hany abou el fotouh_press quote (41)
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8/3/2019 Hany Abou El Fotouh_press Quote (41)
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Article Directory: ArticleSlash
Category: Finance
The Cosmetic Corporate Governance; Will companies learn lessons from theGlobal Financial Crisis!by HANY ABOU-EL-FOTIUH
The global financial crunch sheds light on the significance of understanding what hashappened in big financial institutions which collapsed and what we need to do to addressdefects in the thin-surfaced cosmetic arrangements of corporate governance andaccountability. Obviously, the problems were not due to lack of corporate governance in theseorganisations, but how rather corporate governance framework has been used to misleaddifferent stakeholders including the regulators. If something could be considered a teachableepisode, it is the current financial crisis and how poor corporate governance helped to producethe shocking results.
The impact of the crises started to diminish. Still, all key players, including top executives,regulators and investors, have much to learn from the global financial failures. TheOrganisation for Economic Co-operation and Development (OECD) Steering group has issueda report entitled Corporate Governance Lessons from the Financial Crisis . This Reportconcludes that among major contributors to the financial crisis are failures and weaknesses incorporate governance arrangements. When they were put to a test, corporate governanceroutines did not serve their purpose to safeguard against excessive risk taking in a number offinancial services institutions.
Other key contributors to the global financial crises include failures in transparency, failures inlending standards; failures in prudential standards; failures in risk-management.
As to the remuneration of top executives, the real problem was not the amount they receive; itis how companies pay them. The bad bonus culture encourages a short-term thinking: hit as many deals as you can this year and get a larger bon us! That approach pushed executives tofocus their attention to achieving short term objectives at the expense of sustainable growthobjectives.
Most financial institutions link compensation to quarterly performance, encouraging short-termgambles. When the bets win, executives get the rewards, but when the bets sour, as they havein the latest financial crunch, the executives who took the risks do not have to return their
fat-cat bonuses. The executives were, in most cases, no longer gambling with their own networth. It was the shareholders who took the hit. Thus the executive greed acted as fuel thrownon the fires of and contributed to the blazing global financial crisis.
The right approach if we are going to keep the financial system from being misused by topexecutives’ greed again is to maintain a partnership between the top executives andhave their net worth tied to the organisations' well-being. As a result, they would be cautiousabout taking big risks and discourage the malpractice of running after short terms gains. Also,we need to replace bonuses with better, longer-term compensation such as deferred cash payand restricted stock.
The directors of the troubled institutions appear to have provided only the thin-surfacedsupervision to control the greed of top executives. The boards of the collapsed firms carry thefull responsibility. Each month they see the numbers. They are also responsible for compliance
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with regulations. And they set the remunerations packages for the top executives. However thetroubled firms just ticked the boxes for good corporate governance in their annual reports. Inother words, there organisations presented an obvious example of the cosmetic corporategovernance to fool different stockholders including investors, rating agencies and regulators!
The current global financial crisis has shed light on how poor risk management could lead tocatastrophic results. The risk management systems have failed in many cases due tocorporate governance procedures rather than the inadequacy of computer models alone.
With the advent of new products such as sophisticated derivates and certificate of deposits,they posed unknown risks. Risk management may not have been up to the task since many ofthe standard quantitative models and users of these models regularly misjudged thesystematic nature of risks. To some extent this was due to product complexity and overrelianceon quantitative analysis. Sadly, many risk evaluations were wrong including those provided byrating agencies.
The directors of the collapsed financial institutions should have better understanding of the riskimplication at the time of taking decisions related to sophisticated products such as derivatives.The reality is many board members had inadequate knowledge on the sophisticated newproducts and likely were embarrassed to show that they lack the adequate knowledge! Herewhere directors’ education and orientation fails as best corporate governance bestpractice. On going education is important to ensure that the directors are familiar with allaspects of the company's affairs with a particular focus on risks. Each director must receivecustomized orientation programs in areas where he\she lack adequate knowledge inorder to be able to effectively undertake the fiduciary oversight role.
Finally, the concept that in bad times companies would be more interested in supporting theirprofitability and accordingly will not have time for corporate governance is irrational. Theintegrity cannot be compromised because corporate governance is not seasonal - it is for all
times and must be embedded in senior corporate executives and directors. Companies mustnot put corporate governance on the shelf in bad times. It is like a muscle, must be exercisedor it will atrophy
Hany Abou-El-Fotouh
Director Head of policy and Corporate Affairs & Board Secretary
CI Capital Holding, the investment banking arm of Commercial International Bank - Egypt
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