Corporate Governance in the GCC - Euromoney

The 2007 guide toCorporate Governancein the GCCPublished in conjunction with:Global Investment HouseSAMBA Financial GroupSeptember 2007

Introduction: the boomcontinuesFollowing several years of explosive growth, there is no sign yet of any deceleration in the economicboom being enjoyed by the six member states of the Gulf Co-Operation Council (GCC).According to the 2010 Economic Outlook published in June 2007 by theNational Bank of Kuwait (NBK), average real growth in the GCC moderatedto 5.9% in 2006, compared with 9.4% in 2003, but remained “morethan double its average over the 80s and 90s.” The current boom, addsthe NBK analysis, is likely to be sustained for “at least three more years,”meaning that “the expected seven-year run of above average growth willmake it the longest expansion in three decades.”Beyond the headline growth figures stand a range of dazzling economicindicators. According to NBK, national income growth averaged“Current account and fiscal surpluses reached 26% and 17% of 2006 GDPrespectively, and are likely to rise further if high oil prices are sustained”19% in the last four years, driven by a combination of “higher oil andnon-oil activity, public spending and domestic confidence.” Currentaccount and fiscal surpluses reached 26% and 17% of 2006 GDP respectively,and are likely to rise further if high oil prices are sustained.Those surpluses are leading to the accumulation of immense volumesof excess liquidity both in the public and the private sector, andamong consumers throughout the Gulf. NBK’s review notes that inspite of massive spending on projects, GCC governments have addedalmost $500bn to their net foreign assets over the last four years,which is enough to sustain spending growth for many years. At thesame time, the ongoing investment boom in the region, with some$1.25 trillion earmarked for public and private projects, is continuingto propel growth in the private sector. Completing the virtuous circle,purchasing power is sharply higher, with per capita GDP having postedan annual average growth rate of 15% over the last four years inspite of mounting inflationary pressures. That purchasing power, addsNBK, has been complemented by the build-up in private wealth fromthe recent equity bull run and from the buoyant real estate market.The continued surge in economic growth and the colossal wealth itis creating has not, of course, been distributed entirely equally acrossthe GCC region. In terms of real GDP expansion, in 2006 the UAE andQatar continued to lead the way, posting growth rates of 10% and8.8% respectively, making Kuwait (5.7%), Oman (4.7%) and SaudiArabia look sluggish by comparison.Even in the relative laggards, however, as well in those countries thatare leading the pack in terms of growth, the compelling nature of theGCC’s economic story has been recognised by key external commentatorssuch as the leading ratings agencies. In early July, Moody’supgraded the foreign and local currency government bond ratingsof UAE to A2, and soon afterwards Standard & Poor’s announcedupgrades for Saudi Arabia and for Kuwait (both from A+ to AA-). Thoseupgrades have had a positive knock-on impact on other ratings inthe region, with Moody’s, for example, upgrading eight Saudi Arabianbanks at the end of July.

Challenges: a new emphasison governanceThe continued boom in the GCC is bringing with it a number of new challenges and responsibilities,together with closer integration with international investors and global stakeholders on at leastthree levels, all of which are calling for a greater emphasis on improved corporate governance.The first of the three is that the excess liquidity that has been accumulatedin the region is now being invested internationally in avery well-diversified range of assets and industries. Previous oil boomstended to see much of the surplus cash from the Middle East eitherinvested frivolously (in areas such as showy real estate), or passively(in financial assets and through external investment managers). Muchin developed economies. That wave of investment is bringing with it aseries of new challenges with many of the heavyweight corporate investorsfrom the GCC suddenly under unprecedented public scrutinyoverseas.That is because many of the companies now being acquired by GCC“ The compelling macroeconomic outlook for the region, twinned withfar-reaching regulatory reform is prompting a much broader community ofinternational equity investors either to increase their exposure to GCC equitymarkets, or to invest in the region for the first time”of today’s oil wealth, by sharp contrast, is being channelled into corporateassets overseas, many of which are large blue-chip companiesinvestors are very large employers fulfilling key social roles. GE Plastics,for example, which is being acquired by Saudi Arabia’s Sabic, employssome 11,000 people worldwide, several thousand of whom are locatedin the US. Those employees will need to be reassured that anyrestructuring arising from the acquisition is handled in a transparentand open manner.Over and above those concerns, other inward-looking commentatorshave voiced anxiety over the perceived security risks arisingfrom overseas investment in local corporate assets – especially inthe US. Witness the concerns raised about potential security breachesin New York and Baltimore when DP World trumped Singapore’sPSA in the battle for P&O.Other highly visible assets ranging from the UK retailer, Sainsbury,to Auckland Airport in New Zealand have also been attracting theattention of deep-pocketed investors from the Middle East. Theseinvestors will increasingly need to ensure that their corporate governancestandards as well as their media relations are of a standardthat is commensurate with practices in the countries where they areinvesting.A second area in which today’s oil-fuelled boom is underpinningcloser ties between the GCC and the global community is the capitalmarket. The strong performance of GCC equity markets has not goneunnoticed by international investors in recent years. Many, of course,will have been unnerved by the sharp corrections in the markets atChallenges: a new emphasis on Governance

