The Corporate Governance Outlook In The Middle East For 2020

The Middle East is a diverse and fascinating region. A century of rapid development built on a foundation of rich history has shaped an attractive entrepreneurial business environment.

The fast pace of corporate evolution against a strong cultural backdrop presents unique challenges for corporate governance in the region and there’s no one better placed to offer an insight into what the future holds than Dr Ashraf Gamal El Din. He is the highly experienced CEO of Hawkamah, the Institute for Corporate Governance in the Middle East. Hawkamah and Diligent have been in partnership over the past three years, focusing on the shared objective of promoting more effective boards.

Diligent were fortunate to be able to talk to Dr Ashraf and get his views on recent developments in corporate governance, the particular challenges faced and what to look out for as 2020 unfolds. He also offers valuable advice for governance professionals in the region.

Trends in 2019 – Corporate Governance Awareness on the Rise

Reflecting on 2019, Dr Ashraf saw encouraging signs that regional awareness of corporate governance is growing. New regulations are coming into force that put clearer emphasis on director responsibility and the importance of Environmental and Social Governance (ESG), as he explains:

“We have seen many developments indicating a rise in concern about corporate governance. For example, last year Saudi Arabia launched a new corporate governance code that puts more emphasis on the role of the board of directors, underlining board liabilities, clarifying more about what information must be disclosed and how conflicts of interest in Saudi-listed companies should be managed. This closed a lot of gaps that existed before.”

“The UAE also launched a new code for companies regulated by the Emirates Securities and Commodities Authority (ESCA). This talks more about sustainability, CSR and Board evaluation, as well as calling for gender diversity on Boards.”

“In December, Dubai Financial Markets (DFM) – the Stock Exchange of Dubai – also launched a guide on the disclosure of ESG practices to help companies understand how they should be disclosing these activities.”

Dr Ashraf also points to a trend towards the introduction of new indices that allow comparisons between companies by governance performance. Saudi Arabia, for example, has announced the launch of a new index for listed companies that will be publicly available to investors so there is transparency about corporate governance performance.

Family Tensions

One challenge that is common in the Middle East is governance and succession in family businesses. This became particularly noticeable in 2019, as Dr Ashraf explains: “. This causes tensions and instability in those companies. We are still lagging behind on the issue of governance in large privately held companies, governments need to seriously consider regulating such companies in order to protect the economy from facing the consequences of their collapse. This includes, for example, the loss of assets, jobs and markets”

Considering some of the key issues affecting family-held companies, Dr Ashraf explains: “These companies operate in multiple unrelated industries, reflecting the interests and objectives of the different family stakeholders. This has created large and diverse conglomerates where there is a lack of structure governing the relationships between parent companies and subsidiaries. It can be difficult to avoid conflicts of interest and, with no framework to manage this, tension is the result. Sadly, some of these tensions are now being played out in law courts.”

Hawkamah is working with family businesses and with government to try to develop family governance structures that will help families to interact within the company on an organised basis: “We want to try to make them look more like corporates, with the associated structures and processes, but this will require quite a significant change in culture, so we know it is going to take time,” says Dr Ashraf. “It is of significant economic importance to start putting minimum levels of governance in place, because some of these companies turn over billions of dollars – if one fails, it will damage the economy.”

Looking Ahead – Governance Themes For 2020

Hawkamah meets with many Boards in the region and is perfectly placed to identify the key themes that are emerging and changing the way Boards operate. There are five topics that Dr Ashraf expects to make waves in 2020:

• Gender diversity: “Most companies are now aware of the importance of having women on Boards. We have yet to see if this will be formally translated into quotas, KPIs of regulation, but there is a definite trend towards diversity, which is a good thing.”
• Board evaluations: “Board evaluations are only mandatory in three countries at present – Bahrain, Kuwait and Oman – but we’re now seeing client companies being proactive and asking us to conduct board evaluations. This is very positive and a growing trend for 2020.”
• Risk management and uncertainty: “The generally high political and financial uncertainty in our region, and globally, is causing more Boards to think about risk oversight and what effect different risks might have on their company in future.”
• Governance of family-owned businesses: “As previously mentioned, this is becoming a serious trend in 2020 as families try to work out how to manage succession from one generation to the next.”
• The rise of ESG: “Regulators are talking about sustainability and ESG and we’re seeing trends towards having indices for ESG performance.”

