The Middle East and North Africa(MENA) region is an emerging marketin which corporate governance is seenas a relatively new concept. Indeedit is only in the last ten years that an Arabic word for corporate governance,
, has emerged. Despiteits infancy in the region, corporategovernance has been makingsigniﬁcant headway. Although it isdifﬁcult to predict the outcome of thecurrent turmoil – the ‘Arab Spring’ orthe ‘Arab Firestorm’– it has highlightedsome pressing demographic, political,governance and socioeconomicchallenges, which, if properlyaddressed, should lead to furthercorporate governance reform.
Overview of recent corporategovernance developments
The Hawkamah Institute for CorporateGovernance was set up in 2006 to helpbridge the corporate governance gapin the region. The Institute was foundedin partnership with internationalorganisations including the OECD, theIFC, and the World Bank GCGF, andregional organisations including theUnion of Arab Banks and the DubaiInternational Financial Centre (DIFC) Authority. Hawkamah resulted fromthe recognition of a growing need fora regional organisation working on theground, for regional institution-building,in order for corporate governance toachieve buy-in of stakeholders. Sincethen Hawkamah has been at theforefront of the corporate governancedebate in the region.Hawkamah’s primary goal is to establishcorporate governance as a topic onthe agendas of MENA policymakersby providing the region’s companiesand regulators with practical tools onhow to improve corporate governance. The Institute’s work involves engaginggovernments and industry, conductingsurveys and studies, and creatingregional benchmarks which often act ascatalysts for reform.In the initial years, Hawkamah’s callsfor corporate governance reform werevery much like voices in the desert. Although the need for better corporategovernance was recognised, theprevailing opinion was that the regionwas not ready for reform. Illustrative of the then state of corporate governanceis the ﬁnding of the 2007 benchmarkHawkamah-IFC study that only 3%f listed companies and banks inthe MENA followed good corporateovernance practices, with noneomplying with internationalbest practices.Much has changed since then.ubsequent Hawkamah researchnd surveys have indicated that therehave been signiﬁcant improvementsin corporate governance in the MENAregion in just a few short years. Although implementation is still patchy,the concept and principles of corporateovernance are now well accepted.Regulators and companies have takenubstantial steps, albeit from a lowbase, to improve their practices. Themajority of MENA countries has nowissued corporate governance codesnd guidelines or is in the processf doing so. Similarly, an increasingnumber of MENA companies havebegun investing in better governancend addressing their corporateovernance shortcomings.
Drivers of corporate governance inthe MENA
orporate governance reform inthe MENA, to date, has not beeninvestor-driven. Much of this stemsfrom a combination of facts suchs the ownership structures of MENA companies (mainly family ortate-owned), the ready availabilityf liquidity and ﬁnancing fromregional banks, and the relativelyunderdeveloped capital markets thatre dominated by retail investors. The region is also generally overlookedby global long-term investors largelybecause of the region’s poor trackrecord in transparency, disclosure andreporting. Regional asset managersuch as the sovereign wealth fundshave not exhibited governance vigourin their local investment processesnd have mainly invested outside theregion in order to diversify away fromlocal risk. Consequently, the beneﬁts of ood corporate governance have beentypically seen by companies in termsf better strategic decision-makingand regulatory compliance ratherthan being associated with better andcheaper access to credit and capital orimproved valuation of companies.
S&P/Hawkamah ESG Pan-Arab Index
To address these gaps, Hawkamahin partnership with Standard & Poor’sand the IFC have created the ﬁrst-everEnvironmental, Social and Governance(ESG) Index for the MENA. It ranks andtracks the transparency and disclosureof regional listed companies on ESGissues. The constituents of this Indexare derived from 11 Arab equitymarkets. The purpose of this Index isto identify the MENA companies thatgo the extra mile in ESG reportingand policy implementation. TheHawkamah-S&P Index is a tool forinternational and regional investorswho may not have the expertise in theMENA companies or in incorporatingcorporate governance in theirinvestment processes. The Index is not only a tool forinvestors, but also for companies.Inclusion in the Index provides publicrecognition for a local company of its ESG practices, but the Index ismore than just a badge of honour. Asthe socially responsible investmentmovement spreads to the region,capital will start ﬂowing towardscompanies with better ESG reporting,thereby improving their access toexternal capital.
Regional investors and banks
Regional investors, as noted above,have not formally incorporatedcorporate governance criteria intheir investment decision-makingprocess. The index is being used toraise awareness among the region’ssovereign wealth funds on the impactgood corporate governance can haveon the bottom line and the index hasoutperformed the market benchmarkby a signiﬁcant margin. One of theregion’s sovereign wealth funds hasinvested in the Index and hopefullyothers will follow.Given their size – MENA SWFsmanage some $2 trillion in assets –and growing importance, encouraging