A Corporate Governance Survey of Listed Companies and Banks Across The Middle East and North Africa

MENAWIDECORPORATEGOVERNANCESURVEY SECTIOND:FOCUSSECTIONONBANKS,FOESANDSOES
ACORPORATEGOVERNANCESURVEY OFLISTEDCOMPANIESANDBANKS ACROSSTHEMIDDLEEAST&NORTHAFRICA MARCH2008
Thissurveywas: CommissionedandeditedbyHawkamahandIFC, PreparedanddraftedbytheIAAGandIFC,and SupportedbytheUnionofArabBanks,Egyptian BankingInstitute,EgyptianInstituteofDirectors, LebaneseTransparencyAssociationandAbuDhabi ChamberofCommerce.
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MENAWIDECORPORATEGOVERNANCESURVEY PREFACE

DISCLAIMERANDLIMITATIONSTOTHISREPORT
Thissurveyhasbeenpreparedasareferencedocumentandisnotintendedtobeexhaustive.While theutmostcarehasbeentakeninthepreparationofthispublication,itshouldnotberelieduponasa substituteforlegaladviceorasabasisforformulatingbusinessdecisions. Any views expressed in this survey are those of the authors and do not necessarily represent the views of: (i) IAAG; (ii) the Hawkamah Institute for Corporate Governance (Hawkamah); or (iii) the InternationalFinanceCorporation(IFC)andWorldBankGroup. Thefollowinglimitationsapplytotheinformationcontainedinthisreport. Thescopeofworkdidnotincludeconductinganauditofcorporategovernancepracticesofthe surveyedbanksandlistedcompaniesintheMENAregion.Assuch,notestshavebeencarried outtoconfirmthevalidityofcompaniesandbanksresponses. Thesurveyisunabletolookbeyondthenumbers.Forexample,whilethesurveycancapture quantitative data on the number of respondents that have established audit committees, it is unabletocommentonwhethertheseauditcommitteesandtheirmembersareproperlyfulfilling theirrolesandresponsibilities. Theinformationpresentedinthisreportwasobtainedasaresultofanalyzingasetofcompleted questionnaires and interviews conducted with responding companies and banks between July 2006 and July 2007. Any subsequent developments were not taken into consideration in the analysisofthesurveyfindings. The surveyed sample was divided into two broad categories: listed and nonlisted banks, and listedcompanies.Althoughthereportoutlinesthepracticesofthesurveyedsampleaccordingto these categories, it is pertinent to mention that the objective of this survey was not to highlight and comment on the differences across these categories. It was to provide an accurate representationofcorporategovernancepracticesintheMENAregionasawhole. Thispublicationshouldnotbereproducedinwholeorinpartwithoutthewrittenpermissionofthe copyrightholder. 2008IFC 2121PennsylvaniaAve. NWWashingtonDC,20433 UnitedStatesofAmerica IFCisamemberoftheWorldBankGroup
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THANKYOUNOTETOPARTICIPATINGBANKSANDCOMPANIES
IFC and Hawkamah would like to thank all the survey participants for the considerable time spent preparing their responses to the survey questionnaire and for their participation in the interview process.Theinformationwereceivedfromtherespondentswasindispensablefortheconductofthe survey,andfordevelopingtheresultingconclusionsandrecommendations. IFCandHawkamahhopethatthissurveyanditsrecommendationsprovetobeusefulinimproving corporategovernancepracticesintheMENAregion,andindeedfortheindividuallistedcompanies and banks that answered participated in this survey. Each respondent is to receive copies of this report,whichwehopetheywillfindhelpfulinimprovingtheirowncorporategovernancepractices. The report will also be posted on the websites of the IFC (www.ifc.org/corporategovernance/mena) andHawkamah(www.hawakamah.org).
ACKNOWLEDGMENT
The sponsors and authors of the survey would like to acknowledge and thank the following institutionsandindividualswhosevaluableeffortgreatlycontributedtothesuccessofthissurvey: Egypt Dr.AshrafGamalElDin,ExecutiveDirector,EgyptianInstituteofDirectors Dr.HalaElSaid,ExecutiveDirectorandZeinabAbdelRazek,ProgramOfficer,EgyptianBanking Institute Dr.MartinSteindl,ProgramManager;AmiraElSaeed,ProjectOfficer,IFC(Egypt) Jordan MaaliQuasem,Schema NesreenAbuSuleiman,OfficeManagerandAhmedAliAttiga,SeniorCountryOfficer,IFC (Jordan) Lebanon JuliaBrickell,CountryOfficer,IFC(Lebanon) BadriSalimMeouchi,ProjectOfficer,LebaneseTransparencyAssociation MENA FouadShakerandRaniaKhouri,UnionofArabBanks NickNadal,ProgramOfficer,Hawkamah Morocco JoumanaCobein,SeniorOperationsOfficerandHnaneHniki,TeamAssistant,IFC(Morocco) UnitedArabEmirates KhalidDeeb,AbuDhabiChamberofCommerce WestBankandGaza YoussefHabesch,CountryOfficer,IFC(WestBank&Gaza) Eachoftheseinstitutionsandindividualsprovidedgreatsupportbyhelpingcollectsurveyresponses intheirrespectivecountriesorsectorsand/orforcommentingoreditingthefinaldraftofthesurvey. Thissurveywouldnothavebeenpossiblewithouttheirhelp.
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ABOUTTHESURVEYSSPONSORSANDAUTHORS
TheInternationalFinanceCorporation(www.ifc.org) ThemissionoftheInternationalFinanceCorporation(IFC),theprivatesectorarmoftheWorldBank Group,istopromotesustainableprivatesectorinvestmentindevelopingandtransitioncountriesto reducepovertyandimprovepeopleslives.IFCfinancesprivatesectorinvestmentsinthedeveloping world, mobilizes capital in the international financial markets, helps clients improve social and environmentalsustainability,andprovidesadvisoryservicestogovernmentsandbusinesses.From itsfoundingin1956throughitsfiscalyearendingin2005(FY05),IFChadcommittedmorethanUS$ 49 billion of its own funds and arranged US$ 24 billion in syndications for the benefit of 3,319 companies in 140 developing countries. IFCs worldwide committed portfolio as of FY05 was US$ 19.3billionforitsownaccountandUS$5.3billionheldforparticipantsinloansyndications. The Private Enterprise Partnership in the Middle East and North Africa (PEP MENA), which was launched by IFC in 2005, now enables the IFC to provide a wide range of advisory services throughouttheregion,includingoncorporategovernance.IFCisusingadvisoryservices,separately or in combination with longterm capital, to reach its goals and to introduce best practices in the region. TheHawkamahInstituteforCorporateGovernance(www.hawkamah.org) The Hawkamah Institute for Corporate Governance (Hawkamah) is an international association of corporate governance practitioners, regulators and institutions advancing home grown but globally integratedcorporategovernancebestpracticesintheregion. Hawkamahsmissionistopromotecorporatesectorreformandgoodgovernance,assistthecountries oftheregionindevelopingandimplementingsustainablecorporategovernancestrategiesadaptedto national requirements and objectives. Regional cooperation will facilitate exchange, and allow countries to learn from successful experiences, combine efforts, move towards harmonization of corporate governance frameworks, and build on synergies resulting from national actions and initiatives. HawkamahiscurrentlyshapingthedevelopmentofcorporategovernanceintheMiddleEast,North Africa and Central Asia. By promoting its core values of transparency, accountability, fairness, disclosure and responsibility, Hawkamah works on policy and practical aspects of corporate governancereformintheregion. IAAGConsultora&CorporateFinance(IAAG)(www.iaag.com) IAAG is a firm specialized in strategic consulting and corporate finance. Our focus countries are LatinAmerica,EasternEuropetheformerSovietRepublicsandAsia,workinginprogramssponsored andfinancedbymultilateralagenciesaswellasadvisingtheprivatesectorandgovernmentagencies. Sinceitsbeginningsin1993,IAAGparticipatesinthetechnicalassistanceprogramsoftheprincipal multilateral development banks, such as the World Bank, European Bank for Reconstruction and Development,EuropeanUnion,AndeanDevelopmentBankandInterAmericanDevelopmentBank, among others. Our services provided within the framework of these technical assistance programs are centered on building financial and capital markets, strengthening small and mediumsized enterprises(SMEs)andimprovingcorporategovernancepractices. IAAGworkedwithDEVSTATS.L.andPKFtocompilethedataofthissurvey.
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TABLEOFCONTENTS
SECTIONA. SECTIONB. I. i. ii. II. III. i. ii. iii. iv. I. i. ii. iii. iv. v. vi. vii. II. i. ii. iii. iv. v. vi. III. i. ii. iii. iv. v. vi. IV. i. EXECUTIVESUMMARY:RECOMMENDATIONSANDKEYFINDINGS.....................................1 INTRODUCTION........................................................................................................................10
Thedefinitionofandrationaleforimprovedcorporategovernance............................................10 Whatiscorporategovernance?........................................................................................................ 0 1 Whycorporategovernancematters?............................................................................................... 0 1 RecenttrendsanddevelopmentsincorporategovernanceacrossMENA...................................12 Aboutthissurvey...................................................................................................................................12 Purposeofthesurvey........................................................................................................................ 2 . 1 Targetcountriesandorganizations................................................................................................. 3 1 Surveytimeline.................................................................................................................................... 3 1 Surveyresponserateandsampleerror.......................................................................................... 3 1 MAINFINDINGS.......................................................................................................................14 DemonstratingCommitmenttoGoodcorporategovernance........................................................14 Understandingthedefinitionofandbusinesscaseforcorporategovernance ....................... 4 . 1 Implementingcorporategovernance:practicevs.theory........................................................... 5 1 Recognizinginternationalreferencepointsforgoodpractice.................................................... 7 1 Formalizingcorporategovernancepoliciesandprocedures...................................................... 7 1 Assigningresponsibilityforcorporategovernance...................................................................... 9 1 Understandingbarrierstoreform.................................................................................................... 1 2 Lookingahead:prioritiesforcorporategovernancereforms..................................................... 1 2 ImplementingGoodBoardPractices..................................................................................................23 Theroleoftheboard.......................................................................................................................... 3 2 Boardcomposition.............................................................................................................................. 5 2 Boardstructure.................................................................................................................................... 0 3 Workingprocedures........................................................................................................................... 2 3 Remunerationpolicy.......................................................................................................................... 4 3 Boardevaluationandtraining.......................................................................................................... 8 3 BuildingaRobustControlEnvironmentandProcesses.................................................................40 Riskmanagement............................................................................................................................... 0 . 4 Internalcontrols.................................................................................................................................. 1 4 Compliance.......................................................................................................................................... 2 4 Theexternalaudit............................................................................................................................... 4 4 Theinternalaudit ............................................................................................................................... 3 . 4 Theauditcommittee........................................................................................................................... 4 4 StrengtheningTransparencyandDisclosure.....................................................................................48 Whatinformationisbeingdisclosedwhere?................................................................................. 8 4
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SECTIONC.

ii. iii. iv. v. vi. V. i. ii. iii. iv. v. I. i. ii. iii. iv. II. i. ii. iii. iv. III. i. ii. iii. I. i. ii. iii. iv. II. i. ii.
Wheretodiscloseinformation:theuseoftheannualreportandinternet?............................. 0 5 Howbesttodiscloseinformation?.................................................................................................. 2 . 5 Specialfocus:consolidationoffinancialinformation................................................................... 3 5 Whoisresponsiblefordisclosure?.................................................................................................. 4 5 Factorspreventingdisclosure........................................................................................................... 4 5 ProtectingShareholderRights.............................................................................................................55 Participatingingeneralassemblymeetings................................................................................... 5 5 Safeguardingtherighttoshareintheprofitsoftheorganization............................................. 7 5 Participatinginandbeingsufficientlyinformedonfundamentaldecisions........................... 8 5 Protectingminorityshareholderthroughpreemptiveandtagalongrights......................... 9 5 Obtainingrelevantandmaterialinformationonatimelyandregularbasis........................... 9 5 AFOCUSONBANKS,FAMILYANDSTATEOWNEDENTERPRISES....................................61 CorporateGovernanceIssuesRelatedToBanks.............................................................................61 . Demonstratingcommitmenttogoodcorporategovernance...................................................... 1 6 Implementinggoodboardpractices ............................................................................................... 2 . 6 Buildingarobustcontrolenvironmentthroughclearreportingstructures............................ 4 . 6 KYCsCG:Assessingthecorporategovernanceofborrowers................................................... 6 6 CorporateGovernanceIssuesRelatedToFamilyOwnedEnterprises........................................67 Establishingafamilyconstitution ................................................................................................... 7 . 6 Implementingsuccessionplanning................................................................................................. 8 6 Developingafamilymemberemploymentpolicy....................................................................... 9 6 Establishingafamilycouncil............................................................................................................ 1 7 CorporateGovernanceIssuesRelatedToStateOwnedEnterprises...........................................73 Exercisingpropertyandownershiprights..................................................................................... 3 7 Demonstratingcommitmenttogoodcorporategovernance...................................................... 5 7 Implementinggoodboardpractices ............................................................................................... 6 . 7 ANNEXES...................................................................................................................................77 Annex1:SurveyMethodology.............................................................................................................77 . Surveypopulation.............................................................................................................................. 7 7 Theoreticalbackground:randomsampling................................................................................... 9 7 Sampledesign..................................................................................................................................... 9 . 7 Samplecalibration.............................................................................................................................. 2 8 Annex2:CorporateGovernanceScoringMethodology(Indicators)............................................82 Indicatorsbybanksandlistedcompanies..................................................................................... 4 . 8 Countries.............................................................................................................................................. 4 8
SECTIOND.
SECTIONE.
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MENAWIDECORPORATEGOVERNANCESURVEY SECTIOND:FOCUSSECTIONONBANKS,FOESANDSOES

