Research Report: UAE Women Directors’ Careers, Board Experiences and Recommendations for Change alongside the Cranfield International Centre for Women Leaders. He holds a Bachelor of Computer Sciences from the Webster University in Geneva.

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THE GOVERNANCE JOURNEYOF A FAMILY BUSINESS

We would like to explore the corporate governance journey of the Future Pipe Industries. And we would like to start from the very beginning, and we would like you to take us through the early days of the business.

What is now Future Pipe Industries was founded in 1984 in Dubai, after I recognised the immense opportunity in the pipe business, especially in the desert where there was a need for water distribution and also petrochemical production. We acquired the Eternit business in Dubai, which had been incorporated back in 1971 with the support and blessing of his Highness Sheikh Rashid bin Saeed Al Maktoum and which commenced production in 1973. Since then the

business has concentrated on meeting the needs of the region during its phenomenal growth over the past thirty years. We have grown alongside it and Future Pipe Industries’ operations now span over twenty three countries, with over 20 sales offices and 13 pipe manufacturing factories, as well as offering services varied from design to engineering, to after sales support. The group has its own sales and marketing, internal audit, finance, legal communication & IT departments. Business grew and expanded with over three thousand employees and hundreds of customers, government bodies and private large companies.

Corporate governance in the Gulf has come a long way since the late nineties, driven by increased

INTERVIEW WITH FOUAD MAKHZOUMI, CHAIRMAN OF FUTURE PIPES

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public governance and greater awareness of higher standards. Our responsibility within FPI has always been to develop effective corporate practices which will also facilitate innovation and support business operations.

Let us turn to family involvement. It is often considered that family businesses do not start out as family businesses, but become so over time. When did you start viewing your business as a family business? A number of family members became involved in the business over the years, starting from 1980s. Did you encourage or discourage family involvement in the business? And how did FPI manage the process of hiring family members?

Over time and after several restructurings, and given the growth in the pipe industry and the opportunities it offered, I managed to bring in many of my university friends and my colleagues from Saudi Arabia to work with me. At a later stage I recruited brothers, in laws and cousins, with relevant experience of course. I didn’t bring in the fresh graduates. I wanted them to work in other companies first, to gain experience before joining FPI. To an extent we have therefore always been a family business.

Progression into positions was according to merit and experience, not because of being a relative, as this was no privilege. The same goes for my son Rami. Rami was introduced to the factories from a young age and saw the business grow, even when he was still at college studying Business, I used to take him to attend negotiations for joint ventures and company acquisitions, to see things on the ground and not only through books.

When Rami joined the company he had to go through all the departments from procurement to manufacturing, to sales, to engineering, and so on. It was only after all training was done and he had attended the office and progressed in his skills that he earned his position as CEO, and in due time. When Rami took the lead he brought in a young team consisting partly of some of his childhood friends.

You always have confidence in family and friends to be by your side as they have your interests in mind, thus the interests of the business. Also they would always want to prove they are in such positions because they earned it and not because of their relation to the boss.

By the 1990s you had three young children, one of whom would later become the CEO of the company - when did you start thinking that you would like to pass the business on to the future generations?

There was no plan in my mind to compel any of my kids to follow suit. When Rami wanted to choose his major at university I took him around to visit many universities in the US other than the universities in London to see what was on offer and decide. It was actually Rami who decided to join the family business after a lengthy consideration. In 2003 my decision to appoint him as my successor was taken after a lot of thought and after watching him grow and perform in an increasingly mature and assured manner. Rami flourished with the responsibility, bringing passion, vision, ambition and great humanity to his administration of business, and it is under his leadership that FPI became as successful as it is today.

Let us turn to the grooming process – in the book “The CEO’s journey” – it is mentioned that you gently started grooming Rami without being explicit about it, taking him to meetings with people such as Pope John Paul II and Sir John Major. To what extent was this grooming as a father as opposed to grooming as a business man? What advice would you give to other business owners on how they should start grooming the second generations?

I believe that it’s our responsibility to teach our children about life, the good and the bad, you guide them through and advise them. I believe if you succeed in having your children not making 50% of the mistakes that could have been done, then it is a job well done. Grooming kids for life is grooming them to face it all in day-to-day life and in business.


I am a great believer of preparing the young generation from early age. To get them involved in the history of the business and the achievements, as even if they decide not to work in the business, yet one day they will be sitting on the board as shareholders. So yes I am a believer in involving the second generation at early stages. I even believe in passing on the helm when the older generation is still able and capable to guide the younger generation through their first few years, so by the time they want to retire or leave this world, they know that the business is in good hands. I am a believer that the second generation will bring new original ways and up-to-date methods to move the company forward.

And once Rami joined the business, what role did the non-family employees play in the grooming process?

From the factory floor, to the executives reporting to him, to the board members, Rami was just a unique guy that earned great respect and a leadership role at such a young age. In each department he was advised, but he conducted his own research too. Of course feedback was given by the heads of departments to the CEO, who at the time was me. We also had many regular discussions to make sure that all questions Rami had in mind were answered. Rami was an observer and a good listener and that helped him progress through all

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areas. And I did not offer Rami to take full office until I was fully satisfied that all was in order.

Businesses truly become family businesses when passed on to the 2nd generation, but many CEOs of family businesses find it extremely difficult to let go. However, you suggested to Rami in 2003, when he was 25 years old, that he should consider becoming the CEO of the company. Why do you think you were able to make this decision to pass on the business when many others cannot?

Passing the business on to your family is as much a matter of personal preference as a commercial decision, and one has to think that there is time when you let go, and better let go when you are still alive, still around and can still play a role even from the back seat. Thus ensuring that the business will succeed after you leave.

The overriding concern is whether any family member is both interested and has the right skills and experience, however, Rami understood the

culture of the company, and he was very good at taking a long-term view of what is best for the business.Rami was even the one who suggested diversifying the family’s personal investments independently of the business. He brought consultants to start a family office; to put everything in proper working order so as to manage the family business and assets and ensure everything falls in place for direct family, and other family members who work in the group and those who don’t. He was the one who was behind introducing the disciplines to treat the company as a public one; the introduction of advisory board, stricter rules and transparency was one of the major fundamentals initiated by Rami. Rami had a lot of ideas that he brought to the business such as Corporate Social Responsibility and he tackled it from all aspects, responsibility towards employees (vigorous training and workshops for advancement), towards customers (better communication), towards upper and lower management to improve company performance as one team, towards the communities of the countries they are in and towards the environment, making FPI a leader in that field.


In the book “The CEO’s Journey”, there is a dialogue between you and Rami at the time when he was taking over as CEO:

Fouad: “Rami, you are coming from a different generation. So the management is going to reject you. The only thing is to prove to all of them that you deserve the post, not because your name is Rami Makhzoumi. You have to engage all these people, you have to give them credit where it’s due, and you have to be very firm where it’s needed.”

Rami: “Give me time… And don’t get involved.”

A transition process such as this obviously requires that the new CEO performs, which he did, but what did this require from you as the current Chairman and former CEO? How did you manage not to get involved? Did clients, suppliers, staff and other stakeholders initially come to you?

At the beginning they did, but I directed them to Rami emphasizing that it’s Rami who was leading FPI now. It did not take long before all realized that there was a new skilled CEO, and very rarely was I bothered after that. As for customers and suppliers they knew Rami, he was not a new comer, he had good relations with them, as I had done the introductions years back and slowly shifted the relation to Rami, so it was an easy transition.

As Rami said, to be able to prove himself, he had to be left alone, and not to be seen as my son. To help him do that, I took a step back and watched. Of course I was always there to give advice if needed, but it was discretely and never obliging Rami to abide, but left the decision to him.

Rami became well-known within the business community as a visionary leader and as the driving force behind corporate governance reform in FPI, but he was also instilling governance on the family side – he instigated the Family Office as well as the Makhzoumi Family Constitution. He also started preparing the business to go through an IPO and consequently a Board was set up. What was your view on these developments? What were the costs vs benefits?

As with every new thing, the old generation has its own views of how things should proceed. But Rami had been to London Business School for his Masters, he was involved in the Young Arab Leaders (YAL), and the Young Arab Presidents (YAP) associations, he was a speaker and a panelist in family business conferences, he was exposed to all the new challenges facing the modern world and he had a better vision of what should be done. At the end everything made sense.

In regards to the family constitution it proved to be the best thing that Rami did for the family, as it put us on the right track to move forward. As for the changes in the company, putting things in place; whether in HR, Communication, or IT, it was all a step forward towards his 2020 Vision which we are still working towards to this day.

As for the Advisory Board, it has benefitted us tremendously as we have members from the Middle East, Europe and US, who bring a vast knowledge and expertise to the table with a profound advice. Seeing things from outside the box is an asset. Any cost here is justified.

Additionally, there were several enhancements that happened on the management and on the board level. In particular, we have enhanced the risk framework and the risk management. Going through the IPO process, of course it was a costly exercise, and even with the IPO not coming through, the procedure itself helped us develop many of our current processes and practices to improve the efficiency, the transparency and the disclosure and enabled us to truly behaving like a public company. At the end the IPO did not go through as the decision was to withdraw at the beginning of the Financial Crisis; this proved to be the right decision during those challenging times.

In particular, the policies and procedures that were scattered all over the company were governed in one framework in a way that adds value to the overall structure. We have clearly defined the roles and responsibilities between the board and the management, in particular to have a greater, enhanced sense of accountability and responsibility between the two levels.

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How has the board added value to your business?

The board of directors in a family business is a structure that can help steer a business and provide direction for the organization. The board has a strategic function in providing the vision, mission and goals of FPI. Each of our board members has been appointed for their substantial experience and deep expertise, including backgrounds in governance and engineering, as well as energy and water resource management. With the board in place the risk and remuneration governance continued to be very important aspects.

What are the characteristics you most value in an independent non-executive director?

Being independent! That is the most important value. They must remain highly independent and ask challenging, often difficult questions. Being away from the day to day issues, help them see the bigger picture. It is like having a Bird’s eye view, you can analyze better and point out things that people from the inside cannot. Independent non -executive directors need to bring a truly independent perspective, champion their area of expertise but not hide behind it.

You are the Chairman, you are the founder, largest shareholders – how do you conduct board meetings to ensure that the board does not become a group of yes men?

Well, when you are used to the old way of doing things it will be very difficult to change from that habit. But when you have an independent board that is appointed because of their expertise and experience you cannot ignore their recommendations, and you have to listen to their views. Mostly board level decisions are collective decisions, even if some decisions are not to the liking of some, the majority rules.

Looking at FPI’s history, what do you think are the key takeaways for other business owners?

For a business to succeed you have to believe in it. To make it grow you have to grasp every opportunity. To become a market leader you have

to be innovative, to do so you need to keep on reinvesting your profit into the business, into new products, new machines, R&D and of course the most important asset, your employees.

In previous issues of the Hawkamah Journal, we have asked other prominent business leaders such Dr Helmut Maucher, the former CEO and Chairman of Nestle, about the role of business in society. What are you views on this?

A flourishing society depends on flourishing businesses. The role of business in society is a legitimate aspect of business leadership, an integral part of successful management practice and sustainable business building. Company leaders are not only leaders of business but leaders in society

Philanthropy is an important tool to support society by empowering the individuals to be self-independent, like what the Makhzoumi Foundation is doing in Lebanon. Also to give back to society charity is not the only means; you can give back by contributing to its cultural, educational, and political development.

Sitting on many boards, like the Institute for Social and Economic Policy in the Middle East, the Harvard’s John F Kennedy School of Government, and the international board member of the Council on Foreign Relations, to name a few gives me the opportunity to be a contributor to the development of the national and international societies.

Corporate Governance is a subject close to Rami’s heart, and after his passing away, a chair in his name for Corporate Governance was set up at AUB in Beirut. We are hopeful that with the book the Journey of a CEO will lead to more awareness of such an important subject.

Furthermore, corporate social responsibility has now become a primary concern at Future Pipe Group. A Vice-President CSR has been recently appointed to dedicate time to ensure that the business oriented activity does not ignore, at any time, its social responsibilities.


