September 2011 - MINDA Malaysian Directors Academy ...

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article fourMALAYSIAN DIRECTORS ACADEMY 16Good corporate governance promotes innovation and changeWhen most of us think about corporate governance, we tend to think about regulation: the rules surroundingWhen most of us think about corporate governance, we tend to think about rules surrounding business setbusiness set by the Securities Commission and Bursa Malaysia. These are viewed as restrictions on what weby the Securities Commission and Bursa Malaysia. These are viewed as restrictions on what we need to do to make moneyneed to do to make money successfully. This is to view corporate governance through the lens of compliancesuccessfully. This is to view corporate only. governance Even in this context, through there are two the reasons lens why of it is compliance not a fair view of what only. the regulators Even in are trying this to context, there are tworeasons why it is not a fair view of what achieve. the regulators are trying to achieve.The first reason is that this view misunderstands the underlying philosophy of the Securities CommissionThe first reason is that this view misunderstandsregulator, shown in Figurethe1underlyingbelow recently expressedphilosophyin their Corporateof theGovernanceSecuritiesBlueprint 2011:Commission regulator,shown in Figure 1 below recently expressed in their Corporate Governance Blueprint 2011:Figure Figure 1: Underlying 1: Underlying Philosophy PhilosophyThree PillarsThreeof DisciplinePillars of DisciplineSelfDisciplineActualConditionMarketDisciplineMoving from rules-based toprinciples-based regulationreflecting market maturityRegulatoryDisciplineRegulatoryDisciplineSelfDisciplineDesiredConditionMarketDisciplineFigure1 shows that the desired condition is less regulatory discipline and more self-discipline and marketdiscipline, but that this depends on the level of maturity of the market. Thus the aim of the regulator is toreduce the amount of rules as soon as the level of good governance, defined through the heightened practicesof self and market discipline, allows this to happen. In other words, the regulator understands the need toreduce the regulatory burden to allow business to get on with the difficult task of making money.Figure1 shows that the desired condition is less regulatory discipline and more self-discipline and market discipline, butthat this depends on the level of maturity of the market. Thus the aim of the regulator is to reduce the amount of rules assoon as the level of good governance, defined through the heightened practices of self and market discipline, allows this tohappen. In other words, the regulator understands the need to reduce the regulatory burden to allow business to get onwith the difficult task of making money.The second reason is that good corporate governance is not just about achieving compliance; much moreimportant, it is about delivering sustainable long-term value creation. This can only be achieved if the boardanswers the following four key questions shown in Figure 2 below:The second reason is that good corporate governance is not just about achieving compliance; much more important, it isabout delivering sustainable long-term value creation. This can only be achieved if the board answers the following fourkey questions shown in Figure 2 below: Figure 2: Creating a sustainablebusiness: Four questions to answerFigure 2: Creating a sustainable business:1)Four business: questions Four questions to answerto answer4)Does the companyhave necessary 4)competencies? Does the companyhave necessarycompetencies?management wantto do?1)What does topmanagement wantto do?Sustainable businesspurpose with long-term“License to Operate”2)What will societyallow the companyto do?2)What will societyallow the companyto do?3)Is the opportunityworthwhile? 3)Is the opportunityworthwhile?Ethical decisionsCommercial decisionsOnce the board has answers to these four key questions, it can then think about the most appropriateapproach to managing its risk and to how it will govern shown in Figure 3 below:Once the board has answers to these four key questions, it can then think about the most appropriateapproach to managing its risk and to how it will govern shown in Figure 3 below:Once the board has answers to these four key questions, it can then think about the most appropriate approach to managingits risk and to how it will govern shown in Figure 3 below:Figure 3: Creating a sustainablebusiness: Figure 3: Creating Risk Decision a sustainable frameworkbusiness:Figure Risk 3: Decision Creating frameworka sustainablebusiness: Risk Decision frameworkMoral Commercialfilter: filter:Ethical Risk-basedMoral strategy decisionsCommercialfilter:dilemmas reflectingfilter:faced by Risk appetiteEthical the firmRisk-based and chosenstrategy decisions treatment ofdilemmas reflecting Riskfaced by Risk appetitethe firm and chosentreatment ofRiskWhat does topSustainable businesspurpose with long-term“License to Operate”Sustainable businesspurpose with long-term“License to Operate”Sustainable businesspurpose with long-term“License to Operate”Ethical decisionsCommercial decisionsRandomGovernancePrincipledRandom GovernanceGovernanceRule basedPrincipled GovernanceGovernanceRule basedGovernanceRisk-basedGovernanceRisk-basedGovernance7Figure 3 shows those elements of governance that matter if long-term value is to be created. The companymust:Figure 3 shows 1. Look those at its elements business of purpose governance through that a moral matter filter if long-term to ensure value that it is to not be doing created. things The that company are wrong;
