24 minute read
Championing integrity in Gulf countries
A new voluntary initiative is setting the benchmark for honourable business
Throughout my career as a legal counsel and now as head of a Gulf-led, non-profit organisation that promotes transparency and accountability as a measure of business competitiveness, I have often seen the word integrity make its way in to conversations.
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Carla Koffel
Executive Director, Pearl Initiative
the forum’s session on the role of integrity in fostering secure and peaceful communities felt that right business conduct was integral to ensuring peace and stability in the region. story is not very different internally. Domestic A majority of respondents also agreed that investors frequently face obstacles obtaining Gulf businesses understand, in varying key information regarding the ownership, degrees, the business case for integrity and performance and the business integrity of anti-corruption practices. However, compared their partners, suppliers and customers. to this, close to 55 per cent of those surveyed From a policy standpoint, the decade-long agreed that regional businesses did not deliberations on the need for integrity have have adequate measures in place to manage
More often, integrity appears to be culminated in serious action in the Gulf, risks associated with regional instability, unequivocally a fundamental measure of especially now as governments in the pointing to a clear gap in building integrity the way people do business, both in this region are seeking to transition from the in to the corporate fundamentals. region and across the world. That said, if public-sector led development model you scratch the surface, most corporate towards private sector-led development. leaders would agree that while integrity means good business, it can often be More action needed considered a nice-to-have rather than a While most Gulf countries have general sustainable long-term business requisite. anti-corruption provisions in their penal
It helps to have perspective in this instance. codes or other criminal legislation, some There is a lot of money to be lost with the countries in the region have passed additional deterioration of integrity and growth of specific legislation criminalising bribery. corruption. The World Economic Forum These laws have been crucial in expanding estimates that corruption increases the cost of the scope and definition of transactions doing business by up to 10 per cent on average. considered as bribery with criminal At a more human level, the value of integrity implications, as well as in setting out rises as we see a millennial and Gen Z influx more significant sanctions for the in to the workforce. As the 2017 Deloitte breach of these laws. For instance, in Millennial Survey confirms, the UAE, the revision of the today’s growing young workforce Corruption: Federal Penal Code in 2005 is most motivated to work with Behaviour resulted in the criminalisation companies that put a culture of trust and integrity at the core of their operations. on the part of officials in of bribery in the private sector, impressing a greater ethical drive in the market.
Across the Gulf region, efforts the public and Nevertheless, the position to improve and formalise private sectors, of the Gulf countries on processes around corporate integrity, corporate social in which they international business integrity and anti-corruption rankings responsibility and corporate improperly and highlights the need for greater governance have been ongoing unlawfully enrich action to implement effective for more than a decade. However, they have gained further urgency in the current low oil price themselves and/or those integrity measures. This view was mirrored at the Pearl Initiative and United Nations environment where companies close to them, Global Compact annual forum, are increasingly looking for or induce ‘Sustainability in Action: Business foreign capital opportunities. Yet, foreign investors are others to do and the UN Global Goals’, held in October 2016, which saw more often held back by the lack so, by misusing than 700 public and private sector of transparency or access to the position representatives examine the sufficient information and knowledge about the Gulf corporate sector as a potential in which they are placed role of the Gulf private sector in advancing the Sustainable Development Goals. Notably, partner, client or supplier. The OECD Glossaries 78 per cent of the participants at
The business case for integrity
Besides the inherent benefits of clean business practices, integrity levels are clearly correlated with better economic performance. Understandably, the UAE, which ranks the highest in the region in the World Bank’s ‘Doing Business’ index, has improved its economic landscape through better checks and balances in the business sector. Emphasising this point, a 2016 IMF report clearly shows that investment in corrupt countries is almost five per cent less than in their peers which are relatively not corrupt.
Responding to this reality, the region is seeing a greater thrust towards integrity, moving from mere lip service to time and fund investments to root out corruption. In recent times, for example, corporate spending on integrity practices has seen an increase, with an OECD survey indicating that 80 per cent of respondents confirmed that their company’s board was strongly involved in the design and implementation of their company’s integrity policy. Close to 20 per cent of respondents estimated integrity budgets to have increased by 25 per cent to 50 per cent over the last five years. Going beyond policy and regulation
With the growing body of knowledge on the advantages of integrity within business, it becomes more and more apparent that real change can only be possible if the corporate sector takes a more introspective role in effecting clean business. While strict legal measures can complement such actions, fundamental breakdown of corporate governance can be extensively damaging,
combining wealth and resource depletion with a more catastrophic destruction of trust.
