a corporate governance survey of listed companies and banks across the middle east and north africa

8/6/2019 A Corporate Governance Survey of Listed Companies and Banks across the Middle East and North Africa

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MENAWIDECORPORATEGOVERNANCESURVEY

SECTIOND:FOCUSSECTIONONBANKS,FOESANDSOES

Page1of81

Thissurveywas:

CommissionedandeditedbyHawkamahandIFC,

PreparedanddraftedbytheIAAGandIFC,and

SupportedbytheUnionofArabBanks,Egyptian

BankingInstitute,EgyptianInstituteofDirectors,

LebaneseTransparencyAssociationandAbuDhabi

ChamberofCommerce.

ACORPORATEGOVERNANCESURVEYOFLISTEDCOMPANIESANDBANKS

ACROSSTHEMIDDLEEAST&NORTHAFRICA

MARCH2008


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PREFACE

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DISCLAIMERANDLIMITATIONSTOTHISREPORT

Thissurveyhasbeenpreparedasareferencedocumentandisnotintendedtobeexhaustive.While

theutmostcarehasbeentakeninthepreparationofthispublication,itshouldnotberelieduponasa

substituteforlegaladviceorasabasisforformulatingbusinessdecisions.

Any views expressed in this survey are those of the authors and do not necessarily represent theviews of: (i) IAAG; (ii) the Hawkamah Institute for Corporate Governance (Hawkamah); or (iii) the

InternationalFinanceCorporation(IFC)andWorldBankGroup.

Thefollowinglimitationsapplytotheinformationcontainedinthisreport.

ThescopeofworkdidnotincludeconductinganauditofcorporategovernancepracticesofthesurveyedbanksandlistedcompaniesintheMENAregion. Assuch,notestshavebeencarried

outtoconfirmthevalidityof companiesandbanksresponses.

Thesurveyisunabletolookbeyondthenumbers. Forexample,whilethesurveycancapturequantitative data on the number of respondents that have established audit committees, it is

unabletocommentonwhethertheseauditcommitteesandtheirmembersareproperlyfulfilling

theirrolesandresponsibilities.

Theinformationpresentedinthisreportwasobtainedasaresultofanalyzingasetofcompletedquestionnaires and interviews conducted with responding companies andbanksbetweenJuly

2006 andJuly 2007. Any subsequent developments were not taken into consideration in the

analysisofthesurveyfindings.

The surveyed sample was divided into twobroad categories: listed and nonlistedbanks, andlistedcompanies. Althoughthereportoutlinesthepracticesofthesurveyedsampleaccordingto

these categories, it is pertinent to mention that the objective of this survey was not to highlight

and comment on the differences across these categories. It was to provide an accurate

representationofcorporategovernancepracticesintheMENAregionasawhole.

Thispublicationshouldnotbereproducedinwholeorinpartwithoutthewrittenpermissionofthe

copyrightholder.

2008IFC

2121PennsylvaniaAve.

NWWashingtonDC,20433

UnitedStatesofAmerica

IFCisamemberoftheWorldBankGroup


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PREFACE

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THANKYOUNOTETOPARTICIPATINGBANKSANDCOMPANIES

IFC and Hawkamah would like to thank all the survey participants for the considerable time spent

preparing their responses to the survey questionnaire and for their participation in the interview

process. Theinformationwereceivedfromtherespondentswasindispensablefortheconductofthe

survey,and

for

developing

the

resulting

conclusions

and

recommendations.

IFCandHawkamahhopethatthissurveyanditsrecommendations provetobeusefulinimproving

corporategovernancepracticesintheMENAregion,andindeedfortheindividuallistedcompanies

andbanks that answered participated in this survey. Each respondent is to receive copies of this

report,whichwehopetheywillfindhelpfulinimprovingtheirowncorporategovernancepractices.

The report will alsobe posted on the websites of the IFC (www.ifc.org/corporategovernance/mena)

andHawkamah(www.hawakamah.org).

ACKNOWLEDGMENT

The sponsors and authors of the survey would like to acknowledge and thank the following

institutionsandindividualswhosevaluableeffortgreatlycontributedtothesuccessofthissurvey:

Egypt

Dr.AshrafGamalElDin,ExecutiveDirector,EgyptianInstituteofDirectors Dr.HalaElSaid,ExecutiveDirectorandZeinabAbdelRazek,ProgramOfficer,EgyptianBanking

Institute

Dr.MartinSteindl,ProgramManager;AmiraElSaeed,ProjectOfficer,IFC(Egypt)Jordan

MaaliQuasem,Schema NesreenAbuSuleiman,OfficeManagerandAhmedAliAttiga,SeniorCountryOfficer,IFC

(Jordan)

Lebanon

JuliaBrickell,CountryOfficer,IFC(Lebanon) BadriSalimMeouchi,ProjectOfficer,LebaneseTransparencyAssociationMENA

FouadShakerandRaniaKhouri,UnionofArabBanks NickNadal,ProgramOfficer,HawkamahMorocco

JoumanaCobein,SeniorOperationsOfficerandHnaneHniki,TeamAssistant,IFC(Morocco)UnitedArabEmirates

KhalidDeeb,AbuDhabiChamberofCommerceWestBankandGaza

YoussefHabesch,CountryOfficer,IFC(WestBank&Gaza)Eachoftheseinstitutionsandindividualsprovidedgreatsupportbyhelpingcollectsurveyresponses

intheirrespectivecountriesorsectorsand/orforcommentingoreditingthefinaldraftofthesurvey.

Thissurveywouldnothavebeenpossiblewithouttheirhelp.


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PREFACE

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ABOUTTHESURVEYSSPONSORSANDAUTHORS

TheInternationalFinanceCorporation(www.ifc.org)

ThemissionoftheInternationalFinanceCorporation(IFC),theprivatesectorarmoftheWorldBank

Group,istopromotesustainableprivatesectorinvestmentindevelopingandtransitioncountriesto

reducepovertyandimprovepeopleslives. IFCfinancesprivatesectorinvestmentsinthedevelopingworld, mobilizes capital in the international financial markets, helps clients improve social and

environmentalsustainability, and provides advisoryservicestogovernmentsandbusinesses. From

itsfoundingin1956throughitsfiscalyearendingin2005(FY05),IFChadcommittedmorethanUS$

49billion of its own funds and arranged US$ 24billion in syndications for thebenefit of 3,319

companies in 140 developing countries. IFCs worldwide committed portfolio as of FY05 was US$

19.3billionforitsownaccountandUS$5.3billionheldforparticipantsinloansyndications.

The Private Enterprise Partnership in the Middle East and North Africa (PEP MENA), which was

launched by IFC in 2005, now enables the IFC to provide a wide range of advisory services

throughouttheregion,includingoncorporategovernance. IFCisusingadvisoryservices,separately

or in combination with longterm capital, to reach its goals and to introducebest practices in the

region.

TheHawkamahInstituteforCorporateGovernance(www.hawkamah.org)

The Hawkamah Institute for Corporate Governance (Hawkamah) is an international association of

corporate governance practitioners, regulators and institutions advancing home grownbut globally

integratedcorporategovernancebestpracticesintheregion.

Hawkamahsmissionistopromotecorporatesectorreformandgoodgovernance,assistthecountries

oftheregionindevelopingandimplementingsustainablecorporategovernancestrategiesadaptedto

national requirements and objectives. Regional cooperation will facilitate exchange, and allow

countries to learn from successful experiences, combine efforts, move towards harmonization of

corporate governance frameworks, and build on synergies resulting from national actions and

initiatives.

HawkamahiscurrentlyshapingthedevelopmentofcorporategovernanceintheMiddleEast,North

Africa and Central Asia. By promoting its core values of transparency, accountability, fairness,

disclosure and responsibility, Hawkamah works on policy and practical aspects of corporate

governancereformintheregion.

IAAGConsultora&CorporateFinance(IAAG)(www.iaag.com)

IAAG is a firm specialized in strategic consulting and corporate finance. Our focus countries are

LatinAmerica,EasternEuropetheformerSovietRepublicsandAsia,workinginprogramssponsored

andfinancedbymultilateralagenciesaswellasadvisingtheprivatesectorandgovernmentagencies.

Since itsbeginnings in1993, IAAGparticipates in the technical assistance programsof theprincipal

multilateral developmentbanks, such as the World Bank, European Bank for Reconstruction and

Development,EuropeanUnion,AndeanDevelopmentBankandInterAmericanDevelopmentBank,

among others. Our services provided within the framework of these technical assistance programsare centered on building financial and capital markets, strengthening small and mediumsized

enterprises(SMEs)andimprovingcorporategovernancepractices.

IAAGworkedwithDEVSTATS.L.andPKFtocompilethedataofthissurvey.


