Hard-code governance into company DNA

Corporate behaviour, as with personal behaviour, is defined and informed by principles and ethics. These form the unchanging bedrock of how an organisation conducts itself. These principles and ethics should be hard-coded into the corporate DNA.

In this way, an organisation will behave consistently, irrespective of the economic environment.

This is vital, as circumstances change, management changes, and markets are driven by cyclical rhythms: boom and bust, for instance.

It is also vital because memories are short, and lessons learned at great cost are often forgotten as new people enter a business, and new opportunities present themselves.

What should be unyielding and cast in stone is the way a company conducts itself, irrespective of circumstances.

What should be unyielding and cast in stone is the way a company conducts itself, irrespective of circumstances.

Bryan Hattingh, founder and CEO of the Bryan Hattingh Group

I raise these issues because it was just over a decade ago that the last boom cycle began. It was an extraordinary run, lasting from 1995 to just short of 2000, and it led to a period of wealth creation on a level few people had seen before. But when the market crashed, as was inevitable, the loss was incalculable.

Across the world, and here in SA, billions were wiped out in value as people everywhere dumped their shares. Paper millionaires became actual paupers. Folk who had invested their savings and bonded their homes to participate in the share-fuelled gold rush saw a lifetime`s hard work vanish overnight.

None of this was surprising. Markets everywhere are driven by common factors: push the market up on greed, drive it down on fear. Buy on hype, sell on rumour.

Throughout the history of business, it has been this way. And, hardly surprisingly, it`s beginning to happen again. 2006, a decade later, it is beginning to repeat itself. This in itself is also not surprising, as the previous boom-bust cycle had also occurred around a decade earlier.

What made the 1995-2000 period so remarkable was the clear and incontestable failure of corporate governance exhibited across the world. Today we are still dealing with the fallout from this failure of companies to manage themselves, in the form of punitive regulatory compliance issues such as Sarbanes-Oxley, an Act which has stripped 1% from the US`s growth, and which has made the US less competitive than countries in Asia which do not have similar legislation in place.

Any mature market observer, or follower of Gartner, could have identified that the period from 1995 to 2000 (sparked, it must be recalled, by the listing of Netscape) was driven by the first phase of a new technology, the Internet.

This hype phase was followed by one of crushing disappointment, and today we are in a phase of maturing, one characterised by sustained profitability for most players. All predictable.

There are indications that we are again in a mini-boom phase: one is the number of companies taking to the JSE Securities Exchange`s AltX. In such a bullish period, it is all too likely that excesses and lapses of governance will again come to the fore.

To prevent this, companies should inculcate an ethos of complete fairness, honesty, transparency and accountability.

Yes, there are systems and structures, such as King II, which seek to regulate and enforce compliance on companies. But it is all too easy for executives to pay lip service to and bypass such systems and structures. And this happens constantly - as the media frequently report (read any front page of Personal Finance to get an idea of how frequently corporate governance is violated).

Instead, commitment to proper corporate governance goes bone-deep, and survives any temporal event. It starts with the chairman; is bought into by the CEO (separation of responsibilities is always the best way to go), and percolates through the rest of the board of directors, including non-executives, exco, mid-tier management and all other employees.

And it makes excellent business sense: research from the University of Philadelphia shows that companies exercising good corporate governance have higher value, higher profits, higher sales growth, lower capital expenditures, and fewer corporate acquisitions. Investors which put their money in companies with good corporate governance and sold those with the weakest, earned elevated returns of 8.5% a year.

So, whether you`re in a boom or bust cycle, good corporate governance is the only way to conduct your business in a sustainable fashion. And it all begins with corporate principles and ethics, which will define the company`s behaviour.