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Corporate Governance in Arab Countries

Development of Corporate Governance Structures in Arab and MENA Countries

Diplomarbeit 2009 67 Seiten



1. Introduction
1.1. What is corporate governance?
1.2. Who benefits from good corporate governance?

2. MENA countries and their recent development
2.1. Corporate governance in the MENA countries - an overview
2.2. Hawkamah Institute for Corporate Governance in Arab countries

3. Implementing corporate governance: practice vs. theory
3.1. The survey
3.2. General findings
3.3. Still at the beginning
3.4. Board of Directors
3.4.1. Board Structure
3.4.2. Board size
3.4.3. Establishing board committees
3.4.4. Board meetings
3.4.5.One director, one board? Multiple Directorships
3.5. Managerial Labor Market
3.6. Executive Compensation
3.7. Risk Management
3.7.1.Internal controls
3.7.2.Internal audit
3.7.3. External audit
3.7.4. Audit committee
3.8. Transparency & Disclosure
3.8.1. What is being disclosed?
3.8.2. Any barriers preventing disclosure?
3.9. Shareholder rights

4. Family power in the MENA region

5. Women on boards

6. Conclusion

7. Literature

8. Figures

9. Charts

„Good Corporate Governance is Good Business.“

1. Introduction

1.1. What is corporate governance?

In today's business world we find many different definitions for the term corporate governance. The two most named and used ones in literature describe the term in a very detailed, and brief way. The first definition comes from the Organisation for Economic Co-operation and Development (OECD) and is defined in the following way:

„Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsiblities among different participants in the corporation, such as, the boards, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.“[1] The seond one is shorter and is briefly compared to the first one.

„Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.“[2] As we can see from these two definitions, corporate governance can be seen as a set of processes, customs, policies and laws which determine how a corporation is directed and controlled. Furthermore, it describes the relationships among all the stakeholders of a corporation. The principal stakeholders include the shareholders, management and the board of directors. Among the other stakeholders we can find e.g. employees, suppliers, customers, community, banks, environment; in brief: anyone who is dealing with the corporation.

A company which is dedicated to good corporate governance has well- defined and protected rights for their shareholders, a stable control environment, high transparency and disclosure as well as an empowered board. The company's and the shareholder's interests are perfectly aligned.

The following table gives the reader an overview of the five elements of a good corporate governance (Figure 1).

Figure 1: Five elements of good corporate govnernance

illustration not visible in this excerpt

Source: Hawkamah Institute (2008), A Corporoate Governance Survey, p.11

The elements in this table however do not necessarily represent everybody's opinion on corporate governance in business today. It is more than just sticking to some guidelines or rules. First of all we might ask ourselves „why is there a corporate problem anyway?“ Why does Adam Smith's invisible hand not create a proper solution to this problem? Should not be the market in charge of allocating resources in an efficient and appropriate manner?

Luigi Zingales (1998) defines a corporate governance system as „a complex set of constraints that shape the ex-post bargaining over the quasi-rents generated in the course of a relationship.“ 3 He refers to the initial contract as incomplete which means that not all possible occur or situations could possibly happen or result from certain actions from the parties and thus can not be covered in the contract because it would be either too costly or simply impossible. The result is that there is some room for bargaining. One has to distinct between decisions which have been made ex-ante (before the two parties entered a contract) and ex-post (when the quasi-rents will be divided). Zingales explains this by means of a machine example. Consider the purchase of a customized machine. Before the production starts, the producer and the buyer agree on certain agreements like final price etc. However, signing this contract does not end the relationship between the two groups. While producing, several incidents may happen which can change the price and costs of the production process. The relationship between the producer and the buyer represents a bilateral monopoly as they signed the specific contract. For the buyer, this machine probably has a higher value than on the market. The producer, however, has presumably the lowest cost to produce the machine. This difference between the two parties (what they generate together and what they could get from the market) describes a quasi-rent, which needs to be divided ex-post.4 A quasi-rent can be viewed as the[3] [4] difference between the earnings from an investment and the earnings from the next best investment possibility.

Recalling this example of the machine, the bargaining outcome will also be affected by other factors as first stated in the initial contract. For example, who is the owner of the machine while it is being produced? Is it costly for the buyer or the producer to delay the final shipment? Furthermore, an important role is played by the institutional environment: is the ability of the producer for producing this good known by future clients? All this makes up a governance system.

