CASE STUDY

EMERGING MARKETS:

Navigating a clash between corporate governance and local customs

 

CHALLENGE

A multinational company operating in emerging markets discovered an individual who had access to the company float was taking money out of the company but replacing it before the new accounting cycle. With strong corporate governance rules immediate dismissal seemed to be the natural decision. However, a board member knew this was out of character and not the norm from one of their best and longest standing employees. They asked me to look into it.

 

INSIGHT

Understanding local customs was the key to resolution.

Traditionally, the village elders were responsible for members of the community, helping where and when needed. Time and technology may have moved on, but customs and traditions tend to remain. The company had built a great deal of trust in the region and within the community. What no-one realised was the company’s reputation in effect made this individual a modern day ‘elder’. Hence, when asked for help, it was his duty to do so. In effect, the company’s success brought unintended consequences and potentially nasty repercussions for local hires.

So how could the company navigate its commitment to building local economies while ensuring adherence to strict governance practices?

 

SOLUTION & OUTCOME

  • Investigated if anyone else was being asked to assist members of the community and themes
  • Created a fund with guidelines on how it was to be used
  • Developed an innovation challenge to find more sustainable solutions
  • Adjusted how the company found and integrated local talent

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DO BUSINESS PRACTICES IMPACT PROFITABILITY?

 

For a company to thrive, it needs to ensure the wellbeing and level of satisfaction with its stakeholders – investors, employees, suppliers and customers. Recent times have seen how bad conduct results in negative publicity, poor company image and a drop in share price. So should a company adopt ethical practices as a means of improving and securing a company’s economic performance?

Risk Mitigation

According to EIRIS, studies show that ethics-related news influences a company’s share price for better or worse, revealing effects of between 0.5% and 3% of the share price.

The lesson to be extrapolated from the shift in share price is the underlying knock-on effects on the dynamics and relationships that enable that business to thrive, and ultimately the level of trust and confidence in management. Without this trust, stakeholders tend to limit investments, negatively affecting growth.

Private companies may argue this doesn’t affect them since they don’t have a share price. However, they still have other stakeholders to bear in mind, especially customers, suppliers, employees and themselves as the ultimate owner of the asset – its value, reputation and standing.

 

People Taking Care of People

Employees prefer to work with companies that treat them with dignity, respect and fairness. Creating an environment in which employees feel they matter has a residual benefit in propelling them to create positive experiences for customers. However, if employees see, hear or experience negative behaviour, it erodes their trust in and loyalty to the company, and the quality of care they feel compelled or empowered to portray to customers.

 

Customer Satisfaction

Companies with high levels of customer satisfaction tend to generate a higher degree of customer loyalty, repeat business and more market share in the long run. Customers may decline to deal with a company that causes them to be suspicious and afraid. Businesses that genuinely contribute to their community and maintain good relationships with other companies tend to be more successful in the long run. On the flip-side, those who have corporate social responsibility efforts on the one hand but poor business practices on the other, are in danger of breeding cynicism into their customers, and mistrust.

 

Creating Value

Ethical business practices are sound business practices. Instead of being consumed by unnecessary lawsuits and other activities that detract from the mission and purpose, the business can focus on producing quality products and services that enable positive financial results for the company.

 

Financial Health

Beyond regulatory requirements, accurate financial records are essential for sound decision-making and long-term success. Financial records provide an overview of return on effort, a tool to support business to measure its rewards for initiatives taking place in the marketplace. Sound and timely financial records are essential in determining the trajectory of the company, and the ability to course correct where and when necessary. They also provide the ability to respond quickly to opportunities, without adding strain or unwarranted risk. Furthermore, a clear picture on the financial situation of the company will enable it to have the cash flow required to fulfil its commitments, a sound business practice to keep employees and maintain relationships with suppliers.

 

Green Practices

Whether you’re chopping trees or hugging trees, people look for returns.

The fact of the matter is if you don’t keep an eye on your bottom line, the business will be unsustainable. The bottom line is affected by people’s perception, belief and likability of your company. The internet and social media have provided stakeholders with the tools to have a greater insight into the impact businesses have on our environment and society. Customers seek to do business with companies that reflect their values, and suppliers and investors would be wise to follow suit.

 

Unforeseen Circumstances

It is far easier to set off on the right foot in the first place than trying to course correct once calamity hits. That said, genuine errors and unforeseen circumstances do happen. The ability for a business to respond appropriately and speedily speaks volumes in the eyes of stakeholders. However, waiting until a crisis strikes to instil and encourage good behaviours is a poor strategy given the time it takes to overhaul embedded systems, beliefs and practices. These changes result in delayed decisions, negative public opinion and a downward spiral in relationships with stakeholders – not good practice for any business that needs customers, employees, suppliers and investors to thrive.

Some may still argue why change when some are getting away with it. Others may wait for regulatory bodies to force them to clean up their business practices, and there will be those who choose to see the tide is shifting – that the manner in which we produce and deliver products and services matters. Now is an excellent time to challenge the ills we tolerate under the guise ‘but this is business’ and start by acting responsibly in the first place.

 

 

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