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PREFACE

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TABLEOFCONTENTS

SECTIONA. EXECUTIVESUMMARY:RECOMMENDATIONSANDKEYFINDINGS.....................................1

SECTIONB. INTRODUCTION........................................................................................................................ 10

I. Thedefinitionofandrationaleforimprovedcorporategovernance............................................10

i. Whatiscorporategovernance?........................................................................................................10

ii. Whycorporategovernancematters?...............................................................................................10

II. RecenttrendsanddevelopmentsincorporategovernanceacrossMENA...................................12

III. Aboutthissurvey................................................................................................................................... 12

i. Purposeofthesurvey......................................................................................................................... 12

ii. Targetcountriesandorganizations.................................................................................................13

iii. Surveytimeline.................................................................................................................................... 13

iv. Surveyresponserateandsampleerror..........................................................................................13

SECTIONC. MAINFINDINGS....................................................................................................................... 14

I. DemonstratingCommitmenttoGoodcorporategovernance........................................................14

i. Understandingthedefinitionofandbusinesscaseforcorporategovernance........................14

ii. Implementingcorporategovernance:practicevs.theory...........................................................15

iii. Recognizinginternationalreferencepointsforgoodpractice....................................................17

iv. Formalizingcorporategovernancepoliciesandprocedures......................................................17

v. Assigningresponsibilityforcorporategovernance......................................................................19

vi. Understandingbarrierstoreform....................................................................................................21

vii. Lookingahead:prioritiesforcorporategovernancereforms.....................................................21

II. ImplementingGoodBoardPractices..................................................................................................23

i. Theroleoftheboard.......................................................................................................................... 23

ii. Boardcomposition.............................................................................................................................. 25

iii. Boardstructure.................................................................................................................................... 30

iv. Workingprocedures........................................................................................................................... 32

v. Remunerationpolicy.......................................................................................................................... 34

vi. Boardevaluationandtraining..........................................................................................................38

III. BuildingaRobustControlEnvironmentandProcesses.................................................................40

i. Riskmanagement

................................................................................................................................

40

ii. Internalcontrols.................................................................................................................................. 41

iii. Compliance.......................................................................................................................................... 42

iv. Theexternalaudit............................................................................................................................... 44

v. Theinternalaudit................................................................................................................................ 43

vi. Theauditcommittee........................................................................................................................... 44

IV. StrengtheningTransparencyandDisclosure.....................................................................................48

i. Whatinformationisbeingdisclosedwhere?.................................................................................48


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ii. Wheretodiscloseinformation:theuseoftheannualreportandinternet?.............................50

iii. Howbesttodiscloseinformation?...................................................................................................52

iv. Specialfocus:consolidationoffinancialinformation...................................................................53

v. Whoisresponsiblefordisclosure?..................................................................................................54

vi. Factorspreventingdisclosure...........................................................................................................54

V. ProtectingShareholderRights.............................................................................................................55

i. Participatingingeneralassemblymeetings...................................................................................55

ii. Safeguardingtherighttoshareintheprofitsoftheorganization.............................................57

iii. Participatinginandbeingsufficientlyinformedonfundamentaldecisions...........................58

iv. Protectingminorityshareholderthroughpreemptiveandtagalongrights.........................59

v. Obtainingrelevantandmaterialinformationonatimelyandregularbasis...........................59

SECTIOND. AFOCUSONBANKS,FAMILYANDSTATEOWNEDENTERPRISES....................................61

I. CorporateGovernanceIssuesRelatedToBanks..............................................................................61

i. Demonstratingcommitmenttogoodcorporategovernance......................................................61

ii. Implementinggoodboardpractices................................................................................................62

iii. Buildingarobustcontrolenvironmentthroughclearreportingstructures.............................64

iv. KYCsCG:Assessingthecorporategovernanceofborrowers...................................................66

II. CorporateGovernanceIssuesRelatedToFamilyOwnedEnterprises........................................67

i. Establishingafamilyconstitution....................................................................................................67

ii. Implementingsuccessionplanning.................................................................................................68

iii. Developingafamilymemberemploymentpolicy.......................................................................69

iv. Establishingafamilycouncil............................................................................................................ 71

III. CorporateGovernanceIssuesRelatedToStateOwnedEnterprises...........................................73

i. Exercisingpropertyandownershiprights.....................................................................................73

ii. Demonstratingcommitmenttogoodcorporategovernance......................................................75

iii. Implementinggoodboardpractices................................................................................................76

SECTIONE. ANNEXES................................................................................................................................... 77

I. Annex1:SurveyMethodology.............................................................................................................. 77

i. Surveypopulation.............................................................................................................................. 77

ii. Theoreticalbackground:randomsampling...................................................................................79

iii. Sampledesign...................................................................................................................................... 79

iv. Samplecalibration.............................................................................................................................. 82

II. Annex2:CorporateGovernanceScoringMethodology(Indicators)............................................82

i. Indicatorsbybanksandlistedcompanies......................................................................................84

ii. Countries.............................................................................................................................................. 84


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SECTIOND:FOCUSSECTIONONBANKS,FOESANDSOES

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SectionA. ExecutiveSummary:RecommendationsandKeyFindingsI. DemonstratingCommitmenttoCorporateGovernance

Avarietyofstakeholdersinparticularmarketandbankregulators,localcorporategovernance institutions and institutes of directors, as well as international

organizationsanddevelopmentinstitutionsshouldcontinuetoorganizeawareness

raisingeventsoncorporategovernancethroughouttheMENAregion. Infact,todaya

great majority of respondents76% ofbanks and 67% of listed companiescite

corporategovernanceasbeingimportanttoveryimportantfortheirbusinesses. This

isanencouragingsignandpointstoarisingawarenessofcorporategovernance.

However,we also recommend that in addition to awareness raising events, saidstakeholdersorganizetargetedseminarsandworkshopsthatfocusonthedefinition

of and business case for implementing good corporate governance, so that the

benefits of corporategovernance areunderstood in theoryandmayalso translate

intopractice. Indeed,53%ofrespondentswereunabletoproperlydefinecorporate

governance, confusing the term with corporate social responsibility or corporate

management. Further, most respondents cited improved compliance (60.7%) and

reputation (61.3%) asbenefits rather than access to capital (34.7%) or lower cost ofequity (19.3%). Most importantly, not a single respondingbank or listed company

could claim to have applied corporate governance reforms holistically, i.e. to have

followed a set of 32 indicators which could reasonably qualify a bank or listed

company as a following best practice. Only five respondents or 3% could be

deemedtofollowgoodpractice,havingimplementedbetween1623indicators. The

great majority of companies, 92% in all, fall under the emerging practice or

improvedpracticesections(815indicators). Fivepercenthadonlyimplemented07

indicators,qualifyingthemasunderdevelopedpractice.

Companiesshouldformalizekeygovernancestructures,policiesandprocesses. Theuseofacompanylevelcodesofcorporategovernanceorcodesofethicsisnotwide

spread amongbanks or listed companies. Only (36.5%) have implemented such

codes. Acompanylevelcodeofcorporategovernanceandethicscodeareexcellentfirst steps in setting the overall tone for corporate governance reforms. Regulators

may wish to include similar recommendations for disclosing such documents in

voluntarycodesofcorporategovernance.

Thechairmenoftheboardandchiefexecutiveofficer (CEO)shouldsetthe toneatthe top and champion corporate governance reforms, with the support from a

professionalcompanysecretary. Justunderhalfofsurveyedbanks(47%)andlisted

companies (49%) assign the responsibility for corporate governance policies to the

boardinline with good practice. However, only a small minority of respondents

involvethechiefexecutiveofficer(CEO)(8%),chairman(4%)andcompanysecretary

(4%) in developing corporate governance frameworks; and only 11.3% have

implementedboardlevelcorporategovernancecommittees.

Policymakers and regulators should strongly encouragepossibly mandatedirectors and senior managers to undertake aminimum of corporategovernance

relatedtraining;banksandcompaniesshould,inturn,encouragetheirdirectorsand

seniormanagers to attend such events topreempt regulatory action. Corporate

governance institutes and institutes of directors, too, may wish to build their

expertiseandcapacitytomeetthegrowingdemandforspecificcorporategovernance

training. Thetwolargestbarriersinimplementingcorporategovernancereformsare

a lack of internal corporate governance knowhow, as well as the unavailability of

externalqualifiedspecialistsintheregion(44.9%forbothbarriers).


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SECTIONA:EXECUTIVESUMMARY

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II. ImplementingGoodBoardPractices

Thesurveydemonstratesthattheroleoftheboardtoprovidestrategicguidancetoandoversightovermanagementisnotalwaysunderstoodinpractice. Banksand

listedcompaniesshouldthusreview,clarifyandformalizetheroleoftheboardvis

vismanagementandshareholdersinacorporategovernancecodeorboardcharter.

Ninetythreepercentofbanksand87%oflistedcompaniesstatedthattheboardand

not management was responsible for setting company strategy, contrary to good

practicewhichcallsformanagementtodevelopandtheboardtoapprove,andthen

monitormanagements execution of, strategy. Moreover, mostboardsin the region

may not have the necessary independence to properly fulfill its oversight function.

