John Martin St Valery is a partner at NxD-global
Over the last 10 years, corporate governance in the MiddleEast has progressed from being a relatively non-existent business practice tobecoming widely accepted as fundamental for attracting foreign investmentinflows and deepening the region’s financial markets.
It was onlyafter the global financial crisis that Gulf Cooperation Council governmentsstarted to take corporate governance more seriously. We saw new regulations andcodes come into effect, each outlining principles that would bring domestic corporategovernance practices in line with international standards.
The Organization for Economic Co-operation and DevelopmentJournal reports that today only three countries out of 17 surveyed in theMiddle East and North Africa region do not have any corporate governance codesin place. While this is certainly a step in the right direction, theimplementation and enforcement of the codes remain questionable.
The Gulf financial markets now have similar standards forcorporate governance throughout, but the extent to which they are fullyimplemented varies greatly in each country. The underlying issue here is one ofcompliance. Only the United Arab Emirates and Saudi Arabia regulate theircorporate governance codes, while other countries operate on a “comply orexplain” basis.
It’s all in the implementation
Managing the regulatory pendulum in emerging markets isnever going to be easy. Widely accepted international practices must be adaptedto suit our domestic markets before the buy-in of regulators, complianceauthorities, business leaders and special interest groups can be achieved. Thisexplains the varying degrees to which the regulatory pendulum swings, with thedirection and angle subject to market, sector or even stakeholder conditions.
For example, most of the corporate governance codes from thevarious GCC financial market authorities stipulate that board composition mustcomprise a majority of board members who are non-executive directors, and thatat least one third of the board members must be independent directors.
In countries where this regulation is enforced, certainsectors or companies are exempt from the provision. In the less regulatedmarkets, the principles of the code are considered when evaluating the qualityof a company’s corporate governance. Companies are encouraged to follow theprovision unless they have good reasons not to and disclose those under the“comply or explain” principle.
These varying levels of enforcement lead us to questionwhether corporate governance guidelines are being adhered to. Is the correctquota of independent or non-executive directors being filled? Are listed boardssplitting the role of chairman and chief executive officer as they are advisedto do and, more importantly, do they understand the benefits of full complianceto their businesses or the wider economy?
The presence of independent representatives on the board,capable of challenging the decisions of management, is widely considered as ameans of protecting the interests of shareholders and, where appropriate, otherstakeholders.
These codes exist for the betterment of individualbusinesses and to improve the overall competitiveness of the regional economy.I would agree with Nasser Saidi, executive director of Hawkamah Institute forCorporate Governance, that the issue here is not one of achieving consensus oncodes and standards. Rather it is an issue of implementation, or lack thereof.The GCC countries need to move more quickly on enforcing these standards. Weneed heavier handed regulatory compliance to affect change.
Good corporate governance is a crucial part ofprivate-sector-led economic growth in the Middle East and it needs to berecognized as a public policy concern. The international competitiveness of theMiddle East economies must rest on a base of firms that do not suffer from costof capital disadvantages, and that adapt sound management and corporategovernance practices to domestic circumstances.