SectionA. ExecutiveSummary:RecommendationsandKeyFindings
I. DemonstratingCommitmenttoCorporateGovernance Avarietyofstakeholdersinparticularmarketandbankregulators,localcorporate governance institutions and institutes of directors, as well as international organizationsanddevelopmentinstitutionsshouldcontinuetoorganizeawareness raisingeventsoncorporategovernancethroughouttheMENAregion.Infact,todaya great majority of respondents76% of banks and 67% of listed companiescite corporategovernanceasbeingimportanttoveryimportantfortheirbusinesses.This isanencouragingsignandpointstoarisingawarenessofcorporategovernance. However, we also recommend that in addition to awareness raising events, said stakeholdersorganizetargetedseminarsandworkshopsthatfocusonthedefinition of and business case for implementing good corporate governance, so that the benefits of corporate governance are understood in theory and may also translate intopractice.Indeed,53%ofrespondentswereunabletoproperlydefinecorporate governance, confusing the term with corporate social responsibility or corporate management. Further, most respondents cited improved compliance (60.7%) and reputation (61.3%) as benefits rather than access to capital (34.7%) or lower cost of equity (19.3%). Most importantly, not a single responding bank or listed company could claim to have applied corporate governance reforms holistically, i.e. to have followed a set of 32 indicators which could reasonably qualify a bank or listed company as a following best practice. Only five respondents or 3% could be deemedtofollowgoodpractice,havingimplementedbetween1623indicators.The great majority of companies, 92% in all, fall under the emerging practice or improvedpracticesections(815indicators).Fivepercenthadonlyimplemented07 indicators,qualifyingthemasunderdevelopedpractice. Companiesshouldformalizekeygovernancestructures,policiesandprocesses.The useofacompanylevelcodesofcorporategovernanceorcodesofethicsisnotwide spread among banks or listed companies. Only (36.5%) have implemented such codes.Acompanylevelcodeofcorporategovernanceandethicscodeareexcellent first steps in setting the overall tone for corporate governance reforms. Regulators may wish to include similar recommendations for disclosing such documents in voluntarycodesofcorporategovernance. The chairmen of the board and chief executive officer (CEO) should set the tone at the top and champion corporate governance reforms, with the support from a professionalcompanysecretary.Justunderhalfofsurveyedbanks(47%)andlisted companies (49%) assign the responsibility for corporate governance policies to the boardinline with good practice. However, only a small minority of respondents involvethechiefexecutiveofficer(CEO)(8%),chairman(4%)andcompanysecretary (4%) in developing corporate governance frameworks; and only 11.3% have implementedboardlevelcorporategovernancecommittees. Policymakers and regulators should strongly encouragepossibly mandate directors and senior managers to undertake a minimum of corporate governance relatedtraining;banksandcompaniesshould,inturn,encouragetheirdirectorsand senior managers to attend such events to preempt regulatory action. Corporate governance institutes and institutes of directors, too, may wish to build their expertiseandcapacitytomeetthegrowingdemandforspecificcorporategovernance training.Thetwolargestbarriersinimplementingcorporategovernancereformsare a lack of internal corporate governance knowhow, as well as the unavailability of externalqualifiedspecialistsintheregion(44.9%forbothbarriers).
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MENAWIDECORPORATEGOVERNANCESURVEY SECTIONA:EXECUTIVESUMMARY

II.
ImplementingGoodBoardPractices Thesurveydemonstratesthattheroleoftheboardtoprovidestrategicguidanceto andoversightovermanagementisnotalwaysunderstood in practice. Banksand listedcompaniesshouldthusreview,clarifyandformalizetheroleoftheboardvis vismanagementandshareholdersinacorporategovernancecodeorboardcharter. Ninetythreepercentofbanksand87%oflistedcompaniesstatedthattheboardand not management was responsible for setting company strategy, contrary to good practicewhichcallsformanagementtodevelopandtheboardtoapprove,andthen monitormanagementsexecutionof,strategy. Moreover,mostboardsintheregion may not have the necessary independence to properly fulfill its oversight function. Fifty six percent of boards either do not have a single or only one independent director, and only 26.4% of boards have audit committees with a majority of independentdirectors.Finally,lessthanhalfofrespondents(40%)haveasuccession planinplace,again,anindicationthattheboardmaynotbefulfillingitsstrategicand oversightfunction. Boards in the MENA region should keep their current board size. The majority of boardsinMENAhaveeightormoremembers.Bankboardsareusuallycomposedof ten or more members, while the boards of listed companies typically have eight to ten.Thesenumbersgenerallyappeartobeinlinewithgoodpractice. Banks and listed companies should gradually increase the number of independent directors who sit on their board, and specify in their annual report their understanding of what constitutes independence and which director is deemed independent. Fifty sevenpercentofalllisted companiesand54.3%ofbanksdonot haveanyoronlyasingleindependentdirectorontheirboard. BanksandlistedcompaniesinMENAshouldensureforanappropriatemixofskills on their boards. An overwhelming majority of responding banks and listed companies require the combination of integrity (70%) and professional experience (75%), inline with best practice, however, 69% of respondents chose being a shareholder as the third most relevant requirement for being a director, which typicallyleadstothecreationofinsiderorshareholderboardthatmaynotalwaysact in the interest of the company and all of its shareholders. With respect to female representation on the board, a vast majority of banks (78%) state that they do not haveasinglefemaledirector,whileonly1%answeredthattheyhadmorethanone. On the other hand, onethird of listed companies had at least one or more female boardmembers,asmallbutimportantsteptowardsbalancingtheboardroom. Company stakeholders, in particular shareholders but also regulators, should continue to encourage banks and listed companies to separate the position of chairman and CEO. A significant majority of respondents, 65%, state that the positionsofCEOandboardchairmanareheldbydifferentpersons,inlinewithbest practice. In particular banks (72.2%) follow this best practice, while 42.3% of listed companiescontinuetocombinethesetwofunctions. Audit committees are well represented in the region, however, their independence needstobestrengthened;companiesshouldalsoexplorethebenefitsofcreatingother boardcommitteestostreamlinetheboardswork.Eightyonepercentofbanksand 74.7% of listed companies have audit committees, inline with good corporate governance, however, as already mentioned, only 26.4% of these committees are composed of a majority of independent directors. Other committees are less prevalentintheregion,withonlyaminorityofrespondentscitingthattheirboards alsohavenominations(22.5%)orremuneration(29.3%)committees.
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Boardworkingprocedurescouldbeimprovedupon,inparticularwithrespecttothe numberofboardmeetingsperyearandthedevelopmentofaprofessionalcorporate secretary function. The majority of banks and companies provide relevant information to their boards one to two weeks before board meetings, inline with goodpractice.Withrespecttobanks,46%answeredthattheirboardmetanaverage of three to five times per year, and 21% stated that they met between six and nine times.Only27%ofbankboardsmeettento12timesperyear,inlinewithwhatis arguably considered bestpractice for banks. With respect to listed companies, 60% respondedthattheyeffectivelymetonaquarterlybasis,andonly15%metbetween six to nine times per year, inline with whatmostwould conceive as good practice. Finally,themajorityofsurveyrespondents(45%)statedthatthecompanysecretaryis an employee, or a parttime employee, which while appropriate for smaller companies, may not be appropriate for banks and large publicly listed companies duetoalackofindependence.Itshouldbenotedthatoneononemeetingsduring the interview process revealed that the position of company secretary is generally underdeveloped. Banks and listed companies may wish to create boardlevel remuneration committees to develop executive and nonexecutive remuneration policies, thus ensuring that banks and listed companies in the MENA region are able to attract, motivate and retain talent. With respect to nonexecutive remuneration, 42.9% of companiesdonotpaytheirdirectorsanattendancefee;andonlyaminorityofnon executive directors receives extra pay for taking on additional responsibilities, such as serving on committees (16.1%) or chairing the board (11.3%). With respect to executive remuneration, the survey demonstrates that the use of variable remunerationpackagesis,surprisingly,limited,with53.8%ofrespondentscitingthat they do not offer their executives variable packages. Stock options, too, are not commonplace and only 9.8% of executives and 3.6% have such plans. Thirty nine percent of executives receive board fees, contrary to good practice. Finally, banks and companies typically do not offer their executives with pension (5.4%) or insurance(7.2%)benefits, bothof which are consideredlongtermincentives thatin thecaseofexecutivescanhelptiethemtothecompany. Board evaluations and director trainingboth orientation and continuous professional educationshould be furthered by banks and listed companies and, if necessary, by regulators. Only 20% of banks and 15% of listed companies conduct boardevaluations.Similarly,directortrainingoncorporategovernance,whetherin theformofdirectororientationorongoingtraining,remainsscarcethroughoutthe MENA region, with only 15.3% of respondents offering such training for their directors. III. BuildingaRobustControlEnvironmentandProcesses Banks and listed companies should strengthen their risk management frameworks and practices, in particular by assigning responsibility for managing risks at the management level, and ensuring that the board has the necessary expertise to establish risk policies and effectively guide and oversee management in managing risks. Central banks in particular should provide the necessary guidance to and oversight over banks to ensure that banks have robust risk frameworks in place. Overall,lessthanhalfofthosesurveyed(43%)hadariskfunctioninplace,with23% of listed companies and 62% of banks stating that they had a risk manager or risk department in place. Those banks and listed companies that do have a risk
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management function follow best practice in that the board oversees the risk managementsystemasimplementedbymanagement. Similarly, the internal control function needs to be strengthened by a majority of banks and listed companies in the MENA region to safeguard assets against unauthorizeduseordisposition,maintainproperaccountingrecordsandensurefor thereliabilityoffinancialinformation.Lessthanhalfoftherespondents(47%)have aninternalcontrolfunction,i.e.controllerorcontroldepartment.Thosewithcontrol functions, a significant majority of boards claim responsibility for overseeing this function(80.3%forbanks,69%forlistedcompanies),however,asignificantmajority of CEOs (35%) are also deemed with oversight duties. Best practice calls for management to set and implement, and the board to assure itself that internal controlsarerobustanddefensible. Banksandlistedcompaniesshouldensurethemselvesthatthechiefinternalauditor hasunfetteredaccesstoanindependentauditcommittee.Theinternalauditfunction iswellestablishedinMENA,with88.7%ofbanksandcompaniesreportingthatthey have a CIA. For 80% of the respondent the CIA reports to the board. However, althoughthevastmajorityofrespondentsestablishedauditcommittees,towhichthe CIAshouldreporttoaccordingtobestpractice,only25%oftheseauditcommittees canbeconsideredindependent. Banks should strengthen (and central banks should strongly encourage) the establishment of a compliance function. Most banks (64%) have a compliance function in place; only 23% of listed companies reported having a compliance function.Allbanksshouldstrivetohireachiefcomplianceofficer(CCO)andbuilda strongcompliancefunction. On the other hand, external audit practices are mostly inline with best practice, however, independence needs to be strengthened throughout the region, both among banks and listed companies. Ninetyone percent of thosesurveyedhadan external auditor, of which 77.2% constituted internationally recognized audit firms. An important majority of companies do not receive additional services from their externalauditors(51%)andarethussafeguardedfromconflictsofinterest.However, theideaofauditfirmorpartnerrotationtoensureforexternalauditorindependence isnotfollowedbybanksandlistedcompanies:ofthosesurveyed,only32%havean auditrotationpolicyinplace. The role of the audit committee is broadly understood, however, the role of the committeeinensuringthatallcontrolfunctionsrisk,internalcontrols,compliance, as well as internal and external audit processesproperly interact needs to be strengthened.Moreover, auditcommitteesneedtoimprovetheir oversightoverthe compliance function. Indeed, only 30.6% of audit committees felt that they were responsibleforassuringthemselvesthatthecompliancefunctionwasoperating IV. StrengtheningTransparencyandDisclosure Banks and listed companies in the MENA region should continue to disclose financial information. A vast majority (92.3%) of respondents provided financial statements to shareholders, either through the local press (94.7%), general assembly (93.4%), annual report (88%) or companys website (85.9%), inline with good practice. Nonfinancial disclosure on the other hand remains weak, and banks and listed companies should take steps to improve upon their disclosure in this area, in
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particular with respect to corporate governance related information. While68% of respondentsdodisclosetheircorporateobjectives,disclosureinotherareasremains lackluster, with results showing that the disclosure of corporate governance related informationbeingparticularlyweakamongbanksandlistedcompanies,with53.8% citing that they do not make corporate governance related information available to shareholders. Webbased disclosure needs to be improved upon and listed companies, and to a lesser degree banks, should publish their annual reports and other relevant information,suchasonbeneficialownership,ontheirwebsites.Withrespecttothe annualreport,82%ofbanksbutonly61%oflistedcompaniesstatedthattheirannual report was published on their website, which typically (but not always) contains a full set of financial information. Only 22.7% disclose their articles of association or company charter, 28.7% the companys beneficial owners and 24.7% the companys dividendpolicyonthecompanyswebsite. While financial disclosure in the annual report remains relatively strong at 79.3%, nonfinancial disclosure, again, remains weak and should be an area for urgent reformgiventheimportanceoftheannualreportforshareholdersandinvestors.The surveyshowsthatfewrespondentsincludedasectiononmanagementsdiscussion and analysis (28%), or indeed the banks or companys policies towards corporate socialresponsibility(33%)orcorporategovernance(32%). MENA law and rulemakers should continue to push for the full adoption of internationally recognized financial reporting standards. Sixty seven percent of respondents stated that they disclose information based on International Financial ReportingStandards(IFRS);only4.6%reportaccordingtoUSGAAP.Becausemost centralbanksinMENArequirethebankingsectortoreportinaccordancewithIFRS, in contrast to the market regulators, 77% of banks indicate that their financial reportingisdoneinaccordancewithIFRS,incomparisonto58%oflistedcompanies. This information should be carefully scrutinized as the majority of countries that have adopted IFRS have not done so completely, or have outdated versions of the IFRSframework,andsoinvestorsshouldtakecaretounderstandwhichspecificIFRS havebeenomittedorareoutdated. Althoughthelargemajorityofbanksandlistedcompaniesthatareapartofagroup produce consolidated financial reports, the regulator should ensure for full compliance with this best practice. Listed companies are less prone to produce consolidatedreportsthanbanks,73%vs.84%. Most respondents continue to view disclosure from a compliance point of view, ratherthananeffectivetoolformanagingstakeholderrelationsandaddingvalueto theirbusiness,andsostakeholdersshouldorganizeawarenessraisingeventsonthe roleofdisclosureinstrengtheningcorporategovernance.Themainbarrierscitedby banks and listed companies as to why they do not fully implement best practice in theareaofdisclosureisalackoflegislation,inparticularintheareaofnonfinancial disclosure, again confirming the compliancedriven understanding of corporate governance. V. ProtectingShareholderRights Regulators should strengthen the ability for shareholders to vote during the generally assembly. The vast majority of banks and listed companies, 75.4%, confirmedrelativelyhighattendancelevelsduringtheirpreviousgeneralassemblies,
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demonstrating that shareholders are interested and willing to engage with their companies.Votingatthemajorityofgeneralassembliesisstillconductedbyshow ofhands(66.2%),andonlyslightlymorethathalfofrespondents(54.3%)citedproxy voting as an alternative. At 1.3%, electronic voting is virtually nonexistent in the region. A basic shareholder right during the general assembly is the right for shareholders to elect board members. In the MENA region, board members are elected by shareholders in the vast majority (81%) of banks and listed companies surveyed. Only 17.7% of respondents allow for cumulative voting. Finally, best practicecallsforshareholderstobefurnishedwithsufficientandtimelyinformation concerningthedate,locationandagendaofthegeneralassembly,aswellasfulland timelyinformationregardingtheissuestobedecidedatthemeeting.Itisgenerally thoughtthatsuchinformationshouldbeprovidedtoshareholdersatleast20daysin advanceoftheassembly,however,thesurveyshowsthatwhileslightlyoverhalfof banks(55%)followthisbestpractice,only22%oflistedcompaniesdoso. The regulators should safeguard shareholder rights to share in the profits of the organization, focusing on the effective enforcement of existing legal provisions. There are many ways in which this fundamental shareholder right to share in the profits of the organization can be evaded or eroded, primarily through insider dealing, conflicts of interest and/or related party transactions undertaken by company insiders, and regulators should be vigilant in enforcing violations against this best practice. Eighty two percent of respondents cited that countrylaws or internaldocumentdorequirethemtodiscloserelatedpartytransactions.Moreover, agreatmajoritynumberofbanks(80%)andlistedcompanies(71%)haveestablished policiesonconflictsofinterestandrelatedpartytransactions;ofthosethathadnot, only34.7%ofrespondentsshowedinterestindevelopingsuchpoliciesinthefuture. However,suchpoliciesareonlyeffectivewhenrespectedbymanagersanddirectors. Unfortunately,54.7%ofrespondentsthoughtthatdirectorsfailedtoavoidconflictof interest situations, and that 62.7% used inside information for their benefit, demonstratinganimportantgapbetweenthelawonthebooksvs.actualpractice.. Shareholders should have a say on extraordinary transactions, and banks and companies should adopt specific processes regulating when and how shareholders approve extraordinary transactions in their articles of association. A significant majorityoftherespondents,approximately70%,statedthattheirboardisgenerally responsible for approving extraordinary transactions, regardless of their value. An importantminoritystatedthatthecompetencetoapproveextraordinarytransactions aboveacertainthreshold,e.g.over50%ofbookvalue,isassignedtotheshareholders (40.8%).Andwhilethereismuchdebateinthecorporategovernancecommunityas to whether shareholders are best placed to vote on such transactions, or whether instead directors working with management and their detailed knowledge of the situationshoulddoso,itmaywellbeprudenttoallowshareholdersafinalvoteon suchmatters. Banks and listed companies should provide for tagalong rights to their shareholders,whileregulatorsshouldensurethateffectiveprovisionsonpreemptive rightsareenshrinedinrelevantlawsorregulations.Bothpreemptiveandtagalong rightsarekeyelementsofaneffectiveframeworktoprotecttheinterestsofminority shareholders.Thesurveyshowsthatwhileapproximatelyhalfofbanksprotecttheir minority shareholders through tagalong rights (51%), only a minority of listed companies(31%)doso.
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VI.
CorporateGovernanceIssuesforBanks,FamilyandStateownedEnterprises i. Corporategovernanceissuesrelatedtobanks Bank regulators and other stakeholders have done well to raise awareness of good corporate governance for banks, and should continue to do so. Seventy threepercentofbankmanagersanddirectorsreportedtheirfamiliaritywiththe Basel Committee for Banking Supervision Guidelines for Enhancing the Corporate Governance of Banking Organizations (BSBC Guidelines). On the other hand, much of this awareness must now be translated into practice, for example,viaspecificcorporategovernanceworkshopsorconsultations. Bankboardsshouldreviewtheircurrentcommitteestructure,inparticularwith respect to which committees are best placed to support the board visvis management.Eightyonepercentofbankshaveauditcommittees.Only19%of banks have boardlevel risk committees, while 31% of boards have credit committees. Best practice calls for the board to set policies on risk and credit, ideallythroughaboardlevelriskcommittee,whiletheimplementationofthese matters shouldbe lefttothemanagement teamand management levelrisk and credit committees. Banks do have a number of committees at the management level, inline with best practice, including committees on assets and liabilities (90.3%), information technology (88.2%), risk management (81.4%) and credit (69%). Reporting lines for key control functions need to be reviewed and realigned to avoidpotentialconflictsofinterest. Thechiefriskofficer(CRO)shouldbeindependentofanybusinessline,soas toavoidanyconflictsofinterest,andbestpracticecallsfortheCROtoreport to the CEO or a managementlevel risk committee, with a dotted line reporting relationship to the board and relevant committee, in particular to the audit or risk committee. And while the CRO does indeed report to the CEO in 72% of the cases, there is little to demonstrate that there is any reportingline,fullordotted,totheboard(13%)oritsauditcommittee(18%). The chief compliance officer (CCO) should be independent of any business line as well and, at a minimum, report to a senior level manager, with unrestricted access to the CEO and chief financial officer (CFO), as well as have a dotted reporting line to the boards audit committee. The survey demonstratesthattheCCOreportstotheCEOinthegreatmajorityofcases (70%),butnottotheboard(11%)oritsauditcommittee(20%). Bestpracticeindicatesthatthechiefofinternalaudit(CIA)shouldreportto theboardthroughitsauditcommitteeonafunctionalbasisandtotheCEO on an administrative basis. The survey provides evidence that the CIAs reportinglinesremainmuddled,with34.7%CIAsreportingtotheCEOand only40.3%reportingtotheboardsauditcommittee,which,givenitslackof independence,maywellunderminethatreportingrelationship.
Banksshouldconsiderincorporatingcorporategovernanceintotheirinvestment decisionmakingprocess,thusreducingtheirportfolioriskandatthesametime addingvaluetotheirclients.Resultsindicatethatasignificantmajorityofbanks (58%) do not include an evaluation of their clients corporate governance practices,andthosethatdotypicallyonlydosoonapiecemealandnotholistic basis. ii. Corporategovernanceissuesrelatedtofamilyownedenterprises
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Familyowned enterprises (FOEs) and banks (FOBs) should consider adopting familyconstitutionsandfamilybodies,suchasfamilycouncilsorassemblies,to helpthemdifferentiatethefamilyinterestsfromthoseofthecompany,andalso regulatethepoliciesthatwillguidetherelationshipbetweenthefamilyandthe company. While 50% of listed FOEs had adopted a family constitution, not a single FOB had done so. The survey also shows that family councils are not commonly established in the region, neither for FOBs (0%) nor for listed FOEs (25%). Similarly, familyowned banks and listed companies would be well served to adoptfamilymemberemploymentpolicies.Onceatthecousinconsortiumstage, good practice calls for families to formalize their family members employment policies.Indeed,thesurveyshowsthatfamilymembershipattheboardlevelis prevalent in listed FOEs, with 75% of respondents citing that their boards are composed of a majority of family members. FOBs on the other hand show a substantiallyhigherdegreeofnonfamilymembership,withonly33%ofboards beingcomposedofamajorityoffamilymembers,whichislikelyduetothestrict fit and proper requirements imposed by regulators; in fact, all FOBs cited that family board members were required to comply with qualifications for being board member. At the same time, the position of CEO is held by a nonfamily memberamong67%ofFOBs,whilethispercentagefallsto50%forlistedFOEs. Finally, all banks and companies in the MENA region should adopt succession policies and plans to ensure for business continuity and sustainability. Unfortunately, family succession plans are not widespread in the region, and resultsshowthatonly29%ofrespondentshavepreparedasuccessionplan. iii.Corporategovernanceissuesrelatedtostateownedenterprises The public sector and other stakeholders should raise awareness as to the importance of corporate governance for stateowned enterprises (SOEs), in particular the OECD Guidelines on Corporate Governance for SOES. These Guidelines are not well known, as just over half of the respondents (56%) declaredtobefamiliarwiththeircontentandscope. Regardlessofwhetherthestatefollowsacentralizeordecentralizedownership model, it should ensure that there is one body responsible for protecting its assets,exercisingitsownershiprightsandresponsibilities,andensuringforgood corporate governance among the countrys SOEs. The survey reveals that the exerciseofpoliticalrightsisusuallyacompetenceofahighprofilepublicofficer or delegate (80% of responses in aggregate terms), regardless the shareholders identity.Ofnoteisthatanoverwhelmingmajorityofstateownedbanks(SOBs) 90%,declaredthatpropertyrightsareexercisedbyahighprofilepublicofficeror delegate, while this percentage falls to 62% of respondents for SOEs that are partially listed on an exchange. Most SOEs and SOBs report to the controlling agencyon an adhocbasis, uponrequest (45%),and noton aperiodic basis,for exampleannually(25%) All SOEs should have a clear and explicit set of objectives, which are made publiclyavailable.Moststateownedenterprisesdoseparatebetweenitssocial mission and profitseeking business objectives, with 67% of SOEs citing an existingdifferencebetweentheseoftenconflictingpriorities. Finally, the state should have its own policy in place, requiring all SOEs and SOBs to adopt corporate governance. To date, only 33.3% of government ownership entities have a policy or requirement for their SOEs to adopt good
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corporate governance practices, demonstrating that corporate governance does notappeartobeofprimaryconcernformostgovernments. Moreover, the state should ensure that the boards of its SOEs and SOBs are composed of an appropriate mixofsills and direct types (executive, non executive and independent directors), and that these directors receive an appropriate remuneration. Unfortunately, being a highprofile public officer is stilltheprimarycriteriafornominatingadirectortotheboardofaSOEin62%of cases. Competency and skills are secondary requirements, fortunately still considered as an important criterion by 52% of nominating entities. And with respect to director remuneration, results show that just over half of those surveyed(52%)statethatdirectorsareremuneratedfortheirboardservices.
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MENAWIDECORPORATEGOVERNANCESURVEY SECTIONB:INTRODUCTION