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A FAMILY BUSINESS INTHE SECOND GENERATION

INTERVIEW WITH VISHAL AND RAJIV MEHTA, CO-CEOS OF DIMEXON

ABOUT DIMEXONDimexon operates in diamond cutting and polishing as well as in jewelry manufacturing. It has operations across the world, including Belgium, the United Arab Emirates, India and China. Over 40 years, it has evolved as one of the leading companies in the industry with clients placed worldwide including major jewelry and fashion brands.

The company is co-managed by two brothers, Rajiv Mehta and Vishal Mehta.

Dimexon is a family business – could you describe the journey thus far?

Rajiv Mehta: Dimexon was set up by our father, Pankaj Mehta, in 1966. It was his vision and hard work that built up the company and set up the foundations for its success and sustainability. Initially the company operated in India, but the business soon expanded to Belgium and from there to a number of other countries. Today, we operate on global basis. We buy rough diamonds from mines in Africa, Canada, Australia, and Russia, and we cater to the largest global players including the leading watch makers, the major jewelry brands, retailers and the fashion brands.

Vishal Mehta: In the last decade, there has been a fundamental change in the diamonds industry. At the time, when Dimexon was set up, i.e., in the 1960s and 70s, there was really only one supplier and producer that a diamond manufacturer would like to have, and that was De Beers. De Beers used to control approximately 85% of the world’s diamond market. It is still the largest diamond producer, but ever since the 1980s and 1990s, its share has been declining and today the market in the upstream side of the business is very fragmented. But with new entrants coming into the market, the midstream side is also becoming


more fragmented, and this is where our company operates in. In addition to the changes in the structure of market, the industry has witnessed significant economic volatility.

These developments in the market have forced us to look at ourselves internally. We have had to focus on ensuring that our business remains competitive and sustainable in the long-term for financial and economic reasons, as well as the moral obligations towards the 6,000 people worldwide employed by our business. Not only do we need to focus on the efficiency of our business, but also on other areas such as organizational alignment and governance. We have had to make significant changes in our internal processes and structures to ensure the sustainability of the business.

You mentioned moral obligations, so let us turn to values, particularly to the values of the family, which often are the basis on which a company’s governance framework is built upon. How have the family values been translated into the culture of the organization? Rajiv Mehta: Our value system stems from our father. He always believed that diamonds are precious products, and when you hand them over to someone, you do so on the basis of trust, because you trust that person. So the value system has trust at the bedrock.

And trust is incredibly important in the diamonds market, where the integrity of the product is of utmost importance. In fact, it is so crucial that diamonds have become the second most regulated product in the world – the first one being uranium. So we are dealing in a stringent, multijurisdictional, regulatory framework, but trust and honesty are the underlying values. Related to this is transparency, and we place much emphasis on transparency. For example, we have decided to report on global basis according to the IFRS, although there is no requirement to do so for a private company like Dimexon. We did so already in 2005/2006. Now, this is something that was virtually unheard of among the companies in the midstream of the diamond industry.

But we feel that these are elements that go a long way with our stakeholders, particularly the banks

and other financial institutions, but increasingly also our operational stakeholders such as clients and vendors. It brings about an extra layer of confidence in our business.

I would say that we have been ahead of the curve in our industry. One of our prime partners, De Beers, which is the largest diamond mining company in the world, has 70 customers. In 2013, it started assessing and evaluating its own customer base, not only on their financial strength but also on their reporting standards. We were the only company among the 70 that reported on IFRS. DeBeers is now pushing the remaining 69 to do the same. So we feel that there are obvious business benefits to having strong corporate governance frameworks and practices, which are built upon our values and ethical standards.

Let us discuss the topic of succession planning, which is typically a great challenge for many family businesses. You - the second generation –have taken over the day-to-day running of the business, while your father still serves as the Chairman. How did you manage the transition?

Vishal Mehta: This is a very interesting topic. The community we come from, the Western part of India, is a highly entrepreneurial community, where we have many successful business men, but many businesses from our community are not always known for their sustainability. And what I think really distinguishes our business from many others is the vision of the founder, our father, in this respect.

Perhaps the best way to describe our transition is through a few anecdotes. When I had been in the company some three years and Rajiv some six-seven years, we started asking our father some difficult questions about the future of the business. Founders are not usually accustomed to receiving such questions, and may make some founders very uncomfortable. But our father responded by turning the question back to us. He challenged us to come up with a plan for the future, present the plan to him, and he told us that if we all agreed with the plan, then we would have the support to implement it.

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So, Rajiv and I then went to the drawing board. At this stage, we also commissioned external consultants to carry out a review of our business. The consultants having looked at our business told us that “You are calling in a doctor when nothing needs fixing”. But our aim was not on fixing anything – our aim was to get ready for the future. So we went through the entire vision and strategy exercise, and we got our father’s buy-in.

This was really the starting point for the succession process in our company. The failure of succession in family businesses is often attributed to the founder not letting go, and while there is undeniable truth to this, it is a very one sided view. The onus is equally on the second generation to demonstrate to the founder that they have the passion, drive and ability to take on the challenge of running a business.

But both generations need to recognize that time is precious, that time is the rarest commodity that we have. So we need to start taking the necessary steps while things are going well, and also recognize that the steps themselves need time. So in 2003 we started the transformation process of the business. Corporate governance at the time was a term you did not hear much in the diamond industry, but we started the process piece by piece. We started with the vision of our father, who was

very clear that his aim was always to create a company that had long lasting value and longevity. For example, he did not name the company after his name or the family name, which was very common thing to do, particularly in those days in the industry, but he wanted to create a sustainable and perpetual company that is associated with what it stands for.

With this in mind, we embarked upon the transformation process – first on the corporate structure and holding company side but also the process side, establishing information systems, for example. It was really about ensuring that we have the right structure, processes, people, talent, and etc. are in place to support the future growth of the company. And along this process, our own understanding of corporate governance evolved and we recognize very clearly that corporate governance is not a one off exercise. This is why we have continued to improve our governance practices over the years.

Rajiv Mehta: This is not always easy. It means that we have to stay focused and disciplined, and that we have to keep on taking specific steps to improve our corporate governance practices. But very early on, we recognized that corporate governance is much more than just audit principles and other control functions, and for us, corporate governance is really about its business benefits it can bring if implemented properly.


You are brothers but also the co-CEOS of the company – how do you manage that relationship?

Rajiv Mehta: Having co-CEOs is not usually the best structure, and early on, we recognized that this would create more complexity for the business. And then Vishal and I married two sisters… In other words, we know we have not always followed the convention.

But let me clarify. On the strategic level, we co-head the business, but when it comes to the operational level, we are each responsible for our own areas and we go at it separately with our own teams. However, even with this separation, we know that we need much more alignment, much more communication than we would need in a single CEO situation.

But I would say that we have total trust between us. And both of us are extremely ambitious, and we drive each other. And I think this is crucial in a family business, where you need to set the benchmark yourself. Vishal gives me that benchmark, it helps me to push myself, and sometimes I push him too.

Vishal Mehta: And we respect each other’s roles and responsibilities as well as the protocols. The key really is communication. Although we live in the age of electronic communication, and we use emails and other forms of communication extensively, but we place special emphasis on the one-to-one personal meetings. Rajiv lives in Mumbai, I live in Dubai, so we are only a couple of hours away from each other, and we take the time to meet on regular basis. We feel that it is these personal meetings that allow us to communicate the best.

Rajiv Mehta: The problem for many family businesses is that the procedures are very informal between family members, but this often extends to the non-family employees as well who start seeing themselves as family members, meaning that they become more casual and informal as well. So what Vishal and I try to do is to think of ourselves as employees, and we ensure that protocols and formal processes between us are maintained at all times during work hours.

Vishal Mehta: In other words, this is as much about improving the communication between Rajiv and I as it is about setting the tone at the top, about setting an example for the rest of the organization that clear lines of communication, formality and protocols matter.

How easy is it to report to your father and to your brother? Is it always clear which hat you are wearing?

Vishal Mehta: You keep juggling with the different hats, sometimes you wear the hat of a CEO, sometimes you wear the hat of a brother, son and etc. It can be tricky to report to a board where both your father and brother sit. I think there is a delicate balance, and one has to be mindful of the situation. You obviously need clear roles and responsibilities as well as clear protocols which I mentioned earlier.

But this is an area where non-family board directors can play a very significant role. They do not only bring in their skill sets but also ensure that there is formality and that proper governance mechanisms are in place. Currently we have a Board of five, which includes three family members and two independent non-executives. And I think this balance works well for us. This is a Board that provides advice and guidance while also fulfilling the oversight and monitoring role. In my view, having external directors on the Boards, helps Rajiv and I to put on the management hat and think of ourselves as the management reporting to the board.

We know that in a family business difficult issues arise at some point. What has been the most difficult issue for you?

Rajiv Mehta: Looking back, the most difficult situation for us was 2009, and it had nothing to do with the financial crisis, and all to do with the family business. This was the year when we had a separation within the family business.

When our father started the company in 1966, a few years later he hired his two younger brothers into the business. And as the business evolved, their sons became involved in the business as well. And gradually, the different branches of the

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family started adopting different philosophies and finally in 2009, we decided to go for an amicable separation.

This was a very difficult time for us, not from a financial perspective, but it took us out of our comfort zone and put us in a different environment. But at the same time it opened the world for us, it forced us to re-define our values and overall philosophy and incorporate those into our business. Looking back, this was a difficult time, but it really brought out the best in us.

Vishal Mehta: This unfortunate event worked well for our family. It brought us closer, and it presented us new opportunities and new avenues. It allowed for more efficient decision making for example, but it also allowed us to link our values closer to the business and take the business along the path we wanted it to grow.

This is a crucial aspect of family governance. How do you ensure that family members are aligned on the vision?

Vishal Mehta: Family members do not always share the same background. There are differences in education, experience and upbringing, which sometimes are generational. But I think this is the starting point – to recognize that there are differences, and within our family we have embraced education in this regard. The whole family has attended workshops in renowned institutions such as the IMD to discuss matters related to family governance, to see how other families have chosen to deal with matters, to see where things have worked out and where there have been short comings. I think you learn more from discussing examples from other families rather than your own family, which is a much more emotionally charged topic. The idea behind attending these workshops for us has been to ensure that all family members have the same level of understanding of the vision of the family and that we have buy in from all members of the family.

Rajiv Mehta: We are in an interesting situation. We both have witnessed a separation in the family. We also have seen the strength of the family staying together. And today we are a smaller family, and we need to look at things differently.

We have started to focus on the elements that have an impact in 10-20 years from now. Vishal has children, I have children. We would like to encourage them to become part of the business, but we also want to encourage them to make their own decisions. We want to ensure that certain principles are in place when their time comes, whether it is as employees in the business or as responsible owners of the business. We want to ensure that mechanisms are in place for most, if not all, eventualities. For example, we want there to be clarity on the employment process for family members in the business – both in terms of the criteria as well as the process itself.

To this end, we have started the process of drafting a family constitution, which is a fascinating journey. We have adopted an inclusive approach and we have included the whole family in this process, and this means our parents, me and Vishal and our wives. We also have a trusted, external party who works closely with us and facilitates the process. This enables each family member to debate issues, ask questions, voice his or her concerns as well as wishes and hopes. We take this process of drafting the constitution very seriously as the process on its own is extremely important and fruitful, and it may actually be more important than the final document itself.

And as with corporate governance on the company level, we do not see family governance as a one-off exercise. We plan to review the constitution and key policies on a regular basis and bring our children into this process when they grow up. And we hope they will do the same with their children to fulfill the vision and protect the legacy of the founder.


INDEPENDENT DIRECTORSIN FAMILY BUSINESSES

ARTICLE BY MOSTAFA HUNTER, LEAD FOUNDER AND CHAIRMANEGYPTIAN DIRECTORS AND GOVERNANCE ASSOCIATION (EDGA)

Corporate governance is considered crucial to business sustainability and growth of any economy. The implementation of a proper corporate governance framework can lead to unparalleled growth and sustainability while opening up opportunities for businesses. In this context, corporate governance is essential for family businesses to grow and thrive over generations. This is particularly important since family businesses are one of the fundamental pillars of any growing economy. Yet, most of the approaches towards better implementation of corporate governance frameworks encourage family businesses to improve governance practices over time first and then, at the end of this process, to appoint independent directors to their boards. This article presents another perspective towards this issue: it advances the approach to introduce independent directors as the first step in the governance journey.