Fifty six percent ofboards either do not have a single or only one independent

director, and only 26.4% of boards have audit committees with a majority of

independentdirectors. Finally,lessthanhalfofrespondents(40%)haveasuccession

planinplace,again,anindicationthattheboardmaynotbefulfillingitsstrategicand

oversightfunction.

Boards in theMENA region shouldkeep their currentboard size. The majority ofboards

in

MENA

have

eight

or

more

members.

Bank

boards

are

usually

composed

of

ten or more members, while theboards of listed companies typically have eight to

ten. Thesenumbersgenerallyappeartobeinlinewithgoodpractice.

Banks and listed companies shouldgradually increase the number of independentdirectors who sit on their board, and specify in their annual report their

understanding of what constitutes independence and which director is deemed

independent. Fifty seven percent of all listed companies and 54.3% ofbanks donot

haveanyoronlyasingleindependentdirectorontheirboard.

BanksandlistedcompaniesinMENAshouldensureforanappropriatemixofskillson their boards. An overwhelming majority of responding banks and listed

companies require the combination of integrity (70%) and professional experience

(75%),

in

line

with

best

practice,

however,

69%

of

respondents

chose

being

a

shareholder as the third most relevant requirement for being a director, which

typicallyleadstothecreationofinsiderorshareholderboardthatmaynotalwaysact

in the interest of the company and all of its shareholders. With respect to female

representation on theboard, a vast majority ofbanks (78%) state that they do not

haveasinglefemaledirector,whileonly1%answeredthattheyhadmorethanone.

On the other hand, onethird of listed companies had at least one or more female

boardmembers,asmallbutimportantsteptowardsbalancingtheboardroom.

Company stakeholders, in particular shareholders but also regulators, shouldcontinue to encourage banks and listed companies to separate the position of

chairman and CEO. A significant majority of respondents, 65%, state that the

positionsofCEOandboardchairmanareheldbydifferentpersons,inlinewithbest

practice. In particularbanks (72.2%) follow thisbest practice, while 42.3% of listedcompaniescontinuetocombinethesetwofunctions.

Audit committees arewell represented in the region, however, their independenceneedstobestrengthened;companiesshouldalsoexplorethebenefitsofcreatingother

boardcommitteestostreamlinetheboardswork. Eightyonepercentofbanksand

74.7% of listed companies have audit committees, inline with good corporate

governance, however, as already mentioned, only 26.4% of these committees are

composed of a majority of independent directors. Other committees are less

prevalentintheregion,withonlyaminorityofrespondentsciting thattheirboards

alsohavenominations(22.5%)orremuneration(29.3%)committees.


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Boardworkingprocedurescouldbeimprovedupon,inparticularwithrespecttothenumberofboardmeetingsperyearandthedevelopmentofaprofessionalcorporate

secretary function. The majority of banks and companies provide relevant

information to theirboards one to two weeksbeforeboard meetings, inline with

goodpractice. Withrespecttobanks,46%answeredthattheirboardmetanaverage

of three to five times per year, and 21% stated that they metbetween six and ninetimes. Only 27% ofbankboardsmeetten to 12times per year,inline withwhat is

arguably consideredbest practice forbanks. With respect to listed companies, 60%

respondedthattheyeffectivelymetonaquarterlybasis,andonly15%metbetween

six to nine times per year, inline with what most would conceive as good practice.

Finally,themajorityofsurveyrespondents(45%)statedthatthecompanysecretaryis

an employee, or a parttime employee, which while appropriate for smaller

companies, may notbe appropriate forbanks and large publicly listed companies

duetoalackofindependence. Itshouldbenotedthatoneononemeetingsduring

the interview process revealed that the position of company secretary is generally

underdeveloped.

Banks and listed companies may wish to create boardlevel remunerationcommittees to develop executive and nonexecutive remuneration policies, thus

ensuring thatbanksand listed companies in theMENA regionareable toattract,

motivateand retain talent. With respect to nonexecutive remuneration, 42.9% of

companiesdonotpaytheirdirectorsanattendancefee;andonlyaminorityofnon

executive directors receives extra pay for taking on additional responsibilities, such

as serving on committees (16.1%) or chairing theboard (11.3%). With respect to

executive remuneration, the survey demonstrates that the use of variable

remunerationpackagesis,surprisingly,limited,with53.8%ofrespondentscitingthat

they do not offer their executives variable packages. Stock options, too, are not

commonplace and only 9.8% of executives and 3.6% have such plans. Thirty nine

percent of executives receiveboard fees, contrary to good practice. Finally,banks

and companies typically do not offer their executives with pension (5.4%) or

insurance (7.2%)benefits,both of which are considered longterm incentives that in

thecaseofexecutivescanhelptiethemtothecompany.

Board evaluations and director trainingboth orientation and continuousprofessionaleducationshouldbefurtheredbybanksand listed companiesand, if

necessary,by regulators. Only 20% ofbanks and 15% of listed companies conduct

board evaluations. Similarly, director training on corporategovernance, whetherin

the form ofdirector orientationor ongoing training,remains scarce throughoutthe

MENA region, with only 15.3% of respondents offering such training for their

directors.

III. BuildingaRobustControlEnvironmentandProcesses

Banksand listed companies should strengthen their riskmanagementframeworksandpractices, inparticular by assigning responsibilityformanaging risks at the

management level, and ensuring that the board has the necessary expertise to

establish riskpolicies and effectivelyguideandoverseemanagement inmanaging

risks. Central banks inparticular shouldprovide the necessaryguidance to and

oversight over banks to ensure that banks have robust riskframeworks inplace.

Overall,lessthanhalfofthosesurveyed(43%)hadariskfunctioninplace,with23%

of listed companies and 62% ofbanks stating that they had a risk manager or risk

department in place. Those banks and listed companies that do have a risk


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management function follow best practice in that the board oversees the risk

managementsystemasimplementedbymanagement.

Similarly, the internal controlfunctionneeds to be strengthened byamajority ofbanks and listed companies in the MENA region to safeguard assets against

unauthorizeduseordisposition,maintainproperaccountingrecordsandensurefor

thereliabilityoffinancialinformation. Lessthanhalfoftherespondents(47%)have

aninternalcontrolfunction,i.e.controllerorcontroldepartment. Thosewithcontrol

functions, a significant majority ofboards claim responsibility for overseeing this

function(80.3%forbanks,69%forlistedcompanies),however,asignificantmajority

of CEOs (35%) are also deemed with oversight duties. Best practice calls for

management to set and implement, and the board to assure itself that internal

controlsarerobustanddefensible.

Banksandlistedcompaniesshouldensurethemselvesthatthechiefinternalauditorhasunfetteredaccesstoanindependentauditcommittee. Theinternalauditfunction

iswellestablishedinMENA,with88.7%ofbanksandcompaniesreportingthatthey

have a CIA. For 80% of the respondent the CIA reports to theboard. However,

althoughthe

vast

majority

of

respondents

established

audit

committees,

to

which

the

CIAshouldreporttoaccordingtobestpractice,only25%oftheseauditcommittees

canbeconsideredindependent.

Banks should strengthen (and central banks should strongly encourage) theestablishment of a compliance function. Most banks (64%) have a compliance

function in place; only 23% of listed companies reported having a compliance

function. Allbanksshouldstrivetohireachiefcomplianceofficer(CCO)andbuilda

strongcompliancefunction.

On the other hand, external auditpractices aremostly inlinewith bestpractice,however, independenceneedstobestrengthenedthroughouttheregion,bothamong

banksand listedcompanies. Ninety one percent of those surveyed had an external

auditor,

of

which

77.2%

constituted

internationally

recognized

audit

firms.

An

important majority of companies do not receive additional services from their

externalauditors(51%)andarethussafeguardedfromconflictsofinterest. However,

theideaofauditfirmorpartnerrotationtoensureforexternalauditorindependence

isnotfollowedbybanksandlistedcompanies:ofthosesurveyed,only32%havean

auditrotationpolicyinplace.

The role of the audit committee is broadly understood, however, the role of thecommitteeinensuringthatallcontrolfunctionsrisk,internalcontrols,compliance,

as well as internal and external audit processesproperly interact needs to be

strengthened. Moreover,auditcommitteesneedtoimprovetheiroversightoverthe

compliancefunction. Indeed, only 30.6% of audit committees felt that they were

responsibleforassuringthemselvesthatthecompliancefunctionwasoperating

IV. StrengtheningTransparencyandDisclosure

Banks and listed companies in the MENA region should continue to disclosefinancial information. A vast majority (92.3%) of respondents provided financial

statements to shareholders, either through the local press (94.7%), general assembly

(93.4%), annual report (88%) or companys website (85.9%), inline with good

practice.