article fourFigure 3 shows those elements of governance that matter iflong-term value is to be created. The company must:1. Look at its business purpose through a moral filter toensure that it is not doing things that are wrong;2. Evaluate the risk-reward trade-off implied by its riskappetite and the expected rewards it will receive fordoing the business to ensure that it is worth takingthese risks;3. Decide the basis of governance it will adopt to ensurethat the “Tone at the Top” is correct and there areappropriate processes and procedures in place toensure the company adheres to its Mission, Vision andValues. Depending on its level of sophistication and thematurity of its people, the company can choose a rulesbasedor a principles-based approach to governance.The key to good governance is the need for balance betweenhaving processes and procedures which are essential,while allowing enough flexibility for experimentation andtolerance of error essential to innovation. If the companyfocuses totally on rigid procedures and disciplines, there canbe no tolerance of the error that is such an important partof the learning and experimentation that are the foundationof innovation and there can be no flexibility in approachingproblems in ways not set out in the rule book. Equally, ifthere are no processes and procedures and everything isdone ‘by the seat of the pants’, there will be failures ofgovernance leading to fraud and worse. A sensible, balancedapproach to corporate governance should make clear toall in the organisation what its Mission, Vision and Valuesare, emphasising the principles underlying the desiredand expected behaviours and making it quite clear whichbehaviours will be rewarded and which will be punished.The resulting code of conduct should be able to reconcilethe need to create conditions favourable to innovation withthe need for systems and due process.ConclusionCompanies that survive and prosper in the long run are ableto innovate because they recognise the conditions neededto embrace change.They build into their Vision and Valuesfour key ideas:1. It is OK to fail - provided people learn from theirmistakes and the mistakes do not destroy the company;2. They encourage diversity of thinking and unorthodoxapproaches;3. They look for continuous improvement in their productsand processes;4. They value curiosity and the ability to “connect thedots”.Last of all, they underpin these ideas with a sensiblecorporate governance framework that guides people,rewarding desired behaviours and punishing bad practices.JOHN ZINKINMANAGING DIRECTOR, CORPORATE GOVERNANACEICLIF LEADERSHIP CENTREBefore joining ICLIF, John was the CEO of the SecuritiesIndustry Development Corporation (SIDC). John was alsoChairman of the UMSC Audit Committee until the end of2009. Before joining SIDC John was Associate Professorof Marketing and Strategy at Nottingham UniversityBusiness School, Malaysia Campus and director of the MBAprogramme with responsibility for external affairs. One ofthe founders of the Institute of Corporate ResponsibilityMalaysia (ICRM), he is Deputy Chairman, and is nowan Exco member and the Vice President, Sustainabilityand Governance of the Business Council for SustainableDevelopment Malaysia (BCSDM).17BOARD VIEW_SEPTEMBER 2011iGroves, A, (1996), Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company, (Currency Doubleday, NewYork)iiLevitt, T.C. (1960), “Marketing Myopia”, Harvard Business Review, July-August 1960. Levitt defined Marketing Myopia as a short-sightedfocus on the company’s needs rather than understanding what its customers need and want. By omitting to ask the vital question “Whatbusiness are we really in?” companies fail to foresee and adjust to changes in their markets brought about by innovation. An example ofsuch short-sightedness would be of the transatlantic luxury liner companies competing with each on the time taken to go from Europeto the US without realising they were creating a market for the aeroplane by emphasising the importance of speed – something aircraftcould deliver much better than ships, putting them out of business once transatlantic flight became viable.
Page 2 and 3: CONTENTSEDITORIAL TEAMMALAYSIAN DIR
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Page 28: AND OUR CLIENTS ARE...AgrobankAmana

September 2011 - MINDA Malaysian Directors Academy ...

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