Zingales states two necessary conditions for the existence of a governance problem. The first one is that the relationship between buyer and producer has to create quasi-rents. If there were not any quasi-rents, there would not be any room for bargaining. The second requirement which has to be fulfilled is that these quasi-rents are not perfectly allocated ex-ante. There would not be any bargaining in case they were. Several governance mechanisms like the capital structure, allocation of ownership, takeovers, boards of directors etc. can be seen as processes where such quasi-rents are generated and distributed. Governance is not necessary in a world where future incidents or events can costlessly be put into a contract ex-ante.

This approach of incomplete contracts is a good example to describe the corporate governance of entrepreneurs. The allocation of ownership and the way of how the capital structure is chosen can be described through this approach. We find several efficiencies of such a governance system ex-ante as well as ex-post. The incentive to establish relationships with certain investment opportunities can be counted as an ex-ante advantage. Changing the conditions, which create some room for bargaining, can be seen as advantages for the second group.

It can be concluded that there still has to be done a lot of research and investigations on this topic, namely how such corporate governance mechanisms interact with each other or how takeovers affect the resulting quasi-rents.

1.2. Who benefits from good corporate governance?

Considering the two main definitions of corporate governance, the question arises who is interested in a good corporate governance or rather a good governed company? It seems rather logical that possible investors, who are interested to invest in a company, will choose firms which are stable and have a strong economic growth in order to get a return from their investments. A well-defined corporate governance code is desirable to all the stakeholders for very similar reasons.

- Investors are interested in companies with a good corporate governance since those firms exhibit a lower risk at expropriation. Well-governed companies can protect their shareholder's rights better and also offer a better assurance that the management of the firm is acting in the very interest of the company and all of its shareholders. Furthermore, well-governed companies outperform their competitors with respect to financial and operational performance and also provide a better long-term return on investment.[5]
- As the risks which are associated with the corporation decline with a better corporate governance, companies benefit. There are two reasons for that. First, the probability of„rent-seeking“[6] by managers is reduced. Second, good corporate governance reduces the cost of capital and consequently increases the firm value. The lower risk results from improved processes inside the corporation due to a better coordination of information and a improved decision-making process. This leads to a better performance.
- The public sector also benefits from corporate governance as it eases the development of stronger markets, lowers risk, and improves a country's ability to deal with investments - which helps to advance economic growth.
- All other stakeholders like banks, suppliers and employees profit from the better performance of the firm.

During the last years many researchers started to create indices for measuring the quality of corporate governance practices. These indices are then put in relation to the performance of the companies. Several commercial providers are now offering such services like corporate governance research and corporate governance ratings as the awareness on this topic increased due to the demand of institutional investors. In Europe, Déminor is providing investors with information like disclosure, board structure, governance practices of the Financial Times Stock Exchange (FTSE) Eurotop 300 index companies.[7]

Such providers also exist for other markets. Standard and Poor established such services for emerging markets, and Credit Lyonnais Securities Asia (CLSA) released corporate governance ratings for more than 490 companies in 25 countries. The results from a study which was carried out by CLSA in 2001 found a strong correlation between corporate governance and financial performance ratios.[8]

According to another survey from McKinsey[9] the premium investors would pay for a well-governed firm varies by country and region. The premiums in the MENA countries range from 29% (Egypt) to 30% (Morocco). Compared to those countries, the premiums in Europe are slightly lower (e.g. Germany 20%). There exist plenty of reasons why corporate governance has become such a relevant issue during the last two decades. First of all, we can notice a world-wide wave of privatization in the economy. Regarding this matter, one has to think about how the newly privatized companies should be controlled and owned. That's when corporate governance principles are inevitable. More and more households are saving money in order to invest it in equity. This had the consequence that a service industry came into existence that creates voting recommendations and exercises votes for the clients.[10]

Events such as the big financial crises in the past years or the collapse of big international companies like Enron in the US or Parmalat in Italy - due to corruption or deceptive practices - can shake the economies of countries to a huge degree. Fighting corruption needs constant efforts. Therefore it is very important to have proper solutions to fight such problems; through improving transparency and disclosure, accountability, and a good corporate governance. Good corporate governance is fundamental in guaranteeing a stable and well-growing economy. Schleifer and Vishny give a good explanation why corporate governance is important for the business and society: „Understanding corporate governance not only enlightens the discussion of perhaps marginal improvements in rich economies, but can also stimulate major institutional changes in places where they need to be made.“[11]

2. MENA countries and their recent development

illustration not visible in this excerpt

The term MENA stands for „Middle East North Africa“ and is often used in business writing. They represent an economically diverse group which includes states with a common culture and heritage. The MENA countries can be subdivided into 3 different groups. Countries which belong to the first group are called „Early Reformers“, because they are following economic reform programs since the 1980s. Countries like Egypt, Jordan and Morocco belong to this group.

