GCC Board Directors Institute surveys create regional picture

May 7, 2013 3:39 pm

The overriding lesson of the global financial crisis was that strong and effective directorships are integral to a company’s success, but in many instances this was lacking in the region. The 2009 survey showed many board directors were overstretched and unable to devote sufficient time to any one company due to sitting on numerous boards.

The survey also highlighted that there was a lack of independent and international expertise on GCC boards leaving opportunity for conflicts of interest to arise, and that formal evaluation processes for boards were largely absent.

The 2011 survey found that progress had been made in tackling some of these weaknesses, with fewer overcommitted board members and a higher number of independent directors in the GCC. It also revealed efforts had been made to improve board structures, with more sub-committees in existence.

However, respondents felt that board members had become less engaged and were less prepared for meetings than had previously been the case. The survey also found transparency was a challenge for GCC corporates, with even what should be publicly available information difficult to access.

The findings of the BDI’s latest survey were published in April. They show a continued improvement in the awareness of the importance of strong corporate governance in the GCC. Board members are also becoming more mindful of their roles and responsibilities, and appreciative of the contribution that effective and professional boards can make to the performance of a company. But as the previous two surveys concluded, board composition and directors’ capabilities remain the chief obstacles to effective corporate governance.

Company boards slow to allow new talent

The survey found that the average board in the GCC has six directors, with two independent directors and an estimated four non-executive directors. Although this is below the European average of 12, there is general satisfaction with the size of regional boards. This is probably because the number of board members varies greatly between companies, with some having as many as 10 and others as few as one or two. The latter figure is mostly a trend at privately held firms, which do not have to comply with capital market regulations.

While it was felt that the tenure of board members is long enough to ensure accountability, survey respondents believed members are not rotating sufficiently quickly to allow new talent to enter.
This finding ties in with perhaps the biggest change in attitudes compared with the previous two surveys – the growing belief that ineffective board members need to be replaced. This represents a seismic shift in a region where linkages between business and family are closely intertwined. Board directorships and particularly chairmanships in the GCC have traditionally been considered prestigious ceremonial roles to be held by familial figureheads or a few distinguished members of society. The effect of this has, in some cases, been to neuter the power of the board and its members.

That the idea of replacing ineffective board members is becoming more palatable is a sign of the lessons being learnt from the financial crisis, which brought several GCC corporate scandals in its wake. It is also a sign of the emergence of a new generation of business leaders in the region who appreciate global best practice and the need for fully engaged and dynamic boards.

In practice, however, removing long-serving yet ineffective board members is easier said than done and survey respondents said most companies preferred to wait for ineffective members to stand down voluntarily.

Support for adopting global best practices

When it comes to committees, the region performs well on a global level. On average, GCC boards have three committees, and the survey says this is in line with the European average. The most prevalent committees are audit and remuneration committees, and again this fits with global best practices. The good performance in this area is the result of corporate governance legislation in the region that in some jurisdictions dictates how many committees a publicly listed firm must have. The committees have an average of two non-independent and two independent committee members.

Appropriately, given the need for integrity, independent chairmen are most prevalent on remuneration and audit committees. There is a general satisfaction with the frequency of board committee meetings and average attendance is high at 92 per cent. Attendance rates have improved steadily since the first BDI survey, from 82 per cent in 2009 and 88 per cent in 2011, and this reflects that board members are less overcommitted and also taking their responsibilities more seriously.

The survey found considerable and increasing support for appointing members from outside the GCC, with 71 per cent believing non-nationals add value to the board, both in assisting overseas diversification and enhancing corporate governance, compared with 40 per cent in 2011.

Respondents said international board members bring more formality to the table, enhancing discussions and preparations for meetings.

In terms of delivering on roles and responsibilities, the survey respondents felt boards should devote more time on strategy development, talent management and ensuring the integrity of accounting and financial reports.

There is also a desire to see more time spent on risk management, nomination processes and communication with shareholders and less emphasis on budget approvals and capital expenditure. The latter areas are where boards are perceived to be most effective.

Formal evaluation still lacking

The best ways to improve board members’ capabilities, the survey respondents said, was through participation in local and international workshops and joining professional bodies. Generally, there is a strong understanding of the benefits of exposure to global best practices, evaluation and benchmarking. But despite this self-evaluation continues to be an area of significant weakness, with just 23 per cent of boards conducting a formal evaluation process. Although this is higher than the 16 per cent seen in 2011, it is a glaring gap in the region’s corporate governance regime. In Europe, the survey says, 75 per cent of boards undertake an evaluation.

Also noted for its absence in the GCC boardroom is gender diversity. Women continue to be under-represented, accounting for on average less than 1 per cent of board members. While the social and religious traditions of the Arab world mean that the number of female directors will continue to remain low for the foreseeable future, it sets the region against the global trend to promote gender diversity on boards. Several European governments have set quotas requiring 30-40 per cent of board members to be women.

Despite the good progress made in certain areas since 2009, the survey shows robust corporate governance processes are still lacking at many GCC companies. The challenge is changing boardroom mentality from mere compliance with market regulations to striving for effective corporate governance. An understanding of the benefits of effective governance is growing, but as so often is the case in the region, translating this into action is slow.

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