Nonfinancial disclosure on the other hand remainsweak, and banks and listedcompanies should take steps to improve upon their disclosure in this area, in


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particularwithrespecttocorporategovernancerelatedinformation. While 68% of

respondentsdodisclosetheircorporate objectives,disclosureinother areas remains

lackluster, with results showing that the disclosure of corporate governance related

informationbeingparticularlyweakamongbanksandlistedcompanies,with53.8%

citing that they do not make corporate governance related information available to

shareholders.

Webbased disclosure needs to be improved upon and listed companies, and to alesser degree banks, should publish their annual reports and other relevant

information,suchasonbeneficialownership,ontheirwebsites. Withrespecttothe

annualreport,82%ofbanksbutonly61%oflistedcompaniesstatedthattheirannual

report was published on their website, which typically (but not always) contains a

full set of financial information. Only 22.7% disclose their articles of association or

company charter, 28.7% the companysbeneficial owners and 24.7% the companys

dividendpolicyonthecompanyswebsite.

Whilefinancialdisclosure in theannual reportremainsrelativelystrongat79.3%,nonfinancial disclosure, again, remains weak and should be an area for urgent

reform

given

the

importance

of

the

annual

report

for

shareholders

and

investors.

The

surveyshowsthatfewrespondentsincludedasectiononmanagementsdiscussion

and analysis (28%), or indeed thebanks or companys policies towards corporate

socialresponsibility(33%)orcorporategovernance(32%).

MENA law and rulemakers should continue to push for the full adoption ofinternationally recognized financial reporting standards. Sixty seven percent of

respondents stated that they disclose informationbased on International Financial

ReportingStandards(IFRS);only4.6%reportaccordingtoUSGAAP. Becausemost

centralbanksinMENArequirethebankingsectortoreportinaccordancewithIFRS,

in contrast to the market regulators, 77% of banks indicate that their financial

reportingisdoneinaccordancewithIFRS,incomparisonto58%oflistedcompanies.

This information shouldbe carefully scrutinized as the majority of countries that

have adopted IFRS have not done so completely, or have outdated versions of theIFRSframework,andsoinvestorsshouldtakecaretounderstandwhichspecificIFRS

havebeenomittedorareoutdated.

Althoughthelargemajorityofbanksandlistedcompaniesthatareapartofagroupproduce consolidated financial reports, the regulator should ensure for full

compliancewith this bestpractice. Listed companies are less prone to produce

consolidatedreportsthanbanks,73%vs.84%.

Most respondents continue to view disclosurefrom a compliancepoint of view,ratherthananeffectivetoolformanagingstakeholderrelationsandaddingvalueto

theirbusiness,andsostakeholdersshouldorganizeawarenessraisingeventsonthe

roleofdisclosureinstrengtheningcorporategovernance.The mainbarriers citedby

banks and listed companies as to why they do not fully implementbest practice intheareaofdisclosureisalackoflegislation,inparticularintheareaofnonfinancial

disclosure, again confirming the compliancedriven understanding of corporate

governance.

V. ProtectingShareholderRights

Regulators should strengthen the ability for shareholders to vote during thegenerally assembly. The vast majority of banks and listed companies, 75.4%,

confirmedrelativelyhighattendancelevelsduringtheirpreviousgeneralassemblies,


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demonstrating that shareholders are interested and willing to engage with their

companies. Votingatthemajorityofgeneralassembliesisstillconductedbyshow

ofhands(66.2%),andonlyslightlymorethathalfofrespondents(54.3%)citedproxy

voting as an alternative. At 1.3%, electronic voting is virtually nonexistent in the

region. A basic shareholder right during the general assembly is the right for

shareholders to electboard members. In the MENA region,board members areelectedby shareholders in the vast majority (81%) ofbanks and listed companies

surveyed. Only 17.7% of respondents allow for cumulative voting. Finally,best

practicecallsforshareholderstobefurnishedwithsufficientandtimelyinformation

concerningthedate,locationandagendaofthegeneralassembly,aswellasfulland

timelyinformationregardingtheissuestobedecidedatthemeeting. Itisgenerally

thoughtthatsuchinformationshouldbeprovidedtoshareholdersatleast20daysin

advanceoftheassembly,however,thesurveyshowsthatwhileslightlyoverhalfof

banks(55%)followthisbestpractice,only22%oflistedcompaniesdoso.

The regulators should safeguard shareholder rights to share in theprofits of theorganization, focusing on the effective enforcement of existing legal provisions.

There are many ways in which this fundamental shareholder right to share in the

profits of the organization can be evaded or eroded, primarily through insider

dealing, conflicts of interest and/or related party transactions undertaken by

company insiders, and regulators shouldbe vigilant in enforcing violations against

thisbest practice. Eighty two percent of respondents cited that countrylaws or

internaldocumentdorequirethemtodiscloserelatedpartytransactions. Moreover,

agreatmajoritynumberofbanks(80%)andlistedcompanies(71%)haveestablished

policies on conflictsofinterest and related partytransactions; of those that had not,

only34.7%ofrespondentsshowedinterestindevelopingsuchpoliciesinthefuture.

However,suchpoliciesareonlyeffectivewhenrespectedbymanagersanddirectors.

Unfortunately,54.7%ofrespondentsthoughtthatdirectorsfailedtoavoidconflictof

interest situations, and that 62.7% used inside information for their benefit,

demonstratinganimportantgapbetweenthelawonthebooksvs.actualpractice..

Shareholders should have a say on extraordinary transactions, and banks andcompanies should adopt specificprocesses regulatingwhen and how shareholders

approve extraordinary transactions in their articles of association. A significant

majority ofthe respondents, approximately 70%, stated that theirboardis generally

responsible for approving extraordinary transactions, regardless of their value. An

importantminoritystatedthatthecompetencetoapproveextraordinarytransactions

aboveacertainthreshold,e.g.over50%ofbookvalue,isassignedtotheshareholders

(40.8%). Andwhilethereismuchdebateinthecorporategovernancecommunityas

to whether shareholders arebest placed to vote on such transactions, or whether

instead directors working with management and their detailed knowledge of the

situationshoulddoso,itmaywellbeprudenttoallowshareholdersafinalvoteon

suchmatters.

Banks and listed companies should provide for tagalong rights to theirshareholders,whileregulatorsshouldensurethateffectiveprovisionsonpreemptive

rightsareenshrinedinrelevantlawsorregulations. Bothpreemptiveandtagalong

rightsarekeyelementsofaneffectiveframeworktoprotecttheinterestsofminority

shareholders.Thesurveyshowsthatwhileapproximatelyhalfofbanksprotecttheir

minority shareholders through tagalong rights (51%), only a minority of listed

companies(31%)doso.


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Page7of81

VI. CorporateGovernanceIssuesforBanks,Family andStateownedEnterprises

i. Corporategovernanceissuesrelatedtobanks

Bank regulators and other stakeholders have donewell to raise awareness ofgood corporategovernancefor banks, and should continue to do so. Seventy

threepercentofbankmanagersanddirectorsreportedtheirfamiliaritywiththeBasel Committee for Banking Supervision Guidelines for Enhancing the

Corporate Governance of Banking Organizations (BSBC Guidelines). On the

other hand, much of this awareness must nowbe translated into practice, for

example,viaspecificcorporategovernanceworkshopsorconsultations.

Bankboardsshouldreviewtheircurrentcommitteestructure,inparticularwithrespect to which committees are best placed to support the board visvis

management. Eightyonepercentofbankshaveauditcommittees. Only19%of

banks have boardlevel risk committees, while 31% of boards have credit

committees. Best practice calls for theboard to set policies on risk and credit,

ideallythroughaboardlevelriskcommittee,whiletheimplementationofthese

matters shouldbe left to the management team and management levelrisk and

credit committees. Banks do have a number of committees at the managementlevel, inline withbest practice, including committees on assets and liabilities

(90.3%), information technology (88.2%), risk management (81.4%) and credit

(69%).

Reporting linesforkeycontrolfunctionsneedtobereviewedandrealignedtoavoidpotentialconflictsofinterest.

Thechiefriskofficer(CRO)shouldbeindependentofanybusinessline,soastoavoidanyconflictsofinterest,andbestpracticecallsfortheCROtoreport

to the CEO or a managementlevel risk committee, with a dotted line

reporting relationship to theboard and relevant committee, in particular to

the audit or risk committee. And while the CRO does indeed report to the

CEO in 72% of the cases, there is little to demonstrate that there is anyreportingline,fullordotted,totheboard(13%)oritsauditcommittee(18%).

The chief compliance officer (CCO) shouldbe independent of anybusinessline as well and, at a minimum, report to a senior level manager, with

unrestricted access to the CEO and chief financial officer (CFO), as well as

have a dotted reporting line to theboards audit committee. The survey

demonstratesthattheCCOreportstotheCEOinthegreatmajorityofcases

(70%),butnottotheboard(11%)oritsauditcommittee(20%).