Approaching Corporate Governance in Family Businesses Differently

The appointment of independent directors as the first step provides a number of advantages to the board composition within family businesses and it accelerates the implementation of corporate governance frameworks.

Changing Board of Directors Dynamics

The presence of non-family board members automatically introduces a different dynamic to the board of a family business. Firstly, by bringing new skill sets to the board room, it enhances decision making. Secondly, the presence of external persons puts pressure on the board members to act more professionally on different levels. Meetings often become more organized and regular and family members start to separate between the nature of family meetings and board meetings. When it comes to the decision making process, on the one hand, family members become gradually more familiar with the presence of non-family components. On the other hand, independent directors become more aware of the dynamics of the family and start taking that into consideration. Their presence also brings an objective point of view to the decisions and mediates the process of moving business decisions away from family dynamics. Additionally, the presence of independent directors enables the creation of an independent audit committee that enhances the independence of the board.

As in many cases where the executive managers are members of the family, the

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presence of independent directors changes the dynamics between the management and the board. Independent directors start questioning management decisions and holding the management accountable. The management gradually starts being aware that board meetings are becoming different. Consequently, executive reporting and presentations improve over time. The presence of top-notch experts on the board makes it easier on one hand for the management to get professional advice and on the other hand forces the management to professional business conduct. This balance between scrutiny and guidance has a positive impact on the overall efficiency of the business.

Streaming Consultancy Services with the Business

In businesses of small and medium size, the costs of introducing independent directors are relatively low compared to getting outside advice or consultation. When the remuneration is based on participation in board meetings, advice from an experienced independent director can be affordable. This gives small businesses a chance to gain top-level hands-on expertise incorporated in their boards.

Additionally, directors themselves become more engaged as they are part of the business rather than only consultants. They are held accountable for their advice and should follow-up on its implementation. This forces them to give their best and participate actively in the decision making process. Moreover, presence of diversified professionals on the board allows interactional expertise development and turns out to be an excellent tool for improving the level of awareness and expertise among family board members. Embedding Corporate Governance Advocates

Lastly, independent directors have the potential to gradually turn into internal advocates for corporate governance and compliance. Their presence inside the family makes it much easier for them to introduce and follow-up on the implementation of corporate governance. Independent directors will become aware of any resistance points within the family business and develop mechanisms to handle them. This enables them to identify priorities and set the proper plan for a smooth transition. It also puts them in a position to mediate certain conflicts that might arise during the transition process.

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Potential Challenges for Introducing Independent Directors

Despite the advantages of this approach, it is not without its challenges. This is why the process should be dealt with cautious to ensure a successful transition.

Convincing the family of the importance of introducing non-family outside independent directors to their family board might be difficult. This step touches on the core of the family, which makes it challenging. Family members may not feel comfortable with the presence of a non-family member in their meetings. They may question whether a non-family member shares the same interests as the family, and whether these interests have the same time horizon as the family. Accordingly, the family may start questioning how a non-family member can take care of their money better than themselves. They may also have justified fears regarding confidentiality and competition. For these reasons, this phase needs much assurance and clarification.

The choice of the independent directors is crucial. In terms of technical skills, the choice needs to be in areas needed on the board. It is important to avoid expertise already present in the family, as this might create potential conflicts between expert opinions at the very initial fragile phase of the transition. It is usually important to have people from different disciplines to diversify the expertise on the board. Also, it is very important to have directors with expertise in corporate governance as they will be involved much in corporate governance improvement processes for the company. Additionally, it is important to have people with high level of reputation and integrity as the family has to trust them in this initial phase. The personal skills of the independent directors are considered an essential dimension, as these directors need to perform tasks and roles outside of the technical scope. Independent directors have to be aware of the fact that they represent the first confrontation of the family with the transition. In accordance, they should be prepared to handle this and be alert that the whole success depends on their personal capacities. At the first board meetings, it can be anticipated that there will be an atmosphere of rejection expressed by some board members. This could be manifested through

hostile attitudes that independent directors have to handle cautiously without becoming aggressive. Additionally, they will often be confronted with subconscious defensive attitudes from family board members. Over time they must be able to understand the underlying dynamics of the family, include themselves in family related decision processes and build trust with different family members. They should be able to play the mediator role in some cases.

Independent directors are considered a catalyst for change. Leveraging on high levels of motivation to the board, instead of adopting disruptive approaches, can help it embrace the change. In other words, independent directors have to facilitate and channel change without upsetting the core of family hierarchies and sensitivities. That is why these directors need to be extremely emotionally intelligent, calm and have very strong communication and negotiation skills. Accordingly, outside directors need orientation and preparation before serving on such boards.

An enormously important issue is to add independent directors to the current board, even if there is a high potential for the board size to be too large relative to the company size. Starting the process by replacing board members will kill it from the very beginning. Choosing which family board members would have to replaced by new ones is the wrong step. The family should always feel that there is an addition to the business and not replacement. Introducing non-executive directors from the family might not be helpful in this context, as this notion does not project the needed independence on the board. Adding to that, family businesses introducing outside directors who have served as consultants or have had other relations with the family or company makes it more difficult for them to lead the needed change in the board construct.

Another important point to highlight is that the number of independent directors added to the board should not be large at the beginning. Irrespective of the size of the current board, it is important to limit the number of outside directors to two or maximum three directors. More than that would become too much for the family to handle at the same time. As the process matures over years, the number of independent directors can

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be increased and the overall number of board members decreased.

Finally, one should bear in mind that outside directors will inevitably lose their independence over time. They may become too involved with family relations and thereby become emotionally biased with time. They will be forced to get involved into operational decisions, they will give advice to the management and they might be involved in the design of audit processes. These activities become part of their role on the board. This should be seen as a natural process and should not be a problem as long as they are not awarded extra remuneration for it. Placing too much emphasis on safeguarding “independence” may be counterproductive in such cases. After some years when the processes mature and develop, those directors would need to be replaced with fresh board members offering a higher degree of independence.

Conclusion and Recommendations

The appointment of independent directors as the first step can be an effective way to implement corporate governance in family businesses.

Independent directors act as agents for change within the company and help in its transition to better corporate governance practices. It brings independent decision to the family, includes outside perspectives, opens up new networks and brings new expertise to the board. It is understandable that the inclusion process is not an easy task for both the family and the independent directors, but, if managed well, it can bring along unparalleled success with relatively little resources. Accordingly, there is a need to highlight this issue to family businesses and raise their awareness on the role of independent directors and their importance for the growth and sustainability of the company. Focusing more on independent directors rather than only on following corporate governance frameworks might make it easier for family businesses to capture the concept. Moreover, there is an apparent need for pooling independent directors and making it easier for family businesses to reach them. Finally, special awareness and skills development for directors on their roles is needed. They need to be aware of the challenges they are likely to face while serving on a board of a family business as the first independent director.

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INTERNALIZING CORPORATE GOVERNANCE PRINCIPLES

IN FAMILY BUSINESSES ARTICLE BY STEFAN S. HANDOYO, OPERATIONS OFFICER

CORPORATE GOVERNANCE, INTERNATIONAL FINANCE CORPORATIONThe past economic crises have served as a constant reminder that the observance of modern corporate governance principles continues to be a clear reflection of corporate commitment to responsible citizenship. Both draw inspiration from the fundamental principles of fairness, transparency and accountability. This is particularly true for family businesses (FBs) that have increasingly played a critical role in the development of national economy and the community as a whole.

In the past, FBs were often the ones to blame as the culprits behind economic crises. The great business historian Alfred D. Chandler has blamed the economic decline of Great Britain, for instance, partly on FBs – on their lack of scale, backwardness, and inability to preserve capital. This view unfortunately still dominates until recently. Many still think negatively about the disadvantages of FBs: corruption, nepotism, governance conundrums and favoritism towards family members.

But series of the recent crises undoubtedly also showed us that these disadvantages are not necessarily only the monopoly of FBs. Once touted non-family firms like Enron, WorldCom, Barings, Lehman Brothers, and even old standards like GE and Time Warner were partly to blame for the stock market crash of 2001 to 2008. Greedy top executives of these companies whose stock-priced-based compensation supposedly heightened accountability have contributed to the problems as they gamed the system, focusing too narrowly on massaging the numbers to earn their bonuses instead of building up core competencies and delivering value, emphasizing so much on achieving corporate financial objectives rather than mission as responsible corporate citizens.

Be they caused by family firms or non-family firms, most of economic crises in the past decades eventually boil down on bad corporate governance practices. While the principles of, and the culture behind, corporate governance are fundamentally the same everywhere, the practices and approaches to improving those practices do vary from one country to another, as well as between family firms and non-family firms.

Principles, Structures, and Rules in Family Business

Four major categories of principles, structures, and rules are evident in an evolving family business. That is, the family business as a community of people; committed business families; power as a service; and estate transfer as a responsibility. Successful development of these areas bodes well for the longevity of the business, and exploring these categories in greater depth gives a better-rounded picture of what being a committed business family entails . First, the fact that the FB is a community of people suggests that financial success is not the only requirement for survival. A family business “includes owners, managers and people who work within it, and these people must be organized in accordance with the proper formal structures of responsibilities and management systems.” Families must set up membership rules, commit themselves to the development of members’ professional skills, compensate their members fairly according to a transparent and logical structure, and “meet the ‘social mortgage’ attached to any kind of ownership.”

Miguel Ángel Gallo, Daniela Montemerlo, Josep Tàpies, Kristin Cappuyns, Salvatore Tomaselli, Sabine Klein (IESE Business School), “Five Secrets Behind Successful Family Businesses,” 2006.

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Second, for family members to be united and committed to the business, there must be a structure in the form of “a combination of values, principle systems and rules.” In fact, the values that lie at the heart of these structures are to some degree an attempt by the owner family to formalize some of its beliefs with a view to establishing a long-lasting FB.

Third, the idea of power as a service means that the decision makers in a family business must “demonstrate high-quality motivational balance, since their decisions must take account of transcendent motives and not just intrinsic and extrinsic arguments.” There are two types of power: potestas, which is “the power to decide that is afforded by law,” and auctoritas, which is “the power to decide that is afforded by the possession of the required professional competence.” The different powers exercised by owners and shareholders must be balanced an important challenge that’s vital to the formation of an FB.

Finally, the idea of estate transfer as a responsibility means that plans must be made for the transfer of “ethical, human, intellectual, financial and other resources.” The future of the business must be of utmost importance when making transference decisions, and “the common good takes precedence over the personal good.” Tyranny must be avoided by selecting “good and decent beneficiaries who intend to organize governance in a collegiate way.”

Committing to an FB brings a great deal of responsibility, and when people make this commitment, they may feel a certain degree of ownership over that business even when they are not, in fact, the owners – a phenomenon called “psychological ownership.” This can negatively affect the unity of the group. However, in multi-generational family companies, this feeling can also be positive: feeling ownership “generates commitment, a desire to make an effort to give something back to the family and the business, because so much of what an individual possess has been received from them.”

This kind of intense commitment and involvement is what business families must strive for in order to survive through multiple generations. Instead, given the ever changing cycles of people’s life’s,

as well as the changing circumstances in the family business, no perfect solution can ever be found. Companies are constantly evolving and family members must continually renew their commitment to the business. By understanding what drives people’s behavior, and by analyzing the characteristics of successful multigenerational FBs, business families can begin to strengthen and become, one day, committed business families with a business that will stay viable even when they themselves are gone.

Family Business vs. Non-Family Business

There are a number of persistent myths about FBs in Asia. One such myth is that FBs are small and cannot grow beyond a certain size. The term family business often evokes images of a food stall run by a hard-working husband-and-wife team.

Moreover, family businesses, seemingly, had skirted most aspects of modern management practice. Far from acting accountable, the CEOs who were usually the founder/owner were often secretive. They disliked explaining themselves to shareholders or even opening their books to their bankers. They resented being questioned and sought enormous discretion to do what they believed was right for the company – which was, they insisted, “their business.” Many took only a passing interest in quarterly financial statements, and just as many mistrusted the numbers. Family business leaders then used their freedom to stubbornly ignore market trends or to make moves that were radically out of step with what the rest of industry was doing.

