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Financial crisis highlights need for GCC Corporate Governance

May 8, 2013 12:47 pm

Al-Morished, as a director of the region’s largest non-oil company, has made it his mission to ensure that businesses in the Middle East and North Africa region take the basic tenets of effective corporate governance to heart.

“Management’s role is to manage the company, the board’s role is to govern that company. In that respect, effective boards provide their companies and the people that manage them with a tremendous resource, which takes the form of experience, expertise and knowledge, but also insight, foresight and hindsight,” says Al-Morished.

The challenge, though, is daunting. Businesses across the region still have far to go. In 2009, the BDI ran a study of 200 publicly listed companies in the GCC and found that disclosure and transparency levels of most of the companies was low compared with standards in Europe, North America and Asia. For example, only about one-quarter of the companies disclosed the number of board meetings they hold every year, compared with 100 per cent of European and US companies.

Bad boardroom practice is endemic in many firms. According to a survey by Hawkamah, the UAE-based Institute for Corporate Governance, 42.3 per cent of companies in the region still combine chairman and chief executive officer (CEO) functions.

Growth in GCC public companies creates momentum

As the BDI’s 2011 review of GCC board effectiveness, entitled A Life-long Journey, implied, change is evolutionary. “It takes time to hone the skills and develop the mindset of a truly effective leader, but you need a starting point,” says Al-Morished. “You can build skills and open eyes in just a few days, and we see this all the time in the BDI workshops, which bring the best faculty [members] and practitioners from all around the world.”

The pressure for change in Gulf boardrooms is insistent. The BDI forecasts the GCC will have 1,000 public companies by 2015, from about 725 in 2011, creating a momentum for reform that the region’s business culture – still dominated by family businesses – will find hard to resist.

That driver for change is given added strength by the shifting global economic climate. Although many GCC corporates were shielded from the financial crisis that afflicted the European and North American economies, they cannot afford to hide their heads in the sand when it comes to adopting best corporate governance practice.

“Companies such as Sabic are not dependent on the local market; we are exposed to the global economy,” says Al-Morished. “Our sales in Europe or the US can’t be shielded by high oil prices. Here, the board can be helpful in challenging management to think outside the box.” Sabic, with physical assets spread around the world, has made sure its corporate governance standards are as robust as any jurisdiction within which it operates.

All Sabic subsidiaries have audit and remuneration committees and independent directors, as well as separate CEO and board chairman posts.

“All our publicly traded affiliates have one-third of board members as independent – that is, not from Sabic. We bring in some members from diversified backgrounds, some from a financial background, some from universities, some from the legal profession,” says Al-Morished.

The results are immediately obvious, he says. “You see boards being more assertive in taking positions, and there are more lively discussions.”

Saudi Capital Market Authority increases regulation

Regulators are also contributing. In 2011, Saudi listed companies were required by the Capital Market Authority (CMA) to form a nomination and remuneration committee that would review and audit boards, including appointments and salaries. Since 2012, CMA-licensed entities have been required to include independent members on their boards of directors and to disclose information about board composition, activities, internal audits and financial matters. These firms must also have in place corporate governance policies covering board membership and other criteria.

All this is precipitating sustained change in the way that GCC boards operate. One specific example highlighted by Al-Morished is that there will likely be fewer directors sitting on several boards at the same time – a common trend – because lack of time is an impediment to effectiveness.

Impact on Middle East family businesses

The bigger long-term challenge is to ensure the corporate governance message reverberates through the family-owned business sector. These make up an estimated 80 per cent of the GCC private sector, but tend not to be influenced by modern corporate governance standards. For example, few of these companies deign to disclose their financials to the public.

But even in this sector, change is afoot. According to Imelda Dunlop, executive director of the Pearl Initiative, a private sector-led, not-for-profit organisation set up to improve transparency, accountability and business practices in the Arab world, the family business sector is at a tipping point.

“The driving force for change is the feeling that the next generation of family firms is always more complex, with more people involved, so it becomes a question of survival to somehow codify the company values, or the way things are done in the firm,” says Dunlop. “If the founder has set up a firm with a strong set of values and wants to pass these on to the next generation, they need to be written down and understood by everybody as more people get involved. There’s a very strong sense that if they don’t do that, the family firm is not going to thrive and grow through the transition of the generations.”

Al-Morished also sees change starting to bed in among family firms. “The smart ones are now moving to publicly list themselves and have the children as shareholders or majority shareholders, but they are also bringing in outside investors and professional boards.”

If the region’s family firms do take up the corporate governance challenge, the BDI’s mantra of boardroom effectiveness will gain added heft.

This article is part of the GCC Board Directors Institute report, for more information please visit their website