From Starbucks to Malaysia: Governance is Foundational
June 10, 2018 | Updated at June 21, 2018
There has been a lot of positive feedback from “The Virtuous Cycle” post. We are glad. The cycle is an intuitive and powerful idea. In this post, we would like to explore the foundation for a virtuous cycle. Simply put, governance is profoundly important in getting the cycle started and in keeping it effective.
Governance is a big term and people interpret it in different ways. For our purposes, governance is a blend of procedures, programs, controls, and culture that help a company operate in an ethical manner and best position the company for long-term success. When the term is applied to countries, governance is a blend of the laws, regulations, infrastructure, and societal cohesion that help the citizens, and especially the members of government, conduct activities in an ethical manner and best position the country for long-term success.
Good governance, at both the company and country level, requires honesty and transparency. Honesty and transparency are fuel to keep the virtuous cycle going. With transparency, employees of a company and citizens in a country can more easily see people living their ‘Duty of Care’, while seeing fewer people acting in an inconsistent, selfish, or destructive manner. There are other benefits from good governance. Any large organization, whether company or country, will inevitably have some number of bad things happen. No matter how strong the governance is, people are imperfect and bad events can occur. When good governance exists, people give the company or the country the benefit of the doubt. It is far easier to recover from something bad when good governance is in place.
In the US, Starbucks recently had an unfortunate incident where two African Americans were treated inappropriately. Overall, Starbucks is well run and has a great reputation with its customers. The combination of the great reputation and proactive engagement by the CEO helped slow the negativity, and also turned this bad event into a "teaching moment" with positive change. Without the foundation of good governance, Starbucks might have remained on the defensive as the press searched for other issues, civil rights groups made demands, and a series of negative articles continued to appear in media. Conversely, the prior blog post discussed Wells Fargo and that company’s multiple challenges.
The quality of governance can be measured. Getting a good metric for governance requires much more than “ticking the box”; governance reveals itself through behaviour and behaviour needs to be assessed.
There are governance metrics based on behaviour. If you look at the actual scores, you will find, not surprisingly, companies and countries adhere to the standards for good governance in differing ways and at differing rates. Countries with high-quality governance include Canada, Sweden, and the United Kingdom. Companies in the US with high-quality governance include Intel, Eli Lilly, and Mastercard.
Around the world, there is negative press about corruption involving companies and people in government, as well as bad government decisions. Electorates see the corruption and bad government decisions. They have been increasingly turning to populist candidates with “ends justify the means” platforms. Populism is usually very inconsistent with good governance. The very willingness to use unrestricted ‘means’ to accomplish ‘ends’, even if the ‘ends’ are noble and good, creates conditions for others to use undesirable ‘means’ to accomplish other (often far less noble or good) ends. That is not good governance.
In the face of all of the negative news, it may surprise you to know that governance is improving. Around the world, the average governance score for the major countries of the world is improving. The rise of populism has, so far, caused a slower rate of improvement as opposed to an outright decline. China has a well-deserved reputation for a low quality of governance, though it is improving as rapidly as any country in the world. If this pace continues, China could move past several countries in the emerging markets. There is a lot of optimism in Malaysia stemming from the recent election. We hope the optimism is converted to real changes. Malaysia has historically been a leader among majority Muslim countries and, if the optimism is justified, could be a leader for the quality of its governance.
Companies tend to follow the laws and regulations of the country in which they are domiciled, while also following the listing requirements of exchanges where company shares are traded. We believe the improving country governance will lead to subsequent improvements in corporate governance. Further, our ever-smaller world with global communications capabilities is forcing greater transparency on companies. This transparency will also help improve corporate governance.
Let us end this blog post with a request. What are you doing to go beyond your “Duty of Care”? Look to virtuous cycles that you can strengthen and reinforce. Look to create new virtuous cycles. Help companies and countries improve governance. Expect companies to demonstrate good governance and support those companies through your investment decisions and your loyalty as a customer. Include governance in your electoral decisions; a candidate’s track record on governance issues can and should be more important than their stated positions on various partisan issues.
As we do that, we use the power of our numbers. We will be relevant. A community of trust will be strengthened. And we will have impact. #RTI
Kurt and Daud