Board effectiveness in the Gulf

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By Jane Valls – Executive Director, GCC Board Directors Institute

 

 

The GCC Board Directors Institute (GCC BDI) undertakes a biannual board effectiveness survey. Our 10th anniversary survey of GCC boards has highlighted significant progress realised in the institutionalisation and effectiveness of boards in the region, fostered primarily by the evolution of the regulatory standards for listed companies and banks and of the Companies Law for privately held companies.

While there has been a convergence in the regulatory standards, which in the future may facilitate initiatives aiming to unify regulatory frameworks across the region, the challenges facing directors across the GCC remain diverse. They vary not only by sector and company ownership, but also based on the legal responsibility placed by local regulators on boards. The approach of regulators in terms of rule-making and enforcement has also been an important determinant of the effectiveness of GCC boardrooms.

Based on the results of the survey and interviews conducted by GOVERN on behalf of GCC BDI in preparation of the survey, GCC BDI has made as series of recommendations for both regulators and board members to guide governance reform in the region. While some recommendations are policy-oriented, others are aimed at boards to help guide further governance improvements. Ultimately, these recommendations are aimed at advancing the state of corporate governance implementation in the region, to facilitate capital raising by companies and to attract investment.

Regulators should maintain dialogue with the private sector

While the body of corporate governance regulations has been developing impressively over the past decade, board members feel that regulators should maintain an active dialogue with boards and senior executives to ensure that governance requirements produced by securities, banking and other regulators are aligned and to seek private sector feedback on specific provisions. While recent revision of corporate legislation in some GCC countries has eliminated certain discrepancies, board members feel that inconsistencies remain, notably in regulations applying to listed companies and banks.

In particular, directors are concerned that in some countries the speed of governance reforms has been excessively rapid for boards to effectively integrate the required changes, especially in the current context where boards have to also ensure compliance with a number of regulatory requirements concerning tax, labour and other laws. In this regard, the transition of corporate governance codes from ‘comply or explain’ to a mandatory approach has its risks as board members are concerned that not all provisions are relevant and appropriate for companies of all sizes and sectors.

“Whilst GCC companies are increasingly operating beyond their borders in order to conquer new markets, the composition of their boards is rarely international, with the exception of blue-chip-listed companies that have realised the benefit of international expertise”

These observations underscore the need for better public-private dialogue, which can be facilitated by regulatory consultations allowing companies and industry associations to provide feedback. Such consultations may help address specific concerns of board members, such as remuneration limits. In addition, survey participants thought that enhanced dialogue among regulators is necessary to ensure regulatory expectations are aligned.

Family–owned companies need to be better incentivised and supported

The governance of private, family-owned companies has been much discussed, but remains largely unaddressed, except in the recent revision of corporate legislation in the UAE, Saudi Arabia and Kuwait where it strengthens provisions bearing on board level governance as well as shareholder rights and transparency. At the same time, many of these companies in the GCC remain ‘too big to fail’ and the consequences of their governance deficiencies might have an impact beyond their own sustainability.

Further measures are needed to improve the governance of family companies by creating positive incentives for families to adopt good governance and integrity practices. Considering many large, family-owned companies interact with the government as suppliers or contractors, governments have an opportunity to request that its suppliers have appropriate governance structures in place, including at board level.

Non-binding recommendations and toolkits to support the implementation of such practices, ensuring their compliance with domestic laws, can be produced by government entities or governance NGOs operating in the region. For instance, board evaluation templates can be provided to boards of family companies through Chambers of Commerce or industry associations. Case studies of leading family companies that illustrate how the adoption of good governance practices is implemented by boards and at the operational level would be useful.

SOE governance requires custom governance approaches

While some state-owned enterprises (SOE) in the region, especially those with publicly -listed equity, operate according to world-class governance standards, others lag significantly behind the private sector, especially in terms of their transparency. Many state-owned enterprises continue to operate without boards or do not constitute boards for their subsidiaries (Amico, 2017). In order to encourage private sector development in the region, governments need to ensure that SOE boards are subject to standards similar to those prevalent in the private sector.

State-owned companies, whether wholly or partially state-owned, should be encouraged to adopt formal governance structures and processes that are explicit about board nomination processes. Director appointments to boards of state-owned companies should be subject to a rigorous qualifications standard and it might be useful to limit the number of mandates that a given board member might hold on SOE boards, as has been done for listed companies.