When it came to strategy, family firms lived as much in the past as the future. Some traditions were sacrosanct, and fulfilling a family mission was almost always more important than any bottom line – in fact it was the bottom line. Relationships with outsiders seemed “crony-like,” with contracts based on personal attachments rather than competitive bargaining. What century were these companies living in, we wondered? Who are these guys?

But, the fact remains that a substantial share of the largest firms particularly in Asia is FBs. Though often overlooked due to their discretion and quest for privacy, FBs form the bedrock of


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most economies. In fact, family-owned firms constitute a major proportion of businesses in most developed economies all over the world, dominating the private sector and stock exchanges in many emerging markets. The driving force behind much of the economic success in many parts of the world has been the FBs, and this is particularly true in Asia.

In Asia, family firms are even more prominent, especially among the larger firms. Many of the Asian family firms have evolved into conglomerates that consist of a large number of separate firms, several of which may be listed on stock exchanges in the region. A number of studies show that Asian FBs listed on stock markets in the region have generally outperformed their non-family peers in most Asian markets .

Family businesses make up 35 to 40 percent of the Fortune 500 and S&P 500. They generate at least 50% of the GDP and account for over half the employment in the United States and 78 percent of the new jobs created . Comparable figures for Asia, Europe, and South America are significantly higher.

FAMILY BUSINESSES AROUND THE WORLD

On a more global level, according to the Family Firm Institute, FBs create an estimated 70% to 90% of global GDP annually . The preponderance of FBs in the world’s economic landscape is undeniable – typically, FBs enjoy certain competitive advantages that their non‐family corporate counterparts do not – not just stable ones like efficiency and quality, but innovation, brand building, and entrepreneurship.

Family businesses are also more inclined to put greater importance on long‐term success and strategy, otherwise known as ‘patient capital’--; they have the opportunity to create a legacy which creates a strong sense of pride among their employees as well as brand recognition in the market; and they also have an easier access to capital for new business initiatives. They sustained their advantages as markets and technologies altered and the rosters of rivals churned. They showed an amazing consistency in their practices. They had embraced a peculiar pattern, stuck with it, and got away with it – time and again.

Time and time again, FBs have been shown in many studies to outperform publicly-listed non-family businesses. This is true in revenue growth, market valuations, return on assets, return on equity, and total shareholder returns. Do they accomplish that performance by running down their resources or taking excessive risks? The research evidence suggests not. FBs seem to invest more than non-FBs in human resources and training, in social benefits for their people, and in modernizing plant and equipment. They also enjoy better cash positions, more stable earnings, and lower debt to equity .

Family Business Regeneration

Maintaining the delicate balance among members

Credit Suisse (2011) Asian Family Businesses Report 2011, Emerging Market Research Institute, Credit Suisse.The Canadian Inheritance Study, DecimaResearch, 2006, Boston College Social Welfare Research Institute, January 2003http://www.ffi.org/?page=GlobalDataPointsKPMG Enterprise ‘The Competitive Advantage of a Family Business’ (http://www.kpmg.com/Ca/en/ services/KPMG- ‐Enterprise/Centre- ‐for- ‐Family- ‐Business/Documents/Competitive%20Advantage.pdf)Vikas Mehrotra, Randall Morck (University of Alberta in Edmonton, Canada), Jungwook Shim, Yupana Wiwattanakantang (Hitotsubashi University in Tokyo, Japan), “Adoptive Expectations: Rising Son Tournaments in Japanese Family Firms.”

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of a family business is not always easy; people have different personalities and goals that can complicate their interactions. However, maintaining a high level of family functioning is crucial for a business’s long-term survival. Though founders may be fully committed to the business, passing that commitment on to subsequent generations can prove challenging – even impossible .

Only about 30% of FBs survive into the second generation, 12% are still viable into the third generation, and only about 3% of all FBs manage to thrive into the fourth generation or beyond. Thus, goes the sayings: in Brazilian “Pai Rico, Filho Nobre, Neto Pobre” (rich father, noble son, poor grandson), in Mexican “Padre Bodeguero, Hijo Caballero, Nieto Pordieroso” (father merchant, son gentleman, grandson beggar), and in Chinese “Fu Bu Guo San Dai” (wealth never survives three generations). In fact, many FBs do not survive beyond the second generation. A failure to develop the founder’s business, together with disputes over dividing up the spoils, is usually instrumental in the demise of family firms.

WEALTH RETENTION IN FAMILIES

In spite of the benefits of FBs, their success is anything but guaranteed: only 10% of FBs

continue to a third generation.

Though a business’s founders may start with strong “potential motivation” to improve their own and their families’ lives, turning such motivation

REASONS FOR FAILURE

60% OF THE CASES WASDUE TO A LACK OF COMMUNICATION.

30% OF THE CASES WASDUE TO A LACK OF EDUCATION

OF THE NEXT GENERATION.

3% OF THE CASES WASDUE TO POOR INVESTMENT

DECISIONS.

into “current motivation” is difficult, for two main reasons. First, when founders prepare to leave the business, they may resist transferring the business to the next generation or changing strategy or organization. Second, subsequent generations may choose not to be involved, and founders may opt to sell the business to ensure family members’ financial security. Yet, many multigenerational FBs thrive – and “the key lies in the qualities of the people who form the ownership group.”

As many of Asia’s FBs are still owned by their first or second generation of the founding family, one of the biggest issues facing these firms is that of regeneration. With the retirement of the founder, regeneration often involves a change in both shareholding and management. There is a tendency for most families to eventually bring in non-family CEOs and Chairmen. But these are often not endowed with the same powers that the founder had – due to either fragmented shareholdings or the presence of the founder who still has the loyalty of the employees.

Smooth regeneration and smooth transition of shareholding and management in FBs also depends on the degree of professionalism in the succeeding generations. Professionalization in FBs not only means bringing in professional non-family members to work in FBs, but also professionalizing their own family members. This is often times influenced by the level of their education.

Miguel A. Gallo, Sabine Klein, Daniela Montemerlo, Josep Tàpies, Salvatore Tomaselli, and Kristin Cappuyns, “From the Founder to Multigenerational Family Business: The Family’s Crucial Role as an Owner for Longevity.”

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Highly educated future FBs leaders will be crucial to maintain growth and development of Indonesian FBs. However, as a growing economy with a young population, meeting the demand for higher education will be a major challenge for Indonesia in the coming years. A report from the Boston Consulting Group in May 2013 stated that by the year 2020, Indonesian companies, including FBs, will have difficulties in filling half of their entry-level positions with qualified candidates.

The current low enrollment rates in tertiary education in Indonesia are part of the reason. Data shows that enrolment rates in higher education and in secondary schools in Indonesia are only 13.28 percent and 51.35 percent respectively, compared to a Southeast Asian average of 27.40 percent for higher education enrolment and 65.20 percent for secondary education enrolment.”

The requirements of leadership in Indonesia are really intense, because many family businesses start to look for leaders who can take organizations and really very rapidly advance them and adjust to changes in their own environments. The availability of managerial skill in Indonesia does not come close to matching the needs, as a result of this growth.

Family Business Governance in Indonesia

Family businesses are one of the foundations of the business community. Their creation, growth and longevity are critical to the success of the national and global economy. In Indonesia, more than 90% of businesses are family-owned and controlled companies. Although facing many of the same day-to-day management issues as publicly-listed non-FBs, they must also manage many issues specific to their status.

Many of these issues in family business are actually also issues that many ordinary citizens are facing in their day-to-day family life. Thus, there is a close inter-relationship between how a family nurtures and lives its values and how a family-owned company shapes and lives its corporate culture.Family members come and go, companies on the

other hand are built to last for many generations to come. It is very crucial, therefore, that these companies are built upon a solid foundation that is laid and created by the first generation of the families.

It is the first generations that actually set the tone at the top for the future and sustainability of many successful FBs. They can do this by creating a “Family Constitution or Charter” where the path of good corporate governance and family business principles crosses at each other and a clear guideline on how the family and business matters are treated is drawn.

Family businesses have to strive to be as well-managed as the best of their competitors. The need for a professional business approach is in fact greater in a family than in a non-family company. Family businesses have also distinctive characteristics from which they can derive significant competitive advantage as described above. A long-term perspective comes from building a business for future generations while the strength of most FBs’ founding values give them a clear identity in an increasingly faceless corporate world.

But there are also risks associated with this type of company, most notably the dissension that may arise within families, particularly between family members who are actively working in the business vs. those who are solely shareholders.

Thus, four key issues related to FB corporate governance need to be highlighted: (1) recruitment system that allows willing family members to be employed should be balanced with a performance-based promotion that is resolutely the same for both family and non-family managers; (2) fairness and transparency in financial and non-financial perks and reward systems, particularly within the family, to avoid tensions over perceived injustices; (3) more formal organizational structures to clarify roles and to separate the day-to-day management from the strategic direction of the business; and (4) a regular and proper channel of communication among family members to keep the integrity and unity of the family.

The writer is Operations Officer, IFC Corporate Governance Program, East Asia and Pacific (EAP) based in Jakarta, Indonesia. Opinions in this article are the author’s responsibility.

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COMPANY SECRETARIESADDING VALUE TO ORGANISATIONS

ARTICLE BY ALISON DILLON KIBIRIGE, MANAGING DIRECTORAMDK CONSULTANCY & TRAINING SERVICES LIMITED

David Jackson, the Company Secretary of BP said in 2008 ‘ In today’s world, the role of the company secretary has no one meaning and covers a multitude of tasks and responsibilities. That said the role lies at the heart of the governance systems of companies and is receiving ever greater focus.’

This is truer today than it was in 2008 for whatever type of company the company secretary is operating within. Governance as we know is more than just compliance it is how an organization structures itself to perform effectively and efficiently in the long-term. There is a lot of empirical evidence that organisations, whether they are family owned, listed, state-owned or in the not for profit sector perform better and are more likely to be sustainable if they have good governance practices.

There is often a misconception that the role of the company secretary is purely administrative, preparing and distributing packs for Board meetings, sitting quietly in the Board room taking notes of the proceedings of the meeting and thereafter producing a set of minutes. These days, however, this is only a small part of what they do. To add value to the organisations in which they work they should also act as:

• An adviser to the Board on a plethora of issues including reputation risk;

• The organisation’s governance professional; and

• A communicator for the Board both internally and externally.

Adviser to the Board

An important part of the role of a modern day company secretary is to be an adviser to the Board, especially on issues such as reputational risk.

The company secretary should be able to do this as they are probably the only person in the company that has an overview of the whole organisation. This is because the company secretary should be involved in many of the major business processes, strategy development, monitoring and evaluation, risk management, human resource, liaison with stakeholders, management and the Board, production of the company’s Annual Report and Accounts and other periodic reporting, legal and governance compliance, among them.

An effective company secretary should be a ‘bridge’ for information, communications, advice and arbitration between the different


governance parties, both within and externally to the organisation. These include the company’s owners, its stakeholders, the Board, the Management Team and individual members of the Board and Management Team. This allows the Company Secretary to provide advice to the Board on all aspects relevant to the decision-making process including reputational risk.

The company secretary is often termed the ‘conscience of the company’ as they are required to protect the reputation of the company, some would claim its most valuable asset. They do this through acting with integrity and independence ensuring that both the Board and the company comply with not just the ‘letter’ but also the ‘spirit’ of the law, the company’s values and promises and the company’s license to operate.

When the role of the company secretary is combined with that of another, for example the Head of Legal, it is argued that this compromises the independence of the company secretary as they are answering to management as well as to the company.

Best practice to protect the independence of the company secretary and allow them to give unpalatable advice from management’s point of view to the Board is to have the appointment and any removal confirmed by the Board as a whole. Often the company secretary will also have a reporting line into the Chairman.

