By Jane Valls, Executive Director and Shruti Sardesai, Programme Manager, GCC Board Directors Institute
The tumult of 2020 and 2021 across the world has caused a moment of reckoning for many global businesses as they attempt to find their footing in rough seas. Here in the Gulf region, organisations find themselves at a crossroads as they consider the impact of the Covid pandemic, attempt to predict what might come their way in 2022 and beyond, while attempting to remain innovative and competitive in a region where regulators and competition alike demand adherence to global governance regimes – and fast.
But let’s start at the beginning. Gulf region boards have, over the last decade, evolved significantly due to the recognition that, in order to become global business scions, and attract foreign direct investment, they need to catch up with global corporate trends.
The current markets reflect levels of uncertainty that are driven by the impacts of the Covid-19 pandemic since late 2019. For some businesses, this has provided an opportunity to step back and reassess their priorities. For others, there has been a need to review their commitment to good corporate governance, to reassure shareholders and investors that their assets are being safeguarded, and that steps are being taken to steer the company towards success in a market that has been beset with some reputational concerns.
Not every business has weathered the storm; for those that have, it’s largely been because of their commitment to effective corporate governance. Of course, agility, adaptability and the identification of new opportunities have also been essential to business survival. However, what has been most crucial to business resilience has been a strong corporate culture, combined with strong communications and high levels of transparency.
At the GCC Board Directors Institute (GCC BDI), we are at the forefront of developments in governance. With 15 years of experience, we have kept a close eye on developments across the region and have worked closely with the region’s top board directors, CEOs, government bodies, and others to study the pulse of corporate governance in the Gulf. In the years since our establishment, we’ve kept abreast of global best practices and disseminated them across the region. Throughout the years, we’ve studied the challenges that impact regional businesses, and what it takes for organisations to thrive. To put it simply, it boils down to good governance – but we need to understand what ‘good governance’ really means.
Understanding contemporary governance in the Gulf markets
Being on par with global governance standards is not about ticking boxes or mere compliance – it is about the intelligent application of the key principles of good governance adapted to each particular organisation. This, in turn, builds stakeholder confidence, increases organisational reputation, and enables steady growth. Every two years, GCC BDI reaches out to its key stakeholders to listen to their views on corporate governance and how they are implementing it across their organisations. These biennial engagements form the basis of our board effectiveness reports, the latest of which was published in December 2021.
As expected after two years of uncertainty and volatile changes, our Gulf region stakeholders are finding that they must adapt and change how they operate to match ever-changing governance regulations, to compete for international investment, and to run their operations in a manner that permits capital inflows from diverse sources. Our research notes that only 40 per cent of our respondents (who are, or have held, board positions in GCC countries) believed their companies were partially in line with global regulatory changes. Additionally, 43 per cent of our respondents strongly agreed that there is a need for new approaches to dealing with investors, given the opening of Gulf region markets to international investors.
All of this requires a firm and equitable tone from the top – from chairs, board members and C-suite leaders – and must be rooted in an appreciation and understanding of best practices in corporate governance. A vision for the company is not enough to build an institution that can weather storms of different kinds; the foundations of the institution, i.e. its leaders, must be torchbearers of good governance.
Business outcomes during the pandemic have demonstrated that good governance and good leadership go together to ensure companies survive, in spite of unexpected situations and impacts.
There is confidence in the direction in which GCC boards are moving. Sixty-one per cent of directors we surveyed felt that board effectiveness across the Gulf has improved in the last three years. Our directors felt that ‘board effectiveness’ lies in how a board delivers the purpose of an organisation, how it ensures the long-term health of a company, and how boards govern organisations to be successful. There are, of course, other considerations, but this demonstrates what directors think their boards’ top priorities are and how they measure their own successes.
GCC boards are also acknowledging the importance of independent board directors in driving the success of boards. Sixty-nine per cent of directors surveyed felt that there have been improvements in the last three years in bringing independent directors on to Gulf boards. Sixty-two per cent also felt it should be an imperative for the role of a lead independent director to be introduced in Gulf companies. Having more independent directors in the region would certainly improve the health of companies as they bring in fresh, external perspectives and expertise that can provide the springboard for innovation within an organisation.
Independent directors are crucial to the compositional diversity of a board, but so is gender diversity, and this is still a point of concern on Gulf boards. Only 25 per cent of directors surveyed felt there had been progress with diversity on boards, and 43 per cent of respondents stated there were no women on any of the boards they held positions on. Thirty-eight per cent felt cultural obstacles hindered the hiring of women directors and that boards must make concentrated efforts to seek out women to sit on their boards. This also makes sense from an investor perspective where gender diversity on boards is often a key metric used to assess the viability of investing in companies.
Fresh director perspectives are also crucial for a well-functioning board. Given how quickly investor and market expectations change, not to mention the rapid pace of technological applications, modern boards require directors who are able to move with the times. Sixty-one per cent of directors surveyed felt that inadequate board composition and directors’ capabilities were holding back board effectiveness across the GCC. Expertise in strategic thinking (52 per cent), corporate governance and compliance (35 per cent), and performance management (25 per cent) would be preferred skills for directors on regional boards. Additional expertise in IT (21 per cent), sustainability (26 per cent), and risk management (22 per cent) would also be preferred. This expertise should be encouraged on boards as technology innovation and the rapidly increasing importance of sustainability is now forefront for investors, consumers and regulators alike.
