Companies and family-owned corporations have been urged to reform the way their businesses are run to improve their attractiveness to investors. Improvements to corporate governance could also help safeguard against a repeat of the financial troubles, which beset many companies during the global crisis, say officials and international observers attending a corporate governance conference in Abu Dhabi this week.
Firms listed on the country's financial markets have until April to comply with new regulations from the Emirates Securities And Commodities Authority (ESCA) aimed at establishing a new set of corporate governance standards, including ensuring companies have separate chief executives and chairmen. Further legislation is being considered by the Ministry of Economy which could require non-listed companies to meet the same requirements.
"To avoid crisis and to protect shareholders are the two reasons corporate governance needs to be implemented," said Khalfan Saeed Al Kaabi, chairman of the Abu Dhabi Center for Corporate Governance (ADCCG), which was set-up to promote reform in the industry. The vulnerability of Gulf corporations, especially family-owned businesses, to crises in world markets has been highlighted by the financial strife of the Saudi Arabian family firms Saad and Al Gosaibi, which are embroiled in one of the biggest corporate scandals to hit the region. The two groups are restructuring huge debt piles and a number of court cases have been filed by different parties over alleged financial irregularities.
Statistics on survival rates of family-owned businesses showed they rarely lasted more than two generations, said Anthony Miller, economic affairs officer for the United Nations Conference on Trade and Development. "It's important for the economy that big family-owned firms survive and that's where good corporate governance comes in," he said. "Just because one generation produced a few good managers, there's no reason to assume that the next generation and so on will have those same management skills."
He said big family businesses could learn from US corporate giants such as Wal-Mart and Ford, where the founding families had moved from direct management roles to the boardroom without relinquishing control of the enterprises. Having a separate chief executive and chairman of a company is regarded as best business practice by many institutional investors and global bodies such as the International Corporate Governance Network.
"We do see many investors pushing for that," said Mr Miller. Banks in the region have also been encouraged to upgrade their risk management capabilities to reduce their exposure to financial catastrophes created by defaulting borrowers. "They need to demonstrate that their risk management functions and their governance are up to speed to convince investors both in the wholesale and equity markets where there is a lot of supply right now," said Stilpon Nestor, managing director of Nestor Advisors, a London-based corporate governance consultancy.
Mr Nestor cited the example of Spain's Banco Santander which, he said, managed to dodge the worst of the bad debt many European banks built up, thanks to its establishment prior to the financial crisis of a special risk committee which met up to twice a week. He said boards of banks needed to "professionalise" and gain a better understanding of the business. email@example.com