Governance is in short supply everywhere

Irish Times (Ireland)
By Chris Johns
July 1, 2013

It is tempting to think that we live in a country of low standards and dirty deeds in both political and corporate life. Maybe we do, but it is also clear, to me at least, that governance is in short supply pretty much everywhere.

Some years ago I had occasion to sit behind two CEOs of multinational firms, with significant operations in Ireland, on a flight to New York. They were comparing notes on the most corrupt countries in the world in which to do business. I guessed that they were going to name some far-flung country with a tin-pot dictator and not much legal structure. I even wondered, briefly, whether Ireland would be mentioned. They quickly agreed that the country in question was the United States. [EXPAND Read more]

That is not much evidence upon which to base conclusions about global corporate governance – and I have often wondered how serious they really were. But the story does illustrate what we know about corporate governance around the world: it is a very troubled area.

Niall Fitzgerald, once chairman and chief executive of Unilever, a few years ago wrote in this newspaper of his concerns about the way business is conducted in Ireland and how he feared that he would have had to compromise his principles if he had pursued a career here. My recollection is that his pretty damning indictment of Irish governance and ethics caused barely a ripple.

Ethics and governance are often intertwined, sometimes quite distinct. Brian Lenihanwas obviously a very ethical man, who set himself incredibly high standards. The mistakes his office made seem to me to be a catastrophic failure of governance: he was so badly advised. We had the financial equivalent of a nuclear accident and sent in the equivalent of plumbers and carpenters to fix it.

To this day we hear people saying there was no alternative to the blanket bank guarantee. That’s just wrong, in my view. We had the option of just guaranteeing future bond issuance by the banks, for example.

And I would really like to chat to those people who told Lenihan that Anglo and INBS were of “systemic” importance.

It is always clear when ethics are lacking. What is harder, much harder, is any attempt to define what exactly we mean by the term “ethical”. One of the key trade bodies of my own (recent) business – investment management – is the Chartered Financial Analysts Institute. It has an admirable one-page summary of what it considers ethical behaviour to be. But its “standards of practice” handbook runs to 219 pages.

That is a common theme running through any attempt to regulate behaviour, let alone define ethics. We get tangled up in heavy tomes that rapidly become unwieldy, often unreadable. I have spoken with several lawyers in recent years, people who proudly describe their role in drafting aspects of corporate law. They speak, almost with a tear in the eye, of the thickness and complexity of the legislation they have helped create.

Our definition of ethics can be very personal as well as deeply philosophical: the ancient Greeks wrote a lot about all of this and we still cite them for guidance. Appropriately, perhaps, I have often suggested to colleagues and employees that the best rule of thumb is less about philosophy and more about not doing anything that you would be unhappy to see reported in a newspaper.

Yet that simple rule can also go wrong: plenty of ethical behaviour can look odd to an outsider. “Just obey the law” is another obvious instruction. But lawful behaviour can also be seen to be quite unethical.

Regulation is one way to define and impose ethical standards. The US response to the most recent lapses is legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act. It appears to be one of those things that is being continuously written. In researching this article I found one 800-page version, another had expanded to 1400 pages. Other countries are rushing to revamp their regulatory framework in similar fashion.

Therein lies our opportunity. While a banking inquiry is clearly needed, we must also seize the moment and create regulatory structures that, in time, become the envy of the world.

We always seek to become more “competitive”. And we try to compete head on in areas like technology where everyone else is trying to the same thing. If Ireland can become a place where the rules of doing business are seen to be both sensible and simple, we can steal a huge march on everyone else. Figure out how to keep it simple: start with the tax code and move on to corporate law.

Unreasonably aspirational? Possibly, but this is the time not just to figure out what went wrong but also to put things right. If we want to be different, let’s become well governed. [/EXPAND]