Countries Leading the Second Wave of Corporate Governance in the Middle East

Countries_Second Wave of Corporate Governance

  • Corporate governance (hawkamah in Arabic) in Middle East is no longer a term that requires defining, or has an unclear business case
  • All Middle East countries except Iraq have issued a General Corporate Governance Code, with Egypt, Saudi Arabia and UAE being the front runners.
  • UAE has emerged as one of the least corrupt and most globalised economies in the Middle East, ranking 26th out of 177th in the Transparency International’s 2013 Corruption Perceptions Index.

Middle East is making consistent progress in the implementation of corporate governance initiatives. In part 1 of our Corporate Governance article series, we had talked about the meaning of corporate governance and emergence of a second wave of corporate governance reforms in the Middle East. And now, in this second part, we will look at the progress made on actual implementation of corporate governance practices by Middle East nations.

Corporate governance (or hawkamah in Arabic) in the Middle East is no longer a term that requires defining, or has an unclear business case. Even from the perspective of a family-controlled business, the case for better governance requires much lesser justification today as compared to a decade ago, as discussed in our first article. Moreover, over the past few years, regional regulators have been abolishing the voluntary nature of corporate governance standards — The Emirati, Saudi, Jordanian, Omani and the Qatari securities regulators have moved to a mandatory corporate disclosure requirement regarding compliance with local corporate governance codes.

All Middle East countries except Iraq have issued a General Corporate Governance Code, with Egypt, Saudi Arabia and UAE being the front runners. Saudi Arabia and the United Arab Emirates (members of the GCC (Gulf Cooperation Council)) and Egypt were among the first few Middle East nations who developed and issued Corporate Governance Codes and Guidelines for companies in their territory. The Egyptian Institute of Directors was the first in the region to launch a corporate governance code targeted specifically at state-owned entities in 2005, based on OECD Guidelines on Corporate Governance of State-Owned Enterprises. While Saudi Arabia published its Corporate Governance code in 2006, the UAE published corporate governance guidelines in 2007 for joint-stock companies and in 2011 for small and medium enterprises. The table below gives a quick snapshot of the region’s progress so far:

Countries_Second Wave of Corporate Governance1Table 1:  Corporate Governance Codes and Guidelines in Various Middle East Countries

Source: OECD

The UAE has emerged as one of the least corrupt and most globalised economies in the Middle East, ranking 26th out of 177th in the Transparency International’s 2013 Corruption Perceptions Index. Qatar followed at 28th, with Bahrain, Oman and Saudi Arabia not too far behind. If we look at the actual steps taken to control corrupt practices, we find that while corporate governance centers and institutes of directors have been established in most countries of the region, UAE has more than one corporate governance institute i.e. the Hawkamah Institute, the Abu Dhabi Corporate Governance Center, GCC and BDI.

Despite progress made by the countries, corporate governance still leads the list of factors required for improving investor trust and confidence. The importance of corporate governance was highlighted in a recent survey conducted by the CFA Institute to evaluate opinions on key issues currently facing investment markets in the Middle East and North Africa (MENA). The results showed that investment professionals believe political stability and good corporate governance can have the most positive impact on MENA’s economy. Similarly, the majority of respondents (70%) reported that improved corporate governance practices can improve investor trust and confidence across markets in the MENA region. Interestingly, this issue garnered the highest support among all issues in the whole survey.

Question: What do you think would improve investor trust and confidence across markets in the MENA region? Select all that apply. (N=188)

Countries_Second Wave of Corporate Governance2

 

Chart 1: Corporate Governance leads the list of Factors for Improving Investor Trust and Confidence

Source: CFA Institute, MEIC Pre-Conference Survey

We believe that growing awareness at a country level, and increasing investor demand for transparent corporate governance practices will drive adoption among corporates in the region. In the next and final part of our coverage on corporate governance in the region, we will look at case studies of companies in the Middle East that overcame hurdles and improved their governance practices in ways that boosted their performance and growth.

 

The article was originally published at: Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

 

 

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Understanding the Second Wave of Corporate Governance in the Middle East

Understanding the Second Wave of Corporate Governance in the Middle East

  • Over the past few years, awareness about- and adoption of- corporate governance has picked up pace worldwide, including the Middle East.
  • The need to attract foreign investors and improve access to capital resulted in the first wave of corporate governance awareness in the region in early 21st century.
  • The second, and the current, wave of corporate governance adoption is being driven by the need for family-owned businesses to diversify their boards to improve strategy and decision making, in wake of increased competition from global organizations entering the Middle East. 