SectionB. Introduction
I.
i. Thedefinitionofandrationaleforimprovedcorporategovernance Whatiscorporategovernance?
Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the boards, managers, shareholdersandother stakeholders, andspellsouttherules and proceduresfor makingdecisionsoncorporateaffairs.Bydoingthis,italsoprovidesthestructurethrough which the company objectives are set, and the means of attaining those objectives and monitoringperformance.1 A company committed to good corporate governance has welldefined and protected shareholder rights, a solid control environment, high levels of transparency and disclosure, andanempoweredboard(seealsoFigureB1).Theinterestsofthecompanyandthoseofall shareholdersarealigned.
Commitment Boarddiscussescorporategovernanceissuesandhascreatedcorporategovernancecommittee Companyhasnominatedacorporategovernancechampion Corporategovernanceimprovementplanisinplace Appropriateresourcesarecommittedtocorporategovernance Policiesandprocedureshavebeenformalizedanddistributedtorelevantstaff Companyhasdevelopedcorporategovernancecodeorguidelines Companyispubliclyrecognizedasacorporategovernanceleader Disclosureandtransparency Financialinformationdisclosed Nonfinancialinformationdisclosed FinancialspreparedaccordingtoIFRS Highqualityannualreportpublished Webbaseddisclosureandinvestorsiteinplace Shareholderrights Minorityshareholderrightsareformalized Wellorganizedgeneralassemblyconducted Policyonrelatedpartytransactionsinplace Policyonextraordinarytransactionsinplace Clearlydefinedandexplicitdividendpolicy Goodboardpractices Rolesandauthoritiesareclearlydefined Dutiesandresponsibilitiesofdirectorsunderstood Boardiswellstructured Appropriatecompositionandmixofskills Appropriateboardproceduresinplace Directorremunerationinlinewithbestpractice Boardselfevaluationandtrainingconducted Controlenvironmentandprocesses Independentauditcommitteeestablished Riskmanagementframework/structurepresent Internalcontrolproceduresinplace Internalauditfunctioninplace Independentexternalauditorconductsaudits Managementinformationsystemsestablished Compliancefunctionestablished
FigureB1:Thefiveelementsofgoodcorporategovernance
ii.
Whycorporategovernancematters?
Corporategovernancematterstostakeholdersforbroadlysimilarreasons. Investorscareaboutcorporategovernancesincewellgovernedcompanieshavelowerrisk and fewer unexpected events. Wellgoverned companies are better at protecting shareholderrights,andprovidebetterassurancethatmanagersanddirectorswillactin the best interest of the company and all of its shareholders. In terms of financial and
1
OECDPrinciplesofCorporateGovernance,2004.
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operationalperformance,wellgovernedcompaniesoutperformtheirpeersandprovidea higherlongtermreturnoninvestment. Companies benefit as the risks associated with the corporation decrease. Since good corporate governance minimizes rentseeking2 by managers or controlling shareholders,investorsinvestwithagreatersenseofsecurityandconfidence.Theresult forthecompanyisgreateraccesstocapital.Thecostofcapitaliseffectivelyreducedand the value of the corporation increases. The reduction in risk is complemented by improved operations, which come from better information flows and more rigorous strategicdecisionmaking,whichultimatelycontributetobetterperformance. The public sector cares about corporate governance as it facilitates the development of stronger capital markets, reduces risk, and improves a countrys ability to mobilize, allocate and monitor investmentsall of which help foster economic growth. The vulnerability to financial crisis, as witnessedin South East Asia and Russia in 1997 and todaysU.S.basedmortgagecrisis,canalsobeminimized,ifnotavoided,throughbetter corporategovernance. Otherstakeholderssuchasbanks,suppliersandemployeesbenefitfromthereducedriskand theincreasedhealthofthecompany.Banks,inparticular,willmakecreditdecisionswith greaterconfidence,andcanexpectthattheywillbehandledfairlyshouldproblemsarise. Otherstakeholders,includingsuppliersandemployees,willprefertoenterintobusiness relationshipswithwellgovernedcompanies,sincetheresultingrelationshipsarelikelyto be more prosperous, fairer and longerlasting compared to companies where corporate governancepracticesaredeficient. Didyouknowthat? Wellgoverned UK companies posted 18% higher returns than those with poor governance, after adjusting for risk; worst offenders underperformed the average industryadjustedreturnonassetsbythreetofivepercentagepointsayear.3 WellgovernedfirmsinKoreahavebeenfoundtotradeatapremiumof160%topoorly governedfirms.4 A worsttobest improvement in corporate governance predicted an astronomical 700 foldincreaseinfirmvalueamongRussianfirms.5 A study of S&P 500 firms showed that companies with strong or improving corporate governancepracticesoutperformedthosewithpoorordeterioratinggovernancepractices byabout19%overatwoyearperiod.6 Institutional investors will pay premiums to own wellgoverned companies. Premiums averaged30%inEasternEuropeandAfricaand22%inAsiaandLatinAmerica.7
2
Ineconomics,rentseekingreferstoindividualsorcorporationsthatseekgainsbymanipulatingtheenvironmentrather thanthroughproductivebehavior. ABI Research Paper 7, Governance and Performance in Corporate Britain, the Association of British Insurers (ABI), February 2008. The study also found that it takes two to three years after a company starts breaching until there is an impactonperformance. Black,B.S.;Jang,H.,Kim,W.(2004),PredictingFirmsCorporateGovernanceChoices:EvidencefromKorea,University ofTexasLawSchoolWorkingPaperNo.39,August. Black,B.(2001),TheCorporateGovernanceBehaviorandMarketValueofRussianFirms,EmergingMarketsReview,vol. 2,March. Grandmont, R., Grant, G, and Silva, F. (2004), Beyond the Numbers Corporate Governance: Implications for Investors, (DeutscheBank,April1). McKinseysGlobalInvestorOpinionSurvey,2002.
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II.
RecenttrendsanddevelopmentsincorporategovernanceacrossMENA In the past seven years there have been major worldwide changes in the area of corporate governance. During this period, there have been more than 90 legislative initiatives in 30 different countries, in addition to countless of studies and initiatives to updatebestpracticeincorporategovernance. TheMiddleEastandNorthAfrica(MENA)region,too,hasseenimportantchangesinthe fieldofcorporategovernance.Indeed,notsevenyearsagocorporategovernancewasa nascent,largelyunknownconcept.Today,100sofconferencesoncorporategovernance have been held across the region, a number of MENA countries have adopted new or amended existing corporate governance codes and regulations,8 institutes of corporate governanceordirectorshavebeenestablished,9andbanksandcompaniesthemselvesare starting to undertake corporate governance improvement plans. A number of events have spurred the emergence of corporate governance as a leading reform initiative, including: (i) a number of domestic reform initiatives in the region, in particular the launch of Hawkamah; (ii) the rise of international, regional and domestic investment to the region, coupled with stock market booms (and corrections), and the emergence of investor activism; (iii) corporate governance programs and projects implemented by international development institutions;.10 updates to the international corporate governanceframework.11
III.
i.
Aboutthissurvey Purposeofthesurvey Theprimaryobjectivesofthesurveyareasfollows: To allow all stakeholders to gain an understanding of the extent to which banks and listed companies in the MENA region follow good corporate governance practices,inlinewithinternationallyrecognizedbestpractice. To assist both the private and public sectors to close any gaps between best and currentpractice,byidentifyingareasforimprovement. Toprovidecorporategovernanceprojectswithabaselineonwhichto focustheir corporategovernancereformactivities.
The following countries have launched or amended corporate governance codes or regulations: Egypt: Corporate GovernanceCodeforListedCompanies(2005)andStateOwnedEnterprises(2006);Jordan:CorporateGovernanceCode for Banks; Lebanon: Corporate Governance Code for Small and MediumSized Companies; Morocco: Corporate GovernanceCode(2008);Oman:CorporateGovernanceCodeforListedCompanies(2002,updateinprocess);Kingdom of Saudi Arabia: Corporate Governance Regulations (2006); UAE: ADSM Corporate Governance Code (2006); ADSM CorporateGovernanceListingRules(2006);ESCACorporateGovernanceRegulation(2007).Thefollowingcountriesare in the process of launching codes or regulations: Algeria: Corporate Governance Code for FamilyOwned Enterprises; Lebanon:CorporateGovernanceCodeforListedCompaniesandBanks;Bahrain:CorporateGovernanceCodeforListed Companies; Tunisia: Corporate Governance Code for Listed Companies; West Bank & Gaza: Corporate Governance Code for Small and MediumSized Companies; Jordan: Corporate Governance Code for Listed Companies; Yemen: CorporateGovernanceCodeforSmallandMediumSizedCompanies. InstitutesthathavebeenestablishedintheregionaretheEgyptianInstituteofDirectors(2005),theHawkamahInstituteof CorporateGovernance(2006);andtheInstituteofDirectors(2007).
10
Notably the Center for International Private Enterprise (CIPE), Global Corporate Governance Forum, IFC, Organization forEconomicCooperationandDevelopment(OECD)andWorldBank. Revised OECD Principles of Corporate Governance (1997, revised in 2004); Basel Committee on Banking Supervisions Guidance on EnhancingCorporateGovernanceforBanking Organizations(1998,revised in2006);OECD Guidelines on Corporate Governance of Stateowned Enterprises (2005); the Islamic Financial Services Boards Guiding Principles on Corporate Governance for Institutions Offering Only Islamic Financial Services (Excluding Islamic Insurance (Takaful) InstitutionsandIslamicMutualFunds)(2006).
11
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ii.
Targetcountriesandorganizations ThesurveytargetedcountrieswithoperationalstockexchangesinthreeMENAregions specifically the Maghreb (Morocco, Tunisia), Mashrek (Egypt, Jordan, Lebanon and West Bank & Gaza) and the Gulf Cooperation Council or GCC (Bahrain, Kuwait, Oman, Saudi Arabia and the United Arab Emirates). Within these countries, the surveytargetedbanks,bothlistedandnonlisted,andpubliclylistedcompanies.
iii.
Surveytimeline The survey was launched in July 2006 and final data collection completed by July 2007.
iv.
Surveyresponserateandsampleerror The universe consists of 1,044 banks and listed companies, specifically 122 banks (of which 65 are listed and 57 nonlisted), as and922listedcompanies. TableB1:Finalsurveyresponserate Banks Listedcompanies Total
74 81 155 Thefinalresponseratetothesurveywas155 respondentsofwhich74werebanksand81listedcompanies(seealsoTableB1).The sampleerrorthatresultedforbanksandcompaniesis7.27%,withaconfidencelevel of95%.Whentakenindividually,thesampleerrorforbanksis7.18%andforlisted companies10.14%(seealsoTableB2). TableB2:Surveysampleerror These sample errors, slightly higher than the 5% usually No.ofResponses SampleError considered when large universes are estimated, are Banks 74 7,18% due to the relatively small size of the universe and the Listedcompanies 81 10,41% fact that the survey targeted highlevel senior executives TOTAL 155 7,27% anddirectors,manyofwhich could not find the time to respond.TheresponseratebycountrytothesurveyisshownintheFigureB2.
FigureB2:Responseratetothequestionnairebycountrydisaggregatedbytypeofentity
40 35 30 25 20 15 10 5 0
11 8 3 20 17 28 37
19 14 9 10 4 6 5 1 5 2 3 9 6 15 9 54 76 13 12 8 4 5 32
Total Banks Listed Companies
da n Ku wa it Le ba no n Mo ro cc o
in
Eg yp t
Om Sa an ud iA ra bi Un a ite Tu d ni Ar sia ab W Em es i ra tB te an s k & Ga za
Ba hr a
Jo r
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MENAWIDECORPORATEGOVERNANCESURVEY SECTIONC:MAINFINDINGS

