Chapter 1. Overview of corporate governance in MENA

A strong corporate governance framework is essential for MENA economies as they strive to promote growth and build prosperous societies. The G20/OECD Principles of Corporate Governance, the OECD Guidelines on Corporate Governance of State-Owned Enterprises and OECD Gender Recommendation are important references for building such a framework. This chapter provides an overview of the main findings and policy options in the successive chapters. It first gives a snapshot of the overall economic situation in MENA, then addresses each of the chapters on access to finance and capital markets, improving transparency and disclosure, achieving gender balance in corporate leadership and state ownership in MENA.

    

1.1. Introduction

A strong corporate governance framework is essential for MENA economies as they strive to promote growth and build prosperous societies. The G20/OECD Principles of Corporate Governance stress that sound corporate governance supports economic efficiency, sustainable growth and financial stability (OECD, 2015a).

At present, MENA corporate governance policies and practices could be further aligned with international standards to attract investors and contribute to economic development.

Corporate governance challenges in the region include: concentrated ownership dominated by families and the state, underdeveloped capital markets, the need for a more transparent business culture and modest participation by women in corporate leadership.

This report reviews the corporate governance landscape across the Middle East and North Africa region and proposes pathways for decision makers to build a stronger corporate governance framework to support competitiveness and growth.

It examines why corporate governance matters for the region and why it is important to build a framework that: promotes capital market development for growth companies, enhances transparency and disclosure, supports women’s participation in corporate leadership and improves the corporate governance of state-owned enterprises.

This report was prepared by the MENA-OECD Working Group on Corporate Governance in co-operation with representatives from the MENA jurisdictions under review: Algeria, Bahrain, Djibouti, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestinian Authority, Qatar, Saudi Arabia, Tunisia, UAE and Yemen.

International experiences in developing sound corporate governance policies and examples of good practices are presented to highlight possible avenues for reform that could be considered by MENA policy makers and practitioners. Three internationally recognised standards provide a benchmark: the G20/OECD Principles of Corporate Governance (OECD, 2015a), the OECD Guidelines on Corporate Governance of State-Owned Enterprises (OECD, 2015b), and OECD Gender Recommendation (OECD, 2017a).

1.2. Overall economic situation in MENA

The MENA region is economically diverse despite its common language and shared history. Gross domestic product (GDP) per capita varies widely, from high levels in the Gulf countries, with their wealth of natural resources and relatively small populations, to lower levels in other areas of the region. In 2017, for example, Qatar’s GDP per capita was 110 times that of Yemen.

The region’s overall GDP was USD 2.37 trillion in 2017, representing only 3% of global GDP (Figure 1.1) (IMF, 2018). The total population stood at 353 million in 2017, ranging from under 1 million in Djibouti to 97 million in Egypt (World Bank, 2018).

Figure 1.1. The size of MENA economies, 2017
(GDP, current prices, USD billion)
picture

Note: The Palestinian Authority is excluded due to a lack of comparable data.

Source: IMF World Economic Outlook Database (April 2018).

Over the past decade, oil exporters have benefitted from high oil prices and used the proceeds to modernise infrastructure and create employment (Fasano-Filho and Iqbal, 2003). In 2014, oil accounted for more than 60% of total exports in oil-exporting MENA economies, with the exception of UAE (IMF, 2016a). As a result, economic linkages among countries in the region mean that non-oil-exporting MENA economies also benefitted from oil revenues. This benefit came in the form of investments from oil-exporting economies and had knock on effects on a range of activities including tourism, which in turn bolstered the labour market.

However, the sharp fall in oil prices in late 2014 resulted in deteriorated economic conditions, leading to higher fiscal deficits (Table 1.1).

Table 1.1. Key economic indicators for the MENA region, 2000-2017

 

Average 2000-2014

2015

2016

2017

Real GDP (annual growth, %)

5.1

3.2

3.1

1.7

Current account balance (%)

10.6

-5.1

-6.1

-1.4

Overall fiscal balance

4.7

-10.1

-11.3

-6.2

Inflation p.a. (annual growth, %)

4.7

4.6

4.0

5.8

Note: The indicators group Algeria, Bahrain, Djibouti, Egypt, Iraq, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Palestinian Authority, Qatar, Saudi Arabia, Syria, Tunisia, UAE and Yemen, as well as Somalia and Sudan.

Source: IMF Middle East and Central Asia Regional Economic Outlook.

In addition to difficult economic conditions, ongoing political conflicts have led to weaker investor confidence in the region. Foreign direct investment has also declined since the 2008 global financial crises and the 2011 Arab Spring (UnctadStat, 2017).

