By Sanaa Abouzaid, IFC Corporate Governance Lead, MENA
Many countries around the world are in fragile circumstances, facing severe political instability and conflict or emerging from years of prior conflict.
Currently, 35 countries and states are identified as fragile or conflict-affected, according to the World Bank’s rubric. The data suggests that these same countries will be home to half of the world’s poor by 2030, in part due to the economic fallout from instability: shattered markets, shuttered companies, lost jobs and declining incomes.
Since the Arab Spring uprisings of 2011, more countries in the Middle East and North Africa have been added to that list, which now includes Afghanistan, Iraq, Lebanon, Libya, Syria, the West Bank and Gaza and Yemen.¹
Companies operating in such environments have a double helping of business challenges. In addition to typical issues, such as competitive positioning, growth management, budget constraints and shareholder relations, they face challenges associated with functioning in an unstable environment, such as limited access to finance, disrupted supply chains, unreliable utilities and reduced productivity.
Faced with these challenges, companies in conflict-affected markets need to work twice as hard as firms in stable markets, merely to survive. To mitigate the contextual risks, sound and robust corporate governance standards are an absolute must. While not an antidote for the unstable and fragile business environment, attention to key corporate governance fundamentals can help companies operating in such contexts weather the volatilities and, potentially, emerge stronger than before.
Establish a strong leadership team
The ability to manage through crisis and emerge intact starts at the top. While this applies to all companies in all markets, it is of paramount importance to companies operating in fragile and conflict situations. Clear-minded and energetic leaders can boldly steer the ship and instill confidence. An active, professional, engaged and plugged-in board will keep the company abreast of news and developments, allowing for rapid responses and quick adjustments in fluid situations.
Having the right teams in place at the board- and senior management-levels will also enable the articulation of a clear, well-defined and flexible strategy. This strategy could mean the difference between weathering the turbulence and being destroyed by it.
In countries, such as Yemen, where civil war has escalated the severity of the political and economic stress, IFC is working with senior executives and board directors to help them better navigate through the difficulties. A recent seminar jointly hosted with the Yemeni Institute of Directors drew senior representatives from 23 Yemeni companies, who are taking what they learned about managing through crisis to make better decisions on operating during the war.
In extreme circumstances of political instability, as in Yemen, company survival may depend on the ability to act quickly and temporarily relocate operations elsewhere. Guided by strong and decisive leadership teams, several Yemeni companies have moved to more stable markets, such as Jordan and the United Arab Emirates. Once the situation in Yemen normalises, they plan to return.
These decisions are not easy. Identifying the optimal timeframe, location and resources and, above all, implementing the plan hinges on having a properly functioning, professional leadership team. This includes
a well-networked board of directors, whose foreign business connections can prove quite helpful in guiding such a move.
Develop a succession plan and update it frequently
The sudden loss of senior leadership is a common reality for companies operating in fragile and conflict-affected markets, as executives may relocate to more stable environments. Without a pipeline of talent that has been groomed, trained and prepared to take over, this loss could prove catastrophic.
To mitigate the risks, succession planning is critical. Plans should include a clearly defined chain of command if the CEO and other executives depart, along with detailed job descriptions, roles and responsibilities at all management levels. Plans are to be updated frequently as the situation evolves, so that successors are ready to perform from day one. In this way, essential business functions are sure to continue, even if key people leave.
Companies operating in unstable markets may have difficulty attracting top talent from the usual outside sources. To enhance the management pipeline in support of their succession plans, companies should look inward instead, where high performing members of their current staff can be groomed for increasing levels of managerial responsibility.
“The sudden loss of senior leadership is a common reality for companies operating in conflict-affected markets. Without a pipeline of talent this loss could prove catastrophic”
In addition, they can turn to a vast source of untapped potential: women. In a region where women’s participation rates in the workforce fall well below the 50 per cent global average, bridging the gender gap by hiring more women and training more female executives for higher level leadership roles represents a major opportunity for companies to replenish their talent pool.
For this reason, IFC’s MENA corporate governance team works in countries, such as Iraq, to strengthen the pipeline of qualified women who can assume leadership positions, such as board directorships. Recently, IFC partnered with Iraq’s Women Empowerment Organisation to provide corporate governance training for more than 20 current and prospective female directors, to better prepare them for these roles.
Create a robust control environment
A tested and well-documented set of policies and procedures, featuring strengthened risk management, internal controls and audit functions, can equip companies with the tools they need to preserve assets and protect against fraud or other criminal activity in the midst of broader uncertainties. If the company loses key people or relocates to a more stable market, written documents that detail policies, approaches and procedures will help steer through the new operating environment and enable a more rapid return to normal activity.
Firms, such as IFC client Bank Audi, have seen positive results from strengthening their control environments. Based in Lebanon, Bank Audi has survived multiple periods of instability, in part by improving corporate governance fundamentals, such as risk management and internal audit. Bank officials have said that stronger corporate governance helped shore up Bank Audi’s position, contributing to a 14 per cent compounded average annual growth in profit since 2008, achieved despite the challenges facing the country.
Good governance can give nervous investors confidence
Among the biggest obstacles for companies operating in stabilising but still fragile markets is limited access to finance. Local banks may have liquidity issues, so companies often turn to foreign investors to raise funds. However, foreign investors – even those with a strong risk appetite – could balk at the prospect of wading into uncertainty.
Governments and regulators in markets that have achieved a certain degree of stability have an important role to play here. They can help ensure a predictable and well-monitored legal and regulatory framework to protect investors and minority shareholders. They can implement corporate governance standards that strengthen transparency and disclosure requirements. They can be proactive in developing new regulations that further enhance stakeholders’ protections so that when the market stabilises and investors return, there is increased confidence in the safety of investments.
In the West Bank and Gaza, the Palestine Capital Market Authority (PCMA) is taking such steps. After establishing a framework of regulatory requirements, PCMA collaborated with IFC to develop and implement a corporate governance scorecard. The scorecard provides investors with data on the corporate governance practices of local companies. It also gives companies a tool to determine the status of their own governance and measure how well they comply with the requirements.
Attention to corporate governance fundamentals can strengthen the private sector’s resilience in fragile and conflict-affected situations. They give companies the flexibility they need to respond rapidly if conditions deteriorate. When the situation improves, these same fundamentals will help markets and companies rebound quickly, so they can return to normalcy and resume their role as powerful engines of economic growth in countries desperately in need of such activity. Sometimes crises may breed the best opportunities.
About the Author:
Sanaa Abouzaid is the Regional Corporate Governance Lead for the Middle East and North Africa (MENA) region at the International Finance Corporation (IFC), a member of the World Bank Group. In her capacity, she is responsible for corporate governance work in IFC’s investment operations and advisory services across the MENA region.
Ms. Abouzaid also leads IFC’s corporate governance work with other Development Finance Institutions (DFIs). She was a founding member of the 2011 “Corporate Governance Development Framework” initiative. This Framework provides signatory institutions with a common platform for evaluating and improving governance practices of their investee companies. 33 DFIs signed the Framework to date.
Prior to this appointment, Ms. Abouzaid was a senior corporate governance officer at the IFC, based in Washington DC. She worked with private sector companies and financial institutions in many regions, including MENA, Latin America, Asia, and Africa. She helped these companies and institutions develop and improve their corporate governance practices in order to enhance their performance, solidify their market reputation, and improve their access to external financing.
¹ http://pubdocs.worldbank.org/pubdocs/publicdoc/2015/ 7/700521437416355449/FCSlist-FY16-Final-712015.pdf