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And there it was. The secret ingredient. Trust.
Time for Transparency: What Will It Take to Improve Corporate Governance in the Middle East?
The Real Secret of Thoroughly Excellent Companies
By Peter Bregman
Wednesday March 18, 2009
See the original article in Harvard Business here
At a well-known five-star hotel, I asked if I could extend my checkout time by two hours. I was told no; the hotel was full. Unless I paid for a half day; then they'd accommodate me.
Huh?
If the hotel was full and needed my room, why would it make a difference if I paid them? And if they did have the ability to extend my checkout, why would they charge me? I spoke with the manager. Same answer.
That was the last time I stayed at that hotel franchise.
Contrast that to my recent experience at the Four Seasons in Dallas, TX, a hotel where I've stayed several times.
When I arrived I didn't have to stand in line to check in; the valet simply handed me the key to my room. Which was set-up exactly as I like it: a yoga mat and an exercise schedule on the bed; a bowl of fruit on the table. And they automatically extended my check out time.
I am a customer for life.
How do they do it? What's their secret?
I sat down with Michael Newcombe, general manager of the hotel and 17-year veteran with the Four Seasons, to find out. A woman from room service brought us water and we began to talk
He told me about meeting Isadore "Issy" Sharp, who founded the Four Seasons in 1960 and is still its CEO. Michael met Issy in London two weeks before transferring to a mid-level job at the Four Seasons in Toronto. Issy shook his hand and told him he'd check on him the week he arrived in Toronto. True to his word, Issy showed up that first week to make sure Michael was settling in comfortably.
Michael tells that story to every new hire on his or her first day.
Michael practices proximity management. Every month he meets informally with each employee group. No agenda. No speeches. Just conversation. That helps him solve problems: for example, the time guest check-in was being mysteriously delayed.
During his meeting with the front desk staff, he learned they were slower than usual in checking in guests because rooms weren't available. Then, in his meeting with housekeeping staff, someone asked if the hotel was running low on king size sheets. Most CEOs wouldn't be interested in that question, but Michael asked why. Well, the maid answered, it's taking us longer to turn over rooms because we have to wait for the sheets. So he kept asking questions to different employee groups until he discovered that one of the dryers was broken and waiting for a custom part. That reduced the number of available sheets. Which slowed down housekeeping. Which reduced room availability. Which delayed guests from checking in.
He fixed the problem in 24 hours. A problem he never would have known about without open communication with all his employees.
Michael walks the property regularly. He asks employees about their families, brings donuts, arranges for birthday parties and softball tournaments. He gets beyond the name tag.
I tested him by asking about the woman who poured our water. He smiled, "Judith transferred here from Nevis four years ago, before I arrived at the hotel." And then he told me something about her family.
These are all good management techniques. Perhaps the secret is that Michael does what others just talk about? But there's more to the hotel's approach.
To get a job at the Four Seasons, you need to make it through five interviews, each looking at you from a different angle. The HR director assesses your ability to work. The division head assesses your skills. The Department head looks at cultural fit. The resort manager explores your potential to grow within the resort. And the GM (yes, Michael meets every new prospective employee) looks at your potential to move to another resort.
One in 20 new applicants gets through the process. A 5% admissions rate. That's twice as competitive as Harvard.
Each interviewer is looking for one thing. Together they get a full picture of an applicant. Can he do the job? Will he fit in? Can he grow? Perhaps that's the key to a turnover rate of 11% compared with the industry norm of 27%.
Almost as an afterthought, Michael mentioned one more thing. "When an employee transfers to another resort, they're accepted without interviewing."
"On the basis of?" I asked.
"Our recommendation."
And there it was. The secret ingredient.
Trust.
Sure it's important to stay close to employees, clients, and products. And it makes an important difference when the CEO listens and really cares.
But underlying these is trust, deeply embedded in the culture of the organization, exemplified in its daily operations, driving its success. These days, with banks going bankrupt and employees getting laid off, trust is in short supply. So its value is higher than ever.
Trust is as simple as following through on your commitments. Every sales person knows the way to make a quick sale is to develop quick trust. A good sales person will send you an article with a little note saying it made her think of you. That builds a relationship.
But a great sales person will call you to tell you she saw an article that made her think of you and promise to send it to you. Then she'll send it. That builds trust.
Great sales people create an opportunity to fulfill a commitment -- even when one doesn't naturally exist -- and then fulfill it. Like Issy Sharp's promise to visit Michael in Toronto.
Michael listens to his employees and trusts they have something real to say. In turn, they trust him enough to say what's on their mind. Each interviewer looks for something different and trusts the viewpoint of the others. And each GM trusts the others to transfer only those employees who will succeed in the new resort.
