The Mena region suffers from a lack of understanding of the value of corporate governance, a new study says.
Misperceptions of the respective roles and responsibilities of the board and management, as well as a lack of transparency and accountability were some of the hurdles in the region, argued Samer Kallas, Elie Nammar and Sheharyar Malik, Harvard Business School MBA students, in the report co-authored by GrowthGate Capital.
"While improvements in corporate governance have occurred in the Mena region (through regulations, private sector initiatives, etc) there is still an incomplete understanding of the role of corporate governance and its benefits," they wrote in the report, which was supervised by Josh Lerner, one of the world's foremost researchers on venture capital and private equity.
The topic of corporate governance has gained currency in the region since the Dubai jeweller Damas was pushed close to collapse by the improper withdrawal of large sums of cash by three shareholders. The scandal, which came to light in 2010, provided a wake-up call for companies to have a robust system of oversight and openness. Damas was sold to Qatar's Mannai Corp last year.
The report said private equity companies were helping to change the perception of corporate governance by requiring companies they invest in to have a robust board and management structure as well as strong reporting standards. A survey of 12 private equity companies in the region found that bad corporate governance was generally considered a deal-breaker.
Healthy levels of transparency and oversight resulted in better access to capital and stronger financial performance, it said.
In a move designed to help strengthen corporate governance in the UAE, the Federal National Council last week approved the new commercial companies law. The legislation will ensure greater accountability of boards of directors, managers and auditors as well as handing more powers of scrutiny to the Securities and Commodities Authority.
Ahmed Badreldin, partner and head of the Mena region at the private equity firm Abraaj Capital, and not connected with the report, said one of the challenges in the region was changing the mindset of some family-run businesses, which dominate the business landscape. Levels of transparency and reporting standards will need to be improved as such firms open up to outside investors to attract capital to grow.
"In this region there are many cases where the CEO tries to manage the board and so it's a dummy board in effect," he said. "The private equity industry's role is to demonstrate the value of good corporate governance and the payback it can bring."
Mr Badreldin said Abraaj made strong corporate governance a prerequisite of its investments and abided by International Finance Corporation principles on environmental sustainability, social responsibility and corporate governance.
The report said a "compulsory, exhaustive rules-based framework" may be necessary in the region to help lay the groundwork for strong corporate governance. It said such rules could act as a forerunner for a principles-based approach similar to the UK's combined code, which sets out best practice for board leadership and relations with shareholders.
The report warned that while many private equity firms were making corporate governance a factor in their investment decisions, others were not.
Many smaller players in the region had yet to consider corporate governance as a key factor in their investment cycle, it said.
"Some groups, facing the need to deploy quickly a significant committed capital that hasn't been drawn, seem to be turning a blind eye to good governance when making investment decisions," it said.