SectionC. MainFindings
I.
i. DemonstratingCommitmenttoGoodcorporategovernance Understandingthedefinitionofandbusinesscaseforcorporategovernance AsshowninFigureC1,thegreatmajorityofrespondents76%ofbanksand67%of listed companiescited implementing corporate governance as being important to veryimportantfortheirbusinesses. FigureC1:Theimportanceofimplementingcorporategovernance
ListedCompanies
14%
19%
38%
30%
Banks
4%
19%
43%
33%
Irrelevant
Ofaverageimportance
Important
Veryimportant
On the other hand, not all respondents were able to properly define the term corporategovernanceasasystembywhichcompaniesaredirectedandcontrolled. Respondents confused the term corporate governance with corporate social responsibility(CSR)orcorporatemanagement,orhadanarrow,complianceviewof corporate governance (see Figure C2). And while both CSR and corporate management are clearly important issuesand most certainly will reinforce each othertheyaretwoverydistinctconceptsfromcorporategovernancethatmerittheir ownattentionandthusneedtobeconsideredseparately. FigureC2:Definingcorporategovernance ListedCompany
Asystembywhichcompaniesaredirectedandcontrolled Acommitmenttocontributetosustainableeconomicdevelopment ThecompanyIsinternalstructurethatwillallowittocomply Asetoftoolstohelpmanagementrunthedaytodayactivities ItisthesamethingasCorporateSocialResponsibility Banks 20% 6% 4% 55% 10% 8% 7% 21% 26% 44%
Unsurprisinglyandinlinewiththefindingsinthissection,Figure C3demonstrates thatagreatmajorityofsurveyrespondentsassociatedthebenefitsofgoodcorporate governance with better compliance and improved reputation; only a small majority citedalowercostofcapitalandaccesstooutsidecapital.
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FigureC3:Understandingthebusinesscaseforcorporategovernance
S ustainabilityovertime Mitigationofrisk ComplywithBankisrequirement Protectshareholderrights Building/enhancingthecompany/bankreputationandtrustamo Compliancewithlegalandregulatoryrequirements Preventand/orresolvecorporateconflicts Improveoperationalefficiency Lowercostofdebt Lowercostofequity Accesstoexternalcapital Improvestrategicdecisionmaking
41% 40% 36% 21% 38% 59% 64% 56%
62% 61% 52% 27% 36% 34% 22% 19% 17% 22% 33% 36% 53% 0% 10% 20% 30% 40% 50% Banks 60% 68% 52% 70%
70%
80%
ListedCompanies
Didyouknowthatthechairsandfinancedirectorsofthetop1,000listedUKfirms cited the following three benefits of improved corporate governance: (i) protecting shareholder rights (95%); (ii) improving access to external capital (88%); and (iii) loweringcostofdebtandequity(85%)?Only1%ofrespondentsstatedcompliance withregulationsasamajorbenefit.12 In order to ensure that the benefits from implementing good corporate governance are understood in theory and also translate into practice, all relevant stakeholders should focus on building the business case for good corporate governance by encouraging targeted seminars and workshops for directors and managers on corporategovernance.Banksandcompaniesinturnshouldencouragetheirdirectors andseniormanagerstoattendsuchevents. ii. Implementingcorporategovernance:practicevs.theory Table C1andFigure C5highlightthatwhilebanksandlistedcompaniesstatethat corporategovernancematterstothem,fewcancrediblyclaimtohavingimplemented broadscalereforms.Infact,notasinglerespondenthadappliedall32indicatorsof whatcouldreasonablyqualifyacompanyasafollowingbestpracticeandonlyfive respondents or 3% could be deemed to follow good practice, having implemented between 1623 indicators (see Section E.II for the complete list of indicators). The great majority of companies, 92% in all, fall under the emerging practice or improvedpracticesections. TableC1:Corporategovernanceindicators
12
Moxey,P.(2004),CorporateGovernanceandWealthCreation,ACCAOccasionalResearchPaperNo.37.
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No.ofindicators followed 07 815 1623 2431 32
Levelofpractice Underdevelopedpractice Emergingpractice Improvedpractice Goodpractice Bestpractice TOTALSAMPLE
No.ofrespondents 7 78 62 5 0 152
%ofrespondents 5% 51% 41% 3% 0% 100%
FigureC4:Bestpracticeindicatorsandlevels
78 80 70 60 50 40 30 20 10 0
Underdeveloped practice Emerging practice Improved practice Good practice Best practice
FigureC5:Corporategovernanceindicators
62
According to Figure C6 banks follow better governance practices than listed companies. This is unsurprising, given the fact that banks are typically highly regulated, with specific central bank circulars and regulations on, for example, risk, internal controls, disclosure and even board composition. Interestingly, results for bothbanksandlistedcompaniesfollowasimilartrend,withallrespondentsscoring relativelyhigh(50%andabove)ondisclosureandtransparency,aswellasthecontrol environment, both of which are typically codified in laws and regulations, while respondentsfailedtobreakthe50%thresholdfortheotherindicators,namelyboard practices (47%), shareholder rights (42%) and commitment to good corporate governance(40%).
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FigureC6:Implementingthefivepillarsofgoodcorporategovernance
80% 70% 60% 50% 40% 30% 20% 10% 0% Commitment to corporate governance 40% 44% 37%
Board of directors 47% 51% 45% Aggregated
Control environment 50% 56% 44% Banks
Transparency and disclosure 65% 73% 58% Listed companies
Shareholder's rights 42% 50% 35%
Aggregated Banks Listed companies
iii.
Recognizinginternationalreferencepointsforgoodpractice It appears from the survey responses shown in Figure C7 that a great number of respondents,inparticularlistedcompanies,didnotfollowinternationallyrecognized reference points for good corporate governance, such as the OECD Principles of Corporate Governance (OECD Principles), 25,6% among listed companies, while 57.5% of banks followed the Basel Committee on Banking Supervisions Guidelines on Enhancing Corporate Governance for Banking Organizations (BCBS Guidelines). Compliance with national codes of corporate governance, insofar as they exist, appears more widespread. Again, awareness raising of the existence of these principles, aswellas effortstoadapt these best practices to thelocal circumstances, maywellhelpimproveuponthesefiguresintheyearstocome.
FigureC7:Usinginternationalbestpracticesasabasisforreforms iv.
The OECD Principles 2,6% The T You country is National Code of recommendations corporate of the Basel governance Committee on Banking Superv
None
57,5%
53,4%
42,3% 38,5% Banks
30,1% 25,6%
Listed Companies
13,7%
Formalizingcorporategovernancepoliciesandprocedures Corporate governance reforms are ultimately based on changes in behavior commitment, integrity, objectivity, courage and vigilance, to name but a few notablythoseofshareholders,directorsandmanagers.Suchbehavioralchangedoes
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nottypicallyoccurovernight.Cultureisprocessovertime.13Andsoexplicitchanges toacompanysgovernancepolicies,proceduresandprocessescanpositivelyaffectits corporategovernancecultureovertimeandwithitthebehaviorofitsagents. Figure C8 demonstrates that while most companies choose to use bylaws to formalize their corporate governance practices, the use of a companylevel code of corporategovernance(36.5%)orcodeofethics(49.3%)isnotwidespread. FigureC8:Formalizingcorporategovernance
byLaws CharteroftheBoardofdirectors StatementofadherencetoNationalorInternationalCode CodeofEthics CompanyCodeofcorporategovernance 0% 10% 36% 37% 36% 38% 36% 20% 30% 40% 50% 60% 70% Banks 80% 90% 64% 60% 53% 78% 75%
ListedCompanies
Didyouknowthatin2004,96%oftheFORTUNE1,000companiesintheUSstated that their board, had written guidelines on corporate governance (compared with 71%in2002)?Thepracticeisalsogainingbroaderacceptanceinothercountries,such as in France where 54% of boards have adopted formal board guidelines in 2004, comparedto36%in2003.14 The adoption of new and periodic revision of existing corporate governance documentsconstitutesanimportanttime commitment from the board and senior management. Nevertheless, policies and proceduresshouldbedraftedandkeptup to date, as they play an important role in the daytoday conduct of the business andinformingthecultureofthebusiness. Indeed, as well as supporting the consistent application of policies, procedures and internal controls, written documentation helps banks and companies allocate responsibilities and authorities; reinforces accountability in the event of performance or compliance failure; and improve upon internal and externalcommunication. FigureC9:Whattoformalize
Articlesofassociation Companygovernancecode Codeofethicsand/orconduct Chartersforthe: - Generalassembly - Boardofdirectors - Boardcommittees - Executiveboard Policiesandprocedureson: - Dividends - Informationdisclosure - Riskmanagement&internalcontrols - Internalaudit - Compliance Termsofreferencefor: - Chiefexecutiveofficer - Chieffinancialofficer - Headofinternalaudit - Companysecretary
Theprocessofreviewingandupdatingneedstobeintegratedintothejobdescription of the designated corporate governance champion. Figure C8 contains a comprehensive list of policies and procedures that a company may well wish to
13 14
ByPeterDrucker. 31stAnnualBoardofDirectorsStudy,Korn/FerryInternational,2004.
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codify to ensure for effective and efficient decisionmaking and communication acrosstheorganization. Banks and listed companies may find it beneficial to publish their corporate governance code, board and committee charters, and codes of conduct on their website, as well as references to these in the annual report. Institutional investors and ratings agencies are looking increasingly at the state of a banks corporate governance when making their assessments. Published information is frequently theironlysourceofcomfort,shortofdirectlyquestioningthebankorlistedcompany. Did you know that ethical breaches by management or employees caused 37% of highprofile business failures in Europe? A recent study of 60 European cases of formal bankruptcy or stock price free fall shows this remarkable impact of ethical lapses.15Inalargenumberofthesecases,adominantshareholderormanagerwith big ambitions acted unethically, and his/her actions went unchallenged by the companyandbytheboard.Formalcorporategovernancecodesandcodesofethics can help guard against unethical behavior in companies. A formal performance reviewoftheCEObytheboardofdirectorscanalsohelprootoutethicalproblems beforetheyleadtobusinessfailures. Finally, it is important not to confuse substance with form. Directors and senior managers do not simply go through the motions and follow the form of good corporate governance; they needs to understand their proper roles and responsibilities, and act in accordance with the precepts of good corporate governance. In the end, corporate governance is as much about behavior as it is aboutprocessesandprocedures. v. Assigningresponsibilityforcorporategovernance Just under half of surveyed banks (47%) and listed companies (49%) assign the responsibility for corporate governance policies to the boardinline with good practice. The boards responsibility does not, however, end just by drafting the general corporate governance policy but also in monitoring its compliance. Indeed, best practice calls for boards to create corporate governance committees and task such committeewithevaluating,planningandoverseeingtheimplementationofcorporate governance reforms. Only 13% of listed companies and 10% of banks have such corporategovernancecommittees;18%oflistedcompaniesand16%ofbanksdonot assignthisresponsibilitytoanycorporatebodyorperson.
15
Classification and Analysis of Major European Business Failures, Maastricht Accounting, Auditing & Information ManagementResearchCenter,RSMErasmusUniversity.October2005
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FigureC10:Assigningresponsibilityforcorporategovernance
60% 50% 40% 30% 20% 10% 0%