A recent study in the UK criticized many company secretaries for not being ‘commercially minded’ or aware. This they saw as being an important feature of the job especially when advising the Board. To be commercially aware, an individual must understand the business they are in, and be able to advise the Board so that they can make good practical decisions. To be commercially aware a company secretary should therefore make sure they:

1. Understand how their company makes money and creates value

2. Understand what their company needs, now and in the future, so that it continues to make money and create value

3. Have a thorough understanding of their organisation’s competitive advantage

4. Keep up to date with the industry/sector in which their organization operates.

Governance Professional

It is recognized best practice that to carry out their duties effectively as the governance professional a company secretary should hold a senior position in an organisation not a clerical one, be commercially minded and be appointed and removed by the Board.

Being in a senior position will enable the company secretary to provide essential practical support to the Chairman and other members of the Board, both as a group and individually, before, during and between Board Meetings. In addition to meeting management, the Secretary should also be responsible for ensuring that:

1. Good Board Practices are put in place. These include ensuring that:

a. The roles and authorities of all governance parties are clearly defined and that the parties are aware of them and their rights, powers and liabilities

b. The board is well structured and has the appropriate composition and skills

c. There is an annual evaluation of the Board, any Board Committees and the individual members of the Board which results in an action plan, key performance indicators and training for all those involved.

2. The Company is transparent in all its activities whether this is its communications internally and externally, disclosures, recruitment processes, contractual arrangements etc.

Elevating the Role of the Company Secretary – Lessons from the FTSE All Share may 2012 The All Party Parliamentary Corporate Governance Group.

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3. That there is an effective control environment in place within the organisation. This could include:

a. Establishing an independent audit committee or ensuring that audit issues are brought to the Board’s attention.

b. Assisting the board to evaluate the effectiveness of the risk management framework including internal control procedures

c. Liaising with the internal and external auditors and helping the Board assess their performance and independence.

d. Liaising with management to ensure that effective management information systems are established to create a flow of information to the Board for effective decision-making.

4. The company behaves as a Good Corporate Citizen. This should include:

a. Ensuring that the company complies with the ‘spirit’ not just the ‘letter’ of all relevant laws,

regulations, standards and codes, thus helping to protect the reputation of the company

b. Helping the Board to develop an ethical culture based on shared values and a code of ethics applicable internally and also externally through the supply chain.

c. Advising the Board on how ethical behaviour should be rewarded

d. Assisting the Board to consider the economic, social and environmental factors for the company and how to increase the positive and lessen the negative effects of each

e. Promoting the long-term view of value creation and sustainability

5. The company is committed to good governance. As the primary governance professional the company secretary should be very familiar with a country’s corporate governance framework including its code of corporate governance. The company secretary has responsibility for advising the Board not just on the letter of the Code but also on ‘spirit’ of it. A commercially minded company secretary should

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be able to advise a Board on how corporate governance can be applied as a benefit to the organization not just as a mechanism for ‘checking boxes’ on a list of requirements in the Code.

Communicator for the Board

Between Board meetings the company secretary should be the focal point for communications between the Chairman and members of the Board and between members of the Board and Management. S/he is at the centre of the decision-making process and is key to the efficiency and effectiveness of the Board and hence the smooth running of the company.

A company secretary should have a close relationship with their Board and individual Board members. S/he should also have a close relationship with management especially the Chief Executive Officer as they often form a bridge between the two. This is why it is important for a company secretary to have strong diplomatic and negotiation skills.

The company secretary is often also the primary point of contact for the Company’s owners and is responsible for the maintenance and management of shareholder records, organising shareholder-related events such as Annual General Meetings, the paying of dividends, shareholder communications and producing and issuing the annual report and accounts.

Company secretaries also have a role in stakeholder management. They should be able to advise and assist their Boards on identifying which stakeholder interests and expectations are legitimate and how these stakeholder interests and expectations can be managed efficiently to protect the reputation of the organisation.

The Misunderstood Role

The problem is that the role of the company secretary is often misunderstood even by those who have the responsibility for carrying out the role. Unlike for lawyers, accountants and other professionals most countries do not prescribe that company secretaries have to be a qualified member of the global professional body ‘The Institute

of Chartered Secretaries and Administrators’. They allow other professionals such as lawyers and accountants to carry out the role. These professionals often slant the requirements of the role to their own discipline’s strengths, skills and experience. A qualified company secretary should be able to provide a ‘holistic approach’ encompassing all disciplines, legal, financial and strategic.

If a company secretary is senior enough, has the proper skills, is commercially minded, and most importantly has the backing of the Board they should be able to provide advice that helps a Board avoid the type of governance scandals we have had of late. I am not saying there will never be another scandal but at least Boards will be better informed. Having a properly qualified, commercially aware company secretary is of vital importance especially if organisations are to perform better and be more sustainable bringing the economic benefits through wealth and job creation to countries.

Boards also need to ensure that the governance role is not seen as purely a compliance role within their companies. Many companies are asking their lawyers to act as their governance professionals instead of employing a qualified company secretary as they see a corporate governance code as something to be complied with. Lawyers are used to complying with laws and regulations which are minimum standards. They often apply the same approach to governance and hence fail to protect the reputation of the company which may require the application of a higher standard than just the law. The recent PR issues at Starbucks Coffee Company are an example of this. The company complied with the laws relating to its tax liability in the UK. It did not, however, consider the potential reputational impact of not paying taxes in a country suffering from recession.

In conclusion it can be said that while the Board makes the policies and takes decisions, it is the company secretary that has the responsibility to ensure that they are in ‘the best interest of the company’ and that they are implemented by management as such it could be argued that the company secretary is the ‘backbone’ of the company and a very essential role in any kind of organisation.

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THE LEADERSHIPSHOCK OF GOVERNANCE

ARTICLE BY NICOLAI TILLISCH, FOUNDER, DUAL IMPACT

Nicolai Tillisch is an executive coach and facilitator, who helps business leaders and their organizations to build capabilities and achieve extraordinary results. His extensive work in the Middle East forms the basis for his book, Effective Business in the Gulf: Mastering Leadership Skills for Greater Success. Nicolai is the founder of Dual Impact, the executive coaching and consulting firm. Earlier in his career, he was a management consultant with McKinsey & Company and has held executive roles in a couple of international corporations.

A shock awaits many of the Gulf’s family-owned groups when they attempt to strengthen their corporate governance: the implications for executive board members and management are extensive. This observation is in no way an argument against governance. On the contrary, it illustrates how essential governance is to securing future prosperity.

Business leadership will never be the same again

The founders of the most successful groups have typically been both the owner and the leader of the business, and also a family patriarch. The impressive energy of these men is mirrored in the diversified conglomerates that they have created.

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The inherent complexity becomes evident when corporate governance and family charters begin to transform what is often very much one man’s work into a lasting institution.

Both the board and management are affected when corporate governance is strengthened, whether the motivation is generational succession, requirements associated with financing or partnerships, or an aspiration to better equip the business for the twenty-first century. Board members will shoulder a larger share of responsibility for the group’s strategic direction. The executive members cannot just congratulate themselves for the overall success of the group, but must increasingly pay attention to the viability of each individual business. Senior management in the organization will be asked to present plans and business cases for which they will be held accountable. Everybody in a leadership role must start thinking differently and the company’s method of operation will change.

This is a pattern of events familiar to any company worldwide that wishes to implement effective corporate governance. However, an observation from my research and work as an executive coach is that companies in the Gulf are more likely to underestimate the time and effort required to ensure a smooth journey. Two phenomena help explain this.

Success is a poor starting point for change

First, the extraordinary success of family-owned groups in the Gulf makes it harder for their owners to perceive the need for managerial and executive change.

Half a trillion barrels of proven oil reserves and 1.5 quadrillion cubic feet of gas reserves in the Gulf Cooperation Council countries do not provide fertile ground for pessimism. The more than 2 trillion dollars held in sovereign wealth funds in the region soften possible concerns about changes in the oil price in the short and medium term. In

Kuwait this equates to half a million dollars per national, while the numbers are roughly double for Qatar and quadruple for Abu Dhabi.

Almost anybody who has been in business in any of these six countries for a reasonable length of time has been helped by the region’s general growth. International companies needed local sponsors, which added stable income streams to family groups. The Credit Crunch challenged some families, but the conditions for restructuring have, to a large extent, been favourable. The governments are again pursuing aggressively expansive finance policies. The infrastructure projects announced, including those initiated by private investors, have been estimated to 3.45 trillion dollars.

However, an increasing number of industries are seeing the steadily growing demand outpaced by willing and accessible supply. The substantial cash flow generated by local groups is used to build more presence and capacity, and invest in neighbouring countries and adjacent industries. The region’s wealth and high activity level draw companies from all over the world. Just ten years ago, such entries were overwhelmingly opportunistic. They now commonly represent companies’ strategic priorities. Cities in the Gulf serve as hubs for the entire Middle East and sometimes parts of Africa or Asia, making the GCC countries regional home market. International companies are also placing higher demands on their local sponsors.

The example of Nestlé, the major nutrition, health and wellness company, illustrates the trend. The company entered Saudi Arabia with a sole sponsor in 1955. Nestlé announced its own direct sales and distribution operations in the kingdom, with more than 200 employees, in 2011. The company has also entered into various joint ventures covering a number of business areas. Much of its interaction with consumers and retailers takes place through its global web site, including a special section for the Middle East in both English and Arabic.

United States Energy Information Administration.SWF Institute.Zawya, November 25, 2013.Nestlé, press release, 11th of May, 2011.

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The region’s family owned businesses can no longer expect the general buoyancy of local economies to keep lifting their top and bottom lines. They have to compete for their market share and margin. What really counts in the early stages of an emerging market is to “do the right things”, such as selecting new products that are attractive.

Today’s intensifying competition makes it pressingly important to also “do things right”. The future winners will have to succeed in innovation, customer experience or cost efficiency. Meeting each of these requirements will test a company’s leadership and ability to execute.

Executives can be bought but effectiveness cannot

Second, the traditional approach for succession in Arab family businesses has been proven over time but today’s large family-run groups require an enhanced approach to ensure their future.

The Bedouin on the Arab peninsula had a very special serving person on hand when he received a guest to his tent. The custom involved host and guest looking each other deeply in the eyes during their conversation. The guest would merely extend his cup to call on the servant for more coffee, without changing position or disrupting the dialogue.

The special servant was the Bedouin host’s son. Serving the coffee was not his only task: he was there to listen and observe. Apprenticeship was interwoven in the tribal traditions. Sons followed their fathers to the majlis gatherings from a young age, as they still do to this very day. They got involved in the family business. Yet, no son was guaranteed to succeed his father. A new patriarch could be chosen through consensus among family elders and with involvement of their closest allies. This selection was made from among brothers, sons and nephews based on character, capabilities and connections.

As oil wealth began to accumulate, external managers were hired to help the family members run the business. An attempt was made to build close ties of loyalty by hiring as few clerks as possible. As businesses grew, much of the daily management tended to be delegated, while control was kept through a system of owner approvals and an internal audit function run by particularly trusted people.

Continuous growth led the big groups to rapidly employ herds of expats from other Arab countries, Europe and India among others. As keeping pace with growth was the top priority, less attention was placed on the effectiveness and development of the organization.

Thank you to Nasif Kayed, General Manager for The Sheikh Mohammed Centre for Cultural Under-standing, for reviewing this and next paragraph.

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While the approach has been a necessity, it becomes inefficient and expensive over time. When external hiring is required for almost any new position not given to a family member, from an executive seat on the board to senior management positions in the subsidiaries, then the problem becomes apparent. Any organization will occasionally need to import new talent, but the most effective ones are deeply engaged in nurturing their next generation of leaders.

Contrary to intentions, the old approach also jeopardizes loyalty. Tenured and trusted individuals with solid track records sit on boards, in advisory positions and at the higher management echelons of the Gulf’s family groups, but many lack either the appetite or understanding to do what it truly takes to address the pressing challenges that the business faces. Some consciously defend their positions by hiring people who are no threat, or managing their teams purely in their own interest. Others unintentionally become an extra and non-contributing layer in the hierarchy. This all results in the more ambitious, willing and able subordinate employees becoming disillusioned and cynical.