The Emergence of ESG – Work is Needed to Raise Awareness

On the topic of ESG, Dr Ashraf believes that, despite growing regulator interest, companies in the region are still some distance away from having ESG concerns drive corporate strategy: “We are not seeing ESG being properly integrated in Board reporting and stakeholder engagement yet, nor are we seeing it being used in KPIs.” Part of the challenge lies in a lack of understanding of the scope of ESG, “even when some Boards talk about CSR, or have CSR sections in their reports, they are typically talking about philanthropy – charity donations and support for good causes – not ESG as it is understood globally.”

Dr Ashraf makes the point that forward-thinking companies should be paying more attention to their ESG performance and reporting. “One of the key elements we should be focusing on this year is raising awareness of the value of ESG and why it’s good for companies. It’s not just about compliance or regulations, it’s about your own education and attracting foreign direct investment.”

On the flip side of good ESG performance are the corporate scandals that can result from poor corporate culture. What is the risk of a culture-powered crisis among businesses in the region?

“On the regulatory side, we are seeing good signs of progress,” says Dr Ashraf. “The new corporate governance rules launched in UAE, Oman and Saudi Arabia explicitly mention the responsibility of the Board to make sure that the business has good corporate culture.” However, there is concern that companies do not fully appreciate what constitutes good culture: “I have spent time with more than 60 Boards over the last couple of years and I find there is very poor understanding of what corporate culture is and how the Board can influence it.”

It may be the case that the region needs to experience a crisis of its own before Boards will truly understand the importance of corporate culture: “I think we will have to face a couple of culture-driven crises so Boards can realise what we’re talking about.”

Tips For Corporate Governance Professionals: Take a Realistic Approach

As corporate governance professionals continue working to promote better Board performance, Dr Ashraf counsels that it is important to have a perspective on global trends, but also to be sensitive to the regional culture and specific issues in the environment: “It’s a case of being pragmatic, not idealist. We sometimes have international advisers who come in and prescribe a governance framework according to global best practices, but this won’t work in a less mature corporate governance environment, where we still need education around the fundamental purpose of corporate governance.”

Instead, Dr Ashraf advises a step-by-step approach: “The solutions must be implementable, not just theoretical or ideal, so you might suggest a halfway solution that moves the business towards the ideal. If we just propose perfect theoretical frameworks that can’t be implemented on the ground, they just become a document on the shelf or on the website, but that’s it.”

Thank you to Dr Ashraf for sharing his considerable expertise to give us an insight into the future of corporate governance in the MENA region.

About Hawkamah

Hawkamah was established in 2006 by the Dubai International Financial Centre in co-operation with the World Bank and OECD. As the regional institute for corporate governance in the Middle East and North Africa (MENA) region it is a knowledge hub designed to promote best practice, advise companies and drive corporate governance improvement. Hawkamah achieves this through organising awareness events and conducting in-depth research, as well as working directly with regulators and governments to help draft and review corporate governance codes. Hawkamah also delivers certified training courses to board directors to help improve their knowledge and awareness of governance issues.

Diligent and Hawkamah Partnership

For the past three years, Hawkamah has partnered with Diligent in recognition of the two organisations’ shared ambition to promote better corporate governance, as Dr Ashraf explains: “Diligent and Hawkamah have the same ultimate objective, which is to have more effective boards, we just use different tools. Diligent takes a technology approach to help boards communicate better and exchange information more securely so boards can make better decisions. At Hawkamah we achieve this through developing frameworks, governance codes and providing training on how boards can be more effective.”