Finding yourself immersed among a gaggle of high-profile Lebanese bankers at a conference or social get-together can be a mildly frightening experience. When almost everyone in your vision is a banker or economist, what do you say to soften this phalanx of professionals? Which is the best buzzword to break the ice? The answer, personally tested in a meeting last month, is “corporate governance.”
Dropping the term on the sidelines of a non-governance-related event at the Institute for Finance and Governance at the Ecole Superieure des Affaires (ESA) sparked an immediate conversation with a local banking consultant, who shared his experiences working in the provision of corporate governance (CG).
In the words of the World Bank Group’s International Finance Corporation, CG is “the structures and processes by which companies are directed and controlled.” Good corporate governance is important because it helps companies to operate more efficiently, mitigate risk, improve access to capital, be more accountable, and have the tools to respond to stakeholder concerns.
“Exchanges get involved in good governance work via the listing requirements they specify in order for companies to issue shares on their markets. The general idea is to protect shareholders against the information disadvantage they suffer, to be sure that management is always mindful of their best interests,” said Thomas Krantz, an activist and former chief executive of the World Federation of Exchanges. He offered this perspective on the importance of corporate governance in the context of securities exchange during a speech in late April at the American University of Beirut. The event was sponsored by the Beirut-based specialized consulting firm Capital Concept — a company chaired by Yasser Akkaoui, who is also general manager of Newsmedia, the publisher of Executive.
At the same event, five Lebanese banks signed on to a document called the Investors for Governance and Integrity (IGI) declaration. Per the declaration, they acknowledged their duty to act in the best long-term interest of their beneficiaries, stating, “We believe that corporate governance issues can affect the performance of investment portfolios,” and declaring good CG to be an essential factor “in mitigating financial risks and protecting shareholders’ rights.” With the signatures of the five new banks, the number of IGI signatories has doubled to ten, comprising seven local banks, two investment funds/firms and one regional association that represents 27 private equity firms.
Discussion of corporate governance has been on the rise in Lebanon. For several years before the April event, improved CG was trail blazed by some of the few banks listed on the Beirut Stock Exchange, along with eager consultants and the central bank. Adding to the sense that this is a timely and important issue for Lebanese banks was the arrival of corporate governance training for bank board members instigated last year by the central bank and accolades for a Lebanese bank’s CG in a London-based magazine.
Moreover, recent ratings of Beirut Stock Exchange-listed companies show marked improvement in CG scores. The Governance and Integrity Ratings (GIR), issued by Capital Concept, saw ratings for six of ten listed stocks improve compared with a ratings exercise done two years ago. Except for marginal improvement by cement manufacturer Holcim, all the listed companies with an improved rating were banks. Three advanced by leaps and bounds (though the prior scores of all three were in the insufficient or outright failed range) and two others improved within their grade or by one notch. Of the four listed companies which did not, or barely, improved in the ratings, one is a bank, one a real estate developer ,and two are categorized as manufacturers or traders.
Banks BLC, BEMO, and Bank of Beirut (BoB) saw the strongest improvement. As the top gainers, BoB and BEMO each jumped 50 points. BoB moved from a grade of F to a B-, and BEMO from a D- to B+ on the grade scale, which entails a total of five grades and 12 sub-grades. The third best improvement belonged to BLC, which added 31 points to its score and moved from an F to a C grade. Small gains from higher bases were achieved by Byblos Bank (three points, unchanged C+ grade) and BLOM Bank, which had an 11 point improvement and rose from a B+ to an A- grade, the highest of all listed companies. Two other listed companies of importance, Solidere and Bank Audi, seem not to have sought any improvement in their GIR scores. Bank Audi, given a B- grade under Capital Concept’s GIR methodology in 2015, received a minimally improved score and unchaged grade in 2017, and Solidere’s ranking, a D+, was likewise unchanged.
While the short history of the GIR ratings exercise does not constitute sufficient material to talk about trends or confirm sustainable increases in the corporate governance of Lebanese banks, it is notable that the average scores of banks shot up from less than 40 to 63 points, an increase of over 60 percent, to qualify for a B- grade.
Committing to better CG
The IGI signatories include publicly traded as well as unlisted banks. In the latter group are, in order of their signing, First National Bank, Jammal Trust Bank, BBAC Bank, Al-Mawarid Bank and FFA Private Bank. The listed signatories are BLOM and BEMO, the former having been the first bank to sign the IGI declaration and the latter a signatory from April 2017.
BLOM Bank issued a written statement about its CG commitments to Executive last month, just prior to the announcement of the 2017 GIR ratings by Capital Concept’s Akkaoui. In it, the bank said that it “continues to build on its strong corporate governance foundations.” CG measures mentioned in its statement included an update of its Corporate Governance Code in 2016 and several independent board members attending a training session on “Board Level Corporate Governance in Banks,” conducted in fall 2016 at ESA by Nestor Associates, a London-based CG consultancy. The training was held at the initiative of Banque du Liban, Lebanon’s central bank. BLOM added that more executive and independent board members are scheduled to attend similar training in 2017.
In a further note of interest for Lebanese CG practices, a London-based online publication and magazine called Ethical Boardroom declared its 2017 corporate governance winners for the Middle East in eight industry categories last month. Besides seven companies based in the Gulf region — the likes of SABIC, ZAIN, DP World and ALBA were among the winners — the awards contest declared one Lebanese bank to be the regional corporate governance champ in the financial services category: Bank Audi.
Independent and partisan sources both tell Executive that the process of organizing CG training for the board members of Lebanese banks was, and possibly still is, not without its opaque moments. At the same time it seems undeniable that CG standards at Lebanese banks — and, hopefully at other privately held or listed companies — are moving forward.
As CG advocate Krantz emphasized at the close of his Beirut speech, even regulated public markets are human endeavors, and as such are vulnerable to poor or improper behavior. “We simple humans need guidance in the form of regulation,” he said — which in a moderately better world is exactly what corporate governance is all about.