Given the vast impact of the Covid-19 pandemic, it is unsurprising that risk management expertise is also valued in board directors. Eighty-five per cent of directors believed that the boards they sat on effectively set the risk appetite of the organisation, and 40 per cent believed that their older risk management protocols where adequate to deal with the volatility of the last two years.
Interestingly, 38 per cent also stated that they felt their risk protocols were inadequate, nearly mirroring the percentage of those who did feel the same way. This demonstrates that there is still much work to be done in improving risk oversight and risk management protocols across the region.
ESG needs to move up agenda
Sustainability and ESG is a topic that has embedded itself in corporate governance over the last few decades and has taken on great importance for all manner of stakeholders. Despite the sharp increase in focus on these topics elsewhere in the world, the Gulf region falls behind in terms of both organisational discussions and adoption. This is not to say that there is no work being done in the realm of sustainability – but, as our own research demonstrates, 50 per cent of directors only ‘sometimes’ talk about ESG in board meetings, and 21 per cent never talk about it. Yet 89 per cent of our directors were in agreement that working towards sustainability would help their boards, create long-term value. This is a stark discrepancy, but one we hope will generate significant change on boards given that today’s GCC directors acknowledge the importance of ESG.
These cumulative findings signal that Gulf boards find themselves at a crossroads when it comes to strategy and action. While there is much to applaud, there is also much to amend. The success of many Gulf organisations in staying on
track in the midst of the pandemic demonstrates a high level of agility in the market, but this momentum needs to be maintained in order to build a regional economy that can weather the next unexpected storms that blow our way. The slow uptake in board diversity and lack of focus on ESG displays a hesitation that prevents Gulf boards from staying
on top of key trends and one that regional boards need to address.
Strategic and business acumen are strongly rooted in the composition of Gulf boards, but, as we have noted, there is a still a lack of diversity and independence, which are essential requirements for a strong, modern board, and this can only be examined and addressed through regular board evaluations. In the United Arab Emirates, the Central Bank mandates that an internal board evaluation must take place every year, with an external assessor carrying out the evaluation every five years. In the Kingdom of Saudi Arabia, the Capital Markets Authority states that a board evaluation must be carried out annually, and the Saudi Arabian Monetary Authority also notes that periodical board evaluations must be carried out, focussing on the board as a whole and individual board members.
Forty-four per cent of surveyed directors felt an absence of formal board evaluation processes hindered board effectiveness, and this is demonstrated by our results, which show a mixed reaction to evaluations. Twenty per cent of directors said their boards were only just looking into introducing an evaluation process, 11 per cent said their boards do not conduct evaluations at all, and 42 per cent reported that their evaluations were only internal ones. Of those who do conduct board evaluations, 29 per cent stated that no actions were taken at the end of the evaluation process.
This will undoubtedly change as the regulators get tougher on the issue of effective board evaluations, but it is critical for boards to recognise themselves that thorough board evaluations are not just about adherence to good governance, they are also about maintaining the health and longevity of their organisations.
While our research largely surveyed Gulf board directors about their boards’ practices over the last two years, we also asked them about what they think is going to impact their board in the next three years. The majority (67 per cent) believe their industries will undergo significant changes, and that their organisations will have to grapple with global instability (64 per cent) and disruptive innovation (62 per cent). Fifty-five per cent believed increased regulatory burdens would also impact their boards, demonstrating how regulators in the region are stepping up and becoming more involved in order to ensure that regional board governance meets the highest standards.
It was felt that industry changes and increased innovation would also necessitate the presence of directors well-versed in upcoming business trends, such as IT and ESG experience. Strategic thinking, in particular, will be an important skill in the directors of the future – 78 per cent of directors surveyed said this would be an asset, particularly in the light of the Covid-19 crisis. The other skills to be valued include digital (57 per cent), sustainability (43 per cent), and risk management (48 per cent). Professional development should be offered to directors in these areas to ensure they are ready and able to meet their organisations’ future strategic needs.
Our cumulative research demonstrates that more changes are necessary for the success and sustainability of GCC boards, but also that these boards are moving in the right direction. There is a distinct demand for increased agility and resilience, particularly thanks to lessons learned from the pandemic, but the older drive for excellence and growth remains the foundation for these boards and their motivations.
Ultimately, improved corporate governance will be of benefit not just to the organisations these boards serve, but their wider stakeholder bases and the communities they operate in, too. Improved governance will also elevate the reputation of the Gulf region as an incubator for best practices in corporate accountability, efficiency, and transparency. At the GCC Board Directors Institute, we look forward to working with these regional boards in supporting their growth and excellence.
A full copy of the latest GCC Board Directors Institute Board Effectiveness Review
About The Authors:
Jane Valls joined the GCC Board Directors Institute (GCC BDI), based in Dubai, in January 2016 as Executive Director. Jane has over 20 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. Jane is also the Deputy Chair of the Global Network of Director Institutes.
Shruti Sardesai is a Programme Manager at GCC Board Directors Institute in Dubai, UAE. Her background lies in international relations and gender studies, and over the course of her career, she has worked with international and local non-profit organizations focused on improving social outcomes. She has been the author of Gulf region-oriented publications focusing on corporate governance and women in business leadership, and has previously published articles on online platforms such as Femsplain, gal-dem, and The Tempest. Shruti holds a BA International Studies from the American University of Sharjah, and a Master of Global Affairs (with a Collaborative Masters in South Asian Studies) from the University of Toronto.
GCC Board Directors Institute (GCC BDI) is a not-for-profit organisation that guides board directors of organisations, from family-owned businesses to listed companies, to acquire the know-how and the tools to achieve and sustain effective governance.