Hospitality, good food, collective decision making, respect for family values and esteem for ones elders are typical Middle Eastern traits still in existence today. Having spent half of my life being raised, schooled and working in the Middle East, I feel that I may have slightly more insights into certain Middle Eastern cultures than perhaps the average expatriate. And when I married my Middle Eastern spouse, I did not marry the lady, but her entire family!
Whilst the traits and values mentioned above must been seen as highly admirable, I have a little scepticism as to the typical organisational abilities, management skills and corporate leadership knowhow in the Middle East. You may, therefore, not be surprised by my views on the acceptance and implementation of corporate governance in the Middle East, and how this may be slightly at odds with its cultural diversities. A 2007 study from Hawkamah, the Institute of Corporate Governance based in the Dubai International Financial Centre (DIFC), found that only 3% of listed companies in the Middle East and North Africa (MENA) had adopted "Good Governance Practices", with 0% complying with "International Best Practices".
Until recently, the acceptance of the concept, and the subsequent implementation of the principles of corporate governance in the Middle East has not received strong support from institutional investors and private shareholders. And whilst there may be a variety of reasons for this, I believe that some of the principle root causes are:
(a) The fact that the majority of larger organisations are either family or state owned;
(b) Capital markets remain underdeveloped;
(c) Liquidity and financing requirements were easily available from banks, and
(d) A disclosure adverse culture where shareholders have been reluctant to publicise operational and financial aspects of their enterprises, which has contributed to a general acceptance of the lack of transparency. Consequently, and due to the lack of transparency, the region has not been on the radar of major international investors.
With this lack of investor enthusiasm, the weight of responsibility to initiate and impel the uptake of corporate governance has, to date, rested on the shoulders of regulators in the region, with many corporate governance codes having been developed. The challenge is no longer the development of codes but their effective implementation, which will not occur until (a) regulators are given teeth (like the Dubai Financial Services Authority) and (b) corporations recognise and understand the real benefits that corporate governance brings to an enterprise and its shareholders. Call me a sceptic, but this will only happen when shareholders realize that this generally means a better run organisation and higher returns. Until then, regulators’ capacity to monitor and enforce breaches of their corporate governance codes will continue to be tested.
New Year’s Eve has always been a time for reflection and looking forward to the next year. If I had the ability to let the ‘corporate governance genie’ out of his brass lamp with a single rub on the 31st of December 2013, what would I wish to see as my Top 10 New Year’s Resolutions for improving corporate governance in the Middle East in 2014?
1. Establish a clear and documented segregation between the roles and responsibilities of shareholders, the Board of Directors (Board) and management …
The large majority of corporations in the region are family businesses that represent a substantial part of the private sector. Within this segment, the roles and relationships between family members, the Board and its members, shareholders and the Executive are undefined, undocumented, overlapping, conflicting and complex. Operating in an oral and consensus-based culture, many do not realise the need to create and document policies and procedures to improve operational efficiencies and reduce the incidence of blunders. I am still exacerbated when I see how some of the family businesses within my spouse’s "tribe" are run and what never ceases to amaze me is the amount of time family members (in their capacity as shareholders, executives, management or simply elders and advisers) spend seeking consensus on basic items that should be sacrificed to simple policies and procedures.
2. … and Clarify the role of the Chairman
The interpretation of the title "Chairman" in any reasonable corporate governance code means the Independent Non-Executive Director who chairs the Board. In our Middle Eastern culture, and due to the prevalence of large family businesses, "Chairman" generally means the principle shareholder and founder, who still owns the bulk of the enterprise and still possesses the majority, if not all, of the powers typically associated with the position of the Chief Executive. The title "Chairman" is also easily interchangeable with other titles such as General Manager, Managing Director, and even President.
3. Implement an Authority Matrix
There are a large number of traditional small to medium sized firms in the region where the Chairman still signs the payroll, and if he happens to be travelling his staff’s salaries wait until his return for his signature on the cheques! Whilst this example of the lack of delegation may seem archaic in terms of a "Western" governance model, Middle Eastern culture has always been slightly resistant to the delegation of authority, which has contributed towards operational bottlenecks and restrictive corporate practices. Simply put, "I hold the cheque book and don’t trust anybody else to". A clear Authority Matrix must allow for the delegation of authorities within specified limits and controls, whilst ensuring clear accountability (and freeing-up your Chairman to be the Chairman and not an accounting clerk!).
