Corporate Governance in the GCC - Euromoney

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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.”
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