1.3. Facilitating access to finance and capital markets

Good corporate governance helps decrease capital costs and supports access to capital for corporations (OECD, 2015a). Although MENA economies are at different stages of capital market development, common features can be identified in the region.

Access to finance is a constraint on the development of the private sector, especially for small and medium-sized enterprises (SMEs) and growth companies1, due to the region’s high concentration of banking intermediation, high collateral requirements, limited sectoral diversification and high share of big companies in capital markets.

MENA banking systems dominate the region’s economic landscape, with bank deposits in 2015 accounting for 80% of GDP in the region, compared with a global average of 50% (World Bank GFDD, 2018).

The average private sector credit-to-GDP ratio in the region is comparable with peer economies, with the exception of the Gulf Co-operation Council (GCC) economies. In those economies, average banking intermediation, as measured by private sector credit to GDP, was 54% for 2011-2015, substantially below peer countries (78% for high-income economies).

The size of MENA stock markets, at 1.42% of world market capitalisation in 2017, is very low considering that the region contributes 3% to global GDP. However, stock market capitalisation varies widely among MENA economies, from 78% of GDP in Qatar and 66% in Saudi Arabia to 22% in Tunisia and 19% in Egypt. As of 2017, equity markets in MENA (excluding Djibouti, Libya, Mauritania and Yemen) had 1 456 listed companies, with a market capitalisation of USD 1 128 billion.

Deep and efficient capital markets could help to improve access to corporate finance. Studies suggest that there is a positive link between strong corporate governance and capital market development. A better corporate governance framework promotes deeper, more liquid and more efficient capital markets (IMF, 2016b).

There is also evidence that company-level corporate governance quality can enhance both a company’s ability to access finance and its financial performance (Haque et al., 2008; IMF, 2016b), and that companies with better governance have higher market valuation (Cheung et al., 2014).

The Hawkamah/S&P Pan Arab ESG Index, which tracks the top 50 listed companies in 11 MENA markets that have superior performance according to environmental, social and governance (ESG) factors, has outperformed the pan Arab S&P Index since its launch in 2011. This result suggests that investors have taken corporate governance practices into account when deciding where to invest. A large number of MENA companies are also listed abroad, where they are generally subject to higher disclosure standards (GOVERN, 2016).

A sound corporate governance framework facilitates capital market development over time. Investors need assurance that their rights will be protected when they invest in capital markets. Similarly, companies will not be willing to use capital markets without clear responsibilities defined by the rule of law (OECD, 2015c).

This report finds that MENA’s capital markets do not reflect the potential of the region’s economies. In addition to the factors noted above, the total value of growth company initial public offerings (IPOs) and low sectoral diversification in equity markets suggest that a limited number of companies have access to capital markets.

Bank lending in the region is channelled to large companies, particularly state-owned enterprises (SOEs) and large industrial firms, leaving SMEs and growth companies deprived of bank credit.

The reluctance of family-owned companies to disclose information or dilute their shares by going public affects capital market development in the region. Restrictions on foreign ownership are also a key obstacle to greater foreign investment in the region.

Capital market development would increase opportunities for growth companies to access finance and contribute to the region’s overall economic development. Better corporate governance is crucial in this regard.

Sound corporate governance can positively impact company performance, access to finance, cost of capital, company valuation and the performance of capital markets. Consequently, it promotes the development of deep and broad capital markets, which are essential for growth companies, and this in turn fosters economic development.

1.4. Improving transparency and disclosure in MENA

Transparency and disclosure in listed companies is a key component of the framework needed to promote private sector development in the MENA region and therefore a crucial issue.

Transparency and the disclosure of accurate, timely and relevant information form the basis for efficient capital allocation and a sound capital market. Assuring that investor rights are protected attracts domestic and foreign investors to participate in the capital market by creating an environment of trust, transparency and accountability.

Better disclosure lowers the cost of capital (Barth et al., 2013), reduces monitoring costs, heightens investor confidence and strengthens market competitiveness (Leuz and Wysocki, 2016). To attract equity investment, economies need a sound corporate governance framework that requires credible disclosure.

The G20/OECD Principles of Corporate Governance call for a country’s corporate governance framework to ensure timely and accurate disclosure on all material matters regarding the corporation, including its financial situation, performance, ownership and governance.

This report finds that although MENA economies have taken steps to improve corporate transparency and disclosure, challenges persist in the region.

The majority of listed MENA companies have concentrated shareholders in the form of sovereign investors or founding owners, such as families (Amico, 2014). Ownership structures can affect transparency and disclosure, with the quality of voluntary disclosure often decreasing when ownership is more concentrated.