Over the past few years, awareness about- and adoption of- corporate governance has picked up pace worldwide, including the Middle East. In this first article of a two part series, we will talk about the meaning of corporate governance and the reasons driving the implementing of corporate governance reforms in the Middle East. In the second article, we will look at the progress made on actual implementation of corporate governance practices by the Middle East companies.

Before we analyze the factors driving corporate governance in the Middle East, let’s understand what the term really means. The Cadbury Report in 1992 offered the simplest and most concise definition of the term: “Corporate governance is the system by which companies are directed and controlled”. It essentially means balancing the interests of all stakeholders in an organization – shareholders, management, customers, suppliers, financiers, government and the community.

Now, let’s understand the business conditions in the Middle East that have created the need for improved corporate governance in the region.

The need to attract foreign investors and improve access to capital resulted in the first wave of corporate governance awareness in the region in early 21st century. Middle East was faced difficulty in attracting foreign investors due to a perceived lack of transparency and accountability among businesses in the region, which hampered FDI inflow and corporate partnerships from investors and corporates in the US and the UK. In fact, the first wave of corporate governance awareness occurred in the Middle East about a decade ago (early 21st century), primarily fuelled by the drive to garner foreign funds particularly by countries having no petrochemical resources and requiring substantial funds for developing their infrastructure. The fact that businesses which lacked corporate governance practices had to face higher funding costs and enjoyed a limited access to capital markets compelled the local companies to adopt corporate governance reforms.

However, Transparency International’s 2013 Corruption Perceptions Index, that ranks 177 countries and territories on a scale from 0 (highly corrupt) to 100 (very clean) based on how corrupt their public sector seems to be, lists five Arab countries in the bottom ten of the list. Also, according to PwC’s 2014 Global Economic Crime Survey, 21% of Middle East companies have been the victims of some form of economic crime.  Therefore, corporate governance reforms are far from complete and there is still a lot that needs to be done to improve the attractiveness of the region for foreign investors.

Understanding the Second Wave of Corporate Governance in the Middle East 1

Transparency International’s Corruption Perceptions Index 2013 

Source: Transparency International

The second, and the current, wave of corporate governance adoption is being driven by the need for family-owned businesses to diversify their boards to improve strategy and decision making, in wake of increased competition from global organizations entering the Middle East.

The presence of a large number of state-owned and family businesses in the region, especially in the Gulf Cooperation Countries (GCC), is characterized by extreme ownership concentrations. With 90% of Middle East companies being family-owned, they tend to be run by a single person or group of persons (appointed by the family). Even majority of the non-listed companies (also SMEs) are controlled by family business founders or their descendants. However, while the family-owned structure results in greater control, it creates challenges as the business passes from one generation to another, and faces hurdles in the form of increased competition from big multinationals entering the region.

As per S&P, “Government-related entities tend to make decisions that serve the interest of state policies rather than minority shareholders or creditors. Similarly, in the case of family-owned businesses, one person often holds both the chairman and CEO position, which combined with a strong appetite for investments, risks creating diversified companies ‘that are based more on opportunism than a clearly articulated strategy’”

Understanding the Second Wave of Corporate Governance in the Middle East 2

Family-owned Businesses & the Need for Corporate Governance in the Middle East 

Source: EY Family Business Yearbook 2014

As a result, governance challenges have multiplied, and leaders have come under public pressure to professionalize their boards and management. The above factors have created a compelling case for companies in the Middle East to restructure their boards and adopt advanced corporate governance principles. According to research conducted by the Pearl Initiative (GCC-based organization into corporate governance) and PwC in 2013, there is growing appreciation amongst family-owned companies in the region about the importance of a strong well-functioning independent Board. About 55% of the surveyed GCC-based family firms had Board members from outside the family, and 42% of firms had at least one non-family non-executive director on the Board.

Visionary companies across the region have adopted corporate governance practices as a strategic advantage in their search for growth and profitability. We will look at the progress made by the region’s countries as well as companies in the next part of our article. Watch this space!

The article was originally published at: Arab Business Review

 To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review