THE BLOG
08/20/2013 03:22 pm ET | Updated Oct 20, 2013

Setting the Tone for Transparency

The World Bank estimates that illicit financial flows including corruption, bribery, and theft causes annual global losses of over $1.25 trillion U.S. Dollars every year. This is equivalent to the economies of Switzerland, South Africa and Belgium combined. Looking at these figures, the scale of the problem is evident; however before we are able to tackle it, we must first define the problem.

Wikipedia defines corruption as "spiritual or moral impurity or deviation from an ideal". Whilst this may be a globally accepted definition, it is fair to say that the perception of 'immoral' business practices varies significantly across global jurisdictions. This phenomenon is not one that separates developed markets from frontier or developing markets; there are indeed considerable differences even amongst the world's most established markets. For example, during the 2012 Presidential campaign, regulations in the United States allowed both individuals and companies to participate in supporting candidates in a manner which led to electoral campaign contributions exceeding USD 2 billion. In contrast, the same practices would be deemed illegal in most European Union countries, including the United Kingdom. Similarly, 'facilitation payments' paid to foreign officials by German companies were considered perfectly acceptable practice, and even tax-deductible, until as recently as 1997.

Therefore, until we develop a culturally-relevant and widely accepted concept of what constitutes poor corporate practice in a specific country or region, we cannot develop mechanisms that effectively promote good governance and stamp out corruption in that location.

What are these mechanisms?

Regulation is intrinsic to raising standards of Corporate Governance. A few months ago, in the United Arab Emirates, The Federal National Council passed the long-anticipated draft Companies Law, designed to encourage the adoption of international best practice and help streamline governance standards across the country. This law is set to change the way directors and company auditors can be held to account in regards to corporate governance, by providing clear responsibilities to ensure greater transparency and accountability. If the principles included in the legislation were applied across the Middle East and North Africa, it would help to level the corporate playing field thereby encouraging greater regional economic activity. This in-turn could facilitate the crucial boost needed to generate the tens of millions of new jobs required every year for the 250 million youth of the Arab World, and help avoid further civil unrest.

That said, regulation alone is never sufficient. We don't have to think back too far to identify stark examples where regulation failed to enforce best business practices, even in the most regulated markets. For example, it could be said that it was this exact issue that triggered the start of the global financial collapse in 2008 sending shockwaves across all financial systems. The Private Sector is primarily motivated by incentive, so in order to ensure companies and organisations actively embrace best practice principles, it must first accept that there is true potential for value creation in adopting these practices. In essence, companies need to first appreciate that good corporate governance inevitably leads to greater success and will ultimately be reflected in their bottom line.

There are a host of financial, legal, socio-economic and ethical incentives and disincentives in place to assist in this corporate cultural evolution. Adopting good corporate governance practices can lead to tangible and immediate benefits, including enabling greater access to external capital. For example, transparency leads to increased accountability which in-turn leads to greater levels of trust all along the value-chain. This trust translates into suppliers as well consumers forming a greater affinity with companies, including their products and services. Transparency also boosts loyalty among employees as they grow to admire and respect the organisation for which they work.

Similarly, by not putting these principles in place, companies do not just miss out on the opportunity to flourish but instead open themselves up to the risk of significant damage. High-profile corruption and fraud cases that we have seen in recent years are testament to this, as over and above the fines and immediate loss of earnings caused by unforeseen rogue incidents, the huge reputational losses and subsequent damage to future business can be devastating.

Corporate governance is ultimately a multi-stakeholder exercise, involving the Private Sector, the Public Sector and the wider business community. In particular, education plays a crucial role in ensuring that our future business leaders in schools and universities worldwide receive lessons in ethical behaviour to lay the foundations for their careers. The media also play a key part in this process by generating greater awareness on the subject and celebrating best practice role models and companies who are leading the way. Similarly, the social media boom has revolutionised the way information is being transmitted. For example, the Securities and Exchange Commission (SEC) recently agreed to allow US companies to report financial performance via Twitter. These trends means corporations are exposed to higher levels of scrutiny than ever before, as there are very few places to hide and plenty of opportunities to be 'found out'.

Change can often be painful, but it is entirely necessary to pave the way for a healthier and more prosperous future. Setting the tone for best business practices must come from the top for it to become embedded in an organisation. However, we must not implement a blind rush to try and institute higher levels of trust or adhere to legislation-driven 'box-ticking'. Instead we need to find ways to clearly communicate the desired values and culture of our organisations, empowering management to lead by example, and engraining this culture throughout our corporate ecosystems.

The Pearl Initiative was established in 2010 in collaboration with the United Nations Office for Partnerships (UNOP) to foster a corporate culture of transparency, accountability, good governance and best business practices in the Arab World and beyond. Its purpose is to enhance the corporate community's ability to develop, implement and monitor the effectiveness of better business practices and working with its members to establish such mechanisms.

More than ever, now is an opportune time to implement rigorous corporate governance processes that apply globally whilst remaining regionally sensitive. This will inevitably lead to building greater levels of trust amongst all stakeholders, minimising risks and generating greater levels of competitiveness. After all, applying rigorous transparency and accountability processes is crucial to the health of global markets on their long road to recovery.

Badr Jafar is also the Founder of The Pearl Initiative