Defining corporate governanceIn his presentation to the Islamic Financial Services Board’s 2005summit, Malcolm Knight, general manager of the Bank for InternationalSettlements declared that good governance in both publicand private organizations involves three things:• an understanding of the objectives of an organization, and alignmentbetween the interests of managers and stakeholders;• transparency, and access for stakeholders to information aboutmanagers’ actions and company data; and• accountability, whereby managers are held to account if they fail toachieve the organization’s objectives.When one moves on to governance as it relates specifically to corporates,a number of other considerations get added to the mix ofaccountability, transparency, openness and integrity:• defining shareholder rights and managing the mechanismsthrough which these rights are exercised, particularly to protectminority shareholder rights and interests;• ensuring checks and balances to manage issues of independenceand interference that stem from separating management andownership in firms, and the differentiation between executive andnon-executive board members;• the appointment of strong, independent and highly qualified auditcommittees;• codes of conduct for boards of directors as well as managementand employees;the start of 2006, which led to the TASI index in Saudi Arabia sheddingmore than 50% of its value during the year.Nevertheless, the compelling macroeconomic outlook for theregion, twinned with far-reaching regulatory reform is promptinga much broader community of international equity investors eitherto increase their exposure to GCC equity markets, or to invest in theregion for the first time. Another attraction of many Middle Easternstock markets is their relatively low correlation with other emergingor better-developed and mature equity markets. “In 2006 when themarkets of the GCC crashed by about 50% over the same period theGlobal Emerging Market index rose by about 29%,” says David King.As Deputy CEO of HSBC Global Banking in the Middle East as well asformer CEO of the Dubai Financial Services Authority (DFSA), Kinghas unrivalled experience of the recent evolution of Dubai’s capitalmarket. “The divergence in performance between the Middle East andother emerging markets makes the region very attractive as a sourceof diversification,” he explains.According to a recent survey conducted by HSBC, one factor discouraginginternational investors from increasing their exposure toMiddle Eastern equities, however, is the perception that corporategovernance standards across the region remain inadequate. Themost recent HSBC GCC Investor Survey, conducted in April 2007,polled institutional investors in Dubai, Abu Dhabi, Kuwait, SaudiArabia, Qatar, Bahrain, Oman and Egypt, who were broadly positiveabout the outlook for the region’s bourses. “GCC markets are generallyexpected to outperform both developed and emerging marketsover the next 12 months, although bullishness compared withemerging equities in particular is less marked than in our Decembersurvey,” says the HSBC analysis. Within the GCC, respondents weremost upbeat about the prospects for Kuwait (nominated by 28% ofinvestors as one of their preferred markets), followed by Dubai (19%)and Saudi Arabia (17%).• protecting the rights of external suppliers of equity finance;• rules on representation and gifts, and procurement codes;• compliance policies to make sure principles of corporate governanceare not just recognized but enforced.The downside identified by the HSBC survey, however, was the dimview that institutional investors still have of corporate governancepractices in the region. To the question “how much of a barrier is corporategovernance to stock market performance?” a dispiritingly high64% said this was a “significant barrier”, with only 25% saying this wasnot a barrier, and the remainder confessing to being unsure.In terms of assessing corporate governance standards in the individualmarkets of the region, investors were even more hesitant.While 24% indicated that Kuwait had the highest standards, with21% nominating Oman and 14% naming Dubai, 34% said they wereunsure and none picked Saudi Arabia, Abu Dhabi or Qatar as leadingthe way in terms of corporate governance. They were slightly moredecisive about naming the worst GCC country, with 25% identifyingSaudi Arabia and 22% nominating Dubai as the economies that leftmost to be desired in their corporate governance standards.

Corporate governance inthe GCC: why is it needed?So much for the meaning of corporate governance. For many companies and policymakers inthe GCC, a more relevant question will be why they need to concern themselves with corporategovernance at a time of unparalleled economic prosperity.It is understandable that when the region is growing at such speed,many companies believe that channelling time and energy into niceties“There is still quite a lot of psychological resistance in the GCC to the issue ofcorporate governance for a number of reasons”such as corporate governance is a misuse of resources, at best, and couldeven be counter-productive, at worst. “There is still quite a lot of psychologicalresistance in the GCC to the issue of corporate governance fora number of reasons,” says Stephen Vink. A South African national withfirst-hand experience of the introduction of the King Report on CorporateGovernance in South Africa, Vink is Vice President of Risk Managementat the Kuwait-based Global Investment House, where he has beenworking for the last year on structuring and initiating a risk managementdivision for the firm. “One of the reasons I have come across is thatcompanies believe that corporate governance will be a distraction that

will slow down the decision-making process and therefore hinder theirgrowth and development,” says Vink.Those that have watched corporate governance codes being introducedin other geographical regions argue that this could scarcely befurther from the truth, and that good corporate governance can feedpositively through to companies’ bottom lines. At an OECD Roundtableon Corporate Governance for Banks in Saudi Arabia, held in May 2007, apresentation delivered by the UK Company, Global Governance ServicesLtd, listed a number of benefits that companies can derive from goodcorporate governance. These include higher market values; betteraccess to capital; cheaper access to capital; higher credit ratings; anenhanced corporate reputation and improved abilities to deal with riskand scandals.Others express caution, however, about the linkage between goodgovernance and positive side-effects such as improved credit ratings.“To assume that a company can be upgraded exclusively on the basis ofgood governance is misleading,” says Amra Balic, governance analyst atStandard & Poor’s in London. “Governance is just one of a wide range offactors that we take into account when assigning a rating.”Nevertheless, a number of market participants insist that a range ofbenefits springing from good governance are not merely hypothetical.Dr Khaldoon Sorour is CEO of the recently-established Forsa Investmentsin Saudi Arabia. Half Saudi and half Lebanese, Sorour previouslyworked for Alliance Bernstein in London, and his experience has taughthim that investors are prepared to put a quantifiable value on goodcorporate governance practices. “Institutional investors in western marketshave been prepared to pay premiums of anything between 10%and 40% for companies in regions like the Middle East and Russia whichhave demonstrably better governance standards in terms of their readinessto provide transparent information,” says Sorour, who believes thatmuch still needs to be done to improve corporate governance acrossthe region. “The GCC has certainly improved and I think standards arehigher than they are in countries like Russia or the Philippines,” he says.“But we are still nowhere near where we should be.”For their part, a growing number of leading GCC companies are reportingthat they too have seen empirical evidence suggesting that highquality corporate governance can generate palpable, quantifiable benefits.One good example is provided by Kuwait’s largest listed company,Mobile Telecommunications Company (MTC), which now has consolidatedrevenues in excess of $2.7bn and more than 32m active customerslocated throughout the Middle East and North Africa. MTC says thatit believes “effective corporate governance will in the long term improveour performance, thus benefiting all stakeholders and ultimately servingthe public interest.” The benefits of implementing a well-developedcorporate governance policy, MTC adds, are “tangible”. “For example,” itsays, “rating agencies now look at corporate governance practices, andcompanies with sound practices, such as full financial disclosure andacross-the-board corporate transparency, can benefit from lower borrowingcosts. This was evident in MTC’s case….when financial institutionsprovided the company with [a] $2.4bn bridging loan in May 2005to [support] our acquisition of Celtel.”MTCMTC is one of the international success stories of the Middle Eastbusiness and industry. Founded in 1983 as a Kuwaiti mobile phoneservice provider, it has grown substantially in recent years to thepoint where it operates in 14 countries in Africa and five in theMiddle East, including Jordan and Kuwait where it is the dominantoperator.The company, which now has more than 13 million customers, has aclearly defined strategy of expansion both by winning new licencesand by acquisition, it has bought the Dutch company Celltel, whichhad a widespread base in many parts of Africa. It has financed itsexpansion prudently and efficiently.Corporate governance in the GCC: why is it needed?

