It bears repeating that being decoupled from every other market is not a win-win. At best it makes you a functional zero, irrelevant to all but yourself. The truth of this was reinforced again at the end of last month. When global securities markets shook, from China to developed economies on top of a shrinking oil price, bourses in the Middle East and North Africa region’s main markets were engulfed.
Benchmark indices in Egypt, Qatar, the United Arab Emirates and Saudi Arabia started the last week of August with severe drops; Bloomberg’s regional index of 200 top equities in the Gulf Cooperation Council by market cap and liquidity, the GCC 200, had a ten-session slide to August 24 at the end of which was more than 30 percent down when compared with a 52-week high in September 2014.
The Beirut Stock Exchange (BSE) was not part of the turmoil. The daily bourse comment by BLOM Bank reported a “negative performance” of the Blom Stock Index to the tune of 0.13 percent on August 24, followed the next day by a “lackluster” showing of the exchange as only $1.2 million worth of shares were traded. Note to trader self: a comatose market does not break out into any run, never mind whether bull or bear.
The BSE’s long-standing irrelevancy is a noted impediment to investment and private sector economic development in the Lebanese market. Many proposals and initiatives have been launched in efforts to fire up capital markets as an economic engine; from drafting lists of companies that the government could privatize via IPOs, to new legislation and the ongoing enhancement of capital markets regulation and supervision.
A new hope
Now, a new initiative is tackling the issue from a different angle by trying to spur on listed companies toward improving their corporate governance. The shareholder-rights.com initiative by Beirut-based consultancy Capital Concept bases its reasoning on the notion that investors, with other factors being equal, will prefer to put their money in companies with well-structured and accountable boards, with a high degree of financial transparency, integrity and ethics, and with substantive shareholder rights.
The whip that shareholder-rights.com cracks in order to make listed companies trot faster in adopting top-notch corporate governance is called Governance Integrity Ratings (GIR), a 100-point checklist for best disclosure practices in five corporate governance categories. The grades assigned on the basis of this checklist are straightforward; they range from A – representing real excellence and almost impossible to achieve at the first try – to D for inadequate performance and F for failed.
“A growing body of evidence demonstrates today that corporate governance is essential to the protection of shareholder rights,” Capital Concept reasons in describing its approach, arguing further that “adherence to strict corporate governance principles in a country’s primary and secondary equity markets is a precondition for attracting investors and to achieve vibrancy of capital flows, which are crucial for any country that has a direct interest in improving its competitiveness.” Under this reasoning, Capital Concept has developed a methodology to monitor listed companies’ disclosure on an ongoing basis and says it will publish frequent ratings reports called Corporate Governance Assessments beginning with large corporations in the Middle East and North Africa plus the Lebanese market in a standalone report.
Bottom of the class
Executive obtained an advance copy of the first report, covering BSE-listed companies. According to these GIR rankings, half of the publicly traded Lebanese companies are to be sent home with a report card showing an F in corporate governance up to the summer of 2015. Add to that two companies that got Ds, including market cap leader Solidere, and a 70 percent majority of the ten listed companies in the sample – which covers all corporations traded on the BSE – got corporate governance grades that you wouldn’t want to show to your parents.
These findings also pushed the average corporate governance rating for all BSE-listed companies way down, according to the report. “The overall level of governance practices in Lebanese listed companies is inadequate, expressed in an average rating score of 27 percent or a flat D,” it says, adding, “The average governance score improves to 39 percent when the view is narrowed to the banking sector, which represents the largest number of listed companies on the BSE. Three of the six listed banks earned ratings of C and above; however, two listed banks had to be rated with F and the overall average score for banks remains inadequate, albeit at the upper edge of the D rating.”
Only two banks were assessed in the report as exhibiting good corporate governance, represented by a B grade, and it is probably not a coincidence that these are the two that one could label ‘super-alpha’ under the categorization by which banks with deposits over $2 billion make up the sector’s alpha group. Head of the class was BLOM Bank with a B+, and the organization didn’t find the implementation of corporate governance an overly onerous task. “I cannot say that the procedural adjustments and enhancements that we made to our code and practice of corporate governance were ‘pains’ – if you will, they were more like good medicines that were needed to keep us fit and healthy,” BLOM chairman and general manager Saad Azhari tells Executive.