In this respect, the Pearl Initiative has partnered with Siemens to create the first-ever Integrity Indicator for the private sector in the Gulf region. Designed as a voluntary framework for private firms in the Gulf to measure their performance in relation to international benchmarks in integrity and regional best practices, the initiative also seeks to trigger a conversation on practical measures to improve integrity levels in regional firms.
Currently in its pilot stage, the Integrity Indicator will be formally rolled out this September. It will focus on six pillars of integrity best practices, namely: the company’s integrity framework; its integrity risk assessment; the implementation of integrity policies; the management of integrity incidents; the role of the board and executives, and business integrity reporting.
While the Indicator follows a rigorous methodology, combining qualitative and quantitative factors, what we also expect is that it will provide a strong starting point for corporate leaders to reassess and strengthen their anti-corruption and transparency measures. To accommodate the diverse business sector in the Gulf, the indicator is applicable irrespective of a company’s sector, size and nature of interactions with public stakeholders as well as foreign partners.
By developing this as a voluntary initiative, we also look forward to inviting the participation of companies that are leading the way in adopting strong integrity practices, and can set a benchmark for the rest of the region. These ‘integrity champions’ could go a long way in potentially influencing positive change within the business community, and suitably complement the efforts of regulators and governments to implement enabling
Bribery: The promise, offering or giving, to a public official, directly or indirectly, of an undue advantage, for the official himself or herself or another person or entity, in order that the official act or refrain from acting in the exercise of his or her official duties OECD Glossaries
legislative reform. Ultimately, what we hope to achieve with this project is an action-oriented dialogue within the private sector, enabling a collaborative approach to improving integrity in the region.
INTEGRITY CHAMPIONS
Companies that adopt transparency measures can influence positive change
WORLD BEATING
When Alba’s sixth potline comes on line it will become the largest single-site aluminium smelter
Alba aims high
Aluminium Bahrain B.S.C. was one of the first companies in the country to embrace the Corporate Governance Code – and the impact has been transformational
Aluminium Bahrain B.S.C. (Alba), Bahrain’s flagship industrial company, owns and operates one of the largest aluminium smelters in the world, together with significant assets in power generation, water desalination and calcining production. Its products are considered to be of the highest quality and are sold across the MENA region, Europe, Asia and North America.
Alba has had a dual listing on the Bahrain Bourse and on the London Stock Exchange since 2010. This required significant changes to its corporate governance structure as well as processes to ensure compliance with the various regulatory bodies. Also, in 2010, Bahrain’s Ministry of Industry and Commerce and the Central Bank of Bahrain issued a new Corporate Governance Code modelled on leading international codes. Alba was a leading adopter and the changes of this Code. The changes in the company over the past seven years arising from these events, led by a rejuvenated board of directors and executive management team, have been transformation for the company.
Speaking on Alba’s corporate governance journey, it’s chairman Shaikh Daij Bin Salman Bin Daij Al Khalifa said: “We pride ourselves on the open and transparent manner in which
Bryan Harris
Chief Internal Auditor & Risk Officer, Aluminium Bahrain B.S.C. (Alba)
Alba operates. We are also grateful for the efforts undertaken by our board of directors and executive management to protect the rights of our valued shareholders as well as safeguard the company’s values.”
Governance and expansion
The construction of Alba’s sixth potline for its aluminium smelter, together with an additional 1,792 MW power station, has recently begun, with a planned capital expenditure of approximately $3billion. When completed in 2019, it will boost per-annum production by 540,000 metric tonnes, bringing its total production capacity to 1.5 million metric tonnes per year, making Alba the world’s largest single-site aluminium smelter. The sheer size of this mega-project has resulted in the need to demonstrate sound corporate governance, a well-established corporate social responsibility programme, and project governance and transparency to a wide variety of stakeholders – namely, shareholders, lenders, commercial partners and regulatory authorities, as well as the local community.
Developing clear guidelines
Since March 2011, Alba’s board of directors has presented a comprehensive annual corporate governance report at each shareholders’ meeting. This report, also available on Alba’s website, sets out the company’s compliance with the code and with the additional guidelines, along with transparently providing explanations for areas of non-application and required disclosures.
New charters were also developed for the board and its sub-committees to ensure that their powers and activities were aligned with best international practices.
Clear levels of authority were developed to ensure that key decisions are taken at the appropriate level, and clear budgeting, performance management and industry benchmarking tools were put in place to ensure transparency and clear line of sight on critical areas, such as product pricing and raw material costs.
