Abstract
The events witnessed in the Middle East and North Africa (MENA) region over the past 3 years have resulted in a profound questioning of the economic and social pact in some countries of the region. And yet, the role of corporations as main actors of wealth generation and distribution has not been subject to much debate. As a result, corporate governance, as a field of research, has rarely found its place in the discussion on how to improve the productivity and integrity of MENA economies.
Good corporate governance is clearly a part of the solution to both immediate and longer-term challenges of the region. Examining some of the largest companies in the region – listed and state-owned – this chapter seeks to highlight key developments in their governance and demonstrate how these might have impacted their profitability, integrity and the maintenance of the “new pact” between governments and citizens in the region in the wake of the Arab Spring.
The key premise of this chapter is that unlike in other jurisdictions, developments in governance in the MENA region are driven almost entirely by regulation. Despite complaints against corruption, crony capitalism and other decisions taken against shareholders interest, the region has seen virtually no shareholder engagement. And yet, for corporate governance to serve the interest of companies and societies, it cannot be imposed through regulatory requirements only: shareholders, especially large institutional actors, also need to be part of the ongoing debate on the role of corporations in the future of the region.
The opinions expressed in this article do not reflect the official views of the OECD or its member countries.
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Notes
- 1.
For results of preliminary investigations carried out in Tunisia, please refer to 2011 Report by the Tunisian Anti-Corruption Commission.
- 2.
Financial education and “know your customer” rules in these countries are developing and at the time of this crisis banks would not prevent unsophisticated investors from investing their entire savings into the capital market.
- 3.
Considering the size of the banking sector in MENA countries and the implications of a potential banking crisis, this sector has historically been the most rigorously regulated, with “fit and proper” requirements for board members, mandated board structures and requirements for review of related party transactions.
- 4.
In Morocco for instance, between 2001 and 2010, 350 additional SOEs were established (Semmar 2012).
- 5.
Although exact figures are unavailable, recent research and discussions with SWFs highlight that their capital allocations have in recent years been re-oriented towards domestic policy objectives, to some extent at the expense of international investments (Invesco 2012).
- 6.
Refer for example, to the UAE’s federal and emirate-level competitiveness strategies.
- 7.
For instance, the state-owned cotton and weaving companies in Egypt are highly unprofitable, however they are situated in areas where they are the only source of employment and given the labour intensive nature of the industry, successive governments have been reluctant to restructure or privatise them despite their high cost to the public purse.
- 8.
Refer, for instance, to the annual report of the Tunisian Anti-Corruption Commission (2011).
- 9.
Overall, the turnover ratio of Arab stock markets stood at 64 % regionally or 17 % excluding Saudi Arabia in 2012 (Elalfy 2013).
- 10.
With the exception of the Tunis Stock Exchange, which has received a number of listing applications in 2012–2013, relative to the size of the exchange and the activity in neighbouring markets.
- 11.
Indeed, a recent study demonstrates that there was a reduction in the liquidity (measured by turnover) in MENA markets in the post crisis period and attributed it to poor corporate governance (Farooq et al. 2013).
- 12.
Some exchanges such as the Egyptian Stock Exchange have de-listed many illiquid firms which were initially lured to list by the fiscal incentives offered to listed firms.
- 13.
Refer to Hofstetter 2005 for a detailed explanation of benefits of controlled ownership structures.
- 14.
In several jurisdictions such as Egypt, Morocco and Tunisia multiple share classes exist, as do non-voting shares.
- 15.
For instance, according to the Institutional Shareholder Services, their rate of negative recommendations reached 19.8 % in Morocco and 22.2 % in Tunisia in 2012 (ISS 2012).
- 16.
Interestingly, in 2011, the jurisdiction of DIFC courts was expanded to cover commercial cases arising from disputes between companies not registered in DIFC provided they both agree to this in advance.
- 17.
In April 2012, the board member in question was voted off the board and was replaced by a Chairman of the Kharafi Group. Upon the request of the said board member, the board was dissolved by the lower court but on appeal, the court ruled that the discrimination lawsuit filed by the member of the royal family alleging an unfair board selection process was unfounded.
- 18.
In Saudi Arabia for instance, a third of the board is required to be independent.
- 19.
It is alleged that Mr Al Sanea of the Saad Group has arranged unauthorised borrowing, provided by over 100 banks and amounting to over $9 billion USD, in the name of the Algosaibi Group. The outcome of the case remains unclear and the regulator has not officially issued any penalties, pending investigation of a committee constituted by the King of Saudi Arabia to look into this matter.
- 20.
On the other hand, the governance breaches that this penalty intended to address were severe. The Abdullah brothers used the accounts and goods of this company as their personal assets, despite the fact that the holding company under which it operated was listed.
- 21.
A study conducted by the DIFC in 2012 shows that a change in market classification of the UAE and Qatar would not have much impact on capital flows to these markets (DIFC 2012). Other studies estimate that if Qatar and the UAE are upgraded, they can be expected to receive combined inflows of up to $5.4 billion out of the $380 billion USD invested in emerging markets funds (Healey 2011).
- 22.
Instead, academic studies suggest that institutional quality, investment restrictions and the level of bilateral trade are important variables to address in order to increase foreign portfolio investment (Abid and Bahloul 2011).
- 23.
That said, they have a number of alternative mechanisms for addressing shareholder rights infringements. For instance, the new Kuwait Companies Law issued in January 2013 allows the Ministry of Commerce and Industry, responsible for overseeing compliance with the Law, to appoint an external auditor or convene AGMs to repair any perceived weaknesses.
- 24.
Refer, for example, to Fisman (2001) who demonstrates using the announcements concerning Suharto’s health that in the period studied, over 20 % of the value of Indonesian firms was derived from political connections.
- 25.
XBRL allows the tagging of financial data and information reported by companies in order to allow comparisons between companies by analysts and potential investors. For additional information on the benefits of XBRL, please refer to: http://www.xbrl.org.
- 26.
The risk of potential free riding is addressed by virtue of the structure of these organisations which help to keep the cost of engagement down while maximizing shareholder voice. It would still make sense for some large investors to do the necessary due diligence on some of their investee companies as it would give them a source of competitive advantage.
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Amico, A. (2014). Towards “Shareholder Spring” in the Middle East?. In: Boubaker, S., Nguyen, D. (eds) Corporate Governance in Emerging Markets. CSR, Sustainability, Ethics & Governance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-44955-0_22
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