TheBoardof directors The theBoardof directors Corporate Committee oftheBoard ofdirectors
ListedCompanies 49% 47%
Banks
13% 10% 5% 3% 1%
18%16% 7% 6% 10% 3% 5% 4% 3%
The Corporate Secretary
TheChief Executive Officer/ General Director
The Compliance Officer
Other
Noonein particular
Chairmanof governance
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Figure C10 reveals that three important figures do not appear to play a role in developing, implementing and monitoring corporate governance improvements. Indeed, only a small minority of banks and companies involve the CEO, board chairman and company secretary in developing corporate governance frameworks. Alldo,however,haveanimportantroletoplay. Role of CEO and chairman: The CEO and board chairman generate the leadershipanddriveessentialforcorporategovernancereformstosucceed.This issometimesreferredtoasthetoneatthetop.Bestpracticeisforthechairman and CEO to put corporate governance issues on the boards agenda, and encourageafrankandopendiscussion.ThechairmanandCEOshouldseekto educate board members on the importance of corporate governance, on its benefits,andtherespectiverolesofvariousparties.Theyshouldstartaprocess of evaluation, assessment and improvement. This process should become iterative so that good corporate governance processes and procedures become ingrained. Role of company secretary: Best practice is to provide resources and assign responsibility to a corporate governance champion, ideally to a professional company secretary (or for smaller firms the legal counsel who may double as company secretary), who should be made responsible for developing, implementing and periodically reviewing corporate governance related documentation, under the supervision of the CEO and board through its chairmanorcorporategovernancecommittee.Thecompanysecretaryservesas the focal point for communications with and between the board, senior management and the banks shareholders, and acts as the chief advisor to the boardonallcorporategovernancematters.(Moreinformationontheroleofthe companysecretarycanbefoundinSectionC.II.d.onpage33). Didyouknowthatasurveyof400companiesintheUSrevealedthatthecompany secretary is responsible for compliance and governance, and that 16% even have createdthepositionofchiefgovernanceofficer?16 vi. Understandingbarrierstoreform FigureC11showshowimportantitistotrainorimpartcorporategovernanceknow how to assist companies in implementing corporate governance reforms. 53% of banks and 38% of listed companies stated that the main barrier to implementing corporate governance is a lack of qualified specialists. Similarly, 47% of banks and 43%oflistedcompaniescitedalackofinformationandknowhowasmainbarrierto implementcorporategovernanceis,sinceansweredinthatdirection. FigureC11:Barrierstoimplementingcorporategovernance
16
A survey of 400 corporate secretaries, general counsels and other governance professionals conducted in 2005 by the SocietyofCorporateSecretariesandGovernanceProfessionals.
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1% 4%
Thelocalcorporatelegislationiscontrarytotheinternational standards
7% 5% 13% 7% 8% 10% 10% 23%
Expenditureoncorporategovernanceissuesyieldspoorreturn
orporategovernanceisalowpriorityincomparisontoothertasks
19%
31% 53% 47% 43%
38%
Lackofinformation/knowhow
0%
ListedCompanies Banks
10%
20%
30%
40%
50%
60%
Regulators should consider whether to strongly recommend or mandate corporate governancetrainingforallindividualwhoserveonaboard.Topreventregulatory actioninthisarea,banksandlistedcompaniesshouldencouragetheirdirectorsand senior managers to undertake training on corporate governance and other related topics, such as for example on finance and accounting or risk management. (Additional information on boardroom training can be found in Section C.II.d. on page39). vii. Lookingahead:prioritiesforcorporategovernancereforms The following
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Figure C12depictsthethreepriorityreformareasthatbanksandcompaniesintend toimplementinthefuture:(i)toestablishboardcommittees;(ii)toimplementIFRS; and (iii) to draft a companylevel corporate governance code. In particular the last pointisanexcellentstartingpointforcorporategovernancereforms,asitallowsthe companytodefineitsownuniquesetofcorporategovernanceprinciples.
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FigureC12:Corporategovernancereformpriorities
Banks
ListedCompanies
51% 52% 40% 36% 49% 34% 25% 23% 42% 34% 23% 14% 49% 40% 45% 21% 29% 18% 29% 26% 11% Establish General Shareholder Meeting procedures Establish Boardof directors Charter Establish conflictof interestand relatedparty transaction None 18% 39% 30% 43% 31%
Implement International Accounting Standards
Introduce independent directorsto theBoardof directors
Establish Corporate Secretary position
Implement remuneration systemfor executives
Establish Board committees
Approvea corporate governance Code
Seekfull corporate governance plan
TrainBoard memberson corporate governance issues
Seek consultancy onspecific corporate governance issues
Of note is that an important percentage of listed companies are interested in nominating independent directors to the board (49%), as well as introducing proceduresonconflictsofinterestandrelatedpartytransactions(43%),bothofwhich arekeyelementstoaneffectivecorporategovernanceframework,whereasonly23% respectively26%ofbanksplanondoingso.
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II.
ImplementingGoodBoardPractices Whenyousweepthestairs,youalwaysstartfromthetop.17 Theboardiswherekeycorporategovernanceissuesconverge.Theboardisresponsible for strategic guidance and oversight of management, and functions as a trustee for shareholders. These are important responsibilities, and the means by which the board organizes itself will be an important factor in determining how well it fulfils its responsibilities. A professional, independent and vigilant board is essential for good corporate governance. Ultimately, the board cannot substitute for talented professional managers.Norcanitchangetheeconomicenvironmentinwhichacompanyoperates.It can, however, influence the companys performance and sustainability through its guidanceto,andoversightofmanagement. i. Theroleoftheboard Although specific board authorities will vary by country based on legal traditions, virtuallyallinternationalandnationalcodesofcorporategovernanceagreethatthe overarching role of the board is to strategically guide and oversee management, as wellastoensurethatarobustcorporategovernanceframeworkisinplace. a. Theboardsroleinreviewingandapprovingcompanystrategy An overwhelming majority of respondents (93% of banks and 87% of listed companies, see Figure C12Error! Reference source not found.) stated that the board was responsible for setting company strategy. The process of setting strategyisalsoassumedbytheCEOinalmostaquarterofthebanksandlisted companies surveyed (21% and 30% respectively). FigureC13:Settingcorporatestrategy Managers with their industry 93% knowledge and resources are, 100% 87% however, best placed to develop 80% and then implement strategies, 60% while directors with their 30% 40% experience and objectivity in turn 21% 20% are best positioned to review, 4% 4% challenge and ultimately approve 0% these strategies, in particular Board CEO GMS objectives and corresponding key Banks Listedcompanies performance indicators. The developmentofstrategyisacomplex,difficultandtimeconsumingexercisethat isrightlytheprimaryresponsibilityoftheexecutive,althoughsomeboardshave done well to formulate highlevel strategies to effectively guide management in strategic decisionmaking. Directors and managers would be well served to openly discuss and agree on their respective roles with respect to the strategic decisionmaking process, ideally during the first board meeting following the generallyassembly. b. Theboardsroleinoverseeingmanagement Thesecondprinciple roleoftheboardis to oversee management. The primary means of doing so is to request management to report back to the board on its
17
AGermanproverb.
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implementationofstrategy andadefinedset of key performance indicators. In addition, selecting and, when necessary, replacing the CEO constitutes an importantfirststepindefiningtherelationshipbetweentheboardandCEO. Figure C14showsthatavastmajorityofboardsinMENAdoselectanddismiss theCEO.Sixteenpercentofrespondentscitedthatthegeneralassemblyelected and dismissed the CEO, which arguably runs counter to good corporate governanceasitmaywellunderminetheauthorityoftheboard. FigureC14:ElectinganddismissingtheCEO
100% 80% 60% 40% 20% 0%
Banks Listed companies Board 84,30% 88,00% CEO 7,10% 5,30% GM S 18,60% 14,70%
Banks
Listed companies
Asfortheotherkeyexecutivesandmanagers,resultsshowthattheirselectionis entitledceterisparibustotheboardandtheCEO(seeFigure C15).Bestpractice callsfortheCEOtoselecthisorhermanagementteam,however,fortheboardto establish appropriate parameters ex antefor example on qualification requirements and remuneration levelsand ex postfor example in approving finalcandidates. FigureC15:Electinganddismissingotherkeyexecutives
Board CEO GMS 56% 64% Banks 6%
Listedcompanies 1%
51%
71%
Board
CEO
GMS
Settinga succession policyandoverseeingsuccession planningby management is an important function of the board, as it allows a company to develop and changeleadershipinasystemic,progressiveandnondisruptivemanner.Simply nominatingadeputydoesnotconstitutebestpracticeinsuccessionplanning,as itfailstocapturethesystematicdevelopmentoftalentwithinthecompany.
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Successionplansshouldbeinplaceforallkeyexecutives,inparticulartheCEO andCFO,butalsofordirectorsandtheboardchairman. Results shown in Figure C15 offer a FigureC16:Approving positivepictureinthat77%ofboards successionplans 13% feel responsible for approving succession plans of key executives in of cases. However, these results should not be misinterpreted to mean 28% that succession plans beyond naming a deputyareactually in place inmost companies in the region. Indeed, as 77% can be seen in Section D.II.ii below (see page68), only 29% of family Board CEO GMS owned enterprises have succession plans in place, and qualitative data from the interview process suggest that most respondents have simply named deputiesassuccessors. Did you know that the importance of succession planning for familyowned businessesisofevengreaterimportance?Astudyofinheritedfamilyfirmsand management practices in the UK shows that while family ownership seems to improve a companys management practices, family management of family ownedfirmsoftenleadstoperformancewoes.18Evenworse,choosingaCEOby primogeniture(selectingtheeldestsontolead)tendstoleadtoextremelybad performance. The lack of a deep selection pooldue to a restricted number of familymembersandtheCarnegieeffectinwhichfamilymembersworkless hard at school and early in their careers with the knowledge of a guaranteed family jobbecome more severe in situations of primogeniture, since the CEO positionisdeterminedfrombirth.Thisisbutonereasonwhyonly5%offamily runenterprisescontinuetoaddvalueafterthethirdgenerationofownership. c. Theboardsroleinimplementingcorporategovernancestructures,policiesandpractices Thethirdand final key roleoftheboard is to implement appropriate corporate governancestructures,policiesandprocedures,andpracticesby:(i)ensuringfor companywide commitment to good corporate governance; (ii) implementing good board practices; (iii) establishing a robust control environment; (iv) strengtheningtransparencyanddisclosure;and(v)protectingshareholderrights, in particular those of minorities. However, while boards state that corporate governance matters to them, few can credibly claim to having implemented broadscalereforms(seeTable C1andFigure C5onpage15above).Assuch, not a single respondent had applied all 32 indicators of what could reasonably qualifyacompanyasfollowingbestpracticeintheareaofcorporategovernance ii. Boardcomposition In order to effectively fulfill the boards role, directors should be qualified, have a clearunderstandingoftheirdutytothecompanyandallshareholders,andbeableto exercise sound, objective and independent judgment. This can be achieved by differentmeansandapproachestotheboardssizeandcomposition.
18
FromInheritedFamilyFirmsandManagementPractices:TheCase forModernizing theUKsInheritanceTax.Centre forEconomicPerformance,LondonSchoolofEconomics.
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a.
Boardsize Having either too few or too many directors can be a problem for effective decisionmaking.Aboardwithtoofewmembersmaynotallowthecompanyto benefit from an appropriate mixofskills and breadth of experience. A larger board, on the other hand, is typically difficult to manage, and can make consensusbuildingtimeconsuminganddifficult.Thechallengeinselectingthe correct board size is striking an appropriate balance within the framework mandatedbylaw.Thesizeoftheboardshouldthusenableacompanytohold productiveandconstructivediscussionsandmakepromptandrealdecisions.
FigureC17:Boardsize
Morethan10 8to10 6to7 2to5 0 0% 0 Listedcompanies Banks 4,9% 2,8% 5% 10% 15% 2to5 11,1% 2,8% Banks 20% 25% 6to7 18,5% 22,5% 30% 35% 40% 45% Morethan10 24,7% 40,8%
8to10 40,7% 31,0%
Listedcompanies
ThemajorityofboardsinMENAhaveeightormoremembers(seeFigure C17). Bankboardsareusuallycomposedoftenormoremembers,whiletheboardsof listedcompaniestypicallyhaveeighttoten.Thesenumbersappeartobeinline withbestpractice. b. Identifyingtherightmixofexecutive,nonexecutiveandindependentdirectors Companies can benefit from a having an appropriate mix of executive, non executive and independent directors on its board. In defining the right mixfor the board, it is important to understand the roles executive, nonexecutive and independentdirectorsplay.TableC2summarizestheseroles: TableC2:Theroleofexecutive,nonexecutiveandindependentdirectors Definition:Anexecutivedirectorholdsanoperationalpositionin the company. The executives that one typically finds on boards aretheCEOandCFO. Role: Executives are inevitably best informed on the state of the business and the challenges it faces, since they confront the problemseveryday.Theyarealsoultimatelyresponsibleforthe operatingresultsofthecompanyandmayaddtremendousvalue to the board given their understanding of the bank or company andindustryexpertise.
Executivedirectors
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Nonexecutivedirectors
Definition: Nonexecutive directors are board members that do not hold an executive position in the company. A nonexecutive directormayormaynotbeindependent. Role: Current thinking is that the talent and skills of non executivedirectorswhoarenottechnicallyindependentarebeing overlooked or rejected purely on formal grounds. Nonexecutive directors may contribute: (i) an outside perspective and greater impartialityintheirjudgments;(ii)additionalexternalexperience andknowledge;and(iii)usefulcontacts.
Independentdirectors
Definition: An independent director is a director who has no material relationship with the company beyond his or her directorship. Anindependentdirector shouldbe independentin characterandjudgment,andthereshouldbenorelationshipsor circumstances which could affect, or might appear to affect, the directorsindependentjudgment. Role: The purpose of identifying and electing independent directorsistoensurethattheboardincludesindividualswhocan effectivelyexercisebestjudgmentfortheexclusivebenefitofthe companyandallshareholders,whosejudgmentisnotcloudedby personalinterestorloyaltiesandeitherrealorperceivedconflicts of interest. Independent directors are best able to assess situations openly, and bring an objective and unbiased view to discussions,withoutthefearofpossibleretribution.
As may be inferred from Figures C17 through 19, boards in the MENA region appear to be relatively well balanced, with most boards consisting of a healthy mix of executive and nonexecutive directors, complemented with a few independent directors. However, experience on the ground and qualitative resultsfromtheoneononeinterviewprocessappearstotelladifferenttale,with boards in some MENA countries (in particular the Mashreq region) being dominated by executives,with boards in other countries (in particular theGCC region)beingexclusivelycomposedofnonexecutivedirectors(and,inaggregate, portrayingabalancedmixofdirectortypesthatmaynotexistinpractice).
8to10 FigureC18:Numberofnonexecutive directors FigureC19:Numberofexecutivedirectors 6to7 2to5 1 0 0% 5% 0 Listedcompanies Banks 14,8% 18,6% 10% 15% 1 34,6% 38,6% Banks 20% 25% 30% 35% 40% 6to7 1,2% 2,9% 45% 8to10 6,2% 0,0%
2to5 43,2% 40,0%
Listedcompanies
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FigureC20:Numberofindependentdirectors
However, the survey is clear on the subject of independence: 57.6% of all listed companiesand54.3%ofbanksonlyhaveasingle,ornoindependentdirectoron their board, which over the years has become condition sine qua non for good corporategovernance. Didyouknowthatanaverageoftenindependentdirectorsconstituting80%of the boardsit on the boards of S&P 500 companies operating in the financial industryintheUS.19ThisispartlytheresultofthelistingrulesoftheNYSEand NASDAQthatamajorityofdirectorsbeindependent. Thoughgreaterindependenceishighlydesirable,especiallyforlistedfirms,this requirement may be unrealistic in MENA. It is essential to have some independentdirectors,butamajoritymightnotbefeasible,atleastintheshortto medium term. Any similar requirement imposed by the regulator should take into account, amongst other things, the ownership structure, the local culture, and the pool of qualified independent directors. A minimum of three independent directors to chair key board committeesthe audit, nominations and remuneration committeesmight be an appropriate benchmark for regulatorstostrivefor. c. Identifyingtherightmixofskillsfortheboard Independence is not a panacea. Other skills such as expertise and experience, andcharacteristicssuchasintegrityandloyalty,arejustasimportanttocomplete theboardqualitiesthathelptheboardcollectivelyactasavaluableadvisorto theexecutive. Some basic skills such as finance and accounting, as well as audit are universallyusefultoboards.Boardsshouldensurethattheyhavedirectors with relevant industry experience, which is useful in identifying industry trends and developments, and in guiding management in setting strategy. Boards may also find it useful to have directors who are legal experts; experienced in mergers and acquisitions or reorganizations; or perhaps
19
TheSpenserStuartBoardIndex,2005.
Page30of85