The chief internal auditor and risk officer reports independently to the board and board audit committee and has authorisation to review any aspect of Alba’s controls. A board-approved code of conduct, on par with leading international codes of ethics, was developed and launched to all employees and communicated to all suppliers.
The code of conduct provides a set of expectations and guidelines to all those working for and with Alba and ensures that we uphold the highest standards of integrity and personal conduct in our business and professional activities and when dealing with colleagues, vendors, customers, contractors, government agencies and the public. Compliance with the code of conduct is monitored by Alba’s Integrity Task Force, comprising the chief internal auditor and risk officer, legal manager and the director of administration, which reports directly to the board audit committee. Monitoring tools
include an independently operated confidential hotline and reporting system that provides for reporting in multiple languages by phone and intranet 24 hours a day, every day. This hotline enables Alba employees, contractors and commercial partners to report in confidence any breaches of Alba’s code of conduct, such as frauds and other matters that could potentially prove damaging to the company. Alba’s development and roll-out of the code of conduct and confidential employee reporting system was
MILESTONE
The company’s first Sustainability Report was published in 2016
used as a best practice case study in a Pearl Initiative and University of Cambridge study on transparency and ethics in the Middle East.
The board and its three sub-committees – the board audit committee, the nomination and remuneration committee and the executive committee – conduct annual self-evaluations to review their independence and performance as well as identify areas of improvement. A process has been implemented to identify and report directors’ and executives’ ownership and trading of the company shares.
The company has issued policies on key persons dealing/insider trading and has established quarantine periods for the trading in Alba shares. Alba’s investor relations (IR) department proactively develops investor relations products and tools aligned with international best practices. Relevant communications are posted on the company’s website, including quarterly IR presentations, a financial calendar and toolkits. Alba’s IR
on those areas that are the most critical. It was designed to be consistent with l eading international standards on enterprise risk management, including ISO 31000. The resulting high-level risks and the status of required mitigating actions are reviewed by the audit committee regularly and by the full board periodically. Alba published its first Sustainability Report in 2016 where it featured three dimensions for the company performance – economic, environmental and social – for the year ending 31 December 2016. We pride ourselves on The Sustainability Report covers the significant environmental, economic and social aspects the open and of the company’s business and transparent highlights its sustainability performance and strategies manner in which for integrating sustainable Alba operates. We development principles into its operations and services.are also grateful An important milestone for for the efforts undertaken Alba, the report was developed for 2016 was developed to share Alba’s journey using the internationally by our board recognised sustainability of directors reporting framework from the Global Reporting Initiative (GRI). and executive management to Future plans Alba’s ambitious Line 6 Expansion protect the rights Project mentioned above, is one of of our valued shareholders as the largest brownfield projects in the region. The Line 6 Expansion Project, in compliance with well as safeguard the Equator Principles and the company’s the International Finance Corporation (IFC) Performance values Standards, will develop and implement a comprehensive stakeholder engagement plan (SEP). The objective of Alba’s SEP will be to provide a technically and culturally appropriate approach to consultation, disclosure and understanding of the Line 6 Expansion Project to the stakeholders in a timely manner. The SEP will also make provision for stakeholders to have an opportunity to voice their opinions and any concerns through a formal grievance mechanism CODE OF CONDUCT system that may influence project decisions. Alba believes in upholding the highest Alba’s internal code standards of ethical and professional applies at all levels of the organisation behaviour in everything it does. While Alba follows the Corporate Governance Code of Bahrain and the Corporate Governance department was declared the best company Module of the Central Bank of Bahrain, for investor relations in Bahrain at the Middle we continue to assess our standards and East Investor Relations Society (ME-IR) practices against other international codes, Annual Conference and Awards 2016. such as the UK Corporate Governance Code.
Alba has also implemented an enterprise Although Alba is not required to comply risk-management framework where it sets with it (having only a standard listing on out the principles, policies and procedures for the London Stock Exchange), Alba’s board the identification, evaluation, treatment and of directors and management are keen to monitoring of the key risks that Alba faces, review any gaps as well as identify and enabling resources and effort to be focussed implement any valuable improvements.
Taking control of board culture and new realities
Directors spend around one full month a year on board-related matters. So how do you optimise board culture to make sure this time is used effectively?
Dysfunctional boards waste time and, more importantly, dysfunction depletes the organisation’s resources through unwise decisions and missed opportunities. Highly functioning boards have the courage to step back and take a hard look in the mirror to grasp what is working well and what needs to be improved.