Capital inflows: the impactof foreign direct investmentFDI is a key reason why it will become increasingly important for the oil-producing nations of theMiddle East to forge closer links with international investors and improve their corporate governancestandards.This is the growing recognition throughout MENA that even thewealthiest countries in the region will need to encourage more ForeignDirect Investment (FDI) if they are to guarantee economic prosperityfor future generations who may not be the direct beneficiaries of highoil prices.Already, a drive by GCC governments to open a number of key sectorsto regional and international private sector investors has prompted astriking rise in FDI flows into the Gulf. According to figures published byNBK, FDI inflows into the GCC rose from a very modest $378m in 2000 to$6.6bn in 2003, $12.6bn in 2004 and $20.1bn in 2005, with NBK reportingthat total FDI is estimated to have expanded by a further 20% in 2005.“Even with robust regional demand… the local manufacturing industry acrossthe Middle East has remained small and fragmented as compared to otheremerging economies due to its dependence on oil revenues”According to a recent report published by the Dubai-based private equitygroup, Abraaj Capital, one of the most formidable challenges nowfacing Middle Eastern as well as South Asian governments is the needfor job creation. “With 65% of the population under the age of 25, theMiddle East has the fastest-growing labour force in the world, growingat an estimated 3% per annum until 2020,” notes the Abraaj report.“By one estimate, the Middle East must create 80 million new jobs overthe next 15 years and almost 100 million new jobs by 2020 if it wantsto improve on the current unemployment rates – a near doubling oftoday’s total employment.”The commodities sector alone will be unable to absorb more than amodest proportion of the demand for new job opportunities as youngand increasingly aspirant people enter the labour force. To satisfy thatdemand, the Middle East in general and the GCC in particular recognisesthat it will need to attract investment into manufacturing industry,which it has failed to do during previous economic booms. “Evenwith robust regional demand,” advises Abraaj, “the local manufacturingindustry across the Middle East has remained small and fragmentedas compared to other emerging economies due to its dependence onoil revenues. The manufacturing sector contribution to real GDP hasremained constant at approximately 11% since 2000.”In recent years, the UAE has been at the forefront of the FDI revolution,attracting inflows of $4.26bn in 2003, $8.4bn in 2004 and $12bn in 2005.Saudi Arabia, however, has also seen a surge in FDI volumes in recentyears, with inflows mushrooming from just $778m in 2003 to $4.63bn in2005, according to the NBK data.Impressive though they may be, those figures will need to continue torise if the GCC region is to attract the investment it needs to upgradeits infrastructure. Specifically, according to a bulletin published recentlyby Abraaj Capital, over the coming decade regional infrastructureinvestment will include $188bn to be spent on transportation and ports,$155bn on power and utilities, $130bn on water, $87bn on petrochemicals,$49bn on healthcare and $18bn on education.According to NBK, only 35% of the projects that are now on the drawingboard in the Middle East are being implemented purely by governmentsponsors. That will mean that the local and international private sectorwill be required to shoulder the burden for a colossal flow of investmentinto the region’s infrastructure. Those investors teaming up with localjoint venture partners will only be able to do so with confidence if theyare assured of the best international corporate governance practicesamong regional companies.

Impact of institutionalportfolio investmentBankers say that they expect two key equity market trends to bolster the quality of corporategovernance in the future.The first of the two is rising international investment in GCC stockmarkets – most conspicuously in Saudi Arabia, where access by foreigninvestors has historically been highly restricted. The door to moreinternational participation in the Saudi market has been further ajarsince March 2006, when the CMA announced that non-GCC residents ofthe Kingdom would also be permitted to trade in securities listed on thelocal stock exchange, although for the time being IPOs remain open onlyto Saudi investors.There is a division of opinion as to the likelihood of the Saudi authoritiesopening its stock market more fully to overseas investors. In its recentGCC Investor Survey, HSBC asked institutions in the Gulf whether or notthey expected the Saudi Arabian equity market to be opened up tonon-GCC foreign investors over the next 12-18 months. While just overhalf believed that the market would be opened, 28% said that it wouldn’tand 21% said they did not know.Sorour at Forsa Investments is confident that Saudi Arabia will becomemore integrated with the global capital market. “The Saudi market is developingvery quickly,” he says. “Two years ago when I started working onthe establishment of Forsa there were 70 listed companies. Today thereare about 90 and a number of people think that in a year’s time theremay be as many as 120. As the market grows I believe it will be inevitablethat the market becomes more open. Several key policy-makers have alreadyindicated that more openness towards international investors willhave a stabilising effect, encouraging more long-term investment at theexpense of speculation. So I have no doubt that Saudi Arabia will growinto a leading regional financial centre standing head and shouldersabove Dubai. In terms of population, liquidity and consumer spendingSaudi Arabia accounts for three-quarters of the GCC, so it is natural that itshould play a leadership role.”Angus Blair, of Beltone Financial in Cairo, worked on the first fund to giveforeign investors access to the Saudi Arabian market in 1997. Havingwatched the market evolve since then, he is less sanguine about thewillingness of the authorities to give overseas investors freer access tothe Kingdom’s stock market. “When we worked on the first fund back in1997 we thought that the market would be open within a year or two,”says Blair. “A decade later it still hasn’t happened. Although we may seethe market opened up obliquely through some form of derivative, I thinkthere is still too much sensitivity to foreign ownership to allow non-GCCinvestors to buy shares directly.”While increased overseas investment into the region’s stock marketswould, in theory, lead to more rigorous standards of disclosure, so toowould a fundamental change in the composition of the investor basein GCC capital markets. For too long, say bankers, equities have beenowned and traded principally by unsophisticated retail investors whodon’t read fundamental research. “Leading up to last year’s crash in theSaudi market daily trading volumes were reaching several billion dollars,”says Blair. “Much of that was accounted for by retail, intra-day tradingbased on rumour, which isn’t sustainable.”Others agree. “There is still very little local institutional investment inthe GCC’s equity markets,” says HSBC’s King. “An increase in institutionalparticipation would bring a longer-term perspective to the market andwould also encourage the production of more high quality research,which in turn would improve corporate governance.”In addition to more institutional influence in the equity market, Kingsays that a number of regulatory changes would also underpin strongercorporate governance. One of those changes would be to allow shortselling, which is currently prohibited throughout the region. Aside fromallowing institutions to hedge their exposure more efficiently, shortselling would allow investors to penalise companies still guilty of inadequatecorporate governance, thereby giving the corporate sector anadded incentive to improve the quality of their disclosure.“In addition to the need for the regional standards of corporate governanceand continuous disclosure to be improved, a number of otherchanges are necessary in order to improve the overall performance ofthe regional exchanges and bring them up to the universally recognisedbest practice standards that improve investor confidence, leading toenhanced liquidity and greater efficiency,” says King. Those changes,he says, which are being slowly adopted on a country-by-countrybasis, would include the adoption of IFRS or Islamic AAOIFI accountingstandards; a reduction in the initial minimum required free float levels;independent valuations by investment banks or accounting firms; andthe discontinuation of issuance at par, which has led to some absurdover-subscription levels in the region’s IPO markets.Impact of institutional portfolio investment