Bestpracticeindicates that thechiefofinternalaudit (CIA)shouldreporttotheboardthroughitsaudit committeeona functionalbasisandtotheCEO

on an administrativebasis. The survey provides evidence that the CIAs

reportinglinesremainmuddled,with34.7%CIAsreportingtotheCEOandonly40.3%reportingtotheboardsauditcommittee,which,givenitslackof

independence, maywellunderminethatreportingrelationship.

Banksshouldconsiderincorporatingcorporategovernanceintotheirinvestmentdecisionmakingprocess,thusreducingtheirportfolioriskandatthesametime

addingvaluetotheirclients. Resultsindicatethatasignificantmajorityofbanks

(58%) do not include an evaluation of their clients corporate governance

practices,andthosethatdotypically onlydo soona piecemealandnotholistic

basis.

ii. Corporategovernanceissuesrelatedtofamilyownedenterprises


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Page8of81

Familyowned enterprises (FOEs) and banks (FOBs) should consider adoptingfamilyconstitutionsandfamilybodies,suchasfamilycouncilsorassemblies,to

helpthemdifferentiatethefamilyinterestsfromthoseofthecompany,andalso

regulatethepoliciesthatwillguidetherelationshipbetweenthefamilyandthe

company. While 50% of listed FOEs had adopted a family constitution, not a

single FOB had done so. The survey also shows that family councils are notcommonly established in the region, neither for FOBs (0%) nor for listed FOEs

(25%).

Similarly,familyowned banks and listed companieswould bewell served toadoptfamilymemberemploymentpolicies. Onceatthecousinconsortiumstage,

good practice calls for families to formalize their family members employment

policies. Indeed,thesurveyshowsthatfamilymembershipattheboardlevelis

prevalent in listed FOEs, with 75% of respondents citing that theirboards are

composed of a majority of family members. FOBs on the other hand show a

substantiallyhigherdegreeofnonfamilymembership,withonly33%ofboards

beingcomposedofamajorityoffamilymembers,whichislikelyduetothestrict

fit and proper requirements imposedby regulators; in fact, all FOBs cited that

familyboard members were required to comply with qualifications forbeing

board member. At the same time, the position of CEO is heldby a nonfamily

memberamong67%ofFOBs,whilethispercentagefallsto50%forlistedFOEs.

Finally,allbanksandcompanies in theMENAregionshouldadoptsuccessionpolicies and plans to ensure for business continuity and sustainability.

Unfortunately, family succession plans are not widespread in the region, and

resultsshowthatonly29%ofrespondentshavepreparedasuccessionplan.

iii. Corporategovernanceissuesrelatedtostateownedenterprises

The public sector and other stakeholders should raise awareness as to theimportance of corporate governance for stateowned enterprises (SOEs), in

particular

the

OECD

Guidelines

on

Corporate

Governance

for

SOES.

These

Guidelines are not well known, as just over half of the respondents (56%)

declaredtobefamiliarwiththeircontentandscope.

Regardlessofwhetherthestatefollowsacentralizeordecentralizedownershipmodel, it should ensure that there is one body responsibleforprotecting its

assets,exercisingitsownershiprightsandresponsibilities,andensuringforgood

corporategovernanceamong the countrysSOEs. The survey reveals that the

exerciseofpoliticalrightsisusuallyacompetenceofahighprofilepublicofficer

or delegate (80% of responses in aggregate terms), regardless the shareholders

identity. Ofnoteisthatanoverwhelmingmajorityofstateownedbanks(SOBs)

90%,declaredthatpropertyrightsareexercisedbyahighprofilepublicofficeror

delegate, while this percentage falls to 62% of respondents for SOEs that are

partially listed on an exchange. Most SOEs and SOBs report to the controllingagency on an adhocbasis, upon request (45%),and not on a periodicbasis, for

exampleannually(25%)

All SOEs should have a clear and explicit set of objectives,which aremadepubliclyavailable. Moststateownedenterprisesdo separatebetweenitssocial

mission and profitseeking business objectives, with 67% of SOEs citing an

existingdifferencebetweentheseoftenconflictingpriorities.

Finally, the state shouldhave itsownpolicy inplace, requiringallSOEsandSOBs to adopt corporate governance. To date, only 33.3% of government

ownership entities have a policy or requirement for their SOEs to adopt good


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Page9of81

corporate governance practices, demonstrating that corporate governance does

notappeartobeofprimaryconcernformostgovernments.

Moreover, the state should ensure that the boards of its SOEs and SOBs arecomposed of an appropriate mixofsills and direct types (executive, non

executive and independent directors), and that these directors receive an

appropriate remuneration. Unfortunately,being a highprofile public officer is

stilltheprimarycriteriafornominatingadirectortotheboardofaSOEin62%of

cases. Competency and skills are secondary requirements, fortunately still

considered as an important criterionby 52% of nominating entities. And with

respect to director remuneration, results show that just over half of those

surveyed(52%)statethatdirectorsareremuneratedfortheirboardservices.


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SECTIONB:INTRODUCTION

Page10of85

Commitment

Boarddiscussescorporategovernanceissuesandhascreatedcorporategovernancecommittee Companyhasnominatedacorporategovernancechampion Corporategovernanceimprovementplanisinplace Appropriateresourcesarecommittedtocorporategovernance Policiesandprocedureshavebeenformalizedanddistributedtorelevantstaff Companyhasdevelopedcorporategovernancecodeorguidelines Companyispubliclyrecognizedasacorporategovernanceleader

Goodboardpractices

Rolesandauthoritiesareclearlydefined Dutiesandresponsibilitiesofdirectorsunderstood Boardiswellstructured Appropriatecompositionandmixofskills Appropriateboardproceduresinplace Directorremunerationinlinewithbestpractice Boardselfevaluationandtrainingconducted

Disclosureandtransparency

Financialinformationdisclosed Nonfinancialinformationdisclosed FinancialspreparedaccordingtoIFRS Highqualityannualreportpublished Webbaseddisclosureandinvestorsiteinplace

Shareholderrights

Minorityshareholderrightsareformalized Wellorganizedgeneralassemblyconducted Policyonrelatedpartytransactionsinplace Policyonextraordinarytransactionsinplace Clearlydefinedandexplicitdividendpolicy

Controlenvironmentandprocesses

Independentauditcommitteeestablished Riskmanagementframework/structurepresent Internalcontrolproceduresinplace Internalauditfunctioninplace Independentexternalauditorconductsaudits Managementinformationsystemsestablished Compliancefunctionestablished

FigureB1:Thefiveelementsofgoodcorporategovernance

SectionB. IntroductionI. Thedefinitionofandrationaleforimprovedcorporategovernance

i. Whatiscorporategovernance?Corporate governance is the system by which business corporations are directed andcontrolled. The corporate governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation, such as, the boards,

managers, shareholders and other stakeholders, andspellsout the rules and procedures for

making decisions on corporate affairs. By doing this,it also providesthe structurethrough

which the company objectives are set, and the means of attaining those objectives and

monitoringperformance.1

A company committed to good corporate governance has welldefined and protected

shareholder rights, a solid control environment, high levels of transparency and disclosure,

andanempoweredboard(seealsoFigureB1). Theinterestsofthecompanyandthoseofall

shareholdersarealigned.

ii. Whycorporategovernancematters?Corporategovernancematterstostakeholdersforbroadlysimilarreasons.

Investorscareaboutcorporategovernancesincewellgovernedcompanieshavelowerriskand fewer unexpected events. Wellgoverned companies are better at protecting

shareholderrights,andprovidebetterassurance thatmanagersanddirectorswillactin

thebest interest of the company and all of its shareholders. In terms of financial and

1 OECDPrinciplesofCorporateGovernance,2004.


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Page11of85

operationalperformance,wellgovernedcompaniesoutperformtheirpeersandprovidea

higherlongtermreturnoninvestment.

Companiesbenefit as the risks associated with the corporation decrease. Since goodcorporate governance minimizes rentseeking2 by managers or controlling

shareholders, investorsinvestwithagreatersenseofsecurityandconfidence. Theresult

forthecompanyisgreateraccesstocapital. Thecostofcapitaliseffectivelyreducedand

the value of the corporation increases. The reduction in risk is complemented by

improved operations, which come from better information flows and more rigorous

strategicdecisionmaking,whichultimatelycontributetobetterperformance.

Thepublic sector cares about corporate governance as it facilitates the development ofstronger capital markets, reduces risk, and improves a countrys ability to mobilize,

allocate and monitor investmentsall of which help foster economic growth. The

vulnerability to financial crisis, as witnessed in South East Asia and Russia in 1997 and

todaysU.S.basedmortgagecrisis,canalsobeminimized,ifnotavoided,throughbetter

corporategovernance.

Otherstakeholderssuchasbanks,suppliersandemployeesbenefit fromthe reducedrisk andtheincreasedhealthofthecompany. Banks,inparticular,willmakecreditdecisionswithgreaterconfidence,andcanexpectthattheywillbehandledfairlyshouldproblemsarise.