knowledgeableintakingcompaniespublic.Attimes,itcouldbebeneficialto includetherepresentativesofkeystakeholdersontheboard.Experienceof operatinginaforeigncountrycanalsobeofgreatbenefit,forexampleincase ofopeningofficesorlaunchingproductsabroad. Characteristics and qualities such as leadership, honesty, loyalty and integrity are of course not to be underestimated and are of fundamental importanceintimesofcrisis.Forexample,theabilityofanonexecutiveor independentdirectortochallengethestrategydevelopedbytheCEO,whois often simultaneously the majority owner, or traditional means of doing business, may at first seem a nuisance but likely prove invaluable over the longrun. At a minimum, all directors should have the necessary time to properly fulfill theirboardduties,whichcanbesubstantial. Anoverwhelmingmajorityofrespondingbanksandlistedcompaniesrequirethe combinationofintegrity(70%)andprofessionalexperience(75%),whichisvery much inline with good corporate governance (see Figure C21). However, respondentschosebeingashareholderasthethirdmostrelevantrequirement forbeingadirector,whichtypicallyleadstothecreationofinsiderorshareholder board that may not always act in the interest of the company and all of its shareholders. Qualitative data and the authors experience confirm that most boardsintheregionareinfactshareholderboards,i.e.dominatedbymajority shareholdersortheirrepresentatives. FigureC21:Requirementsforbeingadirector
33% 4% 75%
70% 16% 69%
Beingashareholder Agelimitations Professionalexperience Integrity Qualificationsrequirementincludedinagoverningdocument Noneoftheabove
d.
Balancingtheboardroom:thevalueaddedofwomanontheboard As can be clearly seen from
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Figure C22, female board members are but a small minority on most MENA boards,iftheyexistatall.Animportantmajorityofbanks(78%)statethatthey do not have a single female board member, while only 1% answered that they had more than one female director. On the other hand, one third of listed companieshadatleastoneormorefemaleboardmembers,asmallbutimportant stepinbalancingtheboardroom.
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FigureC22:Numberofwomenintheboard
Did you know that empirical evidence shows that UKbased companies with female directors scoredsignificantly higher in corporate governance (and hence inlongtermperformance)thancompanieswithallmaleboards.20 iii. a. Boardstructure SeparatingthepositionofboardchairmanandCEO Companies operating in some countries, in particular the US and France have traditionally combined the positions of board chairman and CEO, citing improvedleadershipandefficiencyasthemainrationalefordoingso.Combing these two roles is, however, not considered best practice. Indeed, most leading corporategovernancecodescallforaseparationoftheroleofchairmanandCEO, citingtheneedforeffectiveboardoversightovermanagement,whichisnextto impossible due to the inherent conflict when combining the two positions. A nonexecutivechairmanisalsolikelytobemoreinquisitiveinguidingtheboard in fulfilling its main functions, in particular strategic oversight, and is ideally placedtocounterthe(potential)shorttermfocusoftheCEOwithanoutsideand longtermperspective.Themainargumentforseparatingthesetwofunctionsis thattherolesofthechairmanandtheCEOarefundamentallydifferent,requiring differentskillsandcharacteristics:whiletheCEOrunsthebusiness,thechairman runstheboard. A significant majority of Figure C23: Is the position of CEO and respondents, 65%, state that chairmanheldbythesameperson? both positions are held by 35% different individuals, inline with best practice (see Error! Referencesourcenotfound.). In particular banks (72.2%) 65% follow this best practice, presumably due to central bankregulationstothiseffect. Yes No In contrast, 42.3% of listed companiescontinuetocombinethesetwofunctions.
20
The Female FTSE Report 2004, Canfield University School of Management. The study used 13 indicators to measure corporategovernanceinrelationtogenderdiversity.
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b.
EstablishingboardCommittees The demands on a board continue to increase as markets globalize, regulation becomes more complex and as companies grow. Board committees can be an effective method of dealing with these challenges, and appropriate committees should permit the board to: (i) handle a greater number of issues in a more efficient manner by allowing experts to focus on specific areas and develop recommendationsfortheboardasawhole;(ii)developsubjectspecificexpertise on the companys operations, for example on financial reporting, risk management and internal controls; and (iii) enhance the objectivity and independence of the boards judgment, insulating it from potential undue influence of managers and controlling shareholders, in such key areas as remuneration,directornominationandmanagerialoversight. There is a great variety of committees a board may adopt. The three principal committees for the purpose of corporate governance are the audit, nomination (often called the nominations and corporate governance committee) and remuneration committees. Each of these committees should ideally be entirely composedofindependentdirectors.Ataminimum,thesecommitteesshouldbe chaired by an independent director with the remaining members being non executives. Itisimportanttonotethateveniftheboarddelegatessomeofitsresponsibilities to a committee, the board remains the ultimate decisionmaking authority, and retainsresponsibilityforallboarddecisions.Shouldcommitteesrequireoutside advice, they should be in a position tohire outside expertise to advise them on specific issues, such as studies on remuneration levels for executives. External advisorsshouldnothoweverbecomefullmembersofboardcommitteesasthey arenotboardmembers. When board committees are established, their mandate, composition and workingproceduresshouldbewelldefinedanddisclosedbytheboard. FigureC24belowsummarizesthepercentageofboardsthathaveputthesethree core committees in place. The high presence of audit committees (77.8%) is a positive sign; however, we find that only 26.4% of these committees are composed of a majority of independent directors, inline with good corporate governance.Nominations(22.5%)andremuneration(29.3%)committeesareless prevalentintheregion.
FigureC24:Boardcommitteesestablished
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Did you know that 100% of SAP 500 boards now have an audit committee composedentirelyofindependentdirectors;that100%alsohavearemuneration committee,nearlyallofwhicharecomposedofindependentdirectors;andthat 98.5%ofboardshaveanominating/corporategovernancecommittee,andnearly allcommitteemembersareindependentdirectors?21 iv. a. Workingprocedures Theboardagendaandbriefingmaterials The board agenda determines the issues under discussion during board meetings. It is generally put together under the leadership of the chairman by the company secretary, with input from other directors and the CEO. It is the chairmansdutytoofferdirectorsandtheCEOtheopportunitytosuggestitems, within reason, and any director can and should request that the chairman includesamatterontheboardagenda.Theboardagendashouldstrikeabalance between reviews of past performance (e.g. financial statements) and forward lookingissues(e.g.strategy). The board agenda, along with other key materials, should be combined in a board briefing book and forwarded to all board members at least five business days in advance of the board meeting. As can be seen from Figure C25, the materials that are included in the board briefing book and then forwarded to board members appear to be complete in the majority of cases. Figure C26 showsthatthemajorityofbanksandcompaniesprovidesuchinformationoneto twoweeksbeforetheboardmeeting,inlinewithgoodpractice. FigureC25:Boardbriefingmaterialsdistributedtodirectors
None Drafts on decisions to be approved Updates on key performance indicators Financial statements for reporting period M inutes of the previous Board meeting Explanations of each agenda item M eeting agenda
0% Meeting agenda Listed companies Banks 96,15% 93,15%
10%
20%
30%
40%
50%
60%
70%
80%
90% 100%
Explanation Minutes of s of each agenda 69,23% 80,82% Banks the previous 75,64% 78,08%
Financial statements for 89,74% 87,67%
Updates on Drafts on key performanc 65,38% 75,34% decisions to be 55,13% 67,12% 2,56% 4,11% None
Listed companies

