Corporate governance standards in the six Gulf Cooperation Council (GCC) states are improving but much more needs to be done to meet international standards, according to a landmark report by Hawkamah – the Institute for Corporate Governance, based in Dubai – and the Washington-based Institute of International Finance (IIF) released recently in Singapore. The report, Corporate Governance in the GCC – an Investor Perspective, is the first study to benchmark standards in the region and is part of a coordinated strategy to harmonise GCC standards with international best practice.
Hawkamah, which is housed in the Dubai International Financial Center (DIFC), was launched by the Organization for Economic Cooperation and Development (OECD), the World Bank’s International Finance Corporation (IFC), the Union of Arab Banks (UAB) and other groups to develop sound and globally well-integrated corporate governance frameworks. In June 2006, under executive director Nasser Saidi, Hawkamah joined with the IIF to promote, in effect, the implementation of the IIF Code, which is used by key emerging market economies across the globe as the standard by which company shareholder relationships are measured.
Lagging behind
The ground-breaking IIF-Hawkamah survey said: “In general, governance frameworks in GCC countries lag significantly behind corporate governance best practices. However, the survey found a great degree of variance among the corporate governance frameworks in the six countries. Oman appears to have the strongest corporate governance in the region with corporate governance requirements complying with about 70% of IIF’s guidelines, followed by Kuwait and Saudi Arabia with about 50% compliance, and Bahrain and the United Arab Emirates (UAE) with 40%. The greatest room for improvement was found in Qatar, where current corporate governance requirements comply only with 35% of IIF guidelines.”
Welcoming this joint report with Hawkamah (the word means ‘governance’ in Arabic), IIF managing director Charles Dallara says: “Corporate governance practices across the GCC are lagging behind global standards in a number of areas. However, there appears to be considerable agreement that a stronger equity culture needs to be fostered and that high priority should be assigned now to programmes to enhance corporate governance. We are encouraged by the determination of Hawkamah, the DIFC and national authorities in this area.”
Equity culture
While progress is taking place, a key concern is the weak equity culture in the GCC and the tendency for companies to resist change, especially regarding the role and responsibility of the board of directors. The report notes: “Like in many other emerging markets, companies in the GCC are often considered private preserves of controlling families.” Besides the issue of families appointing friends as directors, state-owned companies almost always include government officials on the board, which can create significant conflict of interest and authority problems with regulators.
The study also found that countries with older equity markets have better corporate governance frameworks than those with younger ones. Kuwait and Oman’s were established 44 and 18 years ago respectively, while those of Qatar and the UAE are nine and six years old respectively. The report says that, with the easy access to capital that exists in the Gulf, “companies that have little need to rely on equity markets have no incentive to provide the protections for minority shareholders that lie at the heart of the IIF corporate governance guidelines”.
While standards are acknowledged to be improving and are expected to improve further with the opening up of GCC stock markets to foreign investors, the report recommends the following actions to bring the GCC into line with the IIF code:
- A stronger commitment to better corporate governance from political authorities, as well as from senior government officials involved with capital market development;
- Regulators in the GCC to work more closely together to strengthen the region’s equity markets;
- The setting up of specialised courts to deal with the enforcement of securities laws;
- Increased financial transparency, by harmonising financial reporting requirements;
- The establishment of a registrar of companies, requiring all companies (from sole proprietorship to joint stock companies) to provide information.
The GCC survey represents a landmark development for Hawkamah and its partners but Dr Saidi is under no illusions of the challenges ahead. “Strong leadership and tough enforcement is required by authorities if corporate governance in the GCC is to meet international standards and bring with it foreign direct investment and market efficiencies. We believe the political will is there to achieve this and expect further developments in the coming years,” he says.
Surveys of corporate governance in other Middle East and north African (MENA) countries will follow shortly.
