The idea of corporate governance has really only emerged as a fundamental in business within the last decade to define a new age of clarity and transparency within the boardroom. In this time there have been huge efforts in corporate restructuring to build a more accountable, skilled, diverse and transparent board separate from management.
With a lot of these changes forced by external investor and consumer pressures, many companies view transparency and disclosure (T&D) measures as ‘box-ticking’ obstacles to growth and profitability. On the contrary, research and recent examples show that T&D doesn’t necessarily hinder company growth, and can actually promote it.
For a long time corporate cultural norms perpetuated the notion that the CEO had centralised power and stood at the head of the company. The board beyond the CEO acted largely behind closed doors and decision-making was opaque.
In this new era of transparency, new developments such as social media have underlined the importance of good governance. Some companies have made significant changes and welcomed T&D into their corporate culture. Others however, have been far more resistant to change.
Last year wasn’t short of scandals, which, aside from VW, included Toshiba, Valeant and Fifa, all of which had poor corporate governance and lacked T&D
The misfortunes of opaqueness and non-disclosure
Corporate scandals have often been a central motivator for increased T&D, and the exposure of poor governance acted as a deterrent to others.
As last year’s diesel emission scandal was exposed, Volkswagen illustrated how opaqueness, non-disclosure and overall poor governance can cripple a company. Before the scandal even came to light, there were constant warnings about the way VW operated. MSCI ESG ranked VW’s overall governance score April 2015 at 28th percentile, among the bottom of companies covered by the research globally.
The company was lower than 72 percent of the rest, flagged for counts of bribery, fraud, and collective bargaining. VW’s lax boardroom controls and peculiar corporate culture allowed for this environment, and experts argued the fallout was inevitable.
In September 2015, the German car manufacturer came under fire for fitting defective devices in 11 million vehicles to cheat on emissions tests. As stocks reached remarkable lows, and VW faced fines of up to $61bn (just in the US), the company began to crumble. The fiasco sparked vast amounts of scrutiny, most of which highlighted VW’s rather desperate need for greater corporate transparency.
When caught red-handed, the blame for many companies was deflected away from the top levels of management. Both the US and German executives deferred blame to lower level individuals or small groups. But that level of ignorance among all of higher management is hard to believe. Whether directly or indirectly, the scandal was allowed to unfold under someone’s watch.
Peter Van Vaan, Director of the Business Integrity Programme at Transparency International UK, said: “If the tone is not clear, and any deviation isn’t immediately corrected, people do believe that ‘well, the management say one thing but we’re allowed to do something different.’” He added: “In the case of VW, clearly someone somewhere down the line was encouraged, with quite a significant amount of effort, to create technology and software to cheat the system.”
A debacle on this scale would usually act as a catalyst for change. Yet VW’s recent decisions reflected a disregard for effective corporate governance and continued its culture of cronyism. Hans Dieter Pötsch, VW’s Chief Financial Officer since 2003, was announced a month after the scandal as the newest member of the board. The company continued to outright resist any change or restructure.
Last year wasn’t short of scandals, which, aside from VW, included Toshiba, Valeant and Fifa, all of which had poor corporate governance and lacked T&D. In the meantime, activism and ethical investing have gone mainstream, creating far greater external pressures for corporate restructures. And yet, there is a perennial problem that some are still unable or unwilling to recognise the need for a course correction.
Vaan said it’s easy for companies to view T&D as nothing more than just a “regulatory burden.” Often there is national pressure that “encourages box-ticking.” He added: “I think a lot of those working in finance have taken that approach to all the financial primaries and then further into the realm of ethics as well.”
Improved T&D imposes far greater responsibilities on the corporation; they are put under pressure to provide timely, consistent and accurate information to shareholders and the public regarding financial performance, liabilities, control and ownership, and corporate governance issues.
The upside to embracing transparency and disclosure
It is recognised that real transparency is scary, Jeffery Hollender said: “If you’re not scared by what you’re revealing, then you’re not being transparent enough.” The benefits reaped from a glass-walled company are more than worth it. Consumer and stakeholder trust are the most well-known benefits, but there is more to T&D.
Firstly, combining a high level of truth and specificity can increase revenue. An Engagement report summarised that transparency within a company can increase revenue by 18 percent, where opaqueness can decrease revenue by six percent. It can increase employee commitment and innovation; creating a trustworthy and comfortable environment helps ensure a lower staff turnover, greater productivity, and employee engagement can spur innovation and experimentation.
Another really crucial element to T&D is that it has the capacity to assemble proper and effective problem solving. Where opaqueness leaves major issues, better T&D instigates discussion and pushes for problem solving.
The difference between a company coasting and a company thriving has a lot to do with their attitude towards T&D. A good reputation, internally and externally among employees and fellow management, is at the core of business success and growth. Some companies that have had their reputations tarnished have managed to redeem their brand, and through large scale restructure and T&D measures, have risen back to the top as a serious competitor.
Siemens corporate restructure
Like VW, Siemens was found to have poor corporate governance. Also like VW, this resulted in a scandal, which in 2007 exposed large-scale bribes implicating countries such as Italy, Nigeria and Argentina to make contracts for power generation equipment. But what fundamentally differs between the two conglomerates is the approach used to rebuild.
VW went for the business-as-usual approach, which may find them in a similar situation in the future. Siemens, on the other hand, has more than embraced a radical restructure. All the efforts made have contributed to turning the enterprise around.
Peter Löscher took over as CEO in 2007, and pushed through a major restructuring in the following two years, a feat that investors say others would only achieve in a decade. Löscher himself stated: “about 80 percent of the top level executives, 70 percent of the next level down, and 40 percent of the level below that”, were replaced in the months that followed his appointment. Not only did Löscher radically restructure a company based on good corporate governance and increased T&D, Siemens now actively fights against corruption and bribery on a global scale.
Relieving the regulatory burden of T&D
Even with the evidence to the contrary, companies still perpetuate the idea that T&D is a regulatory burden. The fact is the task itself is really not as hard as companies are making out. Vaan points out the uncomplicated steps towards achieving effective transparency: “Don’t pay bribes. Don’t knowingly loan the money on behalf of the people that really you should be wanting to do business with. Don’t help the corrupt hide their money – these are pretty simple concepts.” He added: “If someone takes that seriously, it’s no longer box-ticking.”
The task is simple, but it is the readjustment of corporate culture and attitudes towards effective T&D that remains the greatest challenge. The purpose of T&D is not to present a checklist to stakeholders and investors, but rather provoke discussion and outcomes that encourages positive change.
If the board and executives aren’t interested in ethics and change, and are only driven by profit maximisation, then meaningful change is hard to achieve. Vaan said: “No amount of box-ticking, compliance or systems will be able to compensate for having people in your business that are not interested in doing the right thing.”