Taking a world view of the development of corporate governance, who does not remember the Asian financial crisis in 1997? And Enron's (the giant US power company) bankruptcy in November 2001?
It was later revealed that the reported Enron financial meltdown was sustained substantially by an institutionalised, systematic and creatively planned accounting scandal.
What was known as Arthur Andersen, the accounting firm, played a major role in the Enron fraud. The weak corporate governance at Enron was a major factor in the scandal.
Enron shareholders lost nearly US$11 billion, when its stock price, which hit a high of $90 per share in mid-2000, plummeted to less than $1 by the end of November 2001.
Following Enron and other major corporate scandals, came the Sarbanes-Oxley (Sox) Act of 2002 in the United States that set new or enhanced standards for all US public company boards, management and public accounting firms. Then came Basel II in 2005 to guard against the type of financial and operational risks banks face.
At that time, Sox and Basel II had a significant impact on the efficiency and effectiveness of corporate activities within organisations, and since then serious attempts have been made to reestablish focus on corporate governance. However, the 2008 financial crisis emphasised the need for more attention to the application of corporate governance and professional scrutiny in corporate operations.
What about closer to home? The UAE is no exception when it comes to corporate governance and the Dubai Declaration on Corporate Governance, issued in November 2006, and the subsequent steps taken by the UAE Government underlined the importance of good corporate governance for the following reasons among others:
• Financial and economic stability.
• Foster development and sustainable growth.
• Nurture and raise investor confidence.
The 2009 resolution issued by the UAE Ministry of Economy (MR 518) makes it mandatory for Public Joint Stock Companies to strengthen their corporate governance and bring them to the standards of the leading international financial centres.
The growing markets in the UAE are a true reflection of the determination exhibited by a strong economy and vision of the authorities who are working hard to implement good governance to ensure everyone is able to reap the fruits of sound corporate governance.
This will attempt to do the following:
• Protect against corruption and bad management.
• Encourage transparency.
• Attract investments.
• Facilitate limiting capital flight if any.
We now have the Abu Dhabi Center for Corporate Governance as an initiative by the Abu Dhabi Chamber of Commerce and Industry, and Hawkamah Institute for Corporate Governance in Dubai. They are working hard to promote sound and effective corporate governance, its establishment and implementation across the country.
We also need to highlight the importance of good governance for state-owned enterprises (SOEs) in the UAE.
There is no law to enforce corporate governance for SOEs in the UAE and as such it might seem to be a luxury. In reality it is not. It is rather a necessity to promote accountability and transparency that will eventually drive good performance.
Over the last couple of years the focus on strategic improvement of SOEs was obvious. Corporate governance will facilitate adding the strategic dimension to the management of these enterprises.
In conclusion, the implementation of corporate governance in UAE organisations, whether private or public, will reflect positively on the economy and will drive prosperity and a sustainable steady growth.
Alawi Al Hashemi is a consultant in corporate governance based in Abu Dhabi