The region’s bond marketsgather momentumIt is not just the GCC equity markets that have been attracting the attention of a growing corpus ofinternational investors.Entities from the Middle East in general, and from the GCC in particular,have become increasingly active issuers in the international debt capitalmarket in recent years. To date, the bulk of that issuance has been accountedfor by financial institutions. But corporate borrowers have increasinglybeen exploring the potential of the international bond market as a sourcepipeline. In a report published in April, Standard & Poor’s (S&P) noted thatto date it has only rated a handful of non-bank corporates in the region(such as Dubai Holding in the UAE, the Saad Group in Saudi Arabia andKuwait Projects Co in Kuwait). But the report adds that “several others havegone through the ratings process confidentially to benchmark themselves“Although they remain in the early stages of development…the corporatebond markets in the GCC countries have experienced unprecedented growthin recent years and in 2006 in particular, with total issuance at least doublingeach year since 2003”of funding – either through conventional issuance or via the fast-growinginternational market for Shariah-compliant bonds (Sukuk).“Although they remain in the early stages of development…the corporatebond markets in the GCC countries have experienced unprecedentedgrowth in recent years and in 2006 in particular, with total issuance at leastdoubling each year since 2003.” So says Moody’s in a report publishedthis year on the recent evolution of the corporate bond market in theArabian Gulf. Specifically, adds the Moody’s report, total GCC bond issuancereached more than $40bn in 2006, of which corporate borrowersaccounted for just under half, or $18.2bn. “The 2006 total marked a sharpincrease of around two and a half times from the 2005 total of $13.5bn,which featured only a relatively small share of corporate issuance of$3.2bn,” Moody’s notes.The ratings agencies report that more corporate issuance is now in theinternationally and to prepare for capital market entry when the time isright. Access to the international capital markets will be critical for fundingthese entities’ growth intentions and diversifying their investor bases.”Since the publication of the S&P report, the government of Abu Dhabi haslaunched a benchmark bond issue, although the oil-rich Emirate has noneed for borrowed funds. Instead, its debut transaction in the bond marketwas designed as the first stage in compiling a yield curve which will actas a benchmark for corporate borrowers from Abu Dhabi looking to fundthemselves in the international capital market.Initiatives of this kind are very significant for corporate governance in theregion, because companies failing to observe the highest standards ofdisclosure will be unable to meet the requirements of the very demandinginstitutional investors that account for the lion’s share of demand in theinternational bond market. As Moody’s puts it, “in light of their tangiblefunding requirements and their intention of tapping the capital markets tomeet them, issuers need to develop improved standards of transparencyand accountability.”The ratings agencies’ representatives on the ground in the Middle East saythat they have been pleasantly surprised at the willingness of companiesacross the region to accommodate the demands of analysts. “All the countriesI have visited in the region have been very receptive to the ratingsagencies,” says Philipp Lotter, Vice President and Senior Credit Officer atMoody’s Middle East, who has been based in Dubai since early 2007. “Ihave been very struck by how eager they are to promote good corporategovernance and to encourage companies to open their books andbecome more accountable.”

The track record ofcorporate governance in theMiddle EastTo date, it is generally recognised both within the MENA region and beyond that corporategovernance standards have a poor track record in the Middle East.The World Bank’s most recent indices on investor protection, for example,send out very mixed signals about the strength of minority shareholderprotection against “misuse of corporate assets by directors fortheir personal gain” in the region. The latest of these indices, publishedscores very poorly in the overall investor protection index, with anaverage of 4.6, which is below all other regions, with even sub-SaharanAfrica averaging 4.7. The more positive news, however, is that the MENAregion’s relatively poor average is largely attributable to its very low“The bad news, for the Middle East, is that the MENA region as a whole scoresvery poorly in the overall investor protection index, with an average of 4.6,which is below all other regions”in 2006, sub-divides investor safeguards into four main indicators. TheDisclosure Index measures the transparency of information provided toshareholders and the public at large; the Director Liability Index assessesliability for self-dealing; and the Shareholder Suits Index measuresshareholders’ ability to sue officers and directors for misconduct. Theaverage of the three, meanwhile, is used as the overall strength of InvestorProtection Index – with benchmarks at either end of the extremeprovided by Mauritania (with a miserable average score of zero) andNew Zealand (which averages an almost-perfect 9.7 out of 10).The bad news, for the Middle East, is that the MENA region as a wholescore (3.5) in the Shareholder Suits index, suggesting that the main deficienciesin terms of investor protection spring from weak legal systems.By contrast, the MENA region scores higher than any other emergingmarket region in the Disclosure Index (5.8) and in the Director LiabilityIndex (4.6).In terms of the individual countries within the GCC region, Kuwaitscores highest for overall investor protection, with its overall score of6.3 meaning that it ranks higher than France, which at 5.3 is on a parwith Oman. Saudi Arabia scores 4.7, again dragged down by a score ofjust 1 in the Shareholder Suits Index, which – astonishingly - is lowerThe Track Record of Corporate Governance in the Middle East11