4. Provide further education for your Board members
There are now several institutions and organisations offering Board Leadership and Non-Executive Director courses in the region. Some offer professional certification for Board members whilst assisting in developing skills and keeping individuals appraised of the most up-to-date corporate governance practices and regulatory frameworks within the corporation’s home jurisdiction.
As the Chairman of the Membership Committee Mudara IOD, the Institute of Directors headquartered in the DIFC, I’ve always been humbled by the desire to learn, that I have witnessed, from Middle Eastern Board members. The course discussions inevitably come down to the difficult and demanding aspect of implementation, as Board members start to openly discuss the cultural changes and challenges they are facing.
5. Address those transparency issues
In 2009, Hawkamah reviewed some 600 regional companies and discovered that (a) only 10% of Gulf Co-operation Council (GCC) listed companies provided information about their Board Members and Executive Management, beyond their names on the websites and annual reports; (b) only 22% of GCC listed companies identified their Executive and Non-Executives Directors; (c) only 4% of listed companies hold investor analysis meetings or conference calls; (d) only 30% of companies provided a summary of their financial performance; and (e) 14% of GCC listed companies did not have a website!
6. Respect the cultural challenges that lie ahead
7. Attract experienced and Independent Non-Executive Directors onto the Board
For the typical Middle Eastern Board that has chosen to appoint an Independent Non-Executive Director, the challenge of selecting a candidate is not an easy one. The candidate must have industry experience but must also be independent. They ought to understand corporate governance but should respect the Middle Eastern cultural environment. As a new Board member if they push too hard, the implementation of corporate governance will backfire but if they don’t push at all, the evolution will stall. But most importantly, the candidate needs to be trusted by the various parties and stakeholders and will need a large diplomatic skill-set to gently, but firmly move the organisation up the corporate governance curve.
8. Establish an Audit and Risk Committee and recognise that the governance of risk is a Board responsibility
Due to the nature of the activities undertaken by this committee, it’s suggested that the individuals on this committee have a strong understanding of internal audit, external audit, accounting principles, financial reporting and risk management expertise. It is generally recommended that the committee is comprised of a majority of Independent Non-Executive Directors who must oversee the principle elements of (a) financial statements; (b) internal controls; (c) risk management; (d) external audits; (e) internal audit and others. Establishing a sound system of risk oversight, management and an effective internal control environment is another fundamental role of the Board. Risk Management supports better decision making because it develops a deeper insight into the risk-reward trade-offs that all organisations must continuously evaluate.
9. If it’s a family business then establish a family constitution
A family constitution should outline the principles and policies that the family and its business subscribe to and must describe the roles and function of all parties including the shareholders, Board, management and employees. By defining the manner by which family members may become involved in the business will contribute to the avoidance of many misunderstandings. As any family and its related business expand, it is important to recognise that the complexities increase exponentially. Worldwide, less than 95% of family businesses survive the third generation as a family business.
10. Realise that corporate governance is IN YOUR INTEREST!
Be it in the West or in the Middle East, good corporate governance bears similar key benefits namely (a) it should lead to better strategic decision making; (b) it should help in gaining access to cheaper credit and capital; (c) it should provide better valuation of your enterprise; (d) it should drive a stronger internal risk management and control framework; and finally (e) it should help you meet any regulatory compliance requirements.
In conclusion, any change requires courage and I firmly believe in the fact that change leadership should start from the top. As such, any 2013 New Year’s Resolutions relating to corporate governance should be driven by the Board and its Chairman. The next 10 years will see a corporate cultural revolution in the region with the early adopters reaping the benefits of corporate governance and the late comers kicking and screaming all the way to their first Annual General Meeting, if they get that far. The "Arab Spring" for corporate governance has started but whatever the outcome, I sincerely hope that the region retains its family values and Middle Eastern traits that my own children are being raised with. Whatever the consequences, the implementation of corporate governance should not be at the cost of these traits and traditional family values.