What Gets Measured, Gets Done
Mark E Hansen, the Head of Asia Governance and Strategic Initiatives at Standard Chartered Bank, serves on the Bank's Asia
Geographic Management Committee. He has a Masters in Economics from UC Berkeley and a BA with honours from Cornell University. He was previously a partner at strategy consulting firm Booz Allen & Hamilton. In an interview with Pinaki Roy of New Business Age during his recent visit to Kathmandu, Hansen spoke in detail about various aspects of corporate governance. He has over 25 years of experience in strategic transformation and performance improvement programmes and has been involved in the development of Standard Chartered's executive leadership training programme. Hansen also put forth Standard Chartered's take on mergers and acquisitions, in the light of Nepali banking sector's latest merger rhetoric. Excerpts:
How do you look at the overall impact of corporate governance in private sector, specifically banking operations?
I think it's becoming increasingly important from several perspectives. One is from the investor's perspective. Investors want to invest in institutions that they believe have strong corporate governance, to ensure the security of their investment. It's not just an emerging market issue; it's a developed country issue. The fate of big companies such as Enron, MCI, WorldCom and Lehman Brothers have all raised questions about the appropriateness of corporate governance. As the world continues to evolve, investors as well as customers want to do business with institutions they believe are doing the right thing. In the financial sector, we think it's a point of differentiation for Standard Chartered Bank where we have such strong corporate governance. And it's well appreciated by the regulators in the countries that we operate in. We pride ourselves on having high standards. We are well managed and governed. So, we believe we are at the front end of the trend that will put increasing emphasis on corporate governance. We pride ourselves in Nepal because we are a listed company here. And we make sure that we are on the cutting edge of best practices.
When did Standard Chartered Bank first envision the importance of corporate governance? How has it helped spearhead the system so far?
It's been there for a long time. We have always had in our structure a form of country management with governance as well as the businesses. Sometimes it's more towards the business side and at other, towards the governance side. But it's a bit like a check and balance system that you would see in political systems where you have a legislative, an executive and a judicial branch. In ours, we have our businesses and then we have the governance. They serve as a healthy tension and a check and balance between the two. By design, we have always had our businesses focused on shorter term. It is about making the numbers for the year and the governance function having the more strategic perspective. It predates the governance crisis that happened in the west. It was impacted by certain events in the UK in the 1970s and 1980s and later in the US. But all that did was force us to be more rigorous and more introspective about how we can do this better.
How important is the role of institutional investors in increasing the professional diligence of your bank as a corporate entity?
It's quite important. We have large sovereign funds, long term institutional funds, insurance companies as well as a reasonably diversified investor base. We think that diversity is a strength because it helps us work through many different constituents. The institutional investors tend to have a longer term perspective which is important. One of the concerns that I think exists in the academic press today is that they focus too much on the short term, on quarterly profits. We only report our financials semi annually. We would like to look and take a longer term perspective like the investors do. The other point I have always raised is that the investor base is expanding, actually. For example, we are listed in India now so it's not just the western investors in London. We now have Indian investors in Mumbai, Hong Kong investors in Hong Kong and Chinese investors in Shanghai.
A board of directors often plays a key role in corporate governance. How do they go about ensuring accountability of the organisation to its owners and authorities?
If you look at the directors roles, it's important that they understand sharing the responsibilities they take on. What has been happening in the past is that in some institutions they were very lightweight. The practice still exists in a few companies but it is starting to disappear from most of them. Today, the directors have to come prepared, contribute and interface with the regulators. Everyone Capital Markets, Regulators and the Institutions expect the directors to perform. As for our own subsidiaries, we have quite a rigorous process for selecting and then assessing directors on a regular basis.
Who are the parties to corporate governance that have an interest, direct or indirect, in the effective performance of an organisation?
It's a wide group of stakeholders. First, the investors who want to know if the money is put in a well run and governed institution. Second, the banking and capital markets regulators because they want the assurance that the propriety in compliance with regulations is embedded in the organisation that starts with the governance function. And then the customers, increasingly, because they want to know they are doing business with the right organisation. The employees too have an interest. And I say this particularly in Asia because a number of banks and local companies are family-run entities. They have a particular management and governance style. In fact, the part of the problem is that the management and governance aren't separated. So, I think the establishment of appropriate governance and a separation of governance from the management are quite important for the evolution of companies in the Asian markets.
Could you tell us about the key elements of good corporate governance principles?
The first one is compliance which focuses on bringing the global best practises. It also recognises that one has to adhere to local regulations. Therefore, it is a binding constraint issue. We try and incorporate the best practices but we also have to accept the local constraints. The second is integrity and transparency. The best way to demonstrate corporate governance is actually the transparency by which you disclose all your financial information as well as other information about the organisation. The third is process which, though boring, is quite important. The discipline around the varying board agendas, getting papers circulated beforehand, having meetings at appropriate times, correctly managing etc are part of this. It's very administrative but critical for the impact on the working style of the board of directors. This way you make sure that the board is focusing on the right thing and getting its work done efficiently. The final one is the measurement of the board's effectiveness. You need a process to self-examine yourself. It's not necessary to bring in outside experts to determine that. The clich what gets measured, gets done is true.