One best practice that will help your board achieve and maintain peak performance is a board assessment. Annual evaluations of the full board, as well as of the committees, set an important baseline for engagement of all directors. A growing trend would indicate that individual directors be reviewed every two years. Furthermore, retaining a qualified independent third party to assist in this process, will encourage candour and deliver an agnostic perspective. This initiative engages the board to identify and maintain its strengths and identifies opportunities for the continuing strengthening of the culture. It additionally will serve as the basis for an intelligent re-nomination of director candidates.
Successful boards are rooted in mission-driven core values and focus on creating long-term sustainable value for shareholders and customers. They are fully engaged and they assure their organisations have the requisite skills and tools to maintain a culture of competence, open communication and constructive challenge both within the board and with C-suite executives. They address the continuing obligation for succession planning. They focus on strategy, with an in-depth understanding of where the company is and where it is going. A critical addition to board conversations is having at least one director who has expertise in current technology and cybersecurity.
Protecting shareholders
Well-functioning boards recognise the speed at which customers, employees and everyday realities are dramatically changing, especially across generations from iGen and millennials through to retirees. As an example, if you have not read the fascinating
Stuart R. Levine
Chairman & Chief Executive Officer, Stuart Levine & Associates LLC
book Big Shifts Ahead by John Burns and Chris Porter, I highly recommend it. The book’s subtitle Demographic Clarity for Businesses describes the speed at which each decade’s customers, employees and realities are dramatically changing. These changes are critical to understand in order to protect shareholder needs and interests and to provide the necessary financial and human capital oversights. The authors appreciate that these changes must be understood to look after shareholder needs and interests and to provide the necessary financial and human capital oversight.
Highly functioning boards operate in a zone of alignment and collaboration with senior management around ethics and values. With the rise of social media and deteriorating public trust, CEOs are being held to even higher levels of ethical accountability, creating a greater need for board alignment and transparency around succession-related matters.
It can be tough, however, for board members to take a hard look at themselves. An independent and professional ‘mirror’ makes it a little easier to absorb. The assessor gathers independent and confidential input from all board members on how the full board is performing. Some boards will go beyond board member interviews and perform a complete 360-analysis for directors. This top-down, bottom-up approach can provide individual board members with valuable feedback on their areas of strength and those areas that need strengthening.
What assessment is needed?
Asking yourself these excellent questions can help you determine the level of assessment that is required.
■ Board culture Is it collegial? Does your board and senior management have strong internal communication? How is consensus formed? Does collegiality contribute to frank discussion; does it inhibit it? Can your board’s culture sustain challenging conversations or a crisis? Is your board
bringing the right issues to the table? ■ Director performance Are directors adequately prepared? Is ‘airtime’ well distributed? Is there sufficient on-boarding? Are there appropriate levels of director accountability? ■ Strategic planning and risk management Is your board engaged in strategic conversations at every meeting?
Are you clear on what is considered an enterprise risk and how risk is evaluated?
Are you evaluating the assumptions underpinning your strategic plan? ■ Succession planning Is your board comfortable engaging in succession planning discussions with your CEO?
Is there succession planning for board members, as well as C-suite executives? ■ Logistics Is meeting frequency adequate?
Are board materials sufficient and provided in a timely manner? ■ Committees Are the correct committees in place? How well are they functioning? ■ Board composition Does diversity in talent, skills, race, gender and outlook support the company’s needs? Should certain members leave the board due to age, longevity or lack of participation, collegiality or needed skills? Do your board members effectively represent your customer base?
Do they possess the talent needed for your current and future strategies? ■ Continuous learning How are outside perspectives and new information acquired? Do board members appreciate, and are they equipped to handle, the rapid demographic and related changes affecting customers, employees and the business environment?
If you answer ‘no’ or are uncertain about any of these questions, an in-depth discussion and assessment will assist you to work through these challenging issues. Confidential detailed interviews conducted with every board member and the CEO provide the insights that can be analysed against generally accepted best practice standards. The aggregated data will then be shared with the entire board in a reflective process, with appropriate recommendations and personalised solutions. There is no one-size-fits-all.
The presentation of findings must stimulate discussion, be constructive and not appear punitive. Recommendations are designed to create a common understanding of the investments in human capital needed to ensure board optimisation and effectiveness. The board gains perspective on working in a collaborative manner with the leadership team and can more effectively participate in setting strategic direction.
Focussing on individuals
This transparent process could surface ‘underperforming assets’ on the board. This should be a business learning opportunity to strengthen board functioning. Under independent lead director oversight, the process should provide systems and means that support board members in better serving the organisation. For example, those members who should sharpen certain board skills, can be coached with a goal to increasing that individual’s productivity. Individual assessment, feedback and coaching should be designed so that each board member is pursuing their key responsibilities effectively. A lack of improvement, however, should result in the director not getting re-nominated.