Two areas are particularly challenging for MENA economies: disclosure of beneficial ownership and disclosure of related party transactions and their terms.

Regulations on beneficial ownership in the region generally require major shareholders and directors of listed companies to disclose their ownership, in line with global good practice. However, despite improvements in regulation, challenges persist, especially in relation to the identification and disclosure of ultimate beneficial owners.

Definitions of related party transactions have improved, but requirements on the method and timing of disclosure vary across the region, and many MENA economies have not adopted thresholds for disclosure and shareholder approval.

In order to strengthen the effectiveness of their corporate governance frameworks, MENA economies should continue their reform efforts with respect to transparency and disclosure based on international standards and good practices.

Policy makers and companies should strive to ensure full and proper disclosure of ownership and related party transactions, effective supervision and enforcement of disclosure regulations, and greater shareholder engagement through stronger protection of minority investors’ rights. The desirable mix of legislation and voluntary codes should be defined according to each economy’s distinctive features.

Complementing the efforts of policy makers, companies can take immediate action to improve their disclosure practices. In order to attract investors to the region, company websites need to be updated regularly, with more reports made available online in English, including corporate governance reports.

Such efforts can lead to greater investor confidence, stronger market reputation and fluid access to finance, thus contributing to the overall growth and development of the region’s economies and companies.

1.5. Achieving gender balance in corporate leadership

Advancing gender balance at corporate decision-making levels has become a goal for companies around the world. Increasing gender balance in corporate leadership roles is a priority for OECD countries, and most have initiated policies to promote gender balance on company boards and in senior management.

There is strong impetus for MENA economies to embrace initiatives that empower and promote women in the corporate sphere. Women’s leadership is increasingly seen as a cornerstone for building competitive, value-creating companies and, by extension, resilient, inclusive economies.

The introduction of measures that aim to promote greater gender balance has helped MENA economies to align constitutional guarantees of equality and equal opportunity with international commitments. However, not all MENA economies have seen results in corporate practice, and closing the gender gap in corporate decision-making roles remains a challenge in the region.

This report finds that corporate governance codes in MENA economies rarely include gender diversity; that the region lacks targeted measures to encourage gender balance in corporate leadership; and that company and securities laws generally do not mandate the disclosure of board composition and senior management by gender.

Moreover, MENA legal frameworks and social norms, including family codes, play a role in driving gender gaps in the labour market, including at the corporate leadership level.

Galvanising change will require increased engagement between MENA governments and the private sector to develop an environment conducive to greater gender balance on boards and in top-level executive positions.

The G20/OECD Principles of Corporate Governance encourage countries to pursue a range of policies and initiatives to enhance gender diversity on boards and in senior management. Policies can include quotas or targets, reporting requirements, voluntary disclosure by companies of gender composition, increasing board size and actively recruiting qualified women to replace outgoing male board members. These policies can be driven by governments, regulators and companies with measures adapted to specific contexts.

Goals and policies can be underpinned by strategies aimed at fostering gender balance throughout the company and the career cycle of women. Good practice examples that have been used in the region include leadership training and mentoring programmes.

A key challenge in MENA is the difficulty of assessing women’s participation in corporate leadership due to limited disclosure and a lack of reliable data. In order to design appropriate policies, more and better-quality data are needed at the national and regional levels and from companies.

Sustainable measures are required to shift negative attitudes surrounding the ability of women to lead and to accelerate their path to leadership. A “whole of company” diversity framework and conducive human resource policies in areas such as recruitment are needed to create an ecosystem that facilitates women’s corporate leadership in the region.

1.6. Enhancing governance of state-owned enterprises

State-owned enterprises are fundamental elements of the MENA region’s economic architecture. They operate across a wide range of sectors, are strategically important and often provide public services to citizens.

SOEs can contribute alongside private enterprises to well-functioning economies and societies if they are well governed and efficient. Transparency on their operations and objectives is crucial for maximising their economic and societal contributions.

State ownership gives rise to unique governance and regulatory risks that can prevent SOEs from creating optimal value for the economy and society. For example, if a state body is simultaneously responsible for exercising ownership rights in an SOE and regulating the competitive market in which it operates, this can lead to decisions being taken in the interest of a single enterprise at the expense of market efficiency and competitiveness.

This report finds that the exercise of state ownership remains dispersed across the public administration in the majority of MENA economies. Ministries in many cases simultaneously exercise ownership and regulatory roles, which can lead to conflicting objectives.

As markets liberalise and are opened to greater competition with private companies, and as the region’s SOEs become increasingly active in trade and investment abroad, concerns may arise about how their competitive conditions at home impact the global level playing field.