Corruption perception index, world Arab countries 200302468UKUSAUAEOmanJapanQatarIraqYemenLebanonSaudi ArabiaKuwaitJordanBahrain10SwitzerlandIceland12Less corruptCountry rankMore corruptSource: Arab Human Development Report, 2004“The thought process that many Middle Eastern companies are now goingthrough is really no different to what happened in the western corporatesector a decade or so ago”than Afghanistan and Mali. The UAE’s overall score of 4.3, meanwhile,is a higher average than those posted by Switzerland or Greece, but isnot helped by a disclosure index score of 4 – below Djibouti, Iran andBotswana.In many ways, bankers say that these indications are disappointing, especiallyas some Middle Eastern countries have already demonstratedthat it is possible to develop very high standards of corporate governanceagainst the odds. Vink says that Lebanon has already established aprecedent for outstanding corporate governance standards that othercountries in the Middle East would be well advised to replicate.Nevertheless, bankers also recognise that there are a number of goodreasons why corporate governance standards in the Middle East ingeneral – and in the GCC in particular – are not as high as they are inthe US or western Europe. Foremost among these is the structure ofmany of the largest companies in the region, which have historicallybeen built up as family-owned organisations operating in a relativelysmall regional market that have since expanded into large-scale conglomerates,some of which are now global players. “One of the reasonswhy the Middle East is still a babe in arms with respect to corporategovernance is that up until very recently most of the region’s businesswas transacted on a regional basis,” says Vink. “Trade, money andpeople tended to circulate within the region, but there is only a certainamount of business that can be done on that basis, and corporatesin the Middle East are increasingly looking to expand their horizonsbeyond the region.” Although many of those companies may havetheir roots in family-owned businesses, says Vink, a large cross-sectionare now major global players. “In the western world when we talk aboutfamily-owned companies we tend to think of organisations like fatherand-sonplumbing businesses. In the Middle East, a family-ownedbusiness can be a multi-billion dollar conglomerate.”Today, says Vink, attitudes towards corporate governance among thosecompanies is changing, but he adds that external observers should notbe surprised if the process of change takes time. “The thought processthat many Middle Eastern companies are now going through is reallyno different to what happened in the western corporate sector a decadeor so ago,” says Vink.Certainly, an increasing number of the region’s leading quoted companieshave been announcing a series of initiatives on corporate governancethat sound encouraging and progressive. Take the example ofEmaar, the real estate giant that is comfortably the largest companylisted on the Dubai Financial Market (DFM), accounting for about 18.6%of the DFM’s market capitalisation. As DFM’s most liquid stock, Emaar isalso popular with foreign investors as a proxy for the region’s boomingreal estate market, which makes the observance of international-stylecorporate governance practices especially important. Hence the company’sannouncement in November 2005 that it had set up a CorporateGovernance Advisory Council, explaining that “this pioneering initiativeaims to develop international benchmarks for corporate governancepolicies, rules and practices…that will be a beacon to progressivecorporations and institutions in the region.”

Recent initiatives oncorporate governance in theMiddle EastWhile the Middle East’s track record in corporate governance may be chequered, the good newsis that consensus among influential figures from throughout the region’s public and privatesector is that decisive measures need to be taken to improve governance standards.At the same time, however, task force participants acknowledged that theMENA banking industry was still hampered by insufficient understandingof corporate governance. As a consequence, they agreed that specialattention needs to be paid by the MENA banking sector to strengthening“Special attention needs to be paid by the MENA banking sector tostrengthening boards, improving shareholder rights, protecting minorityshareholders and addressing related party transactions”For example, delegates at the meeting of the MENA task force on CorporateGovernance of Banks, held in Amman in February 2007, agreed on theimportance of strengthening corporate governance in the financial servicessector across the Middle East region. More specifically, they acknowledgedthat as banks were at the front line of the financial sector therewould be beneficial side-effects of improved corporate governance in thebanking industry for the non-banking sector. They also agreed that excessliquidity in the region reinforced the need for improved bank corporategovernance, and that market pressure (from, for example, internationalcorrespondent banks) would provide an important incentive for MENAbanks to enhance their corporate governance policies.boards, improving shareholder rights, protecting minority shareholdersand addressing related party transactions. Attention also needs to be dedicatedto initiating a dialogue among stakeholders in improving corporategovernance and developing bank-specific governance codes. Finally, thetask force agreed that the continuation of education programmes andother initiatives aimed at raising awareness about corporate governancewas essential.Recent Initiatives on Corporate Governance in the Middle East13

The Hawkamah InitiativeOne of the most conspicuous of those initiatives was the establishment in the second quarterof 2006 of the Hawkamah Institute for Corporate Governance in Dubai, which is described by itsexecutive director, Dr Nasser Saidi, as a “Think and Do Tank” rather than merely a think-tank.A passionate advocate of good corporate governance standards, DrSaidi is a former Minister of Economy and Trade and Minister of Industryof Lebanon (1998-2000), who joined the Dubai International FinancialCentre (DIFC) as Chief Economist in 2006.“We help design and implement corporate governance programmes andmonitor the outcomes,” Dr Saidi explains. “We work at both a companyand a country level, with the private sector as well as government agenciesand capital market authorities.” That, says Saidi, means adopting arange of different approaches and programmes to corporate governanceadvisory services. “For example, the development of policies addressingcorporate governance in the banking sector needs to be approached ina completely separate way from governance among listed companies,”he explains. “In the banking sector our strategy is to work with bankpractice. Already, the Institute has made important progress in heighteningawareness about the need for improved corporate governance, andthe first study published by Hawkamah and aimed at benchmarkinggovernance standards in the region was a report entitled CorporateGovernance in the GCC – An Investor Perspective. Released in September2006 by Hawkamah and the Institute of International Finance (IIF), thisreport was the result of a series of meetings held with senior officials fromcapital market authorities, central banks and stock exchanges, local fundmanagers and representatives from law, accountancy and managementconsultancy companies involved in corporate governance in the GCC.Other initiatives launched by Hawkamah have included the support it hasgiven to a number of countries, such as Lebanon, Morocco and Tunisia,in setting up national task forces on corporate governance. It has also“We work at both a company and a country level, with the private sector aswell as government agencies and capital market authorities”supervisory authorities, whereas for listed companies it’s all about workingwith stock exchanges and capital market authorities, and developingprogrammes aimed at enhancing transparency and disclosure and improvingaccounting standards.” Other important partners for Hawkamahin the private sector are some of the more reform-oriented chambers ofcommerce and business associations in the Middle East.inaugurated a range of training programmes for market participantsranging from independent directors to investors, and addressed morethan 5000 market players in conferences, seminars and workshops acrossthe Middle East. That has helped Hawkamah attract over 200 membersat the last count and sign some 25 memoranda of understanding (MoU)with international and regional partners.“With family-owned companies, meanwhile, the approach is differentagain,” adds Saidi. “There, the focus is usually on working with families toaddress issues such as those arising from succession and generationalchange and advising on the need to divorce family matters from businessmatters.”The public sector is also an important area for Hawkamah, and willbecome progressively more so as governments in the Middle East turnto privatisation as a means of bolstering corporate performance. “Stateownedenterprises still loom very large in our region,” says Saidi, “andthe stakeholders in those companies are of course very different. This isa relatively new area for Hawkamah, but we have already worked withEgypt to draw up the first corporate governance code for SOEs, which isnow being implemented.”Fundamental to Hawkamah’s raison d’être is the promotion of harmonisationof corporate governance standards in the GCC and across thewider Middle Eastern region and their alignment with international bestHawkamah recognises, however, that it is early days as far as the acceptanceof corporate governance in the region is concerned, which is a viewthat is shared by a number of market participants. At Global InvestmentHouse, for example, Vink says that he conducted a very simple exerciseas a means of finding out how far companies had progressed towardsdefining corporate governance and developing a strategy for building aninternal governance strategy. This involved telephoning the switchboardat 30 large companies in the region and asking to be put through to theperson in charge of corporate governance. Only once was he directed tothe appropriate department.Also at the corporate level, S&P comments that “it is positive that companiesgenerally prepare their financial statements in accordance withinternational financial reporting standards, but fully audited annual accountsand quarterly financial statements are not always easily accessible,with a number of listed companies not posting their most recent financialdetails on their websites. Furthermore, financial results are often filed laterthan required by local regulators.”