Otherstakeholders,includingsuppliersandemployees,willprefertoenterintobusiness

relationshipswithwellgovernedcompanies,sincetheresultingrelationshipsarelikelyto

be more prosperous, fairer and longerlasting compared to companies where corporate

governancepracticesaredeficient.

Didyouknowthat?

Wellgoverned UK companies posted 18% higher returns than those with poorgovernance, after adjusting for risk; worst offenders underperformed the average

industryadjustedreturnonassetsbythreetofivepercentagepointsayear.3

WellgovernedfirmsinKoreahavebeenfoundtotradeatapremiumof160%topoorlygovernedfirms.4

A worsttobest improvement in corporate governance predicted an astronomical 700foldincreaseinfirmvalueamongRussianfirms.5

A study of S&P 500 firms showed that companies with strong or improving corporategovernancepracticesoutperformedthosewithpoorordeterioratinggovernancepractices

byabout19%overatwoyearperiod.6

Institutional investors will pay premiums to own wellgoverned companies. Premiumsaveraged30%inEasternEuropeandAfricaand22%inAsiaandLatinAmerica.7

2 Ineconomics, rent seeking refersto individualsor corporations that seek gainsby manipulatingthe environmentrather

thanthroughproductivebehavior.3 ABI Research Paper 7, Governance and Performance in Corporate Britain, the Association of British Insurers (ABI),

February 2008. The study also found that it takes two to three years after a company startsbreaching until there is an

impactonperformance.

4 Black,B.S.;Jang,H.,Kim,W.(2004),PredictingFirmsCorporateGovernanceChoices:EvidencefromKorea,University

ofTexasLawSchoolWorkingPaperNo.39,August.

5 Black,B.(2001),TheCorporateGovernanceBehaviorandMarketValueofRussianFirms,EmergingMarketsReview,vol.

2,March.

6 Grandmont, R., Grant, G, and Silva, F. (2004), Beyond the Numbers Corporate Governance: Implicationsfor Investors,

(DeutscheBank,April1).

7 McKinseysGlobalInvestorOpinionSurvey,2002.


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Page12of85

II. RecenttrendsanddevelopmentsincorporategovernanceacrossMENAIn the past seven years there have been major worldwide changes in the area of

corporate governance. During this period, there havebeen more than 90 legislative

initiatives in 30 different countries, in addition to countless of studies and initiatives to

updatebestpracticeincorporategovernance.

TheMiddleEastandNorthAfrica(MENA)region,too,hasseenimportantchangesinthe

fieldof corporategovernance. Indeed,notsevenyearsagocorporategovernancewasa

nascent,largelyunknownconcept. Today,100sofconferencesoncorporategovernance

havebeen held across the region, a number of MENA countries have adopted new or

amended existing corporate governance codes and regulations,8 institutes of corporate

governanceordirectorshavebeenestablished,9andbanksandcompaniesthemselvesare

starting to undertake corporate governance improvement plans. A number of events

have spurred the emergence of corporate governance as a leading reform initiative,

including: (i) a number of domestic reform initiatives in the region, in particular the

launch of Hawkamah; (ii) the rise of international, regional and domestic investment to

the region, coupled with stock marketbooms (and corrections), and the emergence of

investor activism; (iii) corporate governance programs and projects implemented byinternational development institutions;.10 updates to the international corporate

governanceframework.11

III. Aboutthissurveyi. Purposeofthesurvey

Theprimaryobjectivesofthesurveyareasfollows:

To allow all stakeholders to gain an understanding of the extent to whichbanksand listed companies in the MENA region follow good corporate governance

practices,inlinewithinternationallyrecognizedbestpractice.

To

assist

both

the

private

and

public

sectors

to

close

any

gaps

between

best

and

currentpractice,byidentifyingareasforimprovement.

To provide corporate governance projects with abaseline on which to focus theircorporategovernancereformactivities.

8 The following countries have launched or amended corporate governance codes or regulations: Egypt: Corporate

GovernanceCodeforListedCompanies(2005)andStateOwnedEnterprises(2006);Jordan:CorporateGovernanceCode

for Banks; Lebanon: Corporate Governance Code for Small and MediumSized Companies; Morocco: Corporate

GovernanceCode(2008);Oman:CorporateGovernanceCodeforListedCompanies(2002,updateinprocess);Kingdom

of Saudi Arabia: Corporate Governance Regulations (2006); UAE: ADSM Corporate Governance Code (2006); ADSM

CorporateGovernanceListingRules (2006);ESCA CorporateGovernanceRegulation(2007). Thefollowingcountriesare

in the process of launching codes or regulations: Algeria: Corporate Governance Code for FamilyOwned Enterprises;

Lebanon:CorporateGovernanceCodeforListedCompaniesandBanks;Bahrain:CorporateGovernanceCodeforListedCompanies; Tunisia: Corporate Governance Code for Listed Companies; West Bank & Gaza: Corporate Governance

Code for Small and MediumSized Companies; Jordan: Corporate Governance Code for Listed Companies; Yemen:

CorporateGovernanceCodeforSmallandMediumSizedCompanies.

9 InstitutesthathavebeenestablishedintheregionaretheEgyptianInstituteofDirectors(2005),theHawkamahInstituteof

CorporateGovernance(2006);andtheInstituteofDirectors(2007).

10 Notably the Center for International Private Enterprise (CIPE), Global Corporate Governance Forum, IFC, Organization

forEconomicCooperationandDevelopment(OECD)andWorldBank.

11 Revised OECD Principles of Corporate Governance (1997, revised in 2004); Basel Committee on Banking Supervisions

Guidance on Enhancing Corporate Governance for Banking Organizations (1998, revised in 2006); OECD Guidelines on

Corporate Governance of Stateowned Enterprises (2005); the Islamic Financial Services Boards Guiding Principles on

Corporate Governance for Institutions Offering Only Islamic Financial Services (Excluding Islamic Insurance (Takaful)

InstitutionsandIslamicMutualFunds)(2006).


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Page13of85

ii. TargetcountriesandorganizationsThesurveytargetedcountrieswithoperationalstockexchangesinthreeMENAregions

specifically the Maghreb (Morocco, Tunisia), Mashrek (Egypt,Jordan, Lebanon and

West Bank & Gaza) and the Gulf Cooperation Council or GCC (Bahrain, Kuwait,

Oman, Saudi Arabia and the United Arab Emirates). Within these countries, the

surveytargetedbanks,bothlistedandnonlisted,andpubliclylistedcompanies.

iii. SurveytimelineThe survey was launched inJuly 2006 and final data collection completedbyJuly

2007.

iv. SurveyresponserateandsampleerrorThe universe consists of 1,044 banks and

listed companies, specifically 122banks (of

which 65 are listed and 57 nonlisted), as

and922listedcompanies.

Thefinalresponseratetothesurveywas155respondentsofwhich74werebanksand81listedcompanies(seealsoTableB1). The

sampleerrorthatresultedforbanksandcompaniesis7.27%,withaconfidencelevel

of95%. Whentakenindividually,thesampleerrorforbanksis7.18%andforlisted

companies10.14%(seealsoTableB2).

These sample errors, slightly

higher than the 5% usually

considered when large

universes are estimated, are

due to the relatively small

size of the universe and the

fact that the survey targetedhighlevel senior executives

anddirectors,manyofwhich

could not find the time to

respond. TheresponseratebycountrytothesurveyisshownintheFigureB2.

28

14

6

15

13 12

17

9

4

20 19

1011

37

5

9

56

57

8

32

5

8

3

9

46

4

213

0

5

10

15

20

25

30

35

40

Bahr

ainEg

ypt

Jordan

Kuwa

it

Leba

non

Morocco

Oman

SaudiA

rabia

Tunis

ia

Unite

dArab

Emira

tes

WestBa

nk&Gaza

Total

Banks

Listed Companies

TableB1:Finalsurveyresponserate

Banks Listedcompanies Total

74 81 155

TableB2:Surveysampleerror

No.ofResponses SampleError

Banks 74 7,18%

Listed

companies

81

10,41%

TOTAL 155 7,27%

FigureB2:Responseratetothequestionnairebycountrydisaggregatedbytypeofentity


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SECTIONC:MAINFINDINGS

Page14of85

7%8%

21%10%

55%

4%6%

20%26%

44%

Banks

ListedCompany

AsystembywhichcompaniesaredirectedandcontrolledAcommitment tocontributetosustainableeconomicdevelopment

ThecompanyIsinternalstructurethatwillallowittocomply

Asetoftoolstohelpmanagementrunthedaytodayactivities

ItisthesamethingasCorporateSocialResponsibility

SectionC. MainFindingsI. DemonstratingCommitmenttoGoodcorporategovernance

i. UnderstandingthedefinitionofandbusinesscaseforcorporategovernanceAsshowninFigureC1,thegreatmajorityofrespondents76%ofbanksand67%oflisted companiescited implementing corporate governance asbeing important to

veryimportantfortheirbusinesses.

