Middle East: Although corporate governance has made major strides in the region, what still needs to be done?

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By Felix Marks – Felix.Marks@EthicalBoardroom.com

The IFC (International Finance Corporation) has been working towards promoting an increased awareness, commitment and improved practices of stronger corporate governance in the Middle East region over the last few years and to date a significant amount of progress has been made from these efforts. The combined efforts of the IFC and other corporate governance groups have helped build a stable and solid foundation for corporate governance in the Middle East geographic region.

In particular there have been major developments in the operations of corporate governance institutes. Across the region there is a heightened level of corporate governance awareness and over the last few years companies have incorporated newly established codes and regulations into everyday business practices within most markets and industry sectors. The efforts of the IFC alone have led to improved amount of funding being awarded towards corporate governance initiatives – amounts of above $150m have been generated by the IFC to date. Furthermore, IFC efforts have facilitated the training of more than 12,000 business directors and executives in corporate governance practices and methodologies.

However, despite this substantial progress, there is still much more to be done in improving corporate governance in the Middle East. Policies and procedures need to be developed in order to broaden the scope and deepen the impact of corporate governance rules. A research paper published in 2011 by the Organisation for Economic Co-operation and Development (OECD) paper noted at that time that a “second wave” of corporate governance will be in order for the coming decade so that the region can move from a preliminary foundation level to the implementation of fully comprehensive and effective corporate governance practices.

A further challenge is the continuing political upheaval and structural changes in the region which resulted from the emergence of the ‘Arab Spring’. These political concerns have significantly damaged market confidence and consequently capital inflows have fallen for the region. The Middle East region has historically had some of the worst access rates to capital and financing in the world and this has just been worsened by the political uncertainty and events of the last few years. Foreign direct investment in the region is low on a global scale and typically only applied by parties with particular caution and high risk appetites. The situation has gotten worse since 2011 and there have been subsequent sharp declines in foreign direct investment and market confidence since this time.

These factors combine to make the need for corporate governance assistance a top priority for the future economic progress of the region.

Although corporate governance cannot address the macro-economic concerns alone it does have a central role in developing investor confidence. This will lead to improved access to capital for businesses and help businesses and the wider economy to grow. At company-level, corporate governance needs to be made more of an everyday part of business in particular countries and market segments. At a market-level, there is a need to improve the authority and capacity of regional institutions and intermediaries. Furthermore, regulators will need to strengthen regulatory frameworks and rules. Measures should be taken to improve investor confidence as a top priority and changes should be made in companies to improve transparency and control mechanisms within all Middle East-based businesses. Companies need to ensure that sound risk management practices are implemented in a proper and timely manner and this will help build a strong governance attitude and approach industry wide. The key of corporate governance practices will be to target the specific issues of each jurisdiction across the Middle East region. Protecting shareholders investments should be placed at the top of the list of objectives and although the region has demonstrated improvement in its overall Investor Protection index since 2006, it needs to progress much further with improved forms of investor protection in combination with additional corporate governance changes to help rebuild investor confidence in the current post-crisis climate.