Article: Good Governance – etiquette for the powerful

I was asked by the German online-magazine „Neue Vernunft“ (new rationality) to write an article about the thesis that ‚good governance‘ is just a buzzword in today’s world of business. My answer:

‚Good governance‘ only degenerates into a hollow buzzword if the standards of conduct are postulated by the management but not exemplified by themselves. I received many comments on that so I thought it might also be of interest for my international network on LinkedIn.

GOOD GOVERNANCE

ETIQUETTE FOR THE POWERFUL

Rules are necessary, we learn this already in our childhood. Later on, there are laws that protect us as individuals from serious conflicts – just in case we follow them.

The consequences are severe, when whole governments believe they will not be held accountable for irresponsible behaviour. This became apparent to political scientists and economists in the 1980s

Back then, development aid funds from industrialised nations trickled away in some of sub-Saharan Africa states faster than a drop of water in the hot desert. The problem of irresponsible politics got a name: Bad governance. The World Bank, therefore, demanded that the nations caught red-handed should comply with Good Governance. Unfortunately, the concrete form of Good Governance remained vague at first. There was little compliance demand and when, only to follow specific  standards of conduct instead of implementing concrete laws.

What began with national governments has long since spilt over into the world of business. After all, a ranking of the 100 largest economic entities in the world, drawn up in 2016 by the British organisation Global Justice Now, shows that only 31 economies are still playing in this league today – but as 69 private companies.

Already on 10th place of the 100 largest economic entities identified on this list, is the US trading company Walmart. Volkswagen is stronger than the economies of India or Russia and Daimler is still financially stronger than, for example, Denmark. This economic power in the hands of investors should at least be curbed by use of Good Governance requirements.

At least in the United States and Great Britain, this curbing of the economic power is done today with detailed requirements for listed companies. In Germany, the „Corporate Governance Code“ provides recommendations and suggestions for the management of listed companies. However, precise legal requirements for setting up a compliance organisation have so far only been found in regulated sectors such as the financial industry.

In Germany  the „Corporate Governance Code“ provides recommendations for the management of listed companies.

It was not until 2020 that the Federal Ministry of Justice embarked on a new path and presented a first draft for consultation on a binding law to combat corporate crime – the so-called „Law to Strengthen Integrity in Business“. This law is intended to make companies in all sectors liable for crimes committed by individual employees. With a turnover of 100 million Euro or more, the sanction can amount to 10% of the group-wide annual turnover – and thus even threaten the existence of the company. The situation is different, if the company has demonstrably practised Good Governance, for example, by introducing measures to ensure compliance with the rules. Then for instance, the fine could be reduced by half or even remain at a warning level. There is a possibility that the law could be passed by end of  2020.

Some managers are still struggling with Good Governance, especially with the Compliance topic. They have a nostalgic demeanour of a time before 2002, when German tax offices did not yet regard Baksheesh, Fakelaki and other „lubricants“ as corruption, but recognised them as „necessary operating expenses“ which could  reduce taxes. And still, the guardians of the inhouse Good Governance, the so-called compliance officers, are sometimes discreetly asked to exercise restraint—mainly when their insistence on compliance with the standards of conduct puts necessary orders at risk. The competition, as the supposed justification is often said, would not be so squeamish.

A vital orientation for employees

Good Governance is not an evil that is as tiresome as it is inevitable for a company. The instruments of the guardians of virtue not only protect managers from prison sentences and the company from fines amounting to millions. Instead, Good Governance can describe positively and transparently what values a company wants to stand for. If this is communicated understandably, the standards of conduct provide essential orientation for all employees – and future „high potentials“. In surveys, especially young talents often indicate that they pay close attention to what the company stands for with their preferred employer.

Good Governance only degenerates into a hollow buzzword, if the standards of conduct are postulated by the management, but not exemplified through themselves. In the end, they can be smiled or cursed at because they are not powerful enough. If the top and middle management are not suitable as a role model for tens of thousands of employees, all the training, manuals and reports to the board will not promote improvements. Then weare left with the dubious and long-outdated rule: the end justifies the means if they boost sales and profits.

Fortunately, this maxim is finding less and less acceptance. The social and economic pressure to act ethically and morally correct has increased – thanks in part to the „Me-Too“ debate, headline-grabbing tax and corruption scandals (e.g. Cum-Ex, FIFA, Bilfinger) or spectacular cases like the VW emissions scandal. In the meantime, public vigilance is so high, that companies prefer to behave as merchants in Italy and the Hanseatic League exemplified in the 12th century: Theycoined the term „honourable merchant“. It stands for a strong sense of responsibility towards one’s own company, society and, nowadays, the environment.

Social and economic pressure has increased.

Today as in those days, a honourable merchant bases his conduct on virtues that aim for long-term economic success without being contrary to the interests of the public. Hewas already practising Good Governance when the buzzword did not exist for a long time.