RIYADH: Unlike the case in advanced economies, where corporate governance has in recent years dominated the political and business agenda, only few Middle Eastern publicly-listed companies have corporate governance in place, albeit a number of governments are considering enforcing it.
Corporate governance is a set of systems, principles and processes about how companies are directed and controlled; it regulates the way boards manage the running of a company by its executives, and how board members are accountable to shareholders and the company. This has a direct influence on a company’s attitude, accountability and responsibility toward all stakeholders, including employees, shareholders, and customers alike. Superior corporate governance plays a fundamental role in strengthening the integrity and efficiency of financial markets. Inadequate corporate governance, however, undermines a company’s potential and at worst leads to financial difficulties and may even result in fraud. Well-governed companies usually outperform other companies and are able to attract new investors whose support can help finance further growth.
To ensure transparency in the corporate arena, good principles of corporate governance focus generally on publicly traded companies with the view to help governments improve the legal, institutional and regulatory framework that relate to corporate governance. Additionally, they provide practical guidance and suggestions for relevant entities such as stock exchanges, investors, corporations, and other entities that play a part in the process of developing good corporate governance.
Experiences derived from advanced and emerging economies demonstrate that no single framework for corporate governance is adequate for all markets, as rules and regulations vary greatly from one country to another, so the internationally recognized principles are not authoritarian or compulsory, but rather made as recommendations that each country can amend to suit their traditions and market conditions.
Whilst corporate regulations may lead in part to improve governance, which is mainly about how companies are directed and controlled, the prime responsibility for superior governance ought to lie within the company rather than outside it. For example, the balance sheet is the result of structural and strategic decisions and activities across the organization, from stock options to risk management, from the board of directors’ composition to the decentralization of decision-making process.
Crafting and introducing into practice effective corporate governance policies are important, but encouraging the right culture is paramount. Senior executives need to set the agenda, not least in ensuring board members feel at ease to participate in open and worthwhile discussion. After all, not all board members need to be finance or risk experts. The primary task for the board is to understand and approve both the risk appetite of a particular company at any particular stage in its evolution and the processes that are in place to monitor risk.
Considering the inverse relationship between innovation and conservatism, governance and growth, a good corporate governance can bring benefits to companies, but may impede growth. For example, strict corporate governance policies may negatively impact mergers and acquisitions deals as a result of the lengthening of due-diligence procedures, and compromise leadership’s ability to make prompt and effective decisions.
Fundamentally, there is a level of confidence that is associated with a company that is known to have good corporate governance. Transparent company governance policies are crucial, as long as information is made readily available to investors and shareholders. Beyond this, the market can deal with the rest, designating an appropriate risk premium to companies that have no or too few independent directors or too aggressive compensation policy, or cutting the costs of capital for companies that adhere to conservative accounting policies.
Corporate governance is known to be one of the criteria that foreign institutional investors are increasingly depending on when deciding on which companies to invest in. As far as corporate transparency is concerned, too few companies are genuinely transparent in the Middle East, thus the regional leaderships, board of directors as well as CEO’s, are encouraged to voluntarily design good corporate governance, that addresses the managements’ concerns over government regulation and strict internal procedures and how it could adversely impact their ability to manage their business effectively. Investors, board members, and CEOs have to recognize the need for trade-off between enhancing corporate reputation and delivering growth.
(Yahya Shakweh is a vice president at Advanced Electronics Company, Saudi Arabia. The views expressed in this article are the author’s personal opinion.)
