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Corporate governance

Increasing female participation at the top will benefit all

by Zeina Zeidan Maalouly

Corporate governance in the Middle East and North Africa (MENA) has been insufficient and is preventing corporations from fulfilling their economic potential. Corporate governance is crucial when companies seek to attract new shareholders and optimally mobilize sources of capital, but publicly traded companies in the region are not only lagging behind developed economies in terms of corporate governance, but also behind many emerging markets.

Transformations of corporate management culture have recently commanded a great deal of attention in international business literature. One particular focus  is the optimization of corporate boards through the increased inclusion of female board members.

It is in the area of female participation in corporate governance, so on the board of directors, that companies in the MENA region face particular shortfalls, which has unfavorable implications on corporate governance culture throughout the region. Globally, women account for only 12 percent of board seats among the world’s largest companies, and 13.4 percent of directors in developed markets, versus 8.8 percent in emerging markets, according to data from MSCI, a global equity indices compiler. But despite this low target, in the Middle East, fewer than 2 percent of board members are women, according to Bloomberg figures.

If a correlation between the low adoption of corporate governance and low rates of women on boards is drawn, corporations in the MENA have the opportunity to kill two birds with one stone by simultaneously improving their corporate governance practices and establishing policies to increase the number of women serving on boards. There are sound reasons to do both, for corporate culture and overall performance alike.

Family business

A primary reason for the slow pace of corporate governance reform in the region is that the majority of businesses are either family-owned or small- or medium-sized enterprises. These companies tend to hire from within, especially for top positions, rendering it difficult to maintain independent and transparent governance.

By definition, corporate governance is the system by which companies are directed and controlled. It hinges on how the company’s board of directors and upper management communicate with its shareholders and stakeholders.

With proper governance, any organization would be transparent and accountable for every decision it makes. This fosters a healthy and symbiotic environment. Inversely, weak corporate governance permits waste, corruption, and mismanagement due to a lack of accountability. The more transparent and forthcoming the organization is about its actions, the more amicable the relationship can be between management and shareholders.

Sound corporate governance requires supervisors who are responsible for constantly reviewing and reevaluating all of a company’s processes and regulations. In the case of any errors or mishaps, they are required to instigate proper changes that will prevent such issues in the future, and make them less harmful to overall profit and performance.

These practices should be made clear to all stakeholders, and any change needs to be promptly reported. The shareholders also hold the right to question any reforms the company implements, or new projects it undertakes, to ensure that such ventures do not have negative impacts on internal or external stakeholders.

There are many benefits for cohesive corporate governance at multiple levels. For a company, it eases access to external capital, bolstering its competitive edge. In the case of family-owned organizations, the distribution of power and capital is very clear, which lessens the possibility of conflicts erupting between family members. The latter is crucial to attract new investors and placate those who are already established. Internally, it will create a transparent feedback mechanism that will root out any weak operations that are compromising productivity.

Properly implemented and transparent corporate governance often attracts shareholders, who are more likely to invest if they have access to all the information regarding the spending of their money as well as the projected success. Furthermore, sound governance will encourage present shareholders to support further expansion into new projects and products that will develop the company and help it remain competitive. This cannot be achieved unless the shareholders are being routinely updated with all the latest findings and regulations that are implemented.

Numerous empirical studies have shown that investors are significantly  more likely to invest in a well-run organization than in a poorly-run one. The corporate value of any organization will be bolstered and subsequently add value to the economic status of the nation.

Including women on corporate boards is a crucial way to improve corporate governance. Studies by international accountancy groups Deloitte and EY have shown that investors and shareholders increasingly see the value of gender balance in businesses, and that shareholders care about the gender composition of boards.

Women on boards

Importantly for the bottom line, a 2016 Organization for Economic Co-operation and Development (OECD) report, citing McKinsey, showed that companies with women on executive committees outperformed those without women in leading positions, bringing in an average of 47 percent more return on equity and 55 percent more earnings before interest and tax.

Findings from narrow market segments—such as listed Fortune 500 companies in the United States—that show improved bottom-line performance of companies empowering women strongly across various levels of decision-making are difficult to extrapolate to international markets. However, an analysis carried out a few years ago by the Peterson Institute for International Economics on 21,980 firms in 91 countries indicated that including women on boards may improve corporate performance, “with the largest gains depending on the proportion of female executives.”

The OECD, which is championing corporate governance, has issued a recommendation on gender equality, advising that jurisdictions “encourage measures such as voluntary targets, disclosure requirements and private initiatives that enhance gender balance on boards and in senior management of listed companies, and consider the costs and benefits of other approaches such as boardroom quotas.”

Introducing quotas to get more women on boards has been proven to be effective. In France, for instance, once a quota was introduced in 2011, the share of women on boards went from 10.7 percent in 2009 to 33 percent in 2015, while there was an 18 percent increase over a similar period in Italy.

Yet despite such progress there is still a seemingly widespread belief that women are not qualified to be on boards. This argument does not hold up to reality. The number of women in higher education outstrips the number of men in Lebanon, as well as in many MENA countries, while in the Lebanese banking sector, women account for 47 percent of all employees—certainly a large enough pool of talent to draw upon. What is holding back women from being on boards is not qualifications but experience. To have that experience, women need to be able to move up the ladder and break through the glass ceiling. That requires a mindset change in corporate culture.

Among family-owned businesses especially, a dual-track approach to corporate governance and increasing female participation in management and boards in the MENA should be encouraged. As the MENA region starts taking corporate governance more seriously, governments, regulators, and institutions should seriously consider adopting the OECD “Recommendation on Gender Equality” to boost the number of women on boards.

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Zeina Zeidan Maalouly

Zeina Zeidan Maalouly, Ph.D, is chair of the board at Royal Financials S.A.L.

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