Interview with Dr Nasser Saidi, executivedirector, Hawkamah Institute forCorporate GovernanceDr Nasser Saidi is passionate about corporate governance. The authorof a book entitled Corporate Governance in the MENA countries: ImprovingTransparency and Disclosure, Saidi is a Lebanese national whoserved as First Vice-Governor of the Banque du Liban (Lebanon’s CentralBank) between 1993 and 2003. He also held the post of Ministerof Economy and Trade and Minister of Industry in Lebanon between1998 and 2000. Dr Saidi is a member of the UN Committee for DevelopmentPolicy, and prior to his career in Lebanese politics pursueda career as a well-respected academic as – inter alia – a professor ofeconomics at the University of Chicago.the US and Europe that is precisely when liquidity is high that goodrisk assessment sometimes goes out of the window and mistakes aremade. Look at the Asian crisis of 1997: at that time budget deficitsweren’t high, nor was inflation, and most of the countries in the regionwere running healthy balance of payment surpluses. All seemed wellon the macroeconomic front, so it was poor corporate governancethat led to the Asian crisis.Euromoney: But surely the correction in GCC stock markets that wesaw last year would have happened anyway?Dr Saidi has been the guiding hand behind the creation of theHawkamah Institute for Corporate Governance that was set up in February2006 to advance governance practices in the Middle East, NorthAfrica and Central Asia. Some 18 months after its launch, Dr Saididiscussed Hawkamah’s accomplishments to date with Euromoney.Euromoney: Why do companies in the GCC need to be concernedwith corporate governance when the region is so awash withliquidity?Saidi: I would argue that it is precisely because there is so muchliquidity in the region that we need improved corporate governance,for two reasons. First, the liquidity in the region is encouragingcompanies to go international. They are finding that their localmarkets are too small to accommodate their expansion plans, and inorder to expand efficiently they need to ensure that they and their“There is no doubt that we still have acorporate governance gap in the region”joint venture partners have strong governance standards to mitigaterisks and maximise returns. Increasingly, companies are aware thatcorporate governance needs to be part of their overall growth anddevelopment strategy.Second, the big market correction we saw in 2006 was very importantbecause it came as a wake-up call both to companies and toregulators that all was not well in terms of transparency anddisclosure, both of which are important components of corporategovernance. Although we have plenty of liquidity in the region, thatdid not prevent stock markets from correcting very sharply.I agree that in order to persuade companies of the need to introducegood governance standards you need to make a strong business case,and making that business case is more difficult at a time when themarket is awash with liquidity. But we know from experience in Asia,“In an environment where you don’thave transparency and full disclosure,and where you don’t have internationalaccounting standards being applied, anyrumour that starts to circulate can createundue volatility in the market”Saidi: I’m not so sure about that. In an environment where you don’thave transparency and full disclosure, and where you don’t have internationalaccounting standards being applied, any rumour that startsto circulate can create undue volatility in the market. It is the absenceof institutional support that creates that sort of volatility, and institutionswill only invest in markets where they can depend on transparencyand high quality information. I’m not saying that good corporategovernance would necessarily have prevented the correction, but wewould not have seen a loss of investor confidence to the same degreeas we did.In the longer term I think it was helpful that we had the correctionbecause it has prompted companies and regulators to step backand think about ways of making sure it doesn’t happen again, andabout how to use the market to serve economic development mostefficiently.Euromoney: Is it possible to measure the progress that has beenmade towards improving corporate governance in the GCC sinceHawkamah was established?Saidi: There is no doubt that we still have a corporate governance gapin the region, but I think that companies are becoming more and moreaware of the need to close this gap. But I’m not prepared to measurewhat we have achieved on the basis of a year and a half. I view this asthe work of a generation.However, Hawkamah’s recent research points to the fact that regulators,capital market authorities and bank and insurance companysupervisors are all very aware of what needs to be done. InstitutionalThe Hawkamah Initiative15

change is probably the most difficult thing to achieve in any economy,and the fact that so many institutions recognise the need for change is avery important measure of what we have achieved so far.The second challenge is putting all this into practice, which will taketime. Investing in corporate governance is not like investing in an ITsystem or in plant and machinery – we shouldn’t expect the results tobecome visible immediately.In order to meet this challenge we need to put a compelling businesscase to companies, and I think there are two ways that we can do that.The first is to impress upon companies what happens when goodcorporate governance standards aren’t maintained. People forget thatthe best corporate governance is like the best central banking – in otherwords it is something you never hear about when things are going well.When people really get the message about corporate governance iswhen it fails – which is what happened in the case of companies likeEnron, WorldCom and Parmalat. They were all performing fine andthere was nothing in their P&L or in their share price to suggest that“I don’t think there is anything especiallyunusual about the structure of companiesin the Middle East. Family-ownedcompanies continue to dominate economicregions such as Asia, Latin America,Europe and even the US”they can. We know that when two identical stock-exchange listed companiesin the same sector produce similar results, the company with thebetter corporate governance always outperforms. That has been provedin any number of empirical studies by organisations such as the IMF andthe London Business School.Euromoney: Are there any cultural difficulties associated with promotinggood governance in the Middle East? For example, is the governanceconcept one that is more difficult for family-controlled companiesto apply?Saidi: No. I don’t think there is anything especially unusual about thestructure of companies in the Middle East. Family-owned companiescontinue to dominate economic regions such as Asia, Latin America,Europe and even the US. In fact, the only country where family-ownedbusinesses are much less important today than they were 50 or 100years ago is the UK.What is different is that markets haven’t developed as fully in this regionas they have elsewhere. Compared to their potential, financial marketshere are still very small. So the main difference between the Middle Eastand other regions is that family businesses haven’t been able to divorceownership from control. The result is that too many people sit on thesame boards. Our region needs to find ways of appointing more independentboard members, which is one of the reasons why in Septemberwe are launching an Institute of Directors which will be similar to theUK’s Institute and which will be open to the private sector as well as todirectors of state-owned companies.Euromoney: Do you subscribe to the view that private equity has animportant role to play in helping to improve corporate governancestandards across the region?anything was wrong. Then new information came out about how theywere governed and all of a sudden they collapsed and in some casesthey took down other big companies, like Arthur Andersen, with them.So one important message that needs to get across is that it’s not justyour own corporate governance that you need to be aware of; you alsoneed to monitor your joint venture partners, your suppliers and evenyour clients.The second way of responding to the challenge is more difficult, andinvolves convincing companies that they can add more value throughbetter corporate governance – and we have the evidence to prove thatSaidi: The first thing to say is that although private equity is sometimesspoken about as though it’s a new discovery, it has always been a featureof the economy in the Middle East. The big difference is that privateequity in this part of the world has never been institutionalised the wayit is today.I take the view that private equity has a very important role to play inimproving corporate governance in the region because the institutionsmaking the investment have to introduce more transparency andbetter disclosure standards. So private equity investors are a key driverof reform.“In the Middle East, for example, many companies will want and need toadapt corporate governance codes to ensure that they areShariah-compliant.”