The second group contains mainly oil-exporting countries like Bahrain, Kuwait, United Arab Emirates and Saudi Arabia. Due to the still rising oil price those countries achieved economic stability. Since 2000 they have also allowed foreign investments in their home market.

The last group contains all other countries whose economy is unstable due to political reasons (West Bank, Gaza, Iraq) or still in early development (Lebanon, Syria, Sudan, Libya). Security markets still do not exist or are of a very small size.[12]

Generally, it can be noticed that the financial sector in those countries primarily is a bank-based sector with still growing securities markets.

Stock exchanges are either controlled and supervised by government or by a securities regulator, as in Egypt and Oman.[13] As for 2007, the Gross Domestic Product (GDP) amounts to about 1,52% of the world's GDP. Market capitalization of all listed companies in the MENA region increased from about 20% in 2002 to more than 58% in 2007 (% of GDP).[14] For further details see the table below.

Figure 2: Overview GDP and market capitalization

illustration not visible in this excerpt

Source: (March 2009)

Many countries in the MENA region announced their commitment to introduce corporate governance to strengthen their market economy and to encourage further private investments in the future. The issue that a good corporate governance is essential for firms to sustain a stable and efficient growth will be discussed in a later chapter.

2.1. Corporate governance in the MENA countries - an overview

Most of the countries in the MENA region are in transition and on the way to market-based governance. Economic reforms have been undertaken in Egypt, Morocca and Jordan in the 1990‘s to move closer to a market economy model.[15] About 10 years ago, the concept of corporate governance was unknown in most of the countries in the MENA region. Due to the domestic war in Lebanon, the implementation of corporate governace in this country has not shown any progress for about 20 years. However, a big economic reform program started in the last years and focuses on the corporate sector.

Looking at the companies and corporations in these countries, it can be noticed that many large companies are often controlled by „family groups“ or individuals. They have at least one shareholder who owns more than 20% of the shares.

This fact can be considered as a major problem for the introduction of corporate governance principles because managers do not have the autonomy, flexibility and objectivity for monitoring all the processes inside the company and to follow its objectives. Moreover, many companies in the MENA region are privatized and state-owned. For example, in Egypt the state holds more than 20% of shares in the 20 biggest companies, and more than 50% in another 12 big companies listed on the exchange.[16] The basis for every corporate governance framework is taken from the company, civil and securities laws. Also the listing rules from the stock exchange regulations and the basic accounting standards are fundamental for the board and the management. Basically the corporate governance framework for those countries in the MENA region refer to two laws: the Corporate Law and the Capital or Securities Market Law.[17] One main aim of these mentioned laws is the improvement and enforcement of disclosure requirements.

In order to rise the awareness of the importance of corporate governance, many conferences and workshops have been held by many institutions in the Arab countries. So far these events made the implementation of corporate governance rules more attractive for the management of firms.

2.2. Hawkamah Institute for Corporate Governance in Arab countries

The international association Hawkamah Institute for corporate governance (Hawkamah)[18] - with its headquarters in Dubai - is an institution with the mission to promote good corporate governance in the Middle East, North Africa and Central Asia region, as well as assisting the countries in developing and implementing such sound and well-integrated codes adapted to the countries‘ needs and objectives. Hawkamah provides its services to all kinds of enterprises; namely from listed companies to banks, financial institutions, non-listed companies including family-owned enterprises as well as the public sector with a focus on state-owned enterprises.

The Hawkamah Institute works together with many other prominent institutions such as the Dubai International Financial Centre (DIFC), the International Finance Corporation (IFC) and the Dubai School of Government (DSG). Furthermore, Hawkamah is also fostering communication and policy dialogue both at regional as well as international level, either through seminars, workshops or conferences.

The Executive Director of Hawkamah is Dr. Nasser Saidi who is the former Minister of Economy and Trade and Minister of Industry in Lebanon. His aim is to back the establishment of the institute and to develop sound financial markets to improve the future economies for the Golf Coorperation Council (GCC) and the MENA region.