What are the consequences of not having good corporate governance?
As I mentioned earlier in this interview, the many recent corporate scandals MCI WorldCom, Enron, Lehman Brothers to name just a few of the more well-known failures from poor corporate governance evidence some of the consequences. Investors lose money. Employees lose their jobs. Regulation may be increased to the point where it becomes very costly and burdensome. Stakeholders trust in business diminishes. The trust which underpins market economies becomes eroded. I think the latter is a lot of the reason why corporate governance is becoming more important to consumers, investors and the society at large. Increasingly, consumers prefer to buy products and services from, employees prefer to work at, and investors prefer to invest in companies who are well-governed and who exhibit good corporate governance.
The Enron collapse is an example of misleading financial reporting. How crucial is quality financial reporting for the corporate governance system to function effectively?
It's absolutely crucial. Because if you cannot trust the numbers, there is no way you can make an economic or financial assessment. I think the financial crisis did not come as a surprise for many because irregular accounting practices existed in the system. Markets function on information and to a certain extent, on trust. If the information cannot be trusted, they don't have market values.
What are the barriers to good corporate governance and their corrective measures?
Let me focus on what helps make good corporate governance. First, there must be a clear separation of governance and management responsibilities. Second, the directors should be willing to dedicate time and effort to be effective board members. Third, the independent directors must protect minority shareholders rights. Fourth, a strong audit committee has to be supported by a reputable and capable external auditor and an independent and strong internal audit function. Fifth, there must be clear, accurate and timely management and financial information. Finally, a board effectiveness review process has to be in place to measure individual contributions and the collective effectiveness of the board. This must be supported by effective company law and regulations which clearly define the corporate governance framework in an unambiguous manner. The form per se is less important than the substance, since there are different models of how to structure governance in a company, for example, Anglo-American models Vs continental European models.
Can you attribute Standard Chartered Bank's stupendous success to effective functioning of corporate governance?
Yes, we view corporate governance quite importantly. I am in charge of corporate governance for all of Asia. And we have a counterpart for the remainder of the bank in Africa, the Middle East and the western countries. We pride ourselves on following best practices not only with the UK board but also our subsidiary boards. Nepal is a good example because we are not just a subsidiary here. We are a listed company and we pride ourselves not only on the financial results we have. We do believe that the governance of the entity here is part of the reason why we are so successful. Again, it allows us to identify issues early on, with a good board and a good governance process in place. It makes you see the risks down the road and helps you position for them. One of the things that might be of interest to your readers is that we actually changed our process and set up two new sub-committees on our board in London. The first one is called brand and values which focuses on the soft side of the company. We think that it's absolutely important to have values in a new organisation. The next is that we have split risk and audit. The audit committee focuses more on audit results and is backward looking while the risk committee is forward looking and focuses on new things on the horizon.
Nepal's banking sector is talking mergers of late. What is Standard Chartered's take on this?
In general, we prefer to grow organically and not through acquisitions because it's easier and more within our control. The degree of certainty about outcome is higher. I have worked on a number of acquisitions for the bank in Indonesia, Korea and Taiwan. Acquisitions are hard. A lot of management consultants will tell you that most acquisitions fail. And it's not normally due to financial reasons. They fail because of the difficulties and efforts required to integrate two separate entities. A lot of it surrounds not necessarily the business side but the soft side the people, values etc. In effect, you are taking another institution and marrying it to your institution. The cultures, values and perspectives aren't similar. It's very challenging and runs the risk of a strife in the management in the long term. I will give you a good example. As you know, we bought Grindlays Bank some years ago. The Grindlays deal worked very well for us and it has always been one of our best acquisitions. Not only because it has provided us a wonderful footprint in South Asia but also because the culture of the two merging banks in question, was very similar. Grindlays was a bank with strong local roots and a global perspective. Some of the other acquisitions we have done recently were that of very local banks. We had to adapt the way we worked, to fit in with the Korean and Taiwanese context, for example. It can definitely work like most other things in life it's a trade off. On Nepal specifically, we do think that there is a need for some consolidation. You have too many banks given the size of the financial sector here.
Does the Standard Chartered Bank have any specific plan in mind? Have you set your sights on any particular brand that you want to acquire?
We will look at opportunities that come our way but our bias will always be towards organic growth. We are quite happy with organic growth and will not pursue acquisition as such. Even if there was anything on the cards, our corporate governance practice does not allow me to disclose any specific information. Nepal is a market that's of interest to us. We will look at the market growth and keep different options in mind. But the organic option will always be our preferred option.