standards of corporate governance. “On the basis of available evidence,”notes this report, “the Steering Group concluded that “activist” hedgefunds and private equity firms could help strengthen corporate governancepractices by increasing the number of investors that have theincentive to make active and informed use of their shareholder rights.This may include demands for changes in management, the compositionof the board, dividend policies, company strategy, company capitalstructure and acquisition plans. Such active and informed ownership isexpected to stimulate the search for the best possible use of corporateassets and thereby contribute to better risk and resource allocation inthe economy as a whole.”Other commentators agree that private equity can be supportive oflonger-term corporate growth and good governance. A recent WatsonWyatt report says that “private equity owners are a small group ofpeople whose interests are, to a large extent, aligned. This makes decision-makingmore efficient. Without quarterly public market scrutiny,companies can implement longer term strategies. Private equity companiescan employ compensation strategies that align the interests ofmanagement and owners.”Stephen Vink, vice presidentof Risk Management , GlobalInvestment HouseAbout Global Investment House “Global”Global Investment House “Global”is a fully-fledged investmentcompany incorporated in 1998and falls under the regulation ofthe Central Bank of Kuwait. Itsunderlying foundation is to meetthe high expectations of localand international clients and toenhance the investment serviceindustry and advance the capitalmarket in the region.Global plays an important role inpromoting investment opportunitiesin the Arabian Gulf Peninsula to investors through expertfinancial engineering as well as in-depth research and reports.Global’s achievements have been recognized on local, regional, andinternational levels.In emerging markets in general, and in the Middle East in particular, itcan be argued that private equity has greater potential for introducingbest corporate governance practice than it does in more mature markets.That is the conviction firmly held by Abraaj Capital, which is widelyviewed as the region’s leader in private equity, and which recentlycompleted the largest deal of its kind in the Middle East – which wasthe $1.9bn buyout of the Egyptian Fertiliser Company (EPC).“Privateequity is an unemotional, faceless investor, which is important becauseit means that it leaves no stone unturned in the due diligence processthat takes place before any acquisition is made,” says Frederic Sicre,Executive Director at Abraaj Capital’s Dubai headquarters.Global has recently received “Best Investment Bank in Kuwait” awardfrom Euromoney Magazine, the third consecutive award from theauthoritative publication which previously awarded Global the “BestEquity House in Kuwait” award in 2005 and 2006 and “Best RealEstate Investment House” in December 2005. The company’s currentassets under management reached KD2.39 billion ($8.3 billion) as at30 June 2007.That is no different, conceptually, from the process that precedes anyprivate equity transaction in developed economies. But in the emergingmarkets, the process can also add very significant value to the investeecompany. “In this part of the world we often encounter very successfulentrepreneurs who have profitably grown their businesses at a locallevel,” explains Sicre. “But taking that business to the next step, often bygiving it a more international focus, means putting in place the rightmanagement and human resources systems, and the right finance andreporting policies. Private equity is very well positioned to support thatprocess in family-owned companies, for example, and can help introducebest practices that exist around the world.”“This region is over-capitalised but under-managed,” says Sicre. “By helpingto make managerial and operational improvements private equitycan act as a genuine value creator. It’s not just about financial engineering,which is often the case in the mega-buyouts you see in the US andEurope.”“The Steering Group concluded that “activist” hedge funds and private equityfirms could help strengthen corporate governance practices by increasing thenumber of investors that have the incentive to make active and informed useof their shareholder rights”

The importance ofcorporate governance in thebanking sectorIt is in the banking system, however, that good quality corporate governance is even moreimportant than in the corporate sector.At May’s Roundtable in Riyadh, a presentation from the IFC emphasisedthat well-governed banks play a pivotal role in broader economicThere is a systemic risk, adds the IFC, that the collapse of a single bankmay undermine the entire financial system.“Bank failures have wider ramifications than corporate failures, as the collapseof a bank may destroy value for shareholders and depositors”development by efficiently mobilising and allocating society’s savingsand providing a source of corporate financing.At the same time, says the IFC, poorly governed banks can lead to disastrousoutcomes: “bank failures have wider ramifications than corporatefailures, as the collapse of a bank may destroy value for shareholdersand depositors, and may require a costly bail-out,” cautions the IFC.Another key area of the economy in which a crisis of confidence occasionedby poor corporate governance could have very damagingspill-over consequences is the real estate sector. As NBK warns in itsEconomic Review published in June, the bursting of the real estate sectorcould cause considerable damage to the region’s banking industry;and the chances of a property crash are exacerbated because it is a“very opaque sector due to lack of information and data.”The importance of corporate governance in the banking sector19

