Commentary: Nepali companies need to adopt and adapt if they want to survive

Nepali Times, Issue #437 (6-Feb-09 to 12-Feb-09
ASHUTOSH TIWARI

While teaching a weekly course on corporate governance in an evening program at a management college last year, one requirement I had for students was to visit and study two Nepali companies, and write about those companies' corporate governance practices. That is, explain how those companies were directed and controlled for stronger business results.

Most students wrote about public companies such as banks and manufacturing units, in part because information obtained from them could be verified from other sources.

The two key findings were as follows:

Family on Board: The board composition of most Nepali-owned public companies raised too many red flags. Unqualified relatives and family members of the founders were assigned seats on the company's board to such an extent that even nominally public companies were ran like family businesses under the control of a patriarch who brooked no dissent.

With the independence of the Board thus compromised, hiring was mostly about getting relatives, friends and loyal hangars-on into the company.

Often, there was no audit committee to make sure that the company's financial reporting was truthful. And the Board members themselves ran the companies on a day to day basis, telling the hand-picked management staff what to do and not do. Besides, with no one questioning their actions, such Board members found it easier to repeatedly use the company assets for personal use with little thought to what shareholders might say.

Indeed, if we examine why some Nepali financial institutions went into receivership in the last three years, the inherently faulty composition of their boards-which then led to board members' treating banks as personal piggy-banks?comes up as trigger point that eventually led to their downfall.

Management mistakes: Often, managers at most companies have to perform in such a way that they hardly have time or interest to deepen the necessarily unglamorous tasks of cleaning up their company's innards that lead to long-term stability.

As such, most companies have lofty mission statements, but no code of ethics, no employee manuals and no agreed-upon and written operating procedures. True, not having these documents helps a manager consolidate power, especially when it comes to hiring his chosen people and then fixing pay packages. In practice, however, such control comes at the cost of enervating office politics that lead to low staff morale and low productivity.

Besides, the absence of such documents reduces the management to making decisions under pressure, and on an ad-hoc basis. When employees always have to guess what the management's decisions might be, that does not help the company to establish a culture of openness, predictability and accountability.

And it's no exaggeration to say that most trade union-related problems in Nepali companies have their start in the management's inability or reluctance to establish and maintain the basic standards of corporate governance.
In all fairness though, most public companies in Nepal do know about the importance of adopting stronger corporate governance practices. But their understanding is comparable to that of a couch potato comprehending the benefits of regular exercise.

My students learnt that the internal control mechanisms at companies they studied were too set to change anytime soon, though some have recorded progress in the presence of professional management and shareholders who ask pointed questions.

Still, the best hope lay in speeding up the magnitude of change in the external context of competition (for customers, managerial talents and resources) in such a way that the companies that want to grow are soon left with only one of two choices: either adopt better corporate practices so that decision rights are clear for stronger business results or exit from the marketplace all together.