How would you feel if you owned 49.9% of a company and could not elect even one member of the company’s board of directors? How would you feel if you owned 49.9% of a company without being able to access its corporate and financial information? How would you feel if you had recently invested few million dollars in a company and were excluded from making or even monitoring important corporate decisions? Would you invest in such companies? Lebanese corporate law does not guard effectively against such risks.
Rational investors, predictably, will run from the risk of companies lacking transparency, and will be more likely to invest in companies that conform to modern standards of corporate governance. Lebanese companies need to work to attract investors by improving their governance systems and practices instead of scaring them away with outdated, opaque mechanisms.
A new code of corporate governance
A June 13 event held at the Lebanese Federation of Chambers of Commerce, Industry and Agriculture witnessed the release of the first Lebanese Code of Corporate Governance (CG). The event was held in the presence of Sami Haddad, the Minister of Economy and Trade, along with prominent figures from the academic, banking, business, legal, accounting, public and private sectors, as well as representatives of commercial and business associations and international institutions. The Code, which was written under the auspices of the Lebanese Transparency Association (LTA), is the first true CG Code in the region in terms of its comprehensiveness and practical applications. The drafting of the Code involved the input and review of many individuals and institutions, including AUB, IFC, LAU, RDCL and the Lebanese Association of Accountants as well as members of the Lebanon Corporate Governance Taskforce.
The Code formalizes in legal yet accessible language a set of international “best practice” standards for how Lebanese (often family-owned) joint-stock companies should function.
For example, the Code provides guidelines for protecting shareholders who own less than a majority stake. Ultimately, companies with minority shareholders will grow and prosper; as larger, more sustainable businesses they will also be able to better withstand political and economic shocks and see a smooth transition between family generations. The ideals of the Code are drawn from research into CG reforms around the world and applied to the realities and challenges of the Lebanese business environment. While LTA hopes to eventually have these principles added to the Lebanese Code of Commerce, for now companies will be encouraged to voluntarily adopt them.
The Code has been recognized for its practical enunciation of how Lebanese companies should be run, but as a set of voluntary guidelines it will only be useful if it is actually put into practice by those same companies.
Why accept the code?
What are the incentives for a Lebanese company to voluntarily take on additional burdens in terms of legal structures, investor relations and protections? Why should families or founders loosen their control of their own firms?
The answer is simple and based on common business sense. Businesses are formed to make profits, and the businesses which implement the principles in the Code will be better positioned to attract and retain investors and, ultimately, generate better returns than their local and international competitors. Not adopting these CG ideals would result in falling behind the competition – something that defies centuries of Lebanon’s mercantile sensibilities. If Lebanese companies stagnate with regard to corporate frameworks and resist CG reform, they will be punished severely by the global economy and risk becoming obsolete.
Lebanese companies, like all companies, need capital to survive and grow, but most of them currently lack the corporate governance to provide access to adequate financing. Lebanese companies in need of expansion today find themselves forced to rely on high-interest bank loans because they are unable to attract equity investors.
Serving both companies and investors
To illustrate this point, take the perspective of two key figures in the life of a Lebanese company – a current shareholder and a potential investor – and then imagine how adapting the principles of the Code can effectively serve their mutual goals. As shareholder in a small Lebanese company, your investment is potentially subject to the whims of managers and directors who may not be inclined to act in your best interest, preferring to fill their pockets at your expense. The Code provides for shareholder protection by imposing specific duties on managers and directors, encouraging director independence, and requiring that investors be adequately informed of the company’s finances and fundamental decisions – as is the case in other regions.
Next, and perhaps more importantly, what does a Lebanese company look like to an independent investor – from Lebanon or abroad – who is considering making an investment? Essentially, such an investor would have to buy shares in a Lebanese company on faith, usually based on family or personal relationships. An investor without such links risks losing the investment through poor corporate governance structures. This situation pushes investors to countries with better corporate rules. It is this structural disincentive to invest in Lebanese small- and medium-sized companies that the Code specifically addresses.
To ignore the value of corporate governance reform is to accept unnecessary risk and doom a company to remain small and perpetually starved for capital, and as a result doom the country’s market to marginality and immaturity. The Lebanese Corporate Governance Code is part of a way out of this unfortunate fate. Adopting the reforms detailed in the Code is essential to any innovative Lebanese company that has prospects of local and regional growth.
Norman D. Bishara and Nada Abdel Sater-Abu Samra are the co-authors of the Code. Badri El-Meouchi is the executive director of the Lebanese Transparency Association