The potential must guide the leadership

Governance is not just about writing down policies and procedures: it involves appointing strong executives that can ensure the success of the business. Having said that, leadership is – just like corporate governance – a means to an end. Any consideration of corporate governance and leaders must start with the goal, which in business is to create value for the shareholders, and work towards it without violating laws and good ethics.

A sequence of four questions will help you dampen the leadership shock and enable the organization to live up to its full potential. The right answers will be unique for each business; just as corporate governance looks slightly different in every successful family group.

1. Where does the largest potential for wealth creation lie? When there is steady economic growth you can diversify your activities, but should typically concentrate your attention and resources when competition increases and markets follow a bumpier road.

2. What assets and capabilities are necessary to succeed? The attractiveness of a business ultimately depends on your ability to accumulate the relevant assets and capabilities that will place you among the winners in your specific field. Ensuring that you possess strong executives with relevant experience and clear sight is a critical element in this.

3. What corporate model should be applied? The motivation for organizing businesses in a group is that there are synergies between them, and you can use one to leverage the other. The nature of opportunities should determine at which end of the spectrum the group should fall: from holding company to integrated corporation.

4. How should the leadership be handled? After answering the above three questions, you have a proper foundation for assessing leadership needs. How many executive roles are pivotal? What backgrounds and merits should the executives filling these roles possess? How should the leadership work in the short term? How should the necessary talent be developed for the future?

Most professionals can become good leaders

Future leaders cannot be grown by merely delegating the task to an already stretched Human Resource department and allocating a budget to training. It is not that leadership cannot be learned. Almost anybody with a genuine interest can rise to become a good manager if they are willing to develop as a professional and gain the relevant experience. Most can also be helped to become effective leaders. However, ensuring that this process is reproducible throughout an organization requires that executives from the very top and line managers further down pay attention to good and bad behaviours, and promote people who are ready to make a significant difference.

Arab families know what it takes to groom a future patriarch. The chairmen of large family groups should ensure that the same persistency is applied more widely in the board and throughout the organization. With this approach quality leaders can be developed, ensuring the future success of the business.

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EMOTIONAL INTELLIGENCE (EQ)AND BOARD PERFORMANCE

ARTICLE BY BRENDA BOWMAN, LEAD TRAINERGLOBAL CORPORATE GOVERNANCE FORUM

Many companies in the Middle East and North Africa region are rapidly expanding and also facing succession issues. Such changes are likely to be reflected in changes in the board room and in a new set of relations between the board and the management. In this article, Brenda Bowman looks at how boards can adapt to changes and how important emotional intelligence, particularly by the chairman, is in this process.

The Board chairman and founder of the company convinced the Board that the time was ripe to expand. He persuaded the Board to offer the CEO position to a dynamic young executive with a successful track record in the European market. Six months later, the Chairman was worried. His tightly knit team of Board members was thrown off balance by the gap that had opened up between it and senior management and concerned by the stories of falling staff morale that drifted into the boardroom. The new CEO’s energy and drive pushed Board members out of their comfort zones, they felt stampeded by the pace of change and disconcerted by the increasing level of risk the company was exposed to.

This type of story is a familiar part of any restructuring, major change of key personnel or, in fact, in the daily management of relationships among Board members and between the Board and the company’s stakeholders. It involves the concept of corporate Governance, which according to the Organization for Economic Co-operation and Development (OECD), “involves a set of relationships between a company’s management, its Board, its shareholders and other stakeholders.” Making these relationships work, particularly in times of stress and change, requires Board members to pay attention to what is happening around them.

Drawing on ground breaking brain and behavioral research, neuroscientists and behavioral psychologists are clarifying the role of Emotional Intelligence (EQ) in harnessing the power and complexity of relationships within and across boardrooms and the workplace. Leading psychologists, such as Daniel Goleman, have documented that in determining star performers, EQ matters twice as much as cognitive abilities such as IQ or technical expertise . They link emotionally intelligent leadership and the bottom line, warning that an organization that does not recognize the need to embed EQ in its culture and its leaders does so at its peril. Leading corporations, such as Google, retail giant Target and General Mills, maker of Cheerios and Haagen Daz ice cream, have developed EQ and yoga programs for executives and employees. General Mills’ deputy general counsel describes the programs as “training our minds to be more focused, see with clarity, to have spaciousness for creativity, reduce stress and feel connected.”

So is what is emotional intelligence? EQ is the ability to recognize emotions in oneself and others and the ability to use this awareness to orient one’s behavior and manage relationships.

This recognition is new: only in recent years has a scientific model emerged of the connections and partnership between the impulsive, rapid responses of our emotional brain centers and our slower rational brain centers. And yet the simple fact that the brain is wired to experience feelings first and thinking second explains much about our behavior. The row between board members that seemed to blow up out of nowhere is the emotional part of the brain reacting rapidly to a perceived threat while the thinking part of the brain takes longer to respond. This precedence, seized by the emotional part of the

Daniel Goleman co-directs the Rutgers University-based Collaborative for Research on Emotional Intelligence in Organizations: www.creio.org Financial Times, Saturday August 25/Sunday August 26 2012 The Mind Business by David Gelles

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brain, is based on our evolutionary biology when vulnerable human beings had to make rapid fight-or-flight decisions that could result in eating or being eaten. Thousands of years later, we often overlook the essential and primary position of the emotional parts of our brains. We value rational, cognitive intelligence, the capacity to make hard decisions and relegate emotional intelligence to the department of human resource management. As a result, we fail to enquire about how our brains work and often ignore or deny the powerful impact that our feelings have on our behavior. We do not see that as well as reacting rapidly to perceived danger, the emotional part of the brain interacts continuously with the thinking, rational part of the brain. Nevertheless, emotions are part of decision-making, managing change, reaching consensus, relating to others and tolerating stress. Corporate leaders are now recognizing the cost to the organizational efficiency from low levels of EQ – such as poor relationships between Board members that reduce meetings to indecisive stalemate or hostile encounters. Boards are beginning to pay attention to the benefits of increasing their EQ skills. And since research demonstrates that a healthy brain remains plastic, continuously creating new neurons and making new connections, Board

members, whatever their age, can lean these skills. Neuroscientist Richard Davidson writes of the astonishing research showing how people of all ages can increase their EQ and develop focus and concentration, understand the motivation that drives themselves and others, read and respond appropriately to the cultural and contextual messages of their surroundings, and build the resilience to adapt to change without being overwhelmed by the demands of a competitive world.

Developing EQ requires attention and practice. Travis Bradberry and Jean Graves have surveyed over 500,000 people on the role of emotions in daily life and have developed programs to help corporate leaders identify their EQ skills, build these skills into strengths and enjoy consistent performance in the pursuit of their life objectives. Bradberry and Graves say that developing EQ is like building information highways between the rational and feeling centers of the brain. Some people are content with a two-lane road but others increase the traffic to such an extent that they develop five-lane superhighways between the two parts of the brain.

The first step in mastering EQ is to understand the four skills that make up EQ, how they build on each other and what they look like in daily interaction.

Richard Davidson and Sharon Begley, The Emotional Life of Your Brain, New York: Plume. 2012Travis Bradberry and Jean Graves, Emotional Intelligence 2.0, San Diego, TalentSmart, 2009

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DANIEL GOLEMAN DEFINES THE FOUR SKILLS THATTOGETHER MAKE UP EMOTIONAL INTELLIGENCE

SELF-AWARENESSSelf-awareness is the capacity to self-observe, identify and name one’s emotions.

SOCIAL AWARENESSSocial awareness is the capacity to detect others’ feelings, motives and concerns.

SELF-MANAGEMENTSelf-management is the capacity to manage feelings, moods and reactions to people and situations.

RELATIONSHIP MANAGEMENTRelationship management is the capacity to respond appropriately to people’s feelings and interests.


Self-awareness requires dropping the auto-pilot habits that carry us through the day without noticing our feelings and behavior. Two key questions are:

1. What kind of mood am I in? Our body language reflects how we feel and therefore how others perceive us. Everyone has constantly shifting moods. EQ involves being aware of these shifts and not falling unconsciously into a default mood. Once we pay attention to moods we can call in the power of the rational brain to change them.

2. What are my values? Our values define us and demonstrate an astute sense of our own needs and feelings and how to fulfill them. Like a company’s code of ethics, they can protect our integrity and dictate our personal boundaries. Strong personal values act as a compass to guide behavior and decision-making.

Self-management builds on self-awareness and guides choices about the way in which we respond to conversations and happenings taking place around us. Two key questions are:

1. Am I getting enough oxygen? Our brains demand 20 percent of ours bodies’ supply of oxygen. Taking a deep breath and counting to ten is well known advice based on the physiological needs of the brain. Pausing allows the thinking, rational part of the brain to catch up with the automatically rapidly moving emotional part of the brain.

2. What stories am I telling myself? We constantly interpret what we see and hear and feed this information into storylines that we carry in our heads. But often our stories are not based on reality. They may be just faulty interpretations of others’ words and behavior. Reviewing the stories we are telling ourselves gives the thinking brain center time to dial back a reaction based on misinterpretation and formulate a more rational response.

Social-awareness means sensing and understanding the moods of others and the emotional climate of a room. Two key questions to ask are:

1. Do I listen attentively to what is said and what is not said? Listening for what we need to know as well as what speakers want us to hear, engages the emotional and the rational centers of the brain. Registering the speakers’ emotional cues allows us to be receptive to bad news as well as good and deal with issues that might otherwise be hidden or missed in a conversation.

2. Do I recognize the culture and values of the organization? As we increase the number of connections with people, we gain crucial information about “how things work around here”. In other words we attune ourselves to the shared codes that distinguish the culture of our organizations and can therefore relate better to those we work with.

Relationship management means knowing that sustaining good working relationships takes patience and commitment.

1. Do I look for and draw on others’ good intentions? Consciously deciding that, unless proven otherwise, our fellow Board members’ intentions are good, the Board can reach reasonable consensus, generating more trust and candor at Board meetings and overcoming disagreements. Proceeding in this way allows the impulsive, super-alert emotional brain to relax since the thinking part of the brain has consciously taken control.

2. How well do I manage conflicts and disputes? Stress diminishes our capacity to listen and our ability to understand others’ perspectives. EQ helps us read the signs of trouble brewing in ourselves and in others. Empathy, diplomacy and tact create spaces in which we can show a willingness to work things out by talking over the potential conflict rather than escalating it with more aggression.

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To see what these skills look like in action, let’s go back to the case of the Chairman who was concerned about a failing relationship between Board and the new CEO. The Chairman invited the CEO out for dinner and explained his concerns. Initially taken aback, the CEO admitted that his focus had been on rapidly expanding into new markets. It had not occurred to him that the Board members wanted to be consulted. “I see the opportunities,” he said. “The history of the Board and its close relationship with management escaped me. To be honest, I don’t see myself slowing down. I think my energy and the urgency

with which I’m pursuing the company’s expansion is what I’m paid for. But I can and will reach out to the Board.” In the following months, the Chairman used his EQ to build trust between the Board and the CEO. He organized small, informal meetings between the CEO and the Board members, helping the fast-paced CEO earn the confidence of the Board and draw on its members’ experience. In doing so, he also created a space for the Board members to raise their concerns and in their conversations see for themselves the skills of the CEO who is pushing the company into expansion and improving the company’s prospects.


RESTRUCTURINGARAB STOCK EXCHANGES:

IMPLICATIONS ON GOVERNANCE..ARTICLE BY ALISSA AMICO, CORPORATE AFFAIRS MANAGER

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENTThe stock exchange industry has experienced a whirlwind of change in the past two decades, whereby most large international exchanges now operate as private and in some cases listed companies, not unlike the companies listed on them. Today, only 12% of the largest stock markets which are members of the World Federation of Stock Exchanges are organised as associations and even demutualised markets are now a minority, at 14% globally. While privately owned and self-listed exchanges are now widespread across the Americas, Europe, and parts of Asia, even 15 years ago, this scenario would have been unimaginable.