Interview with Eisa Al-Eisa,General Manager of SambaEuromoney: Are you satisfied that enough has been done in the GCCin general, and in Saudi Arabia in particular, to promote the higheststandards of corporate governance?Al-Eisa: Several initiatives have been taken by GCC countries during2006 and 2007. Among them were the Saudi Arabian Capital MarketAuthority corporate governance regulations, the SAMA conference oncorporate governance for banks and the regional survey on corporategovernance to promote good standards for a governance framework inthe GCC. Work is in progress to ensure and expedite continuous evaluationand transparency. Samba Financial Group itself applies the highestcorporate governance standards.Euromoney: Do you believe that the Saudi Arabian capital market willbe opened more fully to international investors in the foreseeable future?If so, what will the impact be on corporate governance standards?Al-Eisa: The recent opening up of the Saudi capital market to theKingdom’s non-Saudi residents was a positive step towards marketdevelopment. This, coupled with the economic liberalisation policiesbeing actively pursued by the Kingdom, are indicative of a strong“The recent opening up of the Saudicapital market to the Kingdom’s non-Saudiresidents was a positive step towardsmarket development”Eisa Al-Eisa, SambaAs general manager and chiefexecutive of Samba, one ofSaudi Arabia’s leading financialinstitutions, Eisa Al-Eisa haspresided over a period of expansionand increased profitssince Citigroup first finishedits management contractand then divested itself of itsshareholding. His leadershiphas been characterized by a mix of competitiveness that has seenit take a large portion of all business sectors, and a prudence thathas ensured strict controls over lending and managerial action.The organization is respected for its clear strategy and the rigorousaccountability of management. It has a strong capital base, hasincreased the quality of its assets by reducing the number of nonperformingloans and successfully diversified its sources of funding.possibility that the market will be more fully opened to internationalinvestors. Corporate governance with increased emphasis on areas suchas disclosure and transparency will certainly witness a consistent focusto ensure that investor confidence is sustained.Euromoney: Are smaller, family-owned companies sufficiently committedto corporate governance?Al-Eisa:The increased number of family-owned companies that havegone public in recent years shows that many are seeing the benefit ofestablishing good governance frameworks in their business. But withmarket liberalisation gaining momentum, and with more and moreforeign companies establishing a presence in the Kingdom, even family-ownedcompanies that have not yet chosen to go public have alsostarted to adopt these standards and to reap the benefits of doing so.Euromoney: Is the Kingdom co-operating with other regional initiatives– such as the Hawkamah initiative in Dubai – as a means ofpromoting improved corporate governance?Al-Eisa:Saudi Arabia is actively involved in regional efforts to promotebetter corporate governance by participating in initiatives such as theregional survey and corporate governance conferences arranged byHawkamah and by other organisations.Euromoney: What will the impact of Basel II be on corporate governancein the Saudi Arabian banking sector?Al-Eisa:Basel II implementation will assist banks to establish a moreeffective risk control environment, ensuring that sufficient capital existsto address all risks facing banks and encouraging institutions to bemore transparent in the measurement, management and disclosure ofrisk. This improved risk management process is fundamental to a soundcorporate governance framework.“The increased number of family-ownedcompanies that have gone public in recentyears shows that many are seeing thebenefit of establishing good governanceframeworks in their business”

How banking and capitalmarket authorities areaddressing the challengeMuch of the onus for promoting and monitoring good corporate governance standards will need tocome from banking and capital market authorities as well as from institutes such as Hawkamah.Again, the signals in this respect are positive, with a number of the region’ssupervisory bodies already having announced or implementeda range of initiatives aimed at strengthening corporate governance bypromoting enhanced transparency.As one of the most encouraging examples of this process, witnessthe passage by Saudi Arabia in July 2003 of its Capital Market Law(CML), aimed at providing a unified and comprehensive regulatoryframework within which the country’s broader capital market candevelop. More specifically, the CML is constructed around a series ofdetailed provisions setting out requirements designed to enhancetransparency and accountability among all market participants andto eliminate market manipulation and insider trading. A key recentaddition to the CML has been the publication of a code of corporategovernance for listed companies in Saudi Arabia. In tandem with thepassage of the CML, the Saudi Arabian Capital Market Authority (CMA)was established as the body responsible for overseeing the marketand enforcing itsregulations.Elsewhere in the GCC, Oman is often nominated by bankers as thecountry that has done the most at a capital market level to promotegood governance. In September 2006, for example, Oman’s CapitalMarket Authority signed a Memorandum of Understanding (MoU)with Hawkamah aimed at actively promoting and improving corporategovernance standards in the Sultanate. When this initiative wasannounced, Hawkamah explained that “the Capital Markets Authorityhas issued a series of regulations dealing with corporate governancein Oman, which arguably comprise the most comprehensive corporategovernance regime in the region. The primary regulation is the Codeof Corporate Governance, the first in the region, put in place to ensurethat the governance structure of public limited companies in Omanprovides the shareholders and investors with quality disclosure, workingtowards harmonization of corporate governance standards in theregion. Oman has been the pioneer of financial market reforms andtransparency in the Middle East and the signing of this MoU highlightsthe opportunities for similar signings with other institutions inthe region.”This year has seen supervisory authorities in other GCC countriesintroducing similarly progressive measures. In May, for example, Bahrain’sMonetry Agency (BMA)invited a high-level group of delegatesfrom listed companies, brokerage, audit and law firms to a meetingat which the Bank announced that it was finalising amendments to anumber of guidelines on disclosure standards for publicly listed companiesas well as those governing insider dealing. The BMA announcedat the time that “the Capital Markets Rulebook, which will compriseVolume 6 of the CBB Rulebook, will solidify the regulatory foundationfor securities market activities, thus providing a firm foundation forthe further advancement of Bahrain’s financial markets.”Providing an update on the BMA’s plans to strengthen investor protectionand Bahrain’s status as a financial centre, the Bank’s Governor,Rasheed Mohammed Al Maraj, said that “the recent market correctionsin the region have underlined the need for enhanced corporategovernance among listed companies. The BMA bears responsibilityfor ensuring that corporate governance requirements in Bahrain donot fall short of international standards and best market practices.”He added, however, that “before we implement any new rules, it is ourpolicy to seek the views of the industry and related parties.”Dubai has also been taking measures aimed to promote transparencyin its capital market. The Dubai International Financial Exchange(DIFX), which according to the DIFC “aims to become the leadinginternational financial exchange between Western Europe and EastAsia”, opened for trading at the end of September 2005. Although theDIFX has yet to attract as many listings as it had originally hoped, ithas clearly aimed to raise the bar as far as reporting and disclosure areconcerned. “We are currently working on a prospectus for a companylisting on the DIFX which runs to about 250 pages,” says HSBC’s King.“That would not be unusual in a mature financial centre like the UKor the US, but it is in sharp contrast to some other regional exchangeswhere listing requirements are much less stringent.”Dubai’s other stock exchange, the Dubai Financial Market (DFM),has also been taking notable steps towards improving transparencyof information flows. At the start of August 2007, the DFM took theinitiative of publishing for the first time a comprehensive “CompaniesGuide 2006”, aimed at providing investors with extensive informationabout the 46 companies now listed on the market. At the launch ofthe guide, the DFM’s Chairman Essa Kazim announced that its publicationwas “in line with DFM’s commitment to transparency.”How banking and capital market authorities are addressing the challenge21

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