21
TheSpencerStuartBoardIndex,2005.
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FigureC26:Timelinessofdistributingboardbriefingmaterials
b. Meetingfrequency Boardmeetingsshouldbeheldregularly,atleastfourtimesinayear.Asarule ofthumbandinlinewithbestpractice,sixtotenmeetingsarelikelytoconstitute an appropriate number of board meetings in a year, in particular when committeesmeetbetweenboardsessions. FigureC26andFigureC27showthatsignificantdifferencesbetweenbanksand listedcompaniesexist.Ontheonehand,46%ofbanksansweredthattheboard met an average of three to five times per year, and 21% stated that they met betweensixandninetimes.Only27%ofbanksboardsmeettento12timesper year,inlinewithbestpractice.
FigureC28:Meetingfrequencylistedcompanies
10% 14% 1% 3to5times 6to9times 10to12times 13to15times 15% 60% Morethan16times
FigureC27:Meetingfrequencybanks
3% 27% 3%
3to5times
46%
6to9times 10to12times 13to15times Morethan16times
21%
Sixty percent of listed companies responded that they effectively met on a quarterlybasis,andonly15%metbetween6to9timesperyear(seeFigureC26). c. Theroleofthecompanysecretary Manycompanieshaveasecretarytotheboard;few haveprofessionalcompany secretaries.Thecompanysecretarycanplayasignificantroleinprofessionalizing theworkoftheboardandinimprovingcorporategovernancepractices.Indeed, professional corporate secretaries usually have legal backgrounds, understand corporate and securities law, have sufficient business knowledge to understand thecompanys business, and havestrong interpersonalskillsthat allowthemto helpthechairmansteerboards.
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The company secretary is accountable to and supervised by the board to shield himorherfromundueinfluencefrommanagement. The majority of respondents (45%) statedthatthecompany secretary is an employee, or a part time employee, which while appropriate for smallercompanies,may not be appropriate for banks and larger publicly listed companiesduetoalack of independence (see also Figure C28). The company secretary should not also be a boardmember. v. a. Remunerationpolicy Nonexecutiveandindependentdirectorremuneration Nonexecutiveandindependentdirectorsshouldberemuneratedfortheirboard duties. The most common form of remuneration for nonexecutive and independent directors is an annual fee, part or all of which should be linked to meeting attendance. The annual or meeting fee payable to directors should be thesameforallnonexecutiveandindependentdirectors.Additionalfeesshould be paid for additional responsibilities, such as committee membership or for chairingtheboardorboardcommittees. Settinganappropriatelevelofremunerationisimportanttosafeguardthestatus of independent directors in that a directors judgment could be clouded if s/he receives a significant percentage of his or her total income in the form of a directorsfee. As can be seen from FigureC29:Thefunctionofthecompanysecretary
11% 45% 22% 7%
38%
TheBoarddoesnothaveaCompanySecretary TheSecretaryisamemberoftheBoard Yes,onafulltimebasis Yes,onaparttimebasis(CorporateSecre tarycombine sfunc TheSecretaryisanemployeeofthecompany/bank
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Figure C30, 42.9% of companies do not pay their directors an attendance fee. Only 16.1% of nonexecutives receive additional remuneration for serving on committeesandonly11.3%receivefeesforchairingtheboard.
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FigureC30:Boardremunerationstructureandpracticesforbanks
Abilitytousecompanys/banksassets Contributiontopensionfunds Insurance Stockoption Reimbursedfortravelcostsandotherbusinessexpenses FeesforbeingChairmanoftheBoard FeesforadditionalworkintheCommittees FeebaseduponBoardmeetingattendance Annualfee(variablepackage,linkedtoperformance) Annualfee(Fixedpackage) 0%
Annual fee(Fixed package) Noneoftheabove Nonexecutivedirectors Executives 38,10% 41,30% 39,70% 26% 17% 42% 38% 40% 36% 41% 21% 51% 13% 2% 9% 2% 11% 4% 11% 2% 49% 14% 48% 63% 69% 39% 50% 38% 34% 87% 87% 89% 85%
20%
40%
60%
Stock option 86,80% 1,90% 11,30%
80%
100%
Annual Feebased Feesfor Feesfor Reimburs fee upon additional being edfor (variable package, 50,00% 36,20% 37,90% Board meeting 38,50% 50,80% 41,50% workin Chairman the 69,00% 20,70% 17,20% ofthe 63,10% 13,80% 26,20% travel costsand 34,30% 47,80% 49,30%
Insurance
Contributi Abilityto onto use pension company funds s/banks 84,90% 1,90% 13,20% 88,90% 1,90% 9,30%
87,00% 3,70% 11,10%
Executives
Noneoftheabove
Only 3.6% of banks and companies offer their nonexecutive directors stock options. Did you know that performance and stockbased remuneration is typically not offered to nonexecutive directors? Linking nonexecutives remuneration to company performance can be difficult, as nonexecutives are not directly responsible for the daytoday managementand hence performanceof the company. Of particular importance is the question of who approves nonexecutive remuneration. As shown in Figure C31 below, a significant majority of respondents (63%) assign this responsibility to shareholders, with a slight differencebetweenbanks(69%)andlistedcompanies(59%).Bestpracticewould call for the boards independent remuneration committee to set a policy and appropriate remuneration levels, and then to disclose both the policy and remunerationlevelstoshareholders.
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FigureC31:Approvingnonexecutiveremuneration
80%

Board CEO 4,30% 5,30% GMS 68,60% 58,70% 37,10% 45,30% Banks
41%
60% 40%
63%
20% 0%
5% Board CEO GMS
Banks Listedcompanies
Listedcompanies
b.
Executivedirectorremuneration Theremunerationofexecutivesshouldbealignedwiththelongterminterestsof the company and its shareholders. In order to do so, best practice calls for the board to develop a remuneration policy that specifies the relationship between remunerationandperformance,andalsoincludesmeasurablestandardsthatare basedonthecompanysobjectivesandkeyperformanceindicators. When considering key performance indicators, the board and its remuneration committee may wish to consider financial indicatorsfor example return of equityoreconomicvalueaddedaswellasnonfinancialindicatorswhichfor example can be organized around: (i) customer satisfaction levels or retention rates; (ii) operational processes and quality measures; and (iii) internal growth, knowledgemanagementandtrainingprograms,aswellasemployeesatisfaction rates. As can be seen from
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FigureC32theuseofvariableremunerationpackagesis,surprisingly,limitedin the MENA region, with 53.8% of respondents citing that they do not offer their executivesvariablepackages.Stockoptions,too,arenocommonlyusedandonly 9.8% of executivesand 3.6% of nonexecutives have such plans. And while the factthatbanksandcompaniesdonotoffertheirnonexecutivesstockoptionsis inline with best practice, there is an argument to be made for compensating executiveswithsuchoptions,solongastheyarerestrictedovertimeandarenot structuredtoinduceshorttermbehavior. As a rule, executive directors do not receive additional compensation for their work on the board. In MENA, 39.1% of executives do, however, receive board fees. Finally,banksandcompaniestypicallydonotoffertheirexecutiveswithpension orinsurancebenefits,bothofwhichareconsideredlongtermincentivesthatmay helptiekeyexecutivestothecompany.
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FigureC32:Boardremunerationstructureandpracticesforlistedcompanies
Abilitytousecompanys/banksassets Contributiontopensionfunds Insurance Stockoption Reimbursedfortravelcostsandotherbusinessexpenses FeesforbeingChairmanoftheBoard FeesforadditionalworkintheCommittees FeebaseduponBoardmeetingattendance Annualfee(variablepackage,linkedtoperformance) Annualfee(Fixedpackage) 0%
Annual fee(Fixed package) Noneoftheabove Nonexecutivedirectors Executives 62,30% 26,20% 29,50% 14% 5% 12% 37% 31% 30% 34% 26% 47% 5% 2% 2% 2% 4% 7% 9% 5% 31% 9% 34% 81% 85% 47% 57% 62% 86% 57% 93% 98% 95%
10%
20%
30%
40%
50%
Stock
60%
70%
80%
90% 100%
Annual Feebased Feesfor Feesfor Reimburs fee upon additional being edfor (variable package, 57,40% 34,40% 31,10% Board meeting 47,10% 47,10% 36,80% workin Chairman the 85,00% 11,70% 5,00% ofthe 81,40% 8,50% 13,60% travel costsand 56,90% 33,80% 30,80%
option 86,40% 5,10% 8,50%
Insurance
Contributi Abilityto onto use pension company funds s/banks 94,60% 1,80% 5,40% 98,20% 1,80% 1,80%
93,00% 7,00% 3,50%
Executives
Noneoftheabove
Setting executive remuneration policies falls under the boardsand not managementsauthority,withtheboardideallyactingontherecommendations ofanindependentremunerationcommittee. Thegreat majorityofrespondentscited that the board isindeedresponsiblefor executiveremuneration(85%),withaslightdifferencebetweenbanks(81%)and listed companies (89%), as depicted in Figure C33. As previously mentioned, only 29.3% have remuneration committees, and only 10.3% are composed of a majority of independent directors. Overall, 16% of general meetings appear to either directly vote on pay levels or policies, or have a say on pay, which is a UKstyle annual advisory (nonbinding) vote on compensation; and although it may not be desirable to have shareholders setting, or evenapproving executive remuneration,offeringthemanonbindingvotemaysendapowerfulmessageto executives. When stock options are offered, shareholders should however a bindingvoteduetothepossibilityofdilution.
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FigureC33:Approvingexecutiveremuneration
16%
100% 80%
4%
60% 40% 20% 0% Board

85% Board CEO GMS
CEO 5,60% 2,70%
GMS 15,30% 17,60%
80,60% 89,20% Banks
vi. a. Boardevaluationandtraining Boardevaluation
Listedcompanies
Boardevaluationscanplayanimportantroleinimprovingtheeffectivenessand efficiencyoftheboardswork.Moreover,itdemonstratesthattheboarditselfis notaboveevaluationandsetstheappropriatetoneatthetop.Andinthesame manner that executives benefit from an annual evaluation against performance objectives, boards too can benefit from an evaluation process. Indeed, evaluationshighlighttheweaknessesandstrengthsoftheboard,andactioncan betakentoimprovetheboardseffectiveness. Did you know that in 2003, board evaluation for listed UK companies was introducedbytheCombinedCodeonCorporateGovernance?Similarruleswere introduced in 2004 for companies listed on the New York Stock Exchange (NYSE),aswellasacrossEuropethroughvariousnationalcorporategovernance codes. The result has been impressive: According to a recent survey,22 86% of UK boards are instituting formal full board performance evaluations, as have 75% of responding German directors. Just over half (52%) of those respondents whositontheboardsofFrenchcompaniesstatetheyundergoaformalreview. FigureC34:Conductingboardevaluations
100% 80% 60% 80%
85%
In comparison, and as indicated in Figure C33Error! Reference source not found., only 20% of banks and 15% of listed companies conduct evaluations.
40% 20% 0%
20%
15%
Yes Banks
No Listedcompanies
22 Korn/FerryInternational,32ndAnnualBoardofDirectorsStudy.
Page43of85

b.
Boardtrainingoncorporategovernance Inaglobalandincreasinglycomplexeconomy,therangeofissuesthatdirectors need to be informed about is daunting and evergrowing. For this reason it is increasingly viewed as a necessity to provide induction training to new board members, but also to provide opportunities to update knowledge and refresh skillsthroughcontinuousprofessionaleducation. A well thought out induction process is important for all new directors and, particularly,fornonexecutivedirectors.Ahallmarkofacompanycommittedto good corporate governance and a feature of most corporate governance codes (e.g.theUKCombinedCode,Dutch,French,SwedishandNYSElistingrules)isa process of induction to the board for new directors. Induction programs are typically offered by the company and focus on the companys strategy, operations and governance. The task of organizing the induction training is frequentlyassignedtothecorporatesecretary. In addition to induction training, it is increasingly common for companies to offerongoingtrainingthatmaybeprovidedinhouseorexternally.Nobodyis too senior or experienced not to benefit from continuing professional development. Results show that director training, whether in the form ofdirectororientation or ongoing training, remains scarce throughout the MENA region in that only 15.3% of respondents offer corporate governance related training to their directors (see FigureC34). FigureC35:Providingtrainingoncorporategovernance
100% 80% 60% 40% 20% 0% Yes Banks No Listedcompanies
82% 87%
18%
13%
DidyouknowthattwothirdsofsurveyedboardsintheUnitedStatesdohave formal programs for director training within their companies? Fifty percent of board members are either encouraged or required to participate in director educationoutsidetheboardroom.23
23
Ibid.
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III.
BuildingaRobustControlEnvironmentandProcesses A strong control environment is needed to complement independent, professional and vigilantboards,thusprovidingcompaniesandtheirshareholderswithareasonablelevel ofassurancethatthelikelihoodofmisstatements,mismanagement,fraudorotherabuses areminimized.Oneofthekeydutiesoftheboardistosetpolicieswithrespecttoand oversee managements implementation of the companys control environment, in particularasregardsriskmanagement,internalcontrols,andtheexternalandtheinternal audit. The principal means by which the board oversees the control environment is through the audit committee. While management is responsible for establishing and implementing effective risk and control procedures, it is the board that remains accountabletoshareholdersfortheeffectivenessofthecompanyscontrolenvironment. i. Riskmanagement Companies that effectively manage risk are likelier to see profits over the long run while companies that are overly cautious in their risk taking may well miss opportunities and are unlikely to succeed over the longer term. Those that do not manage risk at all or pursue risks recklessly FigureC36:Presenceofariskfunction should expect failure sooner rather than later. 62% 80% Thechallenge,therefore, isforrisktobemanaged 60% effectively but not 23% 40% eliminatedaltogether,be itintheareaofstrategic, 20% operational, financial or 0% compliancerisk.
Overall,lessthanhalfof thosesurveyed(43%)hadariskfunctioninplace.Morespecificallyandasshownin FigureC35Error!Referencesourcenotfound.,only23%oflistedcompanieshada risk manager or department in place, in sharp contrast to banks, of which 62% responded that they had a CRO, risk manager or risk department. This is to be expected,asbankregulationfrequentlycoversspecificissuesrelatedtospecificrisks. FigureC37:Overseeingtheriskmanagementsystem
100% 80% 60% 40% 20% 0%
Banks Listed companies Board 86,80% 77,60% CEO 26,50% 26,90% GM S 2,90% 4,50%
Banks
Listed companies
As shown in Figure C36Error! Reference source not found., 82.2% of respondents that have a risk management function follow best practice in that the board oversees risk management as implemented by management. Indeed, directors are responsible forsettingtheriskappetite andpolicies,andmanagers for ensuring that all risks are identified, evaluated
Page45of85

andsuitablymanaged. ii. Internalcontrols Directors are also responsible for overseeing the adequacy of the internal control environment and processes, as set by management, and for reviewing their effectiveness. Procedures should have been designed by management for the purpose of: (i) safeguarding assets against unauthorized use or disposition; (ii) maintaining proper accounting records; and (iii) ensuring for the reliability of financial information. DidyouknowthatfraudcostsU.S.organizationsmorethan$400billionannually,or an average organization loss of 6% of revenues? The study24 found that fraud and abusecostsemployersanaverageof$9adayperemployeeandthatsmallbusinesses are the most vulnerable. Of interest is that most fraud is not discovered during routine audits, but instead most cases are exposed by whistleblowers. The study found that prevention, i.e. a robust control framework, is in fact the most cost effectivedefense. FigureC38:Presenceofaninternalcontrolfunction
59% 60% 50% 36%
As shown in Figure C37, less than half of thesurveyed(47%)have an internal control function, i.e. controller orcontroldepartment.
40%
For those with control functions, a significant 10% majorityofboardsclaim 0% responsibility for Banks Listedcompanies overseeing this function (80.3% for banks, 69% forlistedcompanies),however,asignificantmajorityofCEOs(35%)arealsodeemed with oversight duties (Figure C39). Best practice calls for management to set and implement,andtheboardtooverseethecontrolfunction.
20%
30%
FigureC39:Overseeingtheinternalcontrolfunction
24
TheAssociationofCertifiedFraudExaminers,reportonthestatusoffraudandwhitecollarcrimeintheU.S.,1996.
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GMS
CEO
Board
0%
20%
Board
40%
60%
80%
CEO
100%
GM S 6,80% 2,80%
Listed companies Banks
69,90% 80,30%
Banks
35,60% 35,20%
Listed companies
Did you know that many directors do not request a copy of the external auditors management letters? This could be because they confuse the management letter withtheauditorsopinion. Adirectorsfirstglimpseofwhatgoesonintheinternalcontrolsofacompanycanbe found in the Management Letter. The auditors opinion expresses the view of the independent external auditors on whether the financial statements have been preparedinaccordancewithapplicablestandardsandaccuratelyreflectsthefinancial condition of the company. The management letter is intended to let the company knowwhatpossibleweaknessesinthecompanysinternalcontrolsandsystemscame to the attention of the auditors in the course of their work, and what steps the auditorsrecommendbetaken.Itismostlikelywithintheauditcommitteesdutyof care to read management letters and to followup the implementation of their recommendationsbymanagement. iii. Compliance Compliance means compliance with the conduct of business rules imposed by laws andregulations,aswellasinternalrulesandprocedures. Most banks (64%) have acompliance function in place; unsurprisingly, only 23% of listedcompaniesreportedhavingacompliancefunction(seeError!Referencesource notfound.).Andwhilecompliancecanplayanimportantroleforallbusinesses,it plays a particularly important role for banks, as banks rely on staff following a detailed set of policies and procedures, requiring full compliance to protect against mismanagement or fraud. Most central bank regulations require banks to have a compliance function, and banks and their regulators should strive towards full compliance. Theinternalauditsroleis toevaluateandassessthe effectiveness and adequacy of the companys risk management, internal control and corporate governanceprocessesand procedures. Internal FigureC40:Presenceofacompliancefunction
64% 80% 60% 23% 40% 20%