Arab exchanges remain somewhat of an outlier in the world of increasingly privately-owned and self-listed exchanges. This reflects the history of the emergence of exchanges in the region as governmental bodies, with the exception of the Palestine Exchange which emerged out of a private sector initiative. Apart from the Palestinian bourse, the Dubai Financial Market which self-listed 20% of its shares, and four exchanges whose ownership is mutualised , all other exchanges in the region are organised as state-owned, incorporated or administrative entities. Exchange privatisation has not been a hot topic in the Middle East and North Africa (MENA) region until recently, owing to the history of institution

building and the structure of capital markets in the region. However, the interest in restructuring the ownership and legal form of Arab exchanges has grown in recent years, as witnessed by the ongoing discussions related to the corporatisation and privatisation of the Kuwait Stock Exchange and the demutualisation of the Moroccan Stock Exchange. Borsa Istanbul was transformed into a corporate entity last year, following significant structural changes that saw the merger of Turkish securities and commodities markets. Tadawul was corporatised even earlier, paving the way to other potential ownership changes and other bourses, such as the Lebanese and Egyptian exchanges, are increasingly interested in exploring similar ownership transitions.

A number of important issues relevant to the future development of Arab capital markets and, more narrowly, for the ongoing development of corporate governance practices in listed companies are raised by these actual and potential ownership transitions of Arab bourses, which remain a centrepiece of national capital markets and financial center development strategies. First, how might the new ownership arrangements affect the role of stock exchanges as “guardians at the gate” of good corporate governance?-- Secondly, would transition to private ownership help Arab exchanges address some of the market development challenges such as increasing

This article is based on report of the OECD released in December in Oman. The full report, including case studies of individual markets, can be accessed at: http://oecd.org/daf/ca/mena-corporate-governance.htm.The World Federation of Stock Exchanges (WFE) is trade association of 62 publicly regulated stock, futures and options exchanges. These include the Casablanca Stock Exchange (Bourse de Casablanca), the Iraq Stock Exchange, the Tunis Stock Exchange (Bourse de Tunis) and the Amman Stock Exchange.Four of the region’s markets, including exchanges in Damascus, Beirut, Kuwait and Cairo are currently organised as public entities and have no corporate form.For a more detailed exploration of the role of MENA stock exchanges in corporate governance, please refer to the OECD’s earlier report http://www.oecd.org/daf/ca/RoleofMENAstockexchanges.pdf

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listing or liquidity that they have been facing in recent years?

To answer these complex questions, this article first examines the motivations of the ownership transitions, the practical considerations to ponder in these transitions, and finally the implications in terms of market and regulatory risks raised by the questions above. First turning to the motivations, it bears to note that the economic context and hence the motivations of Arab exchanges to broaden their ownership, either through demutualisation or privatisation, are different from those that incentivised European and North American stock markets to do so. Competition among exchanges in the region is rather minimal and most exchanges do not require additional capital to finance expansion or technology acquisition.

Rather, a key driver of ownership transitions is the interest of these markets to have a greater flexibility in their operations and less governmental interference (or in the case of mutualised exchanges, broker influence). The perception of executive management of a number of exchanges in the region is that privatisation and demutualisation, by liberating them to pursue more innovative and perhaps aggressive strategies for development, will enable them to address the recent slump in listings and liquidity. Exchanges interested in adopting a private-sector based ownership model appear to be also encouraged by the fact that most of the largest international markets have done and continue to do so.

Demutualisation and privatisation is further seen as a means to put exchanges in the “same outfit” as listed companies, by forcing them to adopt the same governance and listing standards as issuers.

For self-listed bourses who are subject to the listing requirements, the adoption of higher governance standards sends a positive message to listed companies. Compliance with regulations for listed companies, and notably with the local corporate governance code, might motivate governance reform within MENA exchanges, for example, by replacing current government appointees on boards with independent directors.--

Whether Arab exchanges will be able to achieve their market development or governance objectives through privatisation or demutualisation remains unclear. The impact of stock exchange demutualisation and privatisation has been varied across the world. In Europe and North America, expectations that exchanges become profitable and trade at high price-earnings multiples has put significant short-term profitability pressures on bourses. The competition between regulated exchanges and off-exchange trading venues, which proliferated in North America and Europe, has further exacerbated them. For the first time in a decade, WFE member exchanges reported a significant revenue decline last year.

The conversion of stock exchanges to for-profit entities also raised important issues in terms of their regulatory responsibilities. A key concern expressed by regulators globally is that attempts to maximise profits and shareholder value by demutualised or privatised exchanges might come at the expense of self-regulation and supervision of listed companies by exchanges. The risk of a regulatory race to the bottom, including in corporate governance standards, has been much discussed among regulators and in the literature. To address the potential conflict of interest between their profit-making and regulatory responsibilities,

Competition tends to be especially low for listings which are usually local (with the exception of few listings of large Arab companies outside the region). However, competition for regional or domestic capital, especially institutional capital, is quite robust. Already, exchanges in the region have introduced a number of substantial regulatory and structural changes such as introducing secondary listing tiers to attract SMEs (i.e. Qatar), entering into emerging market indices (i.e. UAE and Qatar) and introducing a dual listing regime (i.e. Saudi Arabia) to address related challenges.Almost all of the largest exchanges globally are privately owned. The Tokyo Stock Exchange was the last large stock exchange to privatise in 2013.That said, many of the region’s state-owned markets, even those which are unincorporated, have governance arrangements that reflect strong private sector presence. For instance, the Muscat Securities Market, which is a government-owned exchange, has a board of directors representing a variety of interests.

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for-profit exchanges worldwide have moved to establish separate entities to conduct regulatory functions or outsourced their regulatory functions to an independent third party.

While such arrangements might be plausible in the region, and especially in the GCC where exchanges have limited self-regulatory and market oversight functions, the transitions of Arab stock exchanges to full or partial private sector ownership may actually complicate regulatory coordination between exchanges and securities regulators. Exchanges organised as governmental organisations often operate under direct oversight of securities regulators and this relationship might become more complicated to manage if they were organised as for profit entities and/or if there were multiple exchange operators.

For a number of jurisdictions - not least Saudi Arabia, the UAE, Turkey and Qatar - which are vying to establish their financial center dominance in the region, private ownership of the exchange might be more difficult to manage. After all, privately-owned exchanges might have objectives other than those promoted by governments as part of their broader financial sector development

strategies. In addition, regional policy coordination (e.g. a single set of listing rules being discussed in the GCC), might be more challenging to achieve if exchanges were privately-owned.

In addition to such regulatory concerns, a number of practical modalities need to be carefully considered before Arab exchanges decide whether private ownership might be suitable as a model. The first and perhaps the most obvious question that arises in this regard is who to transition the ownership to. The choice of potential investors in the restructuring process is crucial to consider from the outset of the restructuring process as it affects the sequencing of reforms. If a sale to a strategic investor such as another international exchange operator is feasible and desirable, the ownership transition may be accomplished much faster than if no clear buyer is available.

In a number of instances, opening capital to financial institutions, notably banks, is one of the key options being considered for exchange restructuring. While banks might be obvious investors in exchange privatisations, bank ownership of exchanges in the MENA region poses multiple concerns, not least the emergence

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of banks as systemically “too big to fail” actors. An important conflict of interest as far as bank ownership of exchanges is concerned is that banks in the region account for a high proportion of listed companies, which would result in banks effectively be supervising their own listing, unless all bank supervision powers are transferred to the central bank and/or to the securities regulator. Self-listing, while removing some of these conflicts of interest, might be difficult to orchestrate and would introduce immediate market pressures that exchanges in the region are not used to dealing with.

The timing of privatisation or demutualisation is also important to consider. For instance, the Kuwait Stock Exchange saw its restructuring process commence in parallel with the establishment of the Capital Market Authority, which complicated the corporatisation and its envisioned sale. The Beirut Stock Exchange currently finds itself in a similar predicament. These experiences clearly demonstrate that the capital markets oversight infrastructure must be firmly in place before exchange ownership transitions are put into place to allow for an orderly transition of regulatory responsibilities. In this region, where corporate governance codes are relatively young and their enforcement is at early stages, it is important that the regulatory bodies are clear about where lines of responsibility lie.

Last but not least, the impact of demutualisation and privatisation on the governance of exchanges themselves must also not be underestimated. Although the governance arrangements of most state-owned and mutualised markets in the region demonstrate the participation of a diverse range of stakeholders on the board, the changing ownership structure would certainly impact on board composition. In a self-listing context, the impact on exchanges’ governance will likely be greater and appropriate mechanisms would have to be introduced to supervise the exchange’s own listing and the creation of required reporting to shareholders following it. This might require serious culture shifts for some exchanges that have historically not been subject to disclosure on their profitability, board meetings, shareholder requests and related matters.

Ultimately, the question is whether demutualisation or privatisation “will pay” in terms of capital market development, by helping markets attract greater listings or portfolio investment. Looking at the issuer side, the answer appears far from clear. Ownership of exchanges by listed companies for instance, an option which was contemplated by the Kuwait Stock Exchange, can create situations where some companies maybe even more reluctant to list their shares in a marketplace which may be, for instance, partially-owned by a competitor. On the other hand, it is plausible to suggest that exchanges may develop a greater institutional investor base and hence attract more issuers if they were privately-owned and more flexible in their strategic decisions.

While exchange ownership structure is unlikely to affect the interest of retail investors, which in most markets of the region are the biggest source of turnover, it would likely affect institutional investors. Foreign institutional investors may be encouraged by developments in capital markets in the region if, for instance, a large international exchange became an investor in one of the Arab exchanges. Private sector ownership of exchanges would likely allow exchanges to deal with the political sensitivities surrounding consolidation that many observers see as a prerequisite for Arab capital markets to appear more prominently on the radar screen of large international investors.

Further consideration of the suitability of privately run exchanges to local economies at this juncture of their development is warranted. Demutualisation or privatisation “may pay” for some exchanges in the region but ownership transitions should not been seen as an automatic solution to the listings and liquidity challenges that many of the region’s exchanges are facing. These latter problems are serious and merit reflection, in particular to examine whether the existing listing regimes and regulatory incentives are effective in mobilising greater interest from issuers and investors. The OECD’s Capital Markets and Corporate Governance Taskforce, composed of heads of stock exchanges and securities regulators, serves as a forum to address this and other issues related to capital markets development and corporate governance.

The opinions expressed in this article do not reflect the official views of the OECD or its member countries

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GET READY FOR MORE INVESTOR SCRUTINY ON ENVIRONMENT,

SOCIAL AND GOVERNANCE ISSUESARTICLE BY STEPHEN DAVIS, PH.D. AND JON LUKOMNIK

The UN Principles for Responsible Investment has taken an important step forward with the launch of a new framework, which will require its institutional investor signatories to report publicly in much greater detail how they integrate environmental, social and governance (ESG) issues into their investment policy.

Though the Principles are aimed at investors rather than companies, the new regime may have a significant impact on companies in the Gulf region. Those that are listed may find their investors becoming more interested in engagement on ESG issues. Those that are not listed may still note a growing interest in the financial community on how companies respond to these challenges, as well as greater pressure from stakeholders to increase their reporting on sustainability issues.

The Principles are the product of an initiative undertaken in 2005 by then UN Secretary General Kofi Annan who invited a group of the world’s largest institutional investors to develop a new approach to responsible investment. The resulting launch of the six principles at the NY Stock Exchange in 2006 marked an important milestone in responsible investment, not least because of its global significance. Responsible investment was no longer just an issue for individual national

markets in the developed world. An important feature of the UN Principles is its worldwide reach.

Nonetheless the impact to date has been modest. In the US, for example, general counsels and other governance professionals have been slow to understand the relevance of the principles to capital markets. Few US-based asset owners—though some major asset managers--have signed on, and only a comparative handful of investors raise the principles when meeting with companies in which they hold stakes. The new framework means this could be about to change.

Until now, signatories had little obligation beyond payment of an annual fee and the publication of a bland statement of their adherence to the principles. Going forward, however, they will have to fill out a detailed 34-page online questionnaire, and their answers on portions of the document will subsequently be published. Both asset owners and asset managers will be required to do this and, though many are unhappy about the additional workload and exposure, they are under pressure to comply. Few are likely to want to suffer the embarrassment of being de-listed from the Principles or to be exposed as taking them lightly in comparison with rivals or peers. Asset managers, in particular, could face the

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loss of clients, especially in Europe where asset owners are more dedicated to the integration of sustainability concerns into the asset management discipline..