As recommended by the OECD, the incidence of public servants and high-level decision-makers, such as ministers and secretaries of state, serving as directors on boards of state-owned enterprises should be limited. However, to the extent that they are appointed to represent the interests of governments on boards of SOEs, they should be remunerated.[1] Furthermore, directors appointed by the state should be equally responsible before the law as any other directors and SOEs should not be exempt from the relevant governance standards that apply by virtue of their listing or other activities.

Board diversity in the GCC needs to be proactively fostered

As highlighted by the survey results, GCC boardrooms remain quite undiversified. The persistently low representation of female board members in the GCC, as well as lack of diversity from the perspective of age and nationality, is noteworthy. While GCC companies are increasingly operating beyond their borders in order to conquer new markets, the composition of their boards is rarely international, with the exception of blue chip listed companies that have realised the benefit of international expertise.

As large GCC companies are increasingly operating across the region, it is advisable for them to recruit talent from other jurisdictions. Indeed, despite the close cultural similarity of GCC countries, the presence of GCC country nationals on boards outside their home country is rather low. This is unfortunate, considering the limited pool of directors in individual countries and the potential benefit that boards could derive from the expertise of nationals of neighbouring countries as well as international experience.

Seeking to address gender imbalance remains an important corporate and policy objective as female representation on boards in the GCC remains one of the lowest globally. While some progress has been realised due to the efforts of organisations, such as the 30% Club and REACH, most jurisdictions in the region have decided not to introduce quotas requiring female representation on boards. Requiring boards to demonstrate that they have considered female candidates for any new board openings can foster a culture of gender inclusiveness and this approach is currently being experimented with in the UAE. It is recommended that other regulators in the region adopt similar non-binding approaches, including voluntary quotas and reporting, and requiring companies to disclose measures that have adopted to improve board diversity, including in terms of gender.

Board and executive appointment, remuneration and succession planning requires attention

Aligning executive and board remuneration with corporate performance has been an important governance topic in the wake of the financial crisis. Although, given the controlled structure of GCC companies, compensation arrangements have been less controversial in the region than internationally, a number of regulators in the region have introduced limits on board member compensation, which the private sector feels constrains the recruitment of qualified board members who are increasingly expected to be held accountable.

Board members feel that limitations on board remuneration are detrimental to attracting qualified talent to the region’s boards. Considering that the majority of board representatives on boards are appointed by or are indeed the controlling shareholders, the agency risks are relatively low. On the other hand, significantly constraining the remuneration of board members can limit the ability of GCC boards to recruit international talent, especially in light of the growing legal responsibilities placed on board members.

Succession planning for executives and board members requires more careful reflection. As regulators have introduced additional provisions that link board tenure and independence, at least for listed companies and banks, the relatively long tenure of GCC board members will likely shorten. This will require an active approach by GCC boards to recruit talent and will require putting in place board evaluation mechanisms to determine gaps and proactively seek board members with the required profile.

Risk management processes need to be reviewed and reinforced

Risk management involves the establishment of accountability for managing risks, specifying the types and degree of risk that a company is willing to accept in pursuit of its goals and how it will manage the risks it faces. In light of the multiplication of risks that board members say they face, it is critical that suitable and scalable risk management processes are introduced. In high-tech and sophisticated industries, such as banking, further processes to manage risks may be necessary and it is recommended to introduce the role of a chief risk officer reporting to the board.

Board charters and manuals should clearly set out board responsibility in overseeing the risk management system to ensure companies comply with the applicable laws and regulations, including environmental, labour, tax and other sector specific requirements. The responsibilities of audit and risk management committees should be made clear and these committees should feature a sufficient number of non-executive and independent directors in line with international best practices.

For companies with international operations, charters and manuals should specify how risks will be addressed and reported enterprise-wide, including in subsidiaries. A number of large SOEs and family conglomerates have established subsidiary boards in order to cascade the responsibility for strategy and risk management. It is important to empower these boards in order to hold them accountable for performance at the subsidiary level.

The ownership structure of GCC companies requires strong conflict of interest provisions and disclosure

The controlled ownership structure of GCC corporates necessitates the introduction of strong conflict of interest provisions, which need to be integrated in board charters and other relevant documents governing the board interactions. While conflict of interest situations have been addressed in detail by regulators for listed companies and banks, further attention is required to ensure that board members are not conflicted and when conflicts of interest emerge, adequate procedures are in place to address them. The introduction of rules governing related party transactions (RPTs) are crucial in this regard as is the role of the audit committee in overseeing RPTs. The introduction of a lead director role is also a potential way forward to reinforce board independence in the GCC.

