Corporate Governance Enforcement in the Middle East and North Africa

The following post comes to us from Alissa Kole Amico, corporate governance project manager for the Middle East and North Africa at the Organization for Economic Co-Operation and Development (OECD), and is based on an OECD Corporate Governance Working Paper by Ms. Amico; the complete publication is available here.

As an echo of the last financial crisis, the two themes that have arguably dominated the corporate governance debate globally are investor activism and corporate governance enforcement. Recent years have seen by all accounts the highest rates of institutional investor activism on a range of issues such as executive remuneration, non-financial disclosure and board composition, and at the same time, increased oversight and enforcement. Stewardship-oriented initiatives and rigorous enforcement activity by securities but also banking sector regulators have seen a level of heightened interest in Europe and North America, and to a lesser extent in emerging markets.

Against this global landscape, the Middle East and North Africa (MENA) region is especially notable by the absence of shareholder engagement by institutional investors, which arguably places a greater burden on regulators to enforce existing laws and regulations which have grown significantly over the past decade. Beginning with the introduction of the first in the region corporate governance code in Oman in 2002, all but one country in the Arab world now have codes and governance recommendations, accompanied by additional recommendations contained in companies and securities laws. Some of these, such as the recently revised Kuwaiti companies law, contain detailed governance requirements and provide wide ranging—by regional and international standards—enforcement powers not only to the Capital Market Authority, but also to other regulatory bodies.

While the level of sophistication of national governance frameworks varies, it is undisputable that they are now well enshrined in the legislation and recommendations in the region, at least in countries with more developed capital markets. Against the background of these increasingly developed legal and regulatory frameworks in the region, the focus of the corporate governance debate in the region over the past 3-5 years has shifted to the implementation and enforcement of these requirements. Whereas compliance oriented services in the corporate governance space have grown, the mentality shifts necessary to introduce substantive changes in companies’ governance practices have been lagging, leading to the perception in the investor community that the region’s companies lack transparency.

Recent trends which include the upgrade of Qatar and the United Arab Emirates to the emerging market status in 2014, the anticipated opening of Saudi stock exchange (Tadawul) to foreign investors, and revolutions in Egypt and Tunisia which have unseated established alliances and elites, have all revealed the interest of shareholders and the general public in enhanced corporate governance oversight and enforcement. The evidence to this claim lies in the growing number of complaints filed with the securities regulators for investigation, especially in Tunisia and Egypt, where allegations of crony capitalism in a number of companies, including in some listed companies, were made.

In Egypt, following the disposal of the Mubarak government, the Egyptian stock exchange moved to require listed companies to make disclosures about their dealings with entities and persons under investigation to the exchange and the regulator. In 2012, the Egyptian Financial Services Authority (EFSA) reported to have investigated over 400 complaints from the public. In Tunisia, where investigations uncovered a wide spread abuse of public and private property by the Ben Ali family and elites associated with the regime, the securities regulator (Conseil de Marché Financier) has intervened to freeze shareholdings in some companies, facilitating their confiscation.

Increased public enforcement activity can also be seen in the larger markets in the region, in the Gulf Cooperation Council Countries. The Saudi securities regulator investigated 288 cases—20% disclosure related and 12% arising from other corporate governance breaches—out of the total 800 investor complaints received in 2012. The Dubai Financial Services Authority has also issued a number of sanctions related to insider trading, market manipulation and other governance breaches and published details of investigations and sanctions publicly. Earlier this year, it also conducted and published a first in the region corporate governance review of companies in its jurisdiction. Overall, available evidence demonstrates a growing level of public enforcement in the region, but also highlights that it is largely focused on disclosure practices and is often not accompanied by serious fines or other mechanisms that would allow regulators to establish serious precedents.

In addition and somewhat against global trends, there has been almost no evidence of private enforcement in the region either against executives, board members or shareholders. This vacuum in private enforcement in the region can be attributed to a variety of factors including notably the lack of a litigation culture, the emerging understanding by investors of laws and regulations empowering them to litigate, as well as weak definition of directors’ duties and liability. Issues addressed by private enforcement actions are in the region typically dealt with away from the public eye without recourse to regulators, shareholders or courts. In principle though, there has been a move by a number of large blue chip companies to establish an investor relations function and some regulators such as the Emirates Securities and Commodities Authority, have gone so far as to mandate all listed companies under its oversight to establish one.

A review of private and public enforcement activity in the region undertaken for this report highlight a number of trends and opportunities for better public and private corporate governance enforcement going forward. Fundamentally, it implies a review of codes, laws and regulations bearing on governance of listed companies to ensure coherence among them as some counties have conflicting requirements contained in the code on the other hand, and the companies law, on the other. Codes should be reviewed, and indeed are starting to be reviewed in Oman, Egypt and other countries, with a view to reflect relevant lessons learned from the global financial crisis and some regional economic developments, particularly with respect to risk management and definition of director duties and independence criteria, which remain imprecise in a number of countries.

The legal powers of securities regulators, as well as their own governance and accountability also merit further reflection, and indeed, some exchanges and securities regulators have moved to introduce codes of ethics and to transparently publish their funding sources and their record of enforcement activity. The technical capacity of regulators to review public complaints and investigate complex cases related to for example insider dealing, should be reinforced. In addition to the supervision and enforcement departments established within securities regulators, high level disciplinary committees could help review and decide on important cases. The overall independence of regulators—both budgetary and political—is of course a crucial condition to empowering them while the capacity of institutional investors in MENA markets to engage with their investee companies is growing.

The full paper with recommendations is available from the OECD’s website: Amico, A. (2014), “Corporate Governance Enforcement in the Middle East and North Africa: Evidence and Priorities”, OECD Corporate Governance Working Papers, No. 15, OECD Publishing. DOI: 10.1787/5jxws6scxg7c-en

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One Comment

  1. Abimbola
    Posted Monday, October 13, 2014 at 5:30 pm | Permalink

    Interesting and insightful perspectives from MENA. We need more reports of advancement in the practice of corporate governance in Africa, especially West and East Africa.

    Such will enhance our attractiveness to investors, help to build sustainable organisations and prioritise the resource allocation by regulators and other supporting institutions. The development of board leadership also depends on such “feedback”.