According to the National Association of Corporate Directors (NACD), re-nomination to a board should not be a given. All directors should be regularly evaluated and receive a review at the end of each term. Unfortunately, in 2015, NACD reported that only 40.7 per cent of respondents to the NACD public company governance survey said that their boards do evaluations at the individual director level. This is clearly a missed opportunity for those boards and companies that don’t.
Complicating a board’s ability to address director skill gaps is the fact that board composition changes infrequently. Statistics show that on public boards, on average, a seat may open every three to four years. Additionally, director ages continue to rise and director tenure is getting longer. A recent trend is a mandatory retirement age of 75 years. However, according to the Spencer Stuart study Board Refreshment: Investors Respond To Trends In Mandatory Retirement Age and Tenure With More Stringent Voting Policies, almost two-thirds have no term limits. Moreover, 27 per cent either don’t discuss mandatory retirement or don’t have a mandatory retirement age.
Director evaluations should determine whether directors are ‘leaning in’ and learning. The issue of continuous learning often gets swept under the rug, but the quality of ‘listening to learn’ should be part of a director’s review. Sometimes, directors need to be replaced when needed learning or improving skills are not occurring. Nobody wants to leave a board – it’s human nature. Getting past the short-term stigma of a director leaving a board, however, can allow a spot for someone who better fits the organisational need. Furthermore, the gracefully departing director can find another board more suitable for his/her existing skills. Companies are being bombarded with changing demographics, economics, technologies and customer needs. This requires shifting strategies that demand directors stay current and that they continuously learn.
ASSESSING THE BOARD
Discover how agile and prepared your company is for change
Improving overall service
Another new and healthy trend is the inclusion of the executive team in the board assessment process. Information is gathered from the top leadership of the company on a track that parallels that of the board members. Areas of exploration can include insights on how management believes the board can serve the organisation more effectively and what the board/management team interface looks like. This information provides valuable input as board members seek a better sense of how to improve their board service.
Planned rotation of committee chairs is another benefit of the assessment process. The assessment conversation should engage board members in strategic conversations of board committee leaders, with a goal to strengthen the board in experience and knowledge. We have seen mistakes occur when strong-willed board chairs allow board members to default to the chairman on major decisions, instead of expressing an independent view. One director should never be in a position to inhibit the full functioning of the board. If a director, for example, wants to have a meeting with the potential CEO successor candidate, that director should not have to get permission from the chair. Decision-making should be the shared responsibility of all board members. Additionally, there should be a defined process for rotating chairs of the committees so that there is no lapse in service or institutional knowledge. This best practice for the management team’s leadership development and succession planning serves the board as well.
Succession planning for both directors and CEOs is a fundamental board responsibility. Independent board assessments are a great way to begin this important conversation that includes an understanding of the transformations the future will bring and how the company will agilely and strategically respond. As an example, a board that was structured five years ago, when the company was in the financial services industry, may require dramatically different skill sets designed for a company that is now in the fintech industry. The skillsets considered necessary for the corporate CEO of 10 years ago are probably quite different now due to new and evolving technologies, customer needs and the evolution of the customer base.
This pivot requires insights and different ways of thinking about succession planning for candidates for the CEO, board chair and board members. For example, when I was chair of the nominating and governance committee on a public board, the chairman asked me which candidate I thought should be the company’s next CEO. My response was that we needed to define the vision for the company for the next five years. That vision would inform the skillsets, knowledge base and leadership capacity required to suit that position.
It’s the same question you should ask at the board level as directors reach ‘retirement age’ and ‘board tenure age’, even if your board does not have mandatory ages for either. When recruiting the next generation of board members, the same questions must be asked. What skill sets will you need to provide intelligent oversight? The same honest, ongoing discussion that you would put in place for the succession planning for the CEO must occur at the board level in order to understand and evaluate the attributes of directors that are needed going forward.
Ensuring continuous value
In another new trend, institutional investors are following high-performing directors to new companies and making larger initial investments in those firms. Investors seek trust in a director’s ability to protect and increase shareholder value. They see that all directors are not created equal; some providing greater value than others.1 Director bios and skill sets appear in the company proxy each year. Companies will be served by the ability to express the skill sets that enable their directors to provide continuing value to the organisation.
Highly-functioning, engaged boards do all that they can to up their game. Qualified independent third-party assistance on a periodic basis is a tool that will help.