For these provisions to be effective, members of the board, key executives and controlling shareholders should have an obligation to inform the board where they have a business, family or other special relationship outside of the company that could affect their judgement with respect to a particular transaction or matter affecting the company. Disclosure of the ownership structure, as well as the profile of the board, including executive and non-executive members, is critical in this regard as it allows shareholders to get insight into the company governance practices.

“As a result of the recent revision of corporate governance codes and corporate laws in the region, the minimal frequency of board meetings is set by the relevant legislation”

Improving disclosure of privately-held companies is important as it remains limited to financial information only and often does not include management discussion and analysis. Large companies and those operating in regulated sectors should be required to produce a corporate governance report that does not merely indicate board and committee composition but presents, in a meaningful manner, key corporate decisions and the rationale underpinning them.

Conduct of board meetings requires further formalisation and support by a board secretary*

Although board dynamics cannot be regulated and need to stem from a corporate culture that is conducive to good governance and accountability, it is important that board interactions are structured around key issues that the board is accountable for, while limiting any intervention of the board in the day-to-day operations, which should remain the prerogative of the management. As a result of the recent revision of corporate governance codes and corporate laws in the region, the minimal frequency of board meetings is set by the relevant legislation.

While the actual dynamics and conduct of board meetings are difficult to control through regulatory provisions, the introduction of a dedicated board secretary professionalises the interactions among board members and ensures that the board remains focussed on crucial issues. Directors report that in light of the challenging global macro-economic climate and region-specific challenges, they are required to spend more time on the exercise of their duties. It is therefore important to channel their time to the most value-adding activities.

A dedicated board secretary who is not a member of the executive team (i.e. head of the legal department) can help professionalise board discussions and other crucial functions, such as organising board evaluations. As highlighted in this report, board evaluations are increasingly being introduced across GCC companies and need to be harnessed as a method to identify weaknesses in board performance and actively address them, not only by provision of training to board members.

Conclusion

GCC BDI’s fifth report shows that board effectiveness and corporate governance have come a long way in the GCC in the past 10 years. Corporate and system failures globally, and an increasingly complex regulatory environment regionally, have sharpened the focus on good governance. From being an honorary role a decade ago, the report shows that director responsibilities are taken more seriously in the region today. While there has been much improvement in the last 10 years, there is still more to do and our report shows that the key area of focus for improvement is still board composition and directors’ capabilities. In addition to better board composition, regulators are increasingly recommending that boards introduce the role of a professional board secretary and conduct annual board evaluations. These are both subjects that need more focus and attention as GCC boards still do not fully understand the benefits of a professional board secretary and a well-executed external board evaluation as key drivers of board performance and effectiveness.

For a copy of the GCC BDI’s 5th Board Effectiveness Report, please see our website www.gccbdi.org * In this report we assume the term board secretary and company secretary to have the same meaning.

 

About the Author:

Jane Valls joined the GCC Board Directors Institute (GCC BDI), based in Dubai, in January 2016 as Executive Director.  GCC BDI is a not for profit company founded in 2007 with the Mission to improve corporate governance and professional directorship in the GCC. The founding fathers – Saudi Aramco, SABIC, Investcorp, Emirates NBD, McKinsey, PwC, Heidrick & Struggles and Allen & Overy – continue to support GCC BDI today and form the Board of Governors. GCC BDI runs open and tailored workshops for board directors, conducts board evaluations and corporate governance assessments as well helping companies to implement their corporate governance and board effectiveness frameworks. GCC BDI now has a network over 700 senior board directors who have been through its workshops and board evaluations and this group is probably one of the most influential networks in the GCC.

Jane has over 15 years of international experience in corporate governance and working with board of directors. She is an accredited Corporate Governance trainer with the International Finance Corporation (IFC), part of the World Bank Group, and is an accredited trainer with the Ethics Institute, as well as being a Certified Ethics Officer. From 2010 to 2015, Jane was the CEO of the Mauritius Institute of Directors (MIOD), one of the leading Institutes in Africa.  She was the first Chairperson of the African Corporate Governance Network from 2013-2015, a network which she helped to found, bringing together 17 Institutes of Directors from across the African continent.

Footnote:

1. In some GCC countries, such as Kuwait, legal provisions prevent civil servants appointed on boards of SOEs from being remunerated.