By mid 2014, therefore the PRI expects 800 of its signatories to have used the reporting framework to disclose their policies, processes and performance in an objective and systematic way, using a common language to describe what they do. According to Wolfgang Enshuber, Chair of the PRI Advisory Council, “calls for the global investor community to be more transparent about how it is responding to the governance and sustainability challenges that define our era have grown louder since the financial crisis.” The new framework, he said, “will enable institutional investors to demonstrate how they are embedding material ESG factors into their processes and working to strengthen the governance of companies and the market as a whole.”

There are a total of six principles, but the first three are the ones that are most relevant to the new framework. The first commits funds to integrate environmental, social and governance risk factors into investment analysis so it is an important driver of their decisions whether to buy or sell securities and whether and how to engage with company

managements. The second Principle requires signatories to be “active owners and incorporate ESG issues into ownership policies and practices.” This means going further than simple voting of shares at general meetings. Finally, the third Principle requires companies to integrate and report on ESG factors through channels such as the Global Reporting Initiative.

The new reporting framework will therefore compel both asset managers and owners to describe in detail just how they mesh responsible investment approaches into their trading and asset allocation decisions. This is likely to lead to a greater emphasis on ESG research, either conducted in-house or bought in from outside. It also means they will pay greater attention to company disclosures on governance, climate and workforce-related issues. Boards are likely to need to step up their reporting on these issues.

Asset managers will also have to disclose their approach to voting and engagement in greater detail, as well as what steps they have taken to push companies to undertake integrated reporting. Behind the scenes, therefore the pressure is growing. Companies everywhere are likely to feel the impact.


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CLIMBING THE LEADERSHIP LADDER THE OTHER SIDE OF

CORPORATE GOVERNANCESPEECH BY SHEIKH HUSSEIN A. AL BANAWI

To characterize corporate governance as simply a tool to manage corporate risk and to coin it as such, falls way short of the true essence of what corporate governance is all about.

Surely, the enactment of corporate governance helps shareowners to achieve organizational longevity, which in turn allows our enterprises to evolve and grow even when faced with the inevitable state of change at the helm.

Many of us agree that organizational longevity is a prerequisite to a sustainable economy. However, as passionate and prudent many of our corporate leaders are, countless organizations are still vulnerable and are not structured to survive change of stewardship without disruption. Invariably, anytime we experience as a society the demise of a flourishing business just because good governance was not an integral part of its structure… We all lose.

Hence, the pursuit of enacting good governance as a pillar to an organization’s decision making process and modus operandi makes the case more compelling that corporate governance is first and foremost about effective leadership, and risk management is just one component of it.

Any present time, a leader aspiring to new highs on a personal or professional level, should look at instituting corporate governance as his or her ticket to be a better leader, a more effective leader. How?

Anyone who is in a leadership role, is faced with a choice; either keep doing what we do best exercising our authority and applying our leadership skills in one’s familiar organization, or embark on a mission to better prepare one’s organization for the future.

The goal is to create a work environment that even though we would not be the know it all, do it all, the center of attention any more, as is in the first choice and yes, our authority won’t be as central or definitive anymore; however, an organization with corporate governance as part and parcel of its decision making structure with checks and balance, will make today’s leaders far better tomorrow.

Corporate governance will provide the leader at the helm and executives within the senior ranks the ability to recognize the inner play of consensus building and the power of improved communication to sell a vision, a strategy, an opportunity, or a

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new course of action. Your leadership skills will be honed and tested as you work with a board of directors that establishes oversight and holds senior management accountable. And let’s not forget the personal learning we gain from bridging team differences, or the insight we acquire from reaching smart compromises. All of that and more while listening and recognizing others points of views dissimilar from our own.

Every accomplished leader can tell you plenty about the merit of having early on to apply their leadership skills in a work environment, where they had to work hard to negotiate with internal and external stakeholders, as a way to achieve and excel.

Taking others for granted and not appreciating that we cannot do what we aim to do without regard to internal corporate dynamics will not develop better leaders. I would go further and argue that we would grow to be less effective in a changed environment, because we will not be able to effectively cope with the ever increasing complexities of the corporate world of tomorrow.An entity with corporate governance as central to its decision making structure is our ticket to leadership development; otherwise we risk maintaining our leadership skills at status-quo, and eventually with diminishing returns.

Obviously, we need to adjust to the fact that our authority and power will be scrutinized and placed in check, but that does not mean it is contained or put to question.

Effective leaders thrive in a work environment, where they have to navigate the unpredictable terrain towards achieving their goals and their abilities are enhanced as they manage diverse constituents.

So next time someone tries to sell you corporate governance as a tool for risk management, remember that not having corporate governance in our countless organizations presents an undefined risk to our credibility as corporate leaders and even a greater risk to the long term survival of our various organizations.

Start by putting together a proper board of directors, don’t pick friends for the sake of familiarity at the


expense of expertise and wisdom, don’t make it a club, pick a board with diverse backgrounds and impeccable integrity. They have to be interested to join the company and are professionals in their own spheres. Start the transformational journey of instituting good corporate governance working hand in hand with your board. Don’t be afraid to discuss your innermost worries with the board; the biggest thing you have to worry about is what you don’t tell the board, not what you tell them.

Engage trusted lieutenants in the organization, who wholeheartedly subscribe to corporate governance as a living concept. Keeping in mind that there are always few team members, who prefer to work in an environment where corporate governance is not enacted; those have to be identified as their agenda might not align with the company’s agenda towards transformation.

Keep front and central as you go through the process of defining the right governance structure for your company, that every time you engage in the process of negotiating the relevant policies and principles that it is less about you and more about your organization. Aim to set up a structure that will enable the organization to manage three key objectives: First, succession at the top; Second, the quality and consistency of decision making; and Third, the checks and balance in the decision making process.

Indeed, we should tick the boxes on all of the above without compromising speed and response time in a highly competitive world.

That should be the aim as you engage in this building block exercise with far reaching ramifications think more about the organization’s longevity, and less about your present time status and to what degree your authority will change. We need to agree to a certain given from the beginning; that the organization’s long-term survival should be our primary goal. We should not expose the company to the risk of rolling a dice, day in day out, when it comes to transition at the helm, and decision making. Gambling with a company’s future for the sake of just managing for the present is a bad trade off.

I will close with this, the practice of good corporate governance starts with the right mindset, and ends with rigorous execution.

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Partnering you for the next lapOver the past 30 years, National Bank of Fujairah has established a reputation as a market leader for business finance in the UAE. Our sector-specific expertise, local knowledge and client focus has served us and our customers well as we continue to work together and go the distance.

As we embark on the next leg of our growth journey and partner you in yours, allow us to dedicate our latest Banker Middle East Product Awards to you, our longstanding clients and partners, whose support and dedication continues to inspire us to greater success.

Banker Middle East Product Awards 2014 - Best Treasury Management- Best Trade Finance Offering - SME- Best Customer Service - Corporate & Investment Banking

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THE 7 MIDDLE EAST ANDNORTH AFRICA CORPORATE

GOVERNANCE CONFERENCE

TH

The 7th Hawkamah Conference was opened by H.E. Hamad Buamim, the Chairman of Hawkamah Institute for Corporate Governance and addressed by H.E Sultan Al Mansoori, Minister of Economy, United Arab Emirates, who called for corporate governance to be viewed as an enabler of sustainability of companies, as an enabler of better decision making, and as a pillar for company performance, and not as a compliance exercise.

Governance and leadership

The contribution of good governance to leadership was the overarching theme of the conference. It should not be seen as a framework requiring compliance for its own sake. “Governance is not only for control, but an instrument to do better,” said Osman Sultan, Chief Executive of the Emirates Integrated Telecommunications Company, du. A key point was a clear definition of the role of the board and its relationship to management. If governance isn’t taken seriously by the leadership

of the company it, won’t be taken seriously elsewhere, but companies with good governance have more efficient management and command a premium.

Iyad Malas, Chief Executive of Majid Al Futtaim, said family-owned businesses need to make many decisions. They need to understand the difference between ownership and management, but set in place an appropriate framework. His company had started having independent directors in 2005 and now the holding company had only one family member on its board.

Majid Jafar, Chief Executive of Crescent Petroleum, said it was important for family companies to make the transition to good governance earlier before they had to deal with succession, because after succession, the family ownership could become fragmented and then succession was more difficult.

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Partnering you for the next lapOver the past 30 years, National Bank of Fujairah has established a reputation as a market leader for business finance in the UAE. Our sector-specific expertise, local knowledge and client focus has served us and our customers well as we continue to work together and go the distance.

As we embark on the next leg of our growth journey and partner you in yours, allow us to dedicate our latest Banker Middle East Product Awards to you, our longstanding clients and partners, whose support and dedication continues to inspire us to greater success.

Banker Middle East Product Awards 2014 - Best Treasury Management- Best Trade Finance Offering - SME- Best Customer Service - Corporate & Investment Banking

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Convergence or divergence

Emerging markets should not seek simply to their converge corporate governance practices with those in developed markets, Mak Yuen Teen, of the National University of Singapore, told a panel on the ethical and cultural dimensions of corporate governance. Singaporean companies tended to have block holders, so it did not help much to buy in best practice from countries such as the UK which gave shareholders the right to move a resolution to dismiss a board on the basis of ten per cent shareholder support.

This did not mean, however, that companies in emerging markets had an excuse for ignoring governance. There were some absolute principles which applied everywhere, he said, including respect for the rights of shareholders and equitable treatment of stakeholders. The requirement was to tailor specific requirements to the local background. The experience of Asean countries with their different legal and cultural backgrounds had meant that even regional convergence was difficult. Ludo van der Heyden of France’s INSEAD business school agreed. The European Union had struggled to produce single rules.

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Who believes in diversity?

Everybody does, according to a straw poll at the conference as part of an Oxford University Union style debate on the subject. The result made life harder for “Team B” led by Francois de Montaudouin, founder of Orbite Middle East, whose task was to argue the case against gender diversity as an issue for boards. But they weren’t to be defeated that easily. Effective boards were the real issue, his team argued. It was right to remove obstacles to women in furthering their careers. Perhaps maternity leave should be lengthened, said Doraliz Ortiz, ENOC Group Legal Adviser, but diversity for its own sake was not the point.Both sides argued against quotas, which are being imposed in a range of European countries with

Germany set to become the most recent convert. Roberta Calarese, Chief Legal officer of the DIFC, made perhaps the most effective point when she said diverse boards brought a better perspective. But Team B, with its careful denunciation of box-ticking, got an accolade at the end for the most thought-provoking arguments, even if it lost the case.

Meanwhile H.E. Mona Al Marri, Chairperson of the Dubai Women Establishment launched the results of a study on the challenges facing women on boards in the UAE. Interviewees quoted in the study had some pertinent advice for fathers. Send your daughters abroad for education, include them in family business succession plans and be proud of them, the study reported them as saying.


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Governance commands a premium

Half the delegates to the conference said they would pay a premium of up 30 per cent premium or even more, according to a poll conducted during the last panel. “There is a premium for good governance,” said Holly Gregory of the US law firm Weil, Gotshal & Manges. “The more regulation a country has and the more mandatory disclosure and transparency, the more the premium goes down.

But what makes for good governance besides transparency. Frank Dangeard, Chairman of the Hawkamah International Advisory Council and Deputy Chairman of Telenor in Norway, said that what really matters is a functioning board. Boards should ensure they have a good management team, added Gregrory. If the team is weak the board should not start to do their executive job for them, they should replace them. Good boards and a bad management team are easier to deal with than a good management and a bad board. Management can’t fire the board, said Dangeard.


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issue01/2014

thehawkamahjournal

a journal on corporate governance & leadership

The Governance Journeyof a Family BusinessAn Interview with Fouad Makhzoumi,Chairman of Future Pipepages 06-12

pages 13-17

pages 49-54

A Family Business in the Second GenerationInterview with Vishal & Rajiv Mehta,Co-CEOs of Dimexon

Highlights from theHawkamah Annual ConferenceArticle by Peter Montagnon

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