I know plenty of managers who transfer their poor performers to other divisions. But at the Four Seasons that would kill a GM. They know their reputations depend on successful transfers.
That trust trickles down from GM to employees. And from employees to guests.
I was in the locker room, having just worked out in the gym and taken a shower. I didn't want to put my sweaty clothes back on, so I was wearing a gym bathrobe. I was worried the locker room attendant wouldn't want me taking a bathrobe out of the locker room. How could they keep track of the robes? Guests might take them home. That's why so many hotels have little notes on their robes that say, "You are welcome to buy this robe in our gift shop."
So I was walking out of the locker room in the robe, sweaty clothes in my arms, when the locker room attendant said, "Excuse me, sir."
Busted, I thought to myself, as I turned to face him.
"Would you like a bag to carry your gym clothes up to your room?" he asked, holding out a plastic laundry bag.
Trust.
See the original article in Harvard Business here
Time for Transparency: What Will It Take to Improve Corporate Governance in the Middle East?
This article is part of the section The Middle East - Life After the Oil Bust - Knowledge at Wharton
This is the link to the full report -
http://knowledge.wharton.upenn.edu/papers/download/20090311middleeast-english.pdf
Last month, news broke that Nabil al-Boushi, an Egyptian brokerage owner based in Dubai, swindled his clients -- including several celebrities -- to the tune of millions of dollars. Among other things, he is thought to have used money from Egyptian investors to pay off investors in the United Arab Emirates, while falsely claiming to have had relationships with top government officials in the region. His doings brought to mind another person in the news: Bernard Madoff, the former chairman of the NASDAQ stock exchange, who has been charged with running a $50 billion Ponzi scheme and duping numerous well-heeled investors, both in the United States and elsewhere.
As al-Boushi's dealings were brought to light, he was quickly termed the "Egyptian Madoff" in the press -- and in both cases, the finger pointing began. As if that weren't enough, investors in the region had already been spooked by the ongoing long-term probe into allegations of bribery and corruption at Dubai Islamic Bank and its subsidiaries, which sent more than 20 executives to jail.
To what extent might strong and enforceable financial regulations and good corporate governance standards have kept these frauds from happening -- or at least limited their impact? How important are such regulations to help buoy investor confidence in the Middle East, especially since oil prices have taken a nose dive? Knowledge@Wharton asked several experts for their take on this timely issue.
Can't Stop Believing
Just having rules in place -- in the Middle East or elsewhere -- doesn't mean these things won't happen, says Wharton legal studies and business ethics professor Ann Mayer. "The United States supposedly is well regulated, but we see that numerous huge Ponzi schemes have been conducted without detection in this country." The Madoff scandal, for instance, happened despite numerous investigations into the funds in question, as reported in the press. "The Madoff [scheme] probably occurred because regulators didn't do what they were supposed to," notes Wharton finance professor N. Bulent Gultekin. "As long as people continue to 'believe' [the sales pitches], such scandals will continue to happen."
In the Middle East, each country is at a different stage of development, explains Gultekin. "You often see such problems in financially-repressed markets, where there isn't much room to maneuver. They are also common during the process of liberalization in the case of emerging markets or deregulation in more developed countries. It can be very easy to swindle people."
Howard Pack, professor of business and public policy, economics and management at Wharton, says, "Given the huge amounts of capital account surpluses that have been accumulated in the Middle East, perhaps a trillion dollars, it would be difficult to enact regulation that would prevent Ponzi schemes or other malfeasance. It is unlikely that local expertise exists, any more than in the U.S., to enforce these regulations. Standard codes of conduct according to the OECD or other international sources would be difficult to enforce."
Several countries in the region are trying to promote best practices, adds Gultekin. "Dubai is trying to bring more of an Anglo-Saxon structure to its financial markets. And in areas of the region [that are compliant with Islamic] Sharia laws, there may be fewer problems because some arbitrary structure has been conceived out of traditions. But people can always find ways to beat the system."
Survey Findings
A 2008 survey covering corporate governance practices in the Middle East and North Africa (MENA) bears out the concerns of Wharton faculty and other experts. Conducted by the Washington, D.C.-based International Finance Corporation (IFC) and Hawkamah, a corporate governance institute in Dubai, the survey found that while the vast majority of publicly listed banks and companies in the MENA region believe corporate governance to be vitally important, more than half -- 53% -- of the participants did not know what the expression means; they confused corporate governance with corporate social responsibility or with corporate management.