Moreover, information on SOEs is limited in the region. The scarcity of data on their objectives and performance limits MENA governments’ ability to implement informed ownership policy reforms. Without transparency on SOE operations, it is difficult to make the state and corporate boards accountable for their performance.

The lack of available information on SOEs extends to their identity: information on which companies are state-owned is often not available to the general public, who are the ultimate “shareholders” of SOEs. Elucidating MENA’s state ownership landscape through greater transparency could inform improvements in state ownership practices and ultimately help to ensure that SOEs operate efficiently, transparently and on a level playing field with private companies. Furthermore, and although many MENA governments have taken measures in recent years to improve state ownership and governance practices, the report finds that there is scope for further professionalisation of state ownership practices. This could be supported by the development of harmonised corporate governance standards applicable to all SOEs.

The OECD Guidelines on Corporate Governance of State-Owned Enterprises, presented in Chapter 5, provide a blueprint for ensuring that SOEs operate efficiently, transparently and on a level playing field with private enterprises. As MENA governments consider undertaking policy and legislative reforms to improve the corporate governance of SOEs, this document can serve as a guidepost.

References

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, Paris, https://doi.org/10.1787/5jxws6scxg7c-en.

Barth, M.E., Y. Konchitchki and W.R. Landsman (2013), “Cost of Capital and Earnings Transparency”, Journal of Accounting & Economics, Vol. 55/2-3, pp. 206-224, Rochester, NY.

Cheung, Y-L. et al. (2014), “Corporate Governance and Firm Valuation in Asian Emerging Markets”, in Boubaker S. and D. Nguyen (eds.), Corporate Governance in Emerging Markets: Theories, Practices and Cases, Springer Verlag, Berlin Heidelberg.

Fasano-Filho, U. and Z. Iqbal (2003), “GCC Countries: From Oil Dependence to Diversification”, IMF Working Papers, International Monetary Fund, Washington, DC.

GOVERN (2016), What Role for Institutional Investors in Corporate Governance in the Middle East and North Africa?, The Economic and Corporate Governance Centre, Paris.

Haque, F., T.G. Arun and C. Kirkpatrick (2008), “Corporate Governance and Capital Markets: A Conceptual Framework”, Corporate Ownership and Control, Vol. 5/2, pp. 264-276, Virtus Interpress, Sumy, Ukraine.

IMF (2018), IMF World Economic Outlook Database (accessed April 2018).

IMF (2016a), “Economic Diversification in Oil-Exporting Arab Countries”, Report to Annual Meeting of Arab Ministers of Finance, International Monetary Fund, Washington, DC.

IMF (2016b), “Corporate Governance, Investor Protection, and Financial Stability in Emerging Markets”, IMF Global Financial Stability Report, International Monetary Fund, Washington, DC.

Leuz, C. and P.D. Wysocki (2016), “The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research”, ECGI Working Paper Series in Law, European Corporate Governance Institute, Brussels.

OECD (2017a), 2013 OECD Recommendation of the Council on Gender Equality in Education, Employment and Entrepreneurship, OECD Publishing, Paris, https://doi.org/10.1787/9789264279391-en.

OECD (2017b), Report on the Implementation of the OECD Gender Recommendations, Prepared for the Meeting of the OECD Council at Ministerial Level, Paris, www.oecd.org/mcm/documents/C-MIN-2017-7-EN.pdf.

OECD (2015a), G20/OECD Principles of Corporate Governance, OECD Publishing, Paris, https://doi.org/10.1787/9789264236882-en.

OECD (2015b), OECD Guidelines on Corporate Governance of State-Owned Enterprises, OECD Publishing, Paris, https://doi.org/10.1787/9789264244160-en.

OECD (2015c), Growth Companies, Access to Capital Markets and Corporate Governance, OECD report to G20 finance ministers and Central Bank governors, September 2015, www.oecd.org/g20/topics/framework-strong-sustainable-balanced-growth/OECD-Growth-Companies-Access-to-Capital-Markets-and-Corporate-Governance.pdf.

UnctadStat (2017), Foreign Direct Investment: Inward and Outward Flows and Stocks, annual, 1970-2016 (database), United Nations Conference on Trade and Development, Geneva.

World Bank (2018), World Bank Open Data (database, accessed on 28 November 2018).

World Bank GFDD (2018), World Bank Global Financial Development Database.

Note

← 1. In the OECD capital market series work, ‘growth companies’ are classified as those with an IPO size of less than USD 100 million, combined with the Eurostat-OECD (2007) definition which describes growth companies as those with an average turnover or employee growth greater than 20% per annum over a period of three years.

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