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Lessons from a Cypriot corporate governance crisis

Author: ICAEW Insights

Published: 26 Mar 2024

A governance code for state-owned enterprises in Cyprus that emerged following the republic’s economic crisis has much to teach all organisations, says one of its leading authors.

Many Cypriots will have 2013 etched on their memories as the republic’s economic crisis led to the collapse of several banks and the government’s bond credit rating being downgraded to junk status by international credit rating agencies. 

The island’s economy was eventually bailed out to the tune of €10bn (£8bn) by the European troika (the European Commission, the European Central Bank and the International Monetary Fund), which imposed a series of austerity measures in return.

Petros Florides, a Cyprus-based governance and risk expert, recalls seeing the drama unfurl. “I was watching this happen. And because of my background, I could see how we had ended up where we were. Not wanting to be an armchair critic, it was time to either put up or shut up.”

That seminal moment was to mark the beginning of a process that culminated some six years later – in the publication of the 2019 Code of Public Sector Governance – which is slowly gaining traction.

Back in 2013, and initially through publishing a series of articles to obtain greater reach, Florides pulled together what he describes as a “very loose coalition” of experts and other interested parties to explore and debate the problems that had led to the collapse. 

Call for better governance

Successive surveys commissioned by Florides highlighted strong public support for a ramping up of governance. “The Cypriot people were talking the language of governance without necessarily mentioning the word,” Florides says. “That gave the validation to say, ‘something needs to change’.”

The code, written by Florides and the other members of the ‘new governance team’ (NGT), offers practical guidance via six governance principles and poses a series of self-help questions to maximise the value received by the general public from service providers, through enhanced public administration by better governance. 

“Given the role in society that SOEs play, it’s incumbent on them to deliver the best service they can to their stakeholders. We’ve now provided the handbook to support them in that aim through good governance. It’s both conformance and performance; we have to go over and above mere compliance. Whether an organisation is privatised or nationalised, it should be well-governed.” 

With the full backing of the Auditor General of Cyprus from the outset, there was a groundswell of support for change among key Cypriot stakeholders, as well as the wider public. In 2019, the Minister of Finance presented it to the Council of Ministers and it was approved as the code of governance that SOEs are expected to implement.

Disappointing take-up

Despite adoption by some of the largest semi-governmental organisations (SGOs), including the state broadcaster and the Electricity Authority, and resounding endorsements about the positive impact on governance, implementation of the code across the republic’s’ 58 or so SOEs has, by Florides’ own admission, been much slower than he would have liked. 

That’s largely due to the pandemic, he says, but also because of a lack of checks and balances about the quality of the code’s implementation. “Accountability for the implementation of the code needs to be improved. A recent IMF evaluation of governance and its implementation tells us what we already know; that the ‘comply and explain’ principle may need to be replaced with something more akin to ‘apply or else’. But it’s not in our power to insist on that. In any event, there needs to be more emphasis on follow-up and evaluation, which is where we are currently targeting efforts.”

Meanwhile, internal challenges – not least capacity issues and good understanding of what good governance looks like – are hampering successful implementation. “More people who serve on boards need to have a better understanding of what governance actually is, and the role and responsibilities of board members regarding both governance conformance and performance.” 

Externally too, more needs to be done to educate the general public – the consumers of the products and services from SGOs – about how to hold these organisations to account. Florides says plans to help young people do that have always been part of the longer-term strategy, but are now higher up the agenda.

Embedding change in culture

Florides accepts there is no fast fix to the changes in culture needed as a foundation for good governance. “Operationalising the code is about having effective processes that drive actions. Over time, these form culture – something that takes a long time to change and nurture.”

Implementation of the code has been delayed due to the pandemic, but Florides is keen to rebuild momentum. “The NGT is constantly looking for different levers to pull to get the code enforced or properly implemented,” Florides explains. “For example, the European Banking Authority report on environmental, social, and governance (ESG) risk factors explicitly mentions how banks should be looking at the extent to which they are exposed to ‘outside-in’ ESG – risk factors through bad governance. This is an angle we are currently exploring with the relevant stakeholders.” 

However, he also accepts that widespread and effective implementation of the code won’t come quickly. 

“When I started this in 2013, I said we wouldn’t see the full benefits. That’s the next generation. And it will be an inter-generational journey spanning many years. But we had to start the clock sometime, so it may well have been then. 

“Too much governance is activity and output-driven. But this code is outcome-orientated, so it’s really about a change of knowledge and behaviour. It is a marathon, not a sprint. We should focus on establishing the right conditions that will prompt actions, leading to better results that will be enjoyed by future generations,” Florides says. 

While the code has been written to apply to the wider public sector organisations that are governed by a board of directors, the principles it contains apply to all organisations. Asked what advice he would give to using code to beef up corporate governance, Florides says the handbook should be seen as a friend and not an enemy.

“It can help you better understand how to fulfil your responsibilities or even just stimulate conversation about governance. We want people to absorb its message and think about outcomes, and then adapt the code to their context. Take ownership of the whole process. Why would anyone not want to do it?”

ICAEW in Cyprus

ICAEW has a dedicated council member and contact members in Cyprus, as well as local staff you can reach out, local events and online resources.

Outline of Cyprus

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