Corporate Governance in the GCC - Euromoney

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.