The whispers in business corridors across the globe when it comes to dealing with emerging markets all amount to one question: are they trustworthy?
The recent revelations about Alstom are an example of why these questions are justified. The French power company that has agreed to pay the US department of justice a US$772 million penalty for charges that it bribed government officials in developing markets such as Indonesia and Egypt.
How should governments and businesses deal with such trust issues? They could continue to allow the US department of justice to deal with it. But why a government would want a foreign government intervening in its affairs is not clear. Why a business would want the burden of double regulation is also unclear.
The only other way forward is for local stakeholders to manage their own issues.
There are many facets to this issue, some regarding policy and some regarding business practice. What is important to business owners is learning how to ensure a company is being managed with integrity. To resolve this issue, one needs to understand what trust means, how trust happens and the cultural influence on trust.
A widely held belief is that trusting someone means believing that they will do the right thing. But does such a definition make sense? Usually, the right thing has a different meaning to you than to the person being trusted. This creates problems, as both people in the trust relationship will end up feeling betrayed.
This understanding also implies that people will continue to behave as they always have. If Tarek worked for Ahmed without incident for 15 years, one would not fault Ahmed for trusting Tarek. If, however, Tarek then takes out a mortgage on his house and invests it all in the stock market, only to lose his investment and his house, how will Tarek act now?
So what is a useful definition of trust for a business looking to build a strong corporate governance culture? A good one is that trust is confidence in knowing the future behaviour of the person. Notice that there is no value judgment here. If Ahmed knows that Tarek will steal from him, then that is trust – it is trust that Tarek is ethically weak.
What blindsides businesses in the Middle East is the prevalent shame culture. Guilt-based cultures, such as in the US, hold actions as being wrong without reference to the person. Shame-based cultures, such as Japan, hold that a mistake is an indication of something wrong with the person.
As such, mistakes in shame-based cultures have a great personal cost. This leads to the behaviour that is the exact opposite of optimal – it takes far too long to trust someone for fear of making a mistake, and once trusted, a person is never removed for fear of announcing a mistake. This leads to a number of people who are trusted but are actually untrustworthy.
It seems grim. Misconceptions and cultural issues are challenging. The key is to remove the human element and create a system that you can trust. It is important to differentiate this from just creating more bureaucracy; it is unfortunately far too easy to believe that throwing more people into the mix creates some sort of oversight. All it creates is new layers of bureaucracy that make it easier to betray trust.
What systems are we talking about? We use the same people, but add the right processes, procedures and authorities to improve corporate governance.
It is important to ensure there is a difference between normal operations, in which the chief executive needs to have autonomy – within approved guidelines – and extraordinary decisions. Should the chief executive be able to invest 15 per cent of assets in a single deal without reverting to the board? Probably. Should he be able to invest 15 per cent of assets with contingent liabilities equal to 100 per cent of assets? Probably not.
Nothing stops corrupt behaviour like free information flow. Far too often, secrecy is allowed directly – proclaiming something is confidential – as well as indirectly, through selective invitations to management meetings.
Another issue to consider is enforcing a wide trust relationship. Why only trust the chief executive? Get to know the rest of the executive team. Why is the chairman the only contact with the executives? Other board members should get involved.
It can be frightening to move to systems-based trust. But it is far less frightening than continual betrayals.
Sabah Al Binali is an active investor and entrepreneurial leader, with a track record of financing, building and growing companies in the Mena region. You can read more of his thoughts at al-binali.com
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