THE BLOG

A Second Wave of Corporate Governance in the Middle East and North Africa

The fast economic growth the world witnessed in emerging economies, particularly in China and India, has increased the awareness and need for stronger governance in private and state-owned companies (SOC). The MENA (Middle East and North Africa) region, in light of the recent uprisings, is being forced once again to re-evaluate its corporate governance structure and the lessons taken from such successful transition economies provide valuable insights. My colleague, IMD Professor Didier Cossin, Director of the IMD Global Board Center, and I have collaborated to analyze this situation.

Governance is the way in which decisions are taken at the very top of organizations (corporations, governments or others). It is an area in which there is need for improvement in the Middle East. The International Financial Corporation (IFC) and the Hawkamah (governance in Arabic) Institute in Dubai published a region-wide corporate governance study in 2008 (pre-crisis). Among the findings, more than half of MENA companies (56%) did not have a complete understanding of the definition and benefits of corporate governance. In addition, nearly all companies (95%) indicated that their governance practices needed to be reviewed.

In the months and years following the financial crisis, companies in the region accelerated their corporate governance reform. But recent events in the region highlight the importance of corporate governance applied for wider purposes. Professor Cossin, an expert source on governance, and I believe that now is the time to go beyond governance rules towards true practices and behaviors that will reinforce (and sometimes reinstitute) the trust of all into the future success of the companies and organizations concerned. These new models of governance need to be distinctive to the region and forcefully enacted.

The recent uprisings in Tunisia and Egypt are reshaping the governance landscape in the region. This will only continue -- even as we write this article, the region is changing. The reasons for the uprisings will be analyzed for years to come, but they certainly show that citizens wish to share in their countries' economic successes. They demand improvements in their quality of life and to see better fairness, transparency and job opportunities. The uprisings stemmed from corruption, reminding us that good corporate governance cannot exist without an efficient level of public governance. Moving forward, this means that private and public-owned companies will not only have to satisfy their investors and shareholders with rules of corporate governance that ensure transparency, but will also have to become better managed and perform with the interest of all society. This interdependency between the public and corporate governance will mark the "new" or Second Wave of corporate governance in the MENA.

This Second Wave will consist in improving practices and behaviors. It is no longer about producing thick governance manuals. It is about effectively, transparently and genuinely managing businesses for performance with the cultural values of the region and the caring and effective management for all parts of society. It will also be about an emotional and professional commitment of the board and senior management towards the success of the organization and its key partners.

There are lessons, Professor Cossin says, for the Middle East that can be gleaned from China's governance transformation. The main reasons for changes in China's corporate governance system were to improve its companies' performance and international competitiveness. The country thus embarked on a reflection on how to adapt Western-models of governance to the specifics of Chinese business. Another important reason for China to focus on improving best practices in corporate governance was to attract more foreign direct investments.

On the other hand, from 2007 to 2010, some of China's large companies developed an aggressive acquisitions approach and bought foreign businesses overseas (notably in oil, gas, mining, and automotive industries). China's huge and aggressive foreign investments have raised increasing concerns among not only the governments in which it is investing, but also among their business communities and the global public.

Improvements in performance and competitiveness also forced China to be successful not only at buying but also at managing! The dramatic evolution of the ownership structures has played an important role in reinforcing the corporate governance best practices. Based on the 2010 China Statistical Yearbook, the structure of the gross industry output has changed in the last decade. In 1998 approximately 95% of the gross industry output in China was generated by SOCs and only a little more than 5% was generated by private companies. By 2009 the situation had changed dramatically; the SOCs generated less than 50% of gross industry output, while more than 50% was generated by private companies (including joint venture with foreign investors and by SMEs).

As Professor Cossin explains, this dramatic change in the business landscape has pushed corporate governance best practices in China towards a professionalization of the corporate decision processes while remaining distinctively Chinese. The same trend applies in several fast growing economies where growth has driven the application of law and regulation, reinforcing the corporate governance system in companies regardless if they are SOCs or privately-owned.

The ownership structure in the MENA region comes with a different history. It is the result of the socio-economic and political evolution the region went through in the last seven decades. Due to the large number of family businesses in the region, especially in the Gulf Cooperation Countries (GCC), and the strong presence of the State, the business landscape is characterized by extreme ownership concentrations. Most of the non-listed companies (also SMEs) are in the hands of family business founders or their descendents.

Corporate governance in the region was driven by the need for more foreign direct investment (FDI), particularly among non-oil producing countries so that they could invest in infrastructure and job creation. Another reason was the fast development of financial markets. Finally, family businesses, facing new competition dynamics due to globalization and the entry of big competing multinationals were pressured to introduce corporate governance systems. Indeed, their leaders remain under business pressure, and now possibly under public pressure, to professionalize their boards and their management. With globalization and product-life cycle challenges, they will need to show their ability to claim first-class performance in all dimensions, including social and financial, at a time of tremendous risks and opportunities.

As the MENA region, in just a short time, has made great strides in increasing awareness about corporate governance, the Second Wave of governance improvement will boost its actual achievements. As we have seen in the case of emerging economies and specifically China, corporate governance was built to support fast economic growth. It is now being redirected towards fair and high-quality growth. In MENA, the Second Wave of corporate governance will be stimulated because of the region's extraordinary need for growth and enhancement in the welfare of its citizens.