3. Implementing corporate governance: practice vs. theory

3.1. The survey

The Hawkamah Institute for corporate governance has carried out a survey in collaboration with the International Finance Corporation (IFC) on corporate governance of listed companies and banks across the Middle East and North Africa. The aim of the survey was to get more detailed information on the role of corporate governance in today's companies. In detail, the survey contained 57 non-listed banks, 65 listed banks and 922 listed companies from 11 MENA countries and so had the total number of 1044. Jordan was the country with the most participants in this survey (219 in total), Lebanon the one with the fewest (9 in total). Due to another survey which had been done by the Internation Finance Corporation (IFC), lebanese banks were not included in the survey of the Hawkamah institute.[19] Banks were divided into four different groups according to their amount of assets. Listed companies were also grouped - along sales - into four categories.

A detailed chart of all the countries which have been considered in the survey can be found at the end of the paper (chart 1).

Despite of the high number of questioned firms, only 155 companies did respond (74 banks, 81 listed companies). The countries which were finally included in the survey are Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Saudi Arabia, Tunisia, United Arab Emirates and West Bank & Gaza.

The major aim of this survey was to find out how important corporate governance is for these companies or rather how their current state according corporate governance is.[20] Furthermore, this survey should allow stakeholders to get an insight into the company's implementation of their corporate governance principles.

The following discussion is based on this survey and tries to give the reader an overview on today's development and state of corporate governance in the Middle East and North Africa region.

3.2. General findings

As mentioned before, good corporate governance codes are essential for a good working and stable firm performance. It is important that the interests of the stakeholders and the management are perfectly aligned to keep everyone happy.

The majority of the survey's respondents also see the implementation of corporate governance codes as important for their corporations (around 40%).[21] The results show that there is no big difference between listed companies and banks.

However, not all participants in this survey were able to give the correct definition of the term corporate governance consistent with common approaches - namely „a system by which business corporations are directed and controlled“. Many of the respondents mixed up the term corporate governance with the term corporate social responsibility (CSR) or corporate management. A fact that shows clearly that corporate governance is still not fully understood by many firms.

CSR tries to describe how companies set their business processes in order to achieve a positive impact on society.[22] It is about the commitment of a firm to behave ethically to improve the workers' life and the society in general. On the other hand, corporate management deals with the monitoring and controlling of a firm's performance using indicators such as revenues, Return on Investment (ROI) and other financial ratios.[23] These explanations show that both CRS and corporate management are both two distinct concepts which have to be considered separately from corporate governance.


[1] OECD Principles of corporate governance (2004): (November 2008)

[2] Shleifer and Vishny (1996), p. 737

[3] Zingales (1998), Corporate Governance, p. 3

[4] Zingales (1998), Corporate Governance, p. 2

[5] Gompers, Ishii and Metrick (2003): p.738

[6] In economics, rent-seeking refers to managers that seek gains by manipulating the environment rather than through productive behaviour.

[7] See for more information (March 2009)

[8] Further information can be found on the website (March 209)

[9] McKinsey's Global Investor Opinion Survey (2002): (November 2008)

[10] Becht, Bolton, Roell (2002), p. 4

[11] Shleifer and Vishny (1996), p. 738

[12] Corporate governance in Morocco, Egypt, Lebanon and Jordan (2003), p. 10

[13] Corporate governance in Morocco, Egypt, Lebanon and Jordan (2003), p. 11

[14] The World Bank, World Development Indicators (WDI), Online Database (December 2008)

[15] Maged Shawky Sourial (2004), p. 7

[16] Corporate governance in Morocco, Egypt, Lebanon and Jordan (2003), p. 22

[17] Corporate governance in Morocco, Egypt, Lebanon and Jordan (2003), p. 23

[18] For further information see (November 2008)

[19] The survey can be viewed under (November 2008)

[20] Hawkamah Institute (2008), Corporate Governace Survey

[21] Hawkamah (2007), Corporate Governance Survey, p. 15

[22] Mallenbaker (2007), CRS - What does it mean? - (November 2008)

[23] For a more detailed explanation see (December 2008)


ISBN (eBook)
ISBN (Buch)
1.9 MB
Institution / Hochschule
Universität Wien
2011 (Juli)
Sehr Gut
Corporate Governance MENA Hawkamah Arab Countries Arabic Enron Business scandals internal audit Board of Directors remuneration risk management transparency disclosure



Titel: Corporate Governance in Arab Countries