Among the most significant findings of the IFC-Hawkamah report was that "not a single responding bank or listed company could claim to have applied corporate governance reforms holistically, i.e. to have followed a set of 32 indicators which could reasonably qualify a bank or listed company as following 'best practice.'" The survey found that while not a single company followed best practices, only 3% had "good practices," and more than 90% had emerging practices. (The latter are defined as firms that have implemented between eight and 15 of the 32 best practice indicators.) For example, among the companies surveyed, only 36.5% had a company level code for corporate governance or ethics policy.
The IFC-Hawkamah researchers recommended that in order to improve the state of corporate governance in the MENA region, several changes are needed. For starters, chairmen of the board and corporate CEOs "should set the tone at the top and champion corporate governance reforms, with the support of a professional company secretary," they wrote. "The two largest barriers in implementing corporate governance reforms are a lack of internal corporate governance know-how, as well as the unavailability of external qualified specialists in the region."
A Financial Times article about this survey noted that companies in the Middle East have often paid the price for poor corporate governance practices, which result in a lack of transparency. The newspaper quoted Ali Al Shihabi, head of Rasmala Investments, a Dubai-based asset manager, who identified opacity as "one of the main reasons why Gulf-wide stock markets have underperformed emerging markets indices over the past 12 months. Given our superior economic fundamentals, we should have outperformed other emerging markets, but the lack of transparency -- both on a macro and micro level -- erodes the confidence of investors," he told the newspaper.
A Checklist for Investor Confidence
Wharton's Gultekin believes that several standards are important for maintaining international investor confidence. "On the corporate side, full disclosure, international accounting standards and protection of minority shareholders are crucial. On the financial side, you need a good watchdog, such as the U.S. Securities and Exchange Commission." He adds that the SEC failed to detect the Madoff scheme despite some advance warnings -- which points to the weakness of the U.S. regulatory model. Still, for each Madoff scheme that might slip through the cracks, experts acknowledge that U.S. regulators do uncover several fraudulent activities each year and penalize their perpetrators.
Gultekin further notes the need for regulators to function with autonomy. "You also need the watchdog to be free of the political structures, and you need a framework for independent entities," he explains. "If [culturally] people are not used to being independent of the political systems, this may be difficult to accomplish." Moreover, autonomous organizations must exist to enforce the legal structures. "And you need to educate people. In many countries, the financial markets connote gambling, so you need strict rules. You need to keep private information private yet provide transparency -- both are needed for a proper financial market."
A small group of people may treat the market like a casino, notes Gultekin, but if everyone acts like a speculator, the markets will not function the way they should. "If people use the stock market for speculation decoupled from reality, how do you regulate it? Probably the same way you would regulate gambling." The countries in the Middle East, Gultekin says, will need to have high standards to preserve investor confidence and keep the markets running effectively.
Standards vs. Behavior
Corporate governance is tricky, says Gultekin. "Just by applying laws themselves, you don't achieve what you want. In the U.S., we have the Sarbanes-Oxley Act [which established standards for public companies and accounting firms], but if things worked correctly, we wouldn't be in the financial mess we're in. In the Middle East, my conjecture is that you need to involve the customs and cultures of the countries as well."
Gultekin cites Japan as an example: "The country had a different corporate culture which reflected its value system and structure. Japan was successful for a long time, but it had trouble integrating its financial markets with the rest of the world." A major issue is behavioral change. "Simply adopting rules without changing people's behavior won't get you anywhere. The laws are necessary but not sufficient." In the Middle East, many companies are family held, and as a result, their governance structures are different than those of companies in the U.S. and elsewhere in the West. "Even within the region, there is little homogeneity," notes Gultekin. "Bahrain is different from the U.A.E.; Saudi Arabia is different from Egypt. Ownership structures are different; the way people conduct business is different. For instance, in an environment where reputation is culturally crucial, it may be possible to encourage ethical behavior even beyond what is legally required."
These factors may make it difficult to implement uniform corporate governance norms throughout the region. Still, some initiatives to drive change have already begun. In November, for example, IFC and Hawkamah, authors of the 2008 report, announced a partnership to offer advisory services in corporate governance to family-owned businesses in the MENA region. In addition, the Dubai-based Mudara Institute of Directors has launched an initiative to educate board members of companies about best practices in corporate governance.
If some of these initiatives pay off, companies and shareholders alike should benefit -- as will the Middle East. They might not prevent future Madoffs and al-Boushis from ripping off investors, but they could at least ensure that such scandals are fewer in number.
Published : 2009.04.01
This is the link to the full report -
http://knowledge.wharton.upenn.edu/papers/download/20090311middleeast-english.pdf