According to Azhari the bank set up its corporate governance code in 2007. “We constantly update and develop our code and procedures in line with BDL and international regulations, so as to enhance the health of the bank and the interests of our stakeholders. This stems from our belief that CG carries a lot of value-added to the Bank in that it improves the Bank’s reputation, lowers the cost of capital, enhances access to outside capital, and optimizes operational and financial efficiency, besides the fact that it implies better risk management,” he says.
More gain than pain
While publicly traded companies are the easiest to track and evaluate for corporate governance performance, benefits of corporate governance are in no way only the domain of listed companies. For Beirut-headquartered insurance and reinsurance organization Chedid Capital Holding (CCH), fortification of its corporate governance in conjunction with a recently completed private equity participation (see story page 72) was a no brainer. Applying best practices in structuring the company’s board, which meant appointing independent non-executive directors, had a number of benefits – for example, increasing the ability to make good decisions and avoid wrong ones. “Any company in any industry should have corporate governance and from our perspective at Chedid Re there is no best practice without corporate governance. When you are managing your company and creating your vision and making your plans, you need people around you that question you, that ask the right questions, people who have their own opinions, who give their opinions and who can disagree with you or agree with you,” says Farid Chedid, the chairman and chief executive of Chedid Re and CCH.
From the perspective of Romen Mathieu, the managing partner of the EuroMena private equity fund that invested with CCH, the collaboration with Chedid was a positive example of the value that corporate governance infuses into a relationship. To achieve growth objectives under the private equity participations that EuroMena engages in as minority shareholder, according to Mathieu one needs good management and complete and honest reporting between the management and board of invested companies. Furthermore, one needs a real agreement from the partner in the invested company that minority shareholder rights are fully understood and accepted.
“In early participations we tried to invest and then implement corporate governance afterwards; sometimes it worked and sometimes it didn’t. Today we don’t invest in a company unless we are sure that corporate governance is already installed or, if not, we need to sign on a plan to install full-fledged corporate governance within three or at most six months, with very painful [consequences] if the company does not abide by this plan,” he says.
Stakeholders in the push for better and greater economic investments in Lebanon and the Middle East have high expectations that Capital Concept’s continual evaluation of corporate governance within the BSE’s publicly traded companies will significantly accelerate the adoption of state-of-the-art corporate governance practices in the Lebanese corporate community. This, despite the blunt reality that the country is “extremely far from what today is common practice in the modern world,” according to Mohammed Alem, managing partner of Beirut-based law firm Alem & Associates.
He outlines a litany of legal inadequacies in relation to corporate governance and shareholder rights for Lebanese companies, as they are obligated to operate under the framework of an extremely dated Code of Commerce. “Rules for joint stock companies, which is where you look to corporate governance whether in privately held or publicly listed companies, have not changed for 30 or 40 years. This makes for a really old piece of legislation that is not adapted to modern requirements for operating companies in a space of transparency and other areas of good governance,” Alem says.
The impediments he cites range from restrictions on rights of new shareholders under article 117 in the Code of Commerce, to weak oversight over related party transactions under articles 157 and 158. Due to the latter weakness, interested parties such as family members of top executives even in large corporations and banks can realize astronomical compensations for services rendered, while any such related party deal “should be disclosed to the board and the board should disclose it to shareholders,” Alem explains.
Whereas an ethical corporate culture, transparency, good conduct and governance “is something that you build before thinking about listing your company… lack of corporate governance makes it difficult to inject equity into corporations,” Alem says, based on his firm’s expertise – 30 of its 60 lawyers specialize in corporate practice.
As he experienced it, the weakness of legal frameworks that rule over corporations is paired with a widespread social acceptance of family deals that characterize the business culture in ways that one does not encounter in developed economies. While this makes it seem clear that the instant outcome of any new ratings initiative may not be the development of an internationally compliant investment culture, and adoption of corporate governance standards throughout the Lebanese business community, Alem is nonetheless positive about the impact GIR ratings will have on listed companies – beginning with banks that need to demonstrate competitive advantages. “I think they [GIR ratings] will bring a tremendous plus because banks today are all fighting for the same clients in a market that is not really growing,” he says.
And the impact will extend further, he expects, because “Listed companies or banks or any corporations that are looking today for fresh capital need to demonstrate that they have a certain level of corporate governance, and any specific measurement of corporate governance will help push everybody to higher standards.”
EuroMena’s Mathieu concurs. From a private equity perspective of implementing efficient deals, he says, “The corporate governance ratings initiative by GIR will save us time; and time is money.”