One year ago, I argued that the second wave of corporate governance had arrived at the shores of the Middle East and North Africa. Put succinctly, the first wave was about the introduction of corporate governance frameworks and the second about their implementation.
It goes without saying that the events of the Arab uprisings have planted the governance debate firmly within public discourse in the region. In Egypt, criticism of the privatization process has, for better or worse, drawn attention to the governance of state-owned enterprises (SOEs). In Tunisia, the confiscation of private ownership stakes of the Ben Ali and Trabelsi families has required a reflection on how these enterprises should be governed. Across the region stock markets have tumbled and some, such as the Egyptian Stock Exchange (EGX), remained closed for over a month to prevent a drastic capital outflow.
This outflow of capital might be a reflection of the political risk attributed by investors to Egyptian companies, but arguably also a reflection of the corporate governance risk. Speaking at the meeting of the “Organisation for Economic Co-operation and Development (OECD) Taskforce of Stock Exchanges for Corporate Governance” earlier this year, Chairman of the EGX Mohamed Omran argued that good governance of listed companies has played an essential role in allowing the stock market to re-open in March. Due to the separation of ownership and executives in many listed companies, in cases where controlling shareholders were subject to legal proceedings listed companies were able to continue their operations.
It is important to consider what has been the impact of the Arab uprisings on corporate governance in the region, beyond anecdotal evidence. First, it is indisputable that the link between good corporate governance and anti-corruption, especially in the banking sector, is increasingly being drawn. There is a growing interest in how good governance can help preserve the integrity of Arab banks, beyond anti-money laundering or anti-fraud provisions. Risk management and related lending in the banking sector is likely to remain a priority for some time.
Beyond this anti-corruption angle, the connection between sound economic governance and good corporate governance is evoked less frequently. This is curious considering that the events that transpired earlier this year in Egypt and Tunisia were arguably rooted to a certain degree in economic governance perceived as unjust. And yet, when pressed to speak about the impact of recent events on the evolution of corporate governance practices, experts either hide in the comfort of national corporate governance regulations in place before the events of this year or point to the need to engage with citizens in making corporations more accountable.
Neither of these approaches enables us to gauge the implications of political transitions on corporate governance in Egypt or Tunisia, or to draw lessons for the wider region. Instead, we should focus on the actual changes on the ground such as the swift modifications to corporate governance frameworks during the past year. For instance, in Tunisia, the transitional government just a few months after the revolution introduced new guidelines for corporate governance of banks. New guidelines for banks, effective next year, have also been introduced in Egypt, in significant part as a response to the anti-corruption concerns.
Attention is also being paid to corporate governance of state-owned enterprises (SOEs), an area which until about two years ago was a no-man’s land in the corporate governance debate in the region. Egypt was the first Arab country to introduce corporate governance guidelines for state-owned enterprises in 2006, and the Egyptian Institute of Directors has made considerable awareness raising efforts to encourage their implementation. Since then, governance of SOEs has been a matter that was allegedly of interest to everyone but which few policymakers or state-owned companies would address publicly. This appears to be changing.
The Moroccan government in October of this year released a comply-or-explain code for its SOEs, modeled on the “OECD Guidelines for Corporate Governance of State-Owned Enterprises”. Weeks later, the government of Dubai issued a decree addressing the governance of its own state-owned companies, which have been under the spotlight, not least due to the Dubai Holding restructuring. Prior to the issuance of this decree, SOEs in the United Arab Emirates were not subject to many corporate governance requirements and even listed SOEs were exempt from corporate governance guidelines issued by the Emirates Securities and Commodities Authority in 2009.
A number of governments in the region have adopted more than two or three codes for specific sectors, notably banking (Jordan, Tunisia, Egypt, etc.), but more recently also real estate (Dubai), as well as for small and medium and unlisted companies (Morocco, Lebanon, etc). It is difficult and perhaps too early to judge the effectiveness of this more extensive code drafting effort. But It ought to be emphasized that codes and guidelines are important but not sufficient for fostering good governance.
Deeds beyond words
All too often in the region, corporate governance is referred to as a practice with a finite outcome, as opposed to an ongoing process. In the public debate, the question seems to be posted in terms of having or not having “corporate governance” as opposed to having effective governance. This is a risky way of framing the question because the answer is then often given with reference to having a code or a guideline, either at the company or national level. In this view, the issuance of corporate governance code regulations is the final destination, a happy status quo.
This approach confuses a patient who has been diagnosed with one who has been cured. And yet, the difference between the two may be one of life and death. Many companies in the region, especially listed ones, have made serious progress in improving their disclosure practices, introducing board committees and establishing investor relations departments. Fortunately, some of these companies publish corporate governance reports that demonstrate with startling clarity the problems of this binary view of governance as something that can be introduced overnight like new software, without changing the hardware.
Consider, for example, one Gulf-based bank that boasts all the right policies, including specialized committees, a chief risk officer reporting to the board and standards for a number of board and committee meetings per annum. There is only one problem with the governance of the said bank — half of its board has been in place for over 30 years. In addition, some of these board members are considered to be independent since they do not hold any executive posts. But it is doubtful whether board members who have presided for that length of time can continue to exercise independent judgment.
This example underlies the dangers in the current corporate governance debate in the MENA region, whereby governance is considered as fait accompli after the boxes required by the national code have been checked. It also highlights that the risk of complacency by regulators and companies is not negligible. After all, stocks of Arab companies do not feature prominently in the portfolios of international fund managers not due to a lack of corporate governance codes or ESG guidelines but due to failings in developing implementation and enforcement cultures.
Another issue is that practices meant to be inspired by these codes are often not publicly disclosed even where there is a positive story to tell. The latter is an important point if Arab markets wish to position themselves as hubs for international capital. A dialogue between regulators, companies, investors, proxy advisers and corporate governance advisory firms may help to project Arab companies onto the international arena.
The Arab uprisings may have in the short term been detrimental to the performance of capital markets in the region, but perhaps we should remember that there is nothing better than a crisis to bring out an opportunity. The opportunity is to leverage the corporate governance debate to raise international interest in Arab markets and to attract more stable investment in the region. Liquidity and listings, the two preoccupations of stock exchanges and securities regulators in the region, will follow.
ALISSA AMICO is program manager for the Middle East and North Africa, Corporate Affairs Division, of the Organization for Economic Cooperation and Development (OECD). The opinions expressed in this article do not reflect the official views of the OECD or its member countries