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How Good Corporate Governance Can Help Save Middle Eastern Economies in Crisis

Posted: 06/30/2013 10:45 am

Weak corporate governance can be linked to financial collapses, the inability to attract investment, persistent corruption, privatization failures, weak property rights, and many other development challenges faced by countries around the world. These challenges are particularly relevant in the Middle East, where many countries are trying to transition to free-market economies. Corporate governance needs to be a central part of this transition.

Only a decade ago, no agreed-upon phrase for corporate governance existed in Arabic, which made debate and reform difficult. If an issue cannot be clearly defined, it cannot be appropriately addressed. To that end, an effort led by the Arabic Linguists Council, supported by the Center for International Private Enterprise (CIPE), resulted in the first standardized term for "corporate governance" in the Arabic language: hawkamat ash-sharikat. Developing a common term opened the door for broad-based dialogue on corporate governance in the Arab world.

At the core of strong corporate governance is the separation of ownership and control. This is of particular interest in the Middle East, where many companies are family-owned. As the business passes from generation to generation, the governance challenge changes completely. And as it becomes a major corporation or grows further, the governance challenges continue to multiply. If you look at Germany, the United States, and other countries that have put into place family councils and other institutions, the survival rate of family firms increases markedly. Once a group of people, including investors, have bought into the company, they have an interest in the governance of that company - helping establish the essential separation between ownership and control.

A good example comes from Algeria, where Slim Othmani returned to his family business in 1999 to become CEO of NCA-Rouiba, a canned foods company started by his father and grandfather in 1966. He noticed that due to the lack of clear rules, and with guidelines dating back to the company's initial formation, its practices were not in line with international best practice. After implementing accounting controls, improved communications, a clear strategy for attracting investment, and focusing on the more lucrative juice business over canned goods, NCA-Rouiba's growth has skyrocketed. Today, NCA Rouiba is the top juice firm by volume in Algeria and in the Maghreb, with annual turnover of $60m. It was listed by the AllWorld Network in 2012 as the fastest growing company in Algeria. Says Othmani, "We couldn't have managed our fast growth if we did not implement a sound policy of corporate governance centered on transparency and a structured communication strategy with various stakeholders, including the family." (Watch an interview with Othmani where he discusses these issues.)

There are three real myths about developing a strong private sector. The first is that business is monolithic. Small business and the informal sector have very different views and interests than does the large corporate sector, which need to be addressed differently through governance reforms. The informal sector alone makes up a huge proportion of potential GDP in the Middle East, and can act as a major driver of employment and reform and economic growth if it can be brought into legality.

The second myth is the assumption that private enterprise is the same as a market economy. In Good Capitalism, Bad Capitalism, Carl Schramm, Bob Litan, and William Baumol talk about different kinds of capitalism, only one of which is a true market economy. Market economies require not only private enterprise, but a whole set of institutions, rules and mechanisms for governance.

The third myth, which particularly needs to be addressed throughout the Middle East as it goes through its transformation, is that the free market will simply emerge if government gets out of the way. The free market has to be built. Institutions, structures, and laws must exist to allow a person like Mohamed Bouazizi, the Tunisian street vendor whose self-immolation set off the Arab Spring, to become a legitimate businessman

Ira Millstein has led the Organisation for Economic Co-operation and Development (OECD) to create a set of principles for corporate governance: transparency, accountability, fairness, and responsibility. Those four underlying values help ensure a corporate governance program that can deliver results. Putting together strong corporate governance principles requires joint action by the government, by the firms themselves, and by active business associations that look out for the best interests of the sector. In fact, CIPE has been part of the development of successful codes of corporate governance for countries as diverse as Bahrain, Pakistan, and Kosovo.

As the Middle East seeks to stabilize its markets after years of upheaval, a good corporate governance strategy can help create a strong and stable private sector that provides jobs, income, and wealth creation for its populations.

This article is based on a presentation delivered at a major conference in Cairo entitled, "Governance: An Essential Component of Reform," co-hosted CIPE, the Egyptian Banking Institute, and the Central Bank of Egypt. The conference highlighted the linkages between democratic governance and corporate governance, giving particular attention to corporate governance as an effective tool in the fight against corruption.

This post is also part of a collaboration between The Huffington Post and The Aspen Institute, in which a variety of thinkers, writers and experts will explore the most pressing issues of our time. For more posts from this partnership, click here. For more information on The Aspen Institute, click here.

 
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