FigureC1:Theimportanceofimplementingcorporategovernance

4% 19% 43% 33%

14% 19% 38% 30%

Banks

ListedCompanies

Irrelevant Ofaverageimportance Important Veryimportant

On the other hand, not all respondents were able to properly define the term

corporategovernanceasasystembywhichcompaniesaredirectedandcontrolled.

Respondents confused the term corporate governance with corporate social

responsibility(CSR)orcorporatemanagement,orhadanarrow,complianceviewof

corporate governance (see Figure C2). And while both CSR and corporate

management are clearly important issuesand most certainly will reinforce each

othertheyaretwoverydistinctconceptsfromcorporategovernancethatmerittheir

ownattentionandthusneedtobeconsideredseparately.

FigureC2:Definingcorporategovernance

Unsurprisinglyandinlinewiththefindingsinthissection,FigureC3demonstrates

thatagreatmajorityofsurveyrespondentsassociatedthebenefitsofgoodcorporate

governance withbetter compliance and improved reputation; only a small majority

citedalowercostofcapitalandaccesstooutsidecapital.


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Page15of85

FigureC3:Understandingthebusinesscaseforcorporategovernance

53%

36%

17%

19%

34%

27%

52%

61%

64%

21%

36%

40%

68%

33%

22%

22%

52%

36%

70%

62%

59%

38%

56%

41%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Improvestrategic decisionmaking

Access

to

external

capital

Lowercostofequity

Lowercostofdebt

Improveoperationalefficiency

Preventand/orresolvecorporateconflicts

Compliancewithlegalandregulatory requirements

Building/enhancingthecompany/bankreputationandtrustamo

Protectshareholderrights

ComplywithBankisrequirement

Mitigationofrisk

Sustainability overtime

ListedCompanies Banks

Didyouknowthatthechairsandfinancedirectorsofthetop1,000listedUKfirms

cited the following threebenefits of improved corporate governance: (i) protecting

shareholder rights (95%); (ii) improving access to external capital (88%); and (iii)

loweringcostofdebtandequity(85%)? Only1%ofrespondentsstatedcompliance

withregulationsasamajorbenefit.12

In order to ensure that thebenefits from implementing good corporate governance

are understood in theory and also translate into practice, all relevant stakeholders

should focus on building the business case for good corporate governance by

encouraging targeted seminars and workshops for directors and managers on

corporategovernance. Banksandcompaniesinturnshouldencouragetheirdirectors

andseniormanagerstoattendsuchevents.

ii. Implementingcorporategovernance:practicevs.theoryTableC1andFigureC5highlightthatwhilebanksandlistedcompaniesstatethat

corporategovernancematterstothem,fewcancrediblyclaimtohavingimplemented

broadscalereforms. Infact,notasinglerespondenthadappliedall32indicatorsof

whatcouldreasonablyqualifyacompanyasafollowingbestpracticeandonlyfiverespondents or 3% couldbe deemed to follow good practice, having implemented

between 1623 indicators (see Section E.II for the complete list of indicators). The

great majority of companies, 92% in all, fall under the emerging practice or

improvedpracticesections.

12 Moxey,P.(2004),CorporateGovernanceandWealthCreation,ACCAOccasionalResearchPaperNo.37.

TableC1:Corporategovernanceindicators


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Page16of85

FigureC4:Bestpracticeindicatorsandlevels

According to Figure C6 banks follow better governance practices than listed

companies. This is unsurprising, given the fact that banks are typically highly

regulated,

with

specific

central

bank

circulars

and

regulations

on,

for

example,

risk,

internal controls, disclosure and evenboard composition. Interestingly, results for

bothbanksandlistedcompaniesfollowasimilartrend,withallrespondentsscoring

relativelyhigh(50%andabove)ondisclosureandtransparency,aswellasthecontrol

environment,both of which are typically codified in laws and regulations, while

respondentsfailedtobreakthe50%thresholdfortheotherindicators,namelyboard

practices (47%), shareholder rights (42%) and commitment to good corporate

governance(40%).

No.ofindicators

followedLevelofpractice No.ofrespondents %ofrespondents

07 Underdevelopedpractice 7 5%

815 Emergingpractice 78 51%

1623 Improvedpractice 62 41%

2431 Goodpractice 5 3%

32 Bestpractice 0 0%

TOTALSAMPLE 152 100%

FigureC5:Corporategovernanceindicators

7

78

62

5 0

0

10

20

30

40

50

60

70

80

Underdeveloped

practice

Emerging

practice

Improved

practice

Good

practice

Best

practice


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Page17of85

FigureC6:Implementingthefivepillarsofgoodcorporategovernance

0%

10%

20%

30%

40%

50%

60%

70%

80%

Aggregated Banks Listed companies

Aggregated 40% 47% 50% 65% 42%

Banks 44% 51% 56% 73% 50%

Listed companies 37% 45% 44% 58% 35%

Commitment tocorporate

governance

Board of directorsControl

environment

Transparency and

disclosureShareholder's rights

iii. RecognizinginternationalreferencepointsforgoodpracticeIt appears from the survey responses shown in Figure C7 that a great number of

respondents,inparticularlistedcompanies,didnotfollowinternationallyrecognized

reference points for good corporate governance, such as the OECD Principles of

Corporate Governance (OECD Principles), 25,6% among listed companies, while

57.5% ofbanks followed the Basel Committee on Banking Supervisions Guidelines

on Enhancing Corporate Governance for Banking Organizations (BCBS Guidelines).

Compliance with national codes of corporate governance, insofar as they exist,

appears more widespread. Again, awareness raising of the existence of these

principles, as well as efforts to adapt thesebest practices to the local circumstances,

maywellhelpimproveuponthesefiguresintheyearstocome.

FigureC7:Usinginternationalbestpracticesasabasisforreforms

iv. FormalizingcorporategovernancepoliciesandproceduresCorporate governance reforms are ultimately based on changes in behavior

commitment, integrity, objectivity, courage and vigilance, to name but a few

notablythoseofshareholders,directorsandmanagers. Suchbehavioralchangedoes

53,4%

13,7%

42,3%

38,5%

You country is

National Code of

corporate

governance

None

Banks

Listed Companies30,1%

57,5%

25,6%

2,6%

The OECD

Principles

The

recommendations

of the Basel

Committee on

Banking Superv


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Page18of85

Articlesofassociation Companygovernancecode Codeofethicsand/orconduct Chartersforthe:

- Generalassembly- Boardofdirectors- Boardcommittees- Executiveboard

Policiesandprocedureson:- Dividends- Informationdisclosure- Riskmanagement&internalcontrols- Internalaudit- Compliance

Termsofreferencefor:- Chiefexecutiveofficer- Chieffinancialofficer- Headofinternalaudit- Com an secretar

Fi ureC9: Whattoformalize

nottypicallyoccurovernight. Cultureisprocessovertime.13 Andsoexplicitchanges

toacompanysgovernancepolicies,proceduresandprocessescanpositivelyaffectits

corporategovernancecultureovertimeandwithitthebehaviorofitsagents.

Figure C8 demonstrates that while most companies choose to use bylaws to

formalize their corporate governance practices, the use of a companylevel code of

corporategovernance(36.5%)orcodeofethics(49.3%)isnotwidespread.

FigureC8:Formalizingcorporategovernance

36%

36%

37%

53%

75%

38%

64%

36%

60%

78%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

CompanyCodeofcorporategovernance

CodeofEthics

Statement ofadherencetoNationalorInternationalCode

CharteroftheBoardofdirectors

byLaws


Didyouknowthatin2004,96%oftheFORTUNE1,000companiesintheUSstated

that theirboard, had written guidelines on corporate governance (compared with

71%in2002)? Thepracticeisalsogainingbroaderacceptanceinothercountries,such

as in France where 54% ofboards have adopted formalboard guidelines in 2004,

comparedto36%in2003.14

The adoption of new and periodic

revision of existing corporate governance

documentsconstitutesanimportanttime

commitment from the board and senior

management. Nevertheless, policies and

proceduresshouldbedraftedandkeptup

to date, as they play an important role in

the daytoday conduct of the business

andinformingthecultureofthebusiness.

Indeed, as well as supporting the

consistent application of policies,

procedures and internal controls, written

documentation helps banks and

companies allocate responsibilities and

authorities; reinforces accountability in

the event of performance or compliance

failure; and improve upon internal and

externalcommunication.

Theprocessofreviewingandupdatingneedstobeintegratedintothejobdescription

of the designated corporate governance champion. Figure C8 contains a

comprehensive list of policies and procedures that a company may well wish to

13 ByPeterDrucker.

14 31stAnnualBoardofDirectorsStudy,Korn/FerryInternational,2004.


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Page19of85

codify to ensure for effective and efficient decisionmaking and communication

acrosstheorganization.

