Lesson No. 1 : The CEO must be well-informed of any risks (both technical and financial) when deciding to invest in "new innovation"
Innovative ideas may sound "juicy" but potentially may also become a great threat to sound governance practices. Few gigantic motor corporations thought innovation was a good investment hence a lot of money went to Research and Development (R and D) to produce "innovations" to only knew later that they have breached the law.
a) The VW emissiongate/dieselgate
Quoting Ian McVeigh, Head of Governance at Jupiter Asset Management wrote in the Telegraph UK in 2015 :
"The revelation that the car giant (VW) has been using so-called “defeat device” software to get its diesel cars to pass strict emission tests has been an unmitigated disaster. Since the scandal broke, the value of the company has fallen by around €30bn (£22bn)"
Source : https://commons.wikimedia.org/wiki/File%3AVW_stock_price_after_emissions_violations.png (Analysis by Dennis Bratland)
He wrote further about the significance of the CEO being well informed of investment analysis without the investors finding out about it first. Ian also mentioned about the corporate structure of German companies - having split boards - a supervisory and a management board making it potentially unclear of the "who is responsible or authorized for what?". UK however adopted the principle of putting the final responsibility with only one board.
The Volkswagen dieselgate or emission gate case started on 18 September 2015, when the US EPA issued a notice of violation of the Clean Air Act to German automaker Volkswagen Group for intentionally programmed turbocharged direct injection (TDI) diesel engines to activate certain emissions controls only during lab emission test. The programming caused the vehicles' NOx output to meet US standards during regulatory testing but emit up to 40 times more NOx in real-world driving.
The CEO sportingly have since apologized to the customers, users and the general public. Later, he resigned.
Although Volkswagen is embarking on new policies and slowly regaining the trust of stakeholders and the car buyers, but the price they have paid is high.
Lesson No. 2 : Hiring "external party" to advise the Board can also lead to disaster.
I once heard somewhere that billionaire Warren Buffet; at some point; do not fully trust "external party's" judgement. He would rather make his own final decision.
Be careful when appointing external "subject matter experts" especially authorizing them to speak in a Board Meeting. If it is not necessary to hire, then DON'T!
Many important decision cannot be made unanimously because the "so-called guru" says "NO". Ironically, the CEO agrees and subscribes to the "gurus" advice rather than seeking majority opinions from the experienced board members. (I've seen this happened before - it was a disaster!)
Hiring consultant assisting in corporate governance implementation is fine but these practices should be restricted to mid and support levels where CEO leads the initiative - not vice-versa. Board Members meeting must always be treated as CONFIDENTIAL.
Remember : Not everyone in the boardroom are smart guys!
Lesson No. 3 : There are always good rationales of why laws are implemented and enforced.
Those who try to avoid the law are deemed to have "cheated" the government/ lawmakers and other stakeholders. Or put simply, betraying everyone's trust.
One of the top cases that I've bumped into is misappropriation of funds (breach of trust) due to shareholders "manipulating" their unclear roles, responsibilities and authorities to serve their own ends. Other cases include : board ineffectiveness, unethical audit and risk practices, "unfair" pay, bad relations with external parties such as accountants and company secretaries. (aah yes, accountants and company secretaries can tell stories too - they know your secrets!)
We've witnessed how prolonged "conflict" between corporate entities and the lawmakers ending up in series of investigations and prosecutions. Long battles in the court of law not only endanger the company's reputation (even if you win the case) but the sad consequences that follow it - from people loosing jobs to reduction of market values.
Lesson No. 4 : Risk is always PROACTIVE
Never wait until problem arises. Learn the lessons from others who have failed. Take proactive measures by adopting Risk Management. (and don't just simply say....DO IT!) Proactive Risk Identification will provide you with a guide on Plan of Action (mitigation), brainstorming and develop a strategic plan.
All these activities must happen prior to operation/project implementaton, assessed during the operation (comparing with the Risk Register for proactive risk identification stage) and mitigate during post-operation stage.
Adopt good practices of Risk Management but do not try to be too bold by taking unwanted risks!
Lesson No. 5 : Do What You Say and Say What You Do.
When you have given solemn promises or have put them in your customer charter or have addressed them in Manuals and Procedures - deliver them. Don't just file everything up and ignore them, or displaying what needed to be displayed and "that's it...end of story" - hoping that your PR will do the rest for you.
Sometimes, as a shareholder, you need to realize what you think is "impossible" can happen and do happen - whereby other shareholders (your own friends) can turn against you due to one or two angry customers who feel that you are not delivering what you have promised.
There are so many reasons of why ISO 9000 or Total Quality Management is introduced on the first place. Surely they are not to burden you but to help you.
Lesson No. 6 : Non-Conformance and Risks are opportunity for improvement
Don't scare auditors with cold bullying remarks such as :
- "I'm your paymaster",
- "Make it looks like there is more "loss" than "profit",
- "I know your boss",
- "Don't try to be too smart - remember Enron?"
Remember, auditors are human beings too. If they feel threatened, despite the Non-Disclosure Agreement, they still can adopt the "Need to Know Basis" vs your "Transparency" - they can even get court-orders. Believe me, the end-results won't be good.
Treat auditors as friends who are trying to help you not destroy you. Treat any non-conformances as opportunities for improvement and not some "fault-finding activities". In the end, you'll be in every auditors "good book"
Don't make your company becoming one of the case study being discussed in front of other auditors in their association.
Lesson No. 7 : Be careful when setting limits on shareholder voting power.
One study (by Ken L. Bechmanna, Department of Finance, Copenhagen Business School and Johannes Raaballeb Department of Economics and Business, Aarhus University) shows that the bad corporate governance in the banks is visible in the shape of severe restrictions on shareholder rights, including voting and ownership ceilings, etc. These severe restrictions are quite unique, especially from an Anglo-Saxon perspective. In the U.S., ownership ceilings are not allowed and in a sample of 4,399 U.S. firms, only 24 had voting ceilings (see Commission of the European Communities, 2007).
Similarly, voting and ownership ceilings are not among the 24 corporate governance provisions carefully examined by Bebchuk, Cohen and Ferrell (2009), who show that restrictions on shareholder rights lead to significant reductions in firm value.
Out of the six entrenchment provisions found to be value destroying, four of them set limits on shareholder voting power and the ability of a majority of shareholders to impose their will on the management.
And FINALLY!!
When you are having problems, try avoiding easy paths such as buyover, mergers, bailouts etc or worse - let yourself willingly to become "victim" to "hostile takeover" or ending up in government intervention.
Even if you feel like selling your shares or the company itself, don't give up yet - try your best to first to solve your problems - who knows, you might succeed against all odds.
Be transparent to your employees - let them know what is happening, many companies have gone down to earth and surprisingly, their employees have very good ideas on how to save the company. If the idea works, give these employees the rewards that they deserve!