Banks and listed companies may find it beneficial to publish their corporate

governance code, board and committee charters, and codes of conduct on their

website, as well as references to these in the annual report. Institutional investors

and ratings agencies are looking increasingly at the state of a banks corporate

governance when making their assessments. Published information is frequently

theironlysourceofcomfort,shortofdirectlyquestioningthebankorlistedcompany.

Did you know that ethicalbreachesby management or employees caused 37% of

highprofilebusiness failures in Europe? A recent study of 60 European cases of

formalbankruptcy or stock price free fall shows this remarkable impact of ethical

lapses.15 Inalargenumberofthesecases,adominantshareholderormanagerwith

big ambitions acted unethically, and his/her actions went unchallenged by the

companyandbytheboard. Formalcorporategovernancecodesandcodesofethics

can help guard against unethicalbehavior in companies. A formal performance

reviewofthe CEObytheboardofdirectors canalso helprootout ethical problems

beforetheyleadtobusinessfailures.

Finally, it is important not to confuse substance with form. Directors and senior

managers do not simply go through the motions and follow the form of good

corporate governance; they needs to understand their proper roles and

responsibilities, and act in accordance with the precepts of good corporate

governance. In the end, corporate governance is as much aboutbehavior as it is

aboutprocessesandprocedures.

v. AssigningresponsibilityforcorporategovernanceJust under half of surveyed banks (47%) and listed companies (49%) assign the

responsibility for corporate governance policies to the boardinline with good

practice.

The boards responsibility does not, however, end just by drafting the general

corporate governance policybut also in monitoring its compliance. Indeed,best

practice calls forboards to create corporate governance committees and task such

committeewithevaluating,planningandoverseeingtheimplementationofcorporate

governance reforms. Only 13% of listed companies and 10% ofbanks have such

corporategovernancecommittees;18%oflistedcompaniesand16%ofbanksdonot

assignthisresponsibilitytoanycorporatebodyorperson.

15 Classification and Analysis of Major European Business Failures, Maastricht Accounting, Auditing & Information

ManagementResearchCenter,RSMErasmusUniversity.October2005


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Page20of85

FigureC10:Assigningresponsibilityforcorporategovernance

49%

5%

13%

1%6%

3% 4%

18%

47%

3%

10%7%

10%5%

3%

16%

0%

10%

20%

30%

40%

50%

60%

TheBoardof

directors

The

Chairmanof

theBoardof

directors

Corporate

governance

Committee

oftheBoard

ofdirectors

The

Corporate

Secretary

TheChief

Executive

Officer/

General

Director

The

Compliance

Officer

Other Noonein

particular



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Page21of85

Figure C10 reveals that three important figures do not appear to play a role in

developing, implementing and monitoring corporate governance improvements.

Indeed, only a small minority of banks and companies involve the CEO, board

chairman and company secretary in developing corporate governance frameworks.

Alldo,however,haveanimportantroletoplay.

Role of CEO and chairman: The CEO and board chairman generate theleadershipanddriveessentialforcorporategovernancereformstosucceed. This

issometimesreferredtoasthetoneatthetop. Bestpracticeisforthechairman

and CEO to put corporate governance issues on the boards agenda, and

encourageafrank and opendiscussion. ThechairmanandCEOshouldseekto

educate board members on the importance of corporate governance, on its

benefits,andtherespectiverolesofvariousparties. Theyshouldstartaprocess

of evaluation, assessment and improvement. This process should become

iterative so that good corporate governance processes and proceduresbecome

ingrained.

Role of company secretary: Best practice is to provide resources and assignresponsibility to a corporate governance champion, ideally to a professionalcompany secretary (or for smaller firms the legal counsel who may double as

company secretary), who should be made responsible for developing,

implementing and periodically reviewing corporate governance related

documentation, under the supervision of the CEO and board through its

chairmanorcorporategovernancecommittee. Thecompanysecretaryservesas

the focal point for communications with and between the board, senior

management and thebanks shareholders, and acts as the chief advisor to the

boardonallcorporategovernancematters. (Moreinformationontheroleofthe

companysecretarycanbefoundinSectionC.II.d.onpage33).

Didyouknowthatasurveyof400companiesintheUSrevealedthatthecompany

secretary is responsible for compliance and governance, and that 16% even havecreatedthepositionofchiefgovernanceofficer?16

vi. UnderstandingbarrierstoreformFigureC11showshowimportantitistotrainorimpartcorporategovernanceknow

how to assist companies in implementing corporate governance reforms. 53% of

banks and 38% of listed companies stated that the mainbarrier to implementing

corporate governance is a lack of qualified specialists. Similarly, 47% ofbanks and

43%oflistedcompaniescitedalackofinformationandknowhowasmainbarrierto

implementcorporategovernanceis,sinceansweredinthatdirection.

FigureC11:Barrierstoimplementingcorporategovernance

16 A survey of 400 corporate secretaries, general counsels and other governance professionals conducted in 2005by the

SocietyofCorporateSecretariesandGovernanceProfessionals.


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Page22of85

43%

38%

19%

10%

8%

23%

5%

4%

47%

53%

31%

10%

7%

13%

7%

1%

0% 10% 20% 30% 40% 50% 60

Lackofinformation/knowhow

orporategovernance isalowpriority incomparisontoothertasks

Expenditureoncorporate governanceissuesyieldspoorreturn

Thelocalcorporate legislationiscontrarytotheinternational

standards


Regulators should consider whether to strongly recommend or mandate corporate

governancetrainingforallindividualwhoserveonaboard. Topreventregulatory

actioninthisarea,banksandlistedcompaniesshouldencouragetheirdirectorsand

senior managers to undertake training on corporate governance and other related

topics, such as for example on finance and accounting or risk management.

(Additional information onboardroom training canbe found in Section C.II.d. on

page39).

vii. Lookingahead:prioritiesforcorporategovernancereformsThe

following


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Page23of85

FigureC12depictsthethreepriorityreformareasthatbanksandcompaniesintend

toimplementinthefuture:(i)toestablishboardcommittees;(ii)toimplementIFRS;

and (iii) to draft a companylevel corporate governance code. In particular the last

pointisanexcellentstartingpointforcorporategovernancereforms,asitallowsthe

companytodefineitsownuniquesetofcorporategovernanceprinciples.


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Page24of85

FigureC12:Corporategovernancereformpriorities

Of note is that an important percentage of listed companies are interested in

nominating independent directors to the board (49%), as well as introducing

proceduresonconflictsofinterestandrelatedpartytransactions(43%),bothofwhich

arekeyelementstoaneffectivecorporategovernanceframework,whereasonly23%

respectively26%ofbanksplanondoingso.

42%

23%14%

34%

49%40%

45%

21% 18%

29% 29% 26%

11%

52%

49%

23%

36%

51%

40% 31%

34%

25%

39%30%

43%

18%

Implement

International

Accounting

Standards

Introduce

independent

directorsto

theBoardof

directors

Establish

Corporate

Secretary

position

Implement

remuneration

systemfor

executives

Establish

Board

committees

Approvea

corporate

governance

Code

Seekfull

corporate

governance

plan

TrainBoard

memberson

corporate

governance

issues

Seek

consultancy

onspecific

corporate

governance

issues

Establish

General

Shareholder

Meeting

procedures

Establish

Boardof

directors

Charter

Establish

conflictof

interest and

relatedparty

transaction

None

Banks ListedCompanies


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Page25of85

FigureC13:Settingcorporatestrategy

93%

21%

4%

87%

30%

4%

0%

20%

40%

60%

80%

100%

Board CEO GMS

Banks Listedcompanies

II. ImplementingGoodBoardPracticesWhenyousweepthestairs,youalwaysstartfromthetop.17

Theboardiswherekeycorporategovernanceissuesconverge. Theboardisresponsible

for strategic guidance and oversight of management, and functions as a trustee for

shareholders. These are important responsibilities, and the meansby which theboard

organizes itself will be an important factor in determining how well it fulfils its

responsibilities. A professional, independent and vigilantboard is essential for good

corporate governance. Ultimately, theboard cannot substitute for talented professional

managers.Norcanitchangetheeconomicenvironmentinwhichacompanyoperates. It

can, however, influence the companys performance and sustainability through its

guidanceto,andoversightofmanagement.

i. TheroleoftheboardAlthough specificboard authorities will varyby countrybased on legal traditions,

virtually all internationalandnationalcodes ofcorporate governanceagree that the

overarching role of theboard is to strategically guide and oversee management, as

wellastoensurethatarobustcorporategovernanceframeworkisinplace.

a. TheboardsroleinreviewingandapprovingcompanystrategyAn overwhelming majority of respondents (93% of banks and 87% of listed

companies, see Figure C12Error! Reference source not found.) stated that the

board was responsible for setting company strategy. The process of setting

strategyisalsoassumedbytheCEOinalmostaquarterofthebanksandlisted

companies surveyed (21% and 30%

respectively).

Managers with their industry

a corporate governance survey of listed companies and banks across the middle east and north africa

Documents