Page47of85 0%
Banks
Listedcompanies

auditisnotresponsibleforensuringthatthecompanyiscompliantwithinternalor externalrequirements.Thisismanagementsresponsibility,whichtypicallyappoints acomplianceofficer. Unlike internal audit, compliance is not generally an independent function. It typically reports to the companys senior executive management, though best practicescallsforcomplianceofficerstoincreasinglyreportdirectlytotheboardand itsauditcommitteeaswell.Theauditcommitteehasaresponsibilitytounderstand and oversee the compliance process. Thus, many compliance officers also have a dualreportinglinetoaseniormanagerortheCEOandtheboardsauditcommittee. From a legal and reputational risk perspective, it is very important that the board receivesregularupdatesfromthecomplianceofficerastothestateofaffairs. iv. Theinternalaudit Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organizations operations. It helps an organizationaccomplishitsobjectivesbybringingasystematic,disciplinedapproach to evaluating and improving the effectiveness of risk management, control and corporate governance processes.25 A progressive internal audit function plays a criticalroleinprovidingexecutivemanagementandtheboardwithanobjectiveand comprehensive view of the business processes, identifying risk and controls and validatingthatthecontrolsareeffectiveinmitigatingrisk. Figure C41showsthatthegreatmajorityofbanks(85%)andlistedcompanies(92%) haveaninternalauditfunction. FigureC41:Presenceofaninternalauditfunction
85% 100% 80% 60% 40% 20% 0% Banks Listedcompanies 92%
Ontheotherhand,forthisinternalauditfunctiontobeeffective,itisimportantthat theCIAcarryouthisorheractivitiesindependently.Bestpracticethuscallsfordual reporting responsibilities, with the internal auditor reporting to management administrativelyandtotheboardfunctionally.Figure C42showsthatthemajority of banks (93%) and listed companies (76%) follow best practice, with the board overseeing the internal audit function. However, because few audit committees in the region are composed of a majority of independent directors, the CIAs independencemaywellbejeopardizedinpractice.
25
www.theiia.org
Page48of85

FigureC42:Overseeingtheinternalauditfunction
Banks
Listedcompanies
15%
0%
28%
1%
76%
93% Board CEO GMS

Board CEO GMS
Did you know that a useful starting point for identifying leading internal audit practicesandforbenchmarkingthebanksfunctionagainsttheseistheguidanceand standards issued by the Institute of Internal Auditors (IIA)? The audit committee should ensure that internal audit function has sufficient resources to meet the standardsrequiredbytheIIAand(asrecommendedbytheIIA),subjecttheinternal audit function to an independent assessment every five years. Companies may furtherwishtoconsiderallowingtheirinternalauditorstoreceiveacertificatefrom theIIA. v. Theexternalaudit
FigureC43:Presenceofanexternalauditor An annual external audit should be conducted by an independent,competentand 80% qualifiedauditorinorderto 60% provide an external and 40% objective assurance to the 20% boardandshareholdersthat 0% the financial statements Banks Listedcompanies fairlyrepresentthefinancial positionandperformanceofthecompanyinallmaterialrespects.Externalauditors shouldbeaccountabletotheshareholdersandoweadutytothecompanytoexercise dueprofessionalcareintheconductoftheaudit.
93% 90% 100%
Professionalstandardsrequiretheexternalauditortostatewhether,intheiropinion, the financial statements are presentedin conformity with anunderlying accounting principle or standard, and to identify those circumstances in which such standards havenotbeenconsistentlyobservedinthepreparationofthefinancialstatements. As can be seen from Figure C43 above, 91% of those surveyed had an external auditor.Figure C44showsthatthegreatmajorityoftheseconstitutedinternational auditfirms. FigureC44:Natureoftheexternalauditor
Page49of85

100%
50%
0%
InternationalAuditFirm Banks Listedcompanies 86,10% 68,80% LocalAuditFirm 11,10% 27,30% IndividualAuditor 2,80% 3,90%
Did you know that the independence of the external auditor has become a central corporate governance concern in the wake of a number of European and US scandals? To deal with the skewed incentives which may arise with a conflicted external auditor, a number of countries now call for disclosure of payments to external auditors for nonaudit services. Examples of other provisions to underpin auditorindependenceinclude,atotalbanorseverelimitationonthenatureofnon auditworkwhichcanbeundertakenbyanauditorfortheirauditclient,mandatory rotation of auditors (either partners or in some cases the audit partnership), a temporary ban on the employment of an exauditor by the audited company and prohibiting auditors or their dependents from having a financial stake or management role in the companies they audit. Some countries take a more direct regulatory approach and limit the percentage of nonaudit income that the auditor canreceivefromaparticularclientorlimitthetotalpercentageofauditorincomethat cancomefromoneclient. a. Rotatingauditfirmsorpartners Suggestiontoimproveauditorindependenceoftenincludetherotationofeither the audit partner or the firm itself after a certain period, typically between five and seven years. Rotation is important because it prevents the external auditor from developing an excessively close relationship with the client, which may eventuallycompromisetheauditorsnecessaryindependence. Howerver, some critics of auditor rotation suggest that it can also cause audit failure.Anauditorthathastakenanewassignmentistypicallyunfamiliarwith thebusinessandmostlikelytocommiterrorsduringthefirst yearoftheaudit. Moreover, many will argue that audit firm rotation may actually be counter productive in emerging markets, where there may be a limited number of qualifiedauditfirms,inparticularforauditsoffinancialinstitutions;androtating thesefirmsoutwouldthusruncountertotheinterestsofshareholders. The idea of audit firm or partner rotation is not practiced by banks and listed companies: of those surveyed, only 32% have an auditrotation policy in place and 53% of respondents had not changed their external auditor in the previous fiveyears(seeFigureC45). FigureC45:Externalauditrotation
Page50of85

70%
59%
60% 50% 40% 30% 20% 10% 0%
53% 53% 43% 32% 43%
7% 3% 3% 3% 1% 1%
Ithasnotbeing changed
Becausethereis apolicyof rotationofthe externalauditor Total Banks
Becausethe qualityofthe workwasnot satisfactory Listedcompanies
Becauseofcost considerations
Fortunately,however,mostinternationalauditfirmshavetheirownaudit partnerrotationsinplace. b. Providingother,nonauditservices Figure C46 shows that a slight majority of external auditors (51%) do not provide their clients with any other services that may jeopordize their independence,inlinewithbestpractice.Onlyasmallminorityprovidebusiness consulting(13%)orlegal(14%)services,whichcouldruncountertothenotionof auditorindependenceshouldthefeesgeneratedfromsuchservicesbematerialin relationtotheauditfee. FigureC46:AdditionalServicesprovidedbytheexternalauditor
60% 50% 40% 30% 20% 10% 0% 51% 39% 13% 14% 11%
Tax consulting
Business consulting
Legal services
Other
No additional servicesare received
c. Nominatingtheexternalauditor Best practice calls for the boards audit committee to conduct a competitive bidding process for the external auditor, the board to then nominate and shareholders to finally approve the appointment of the external auditor. And while69%ofbanksandlistedcompaniesallowtheirshareholderstoappointthe externalauditor,36%ofrespondentsstatedthattheappointmentoftheexternal auditfirmisacompetenceoftheboard(seealsoFigureC47). FigureC47:Appointingtheexternalauditors
Page51of85

36%
69%
6%
Board
CEO
GMS
vi. Theauditcommittee The audit committees primary responsibilities are to: (i) review and report to the board the most critical accounting policies which are the basis for financial reports; (ii) help the board establish internal control policies; (iii) oversee the companys internalauditfunction;(iv)ensureforaneffectivecompliancefunction;aswellas(v) overseetheoverallrelationshipwiththeexternalauditor.Someboardsrequestthat their audit committees support the board in establish an appropriate risk management framework, although banks are increasingly establishing separate boardlevel risk committeesforthis purpose. Ascan be seen fromFigure C48, the role of the audit committee is broadly understood, however, that the role of the committee in overseeing the compliance function needs to be strengthened, as only 30.6%ofauditcommitteesfeelresponsibleforthisarea. FigureC48:Theroleoftheauditcommittee
EnsuresthattheBoardandtheexecutivebodiesactin compliancewiththelegalrequirements,thecharterandbylaws Developsproceduresandpoliciesforinternalcontrolandrisk management Overseestheperiodicfinancialreportingprocessimplemented bymanagement Developrecommendationsontheselectionofanexternal auditor,aswellasfees
26%
35% 57% 61% 59% 61% 64% 71%

80%
0%
10%
20%
30%
40%
50%
60%
70%
Banks
Listedcompanies
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IV.
StrengtheningTransparencyandDisclosure Disclosure is considered to be one of the most important elements of sound corporate governance.Itisdifficultforshareholders,otherstakeholdersandmarketparticipantsto effectively monitor and properly hold the board and management accountable when there is a lack of transparency. Companies that are transparent are thus more highly regardedandultimatelyvaluedbyinvestors. Disclosure and transparency is important within the bank or listed company as well, ensuring that there is proper accountability and responsibility, oversight and guidance, betweenshareholders,directorsandmanagers. Timely and accurate public disclosure should be proportionate to the size, complexity, ownership structure, economic significance and risk profile of the bank or listed company,aswellaswhethertheentityispubliclytradedornot. Did you know that 69% of 137 institutional investors in charge of some of the worlds largest portfolios in 16 countries identified transparency as a top priority when consideringaninitialinvestment?26Banksandlistedcompanieswouldbewellservedto develop clear a communications strategy, possibly a disclosure policy or investor communications function, to ensure that they are providing investors the information theyseekinthemosteffectivemanner. i. Whatinformationisbeingdisclosed? The corporate governance framework should ensure that timely and accurate disclosureismadeonallmaterialmattersregardingthecorporation. a. Financialdisclosure Financialdisclosureencompassesthebanksorcompanys:balancesheet,income statement,statementofcashflows,statementofequityandnotestothefinancial statements. AscanbedeterminedfromFigure C49andFigure C50,financialinformationis generally disclosed by both banks and listed companies, which is likely due to the fact that regulation in this area is typically specific, detailed, and enforced. Most of those surveyed provided financial information to shareholders through the local press (94.7%), generally assembly (93.4%), annual report (88%) and companyswebsite(85.9%),inlinewithgoodpractice. b. Nonfinancialdisclosure Inaddition,bestpracticecallsforthedisclosureofnonfinancialinformation,in particular: (i) operating results; (ii) ownership and voting rights; (iii) key corporatedocuments,includingarticlesofassociation,relevantchartersandby laws, and policies; (iv) material events; and (v) corporate governance related information,forexample,informationontheboardscompositionandstructure. Disclosure in this areawhere legal and regulatory requirements are typically insufficient or altogether absentis much weaker. Results show that the disclosure of corporate governance related information, as well as charters and bylaws,isparticularlyweakamongbanksandlistedcompanies(seeFigureC49
26
InvestorsonRisk.TheNeedforTransparency,Ernst&Young,2005.
Page53of85

and Figure C50). However, it is worth noting that a relevant majority of companiesprovidethisinformationuponashareholdersrequest. FigureC49:Informationdisclosurebybanks
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Dis tributed during GMS P ublis hed in the lo c al pre s s P o s ted o n the c o mpa nys /ba nks we bs ite No t a va ila ble fo r s ha reho lde rs Othe r
FinancialS tatements
OperatingResults
MajorShareholders
Charters&Bylaws
MaterialInformation
GovernanceIssues
Asforlistedcompanies,resultsarequitesimilartothoseofbanksexceptforthe useofelectroniccommunication(emailandcorporatewebsite),whicharemore frequentlyusedbybanksthanlistedcompanies. FigureC50:Informationdisclosurebylistedcompanies

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Dis tribute d during GMS P ublis hed in the lo c al pre s s P o s ted o n the co mpa nys /ba nks we bs ite No t a va ila ble fo r s ha reho lde rs Other
FinancialS tatements
OperatingResults
MajorS hareholders
Charters&Bylaws
MaterialInformation
GovernanceIssues
Page54of85

ii. a.
Wheretodiscloseinformation:theuseoftheannualreportandinternet Webbaseddisclosure Thereisanincreasingtrendinternationallytousecorporatewebsitestodisclose financialandnonfinancialinformation. Withrespecttofinancialinformation,ascanbeseenfromFigureC51andFigure C52, 82% of banks but only 61% of listed companies stated that their annual reportwaspublishedontheirwebsite,whichtypically(butnotalways)contains a full set of financial information. However, information disclosure on specific financialstatementscouldbeimprovedupon,inparticularforlistedcompanies wherewebbaseddisclosureisweak.
FigureC51:Internetbasedfinancialdisclosedbybanks
64% 12% 82%
AnnualReport BalanceS heet ProfitandLossS tatement CashFlowS tatement NotestoFinancialStatements
67% 74%
78%
Noneoftheabove
FigureC52:Internetbasedfinancialdisclosedbylistedcompanies
36% 48% 61%
AnnualReport BalanceSheet ProfitandLossStatement CashFlowStatement
51% 48% 53%
NotestoFinancialStatements Noneoftheabove
As for nonfinancial information, an important majority, 68%, do publish their objectives,however,disclosureinotherareasremainslackluster,withfewbanks and listed companies publishing their beneficial owners (28.7%), dividend policies (24.7%), charters (22.7%) or remuneration (9.3%). Banks appear to be more transparent in disclosing nonfinancial information than listed companies, ascanbeobservedforFigureC53andFigureC54below. FigureC53:Internetbasednonfinancialdisclosedbybanks
Page55of85

CompanyCharter CompanyObjectives
19% 27% 30%
26%
Materialforeseeableriskfactors Listofaffiliatedparties
68%
Identityofbeneficialowners RemunerationoftheBoardasindividuals
18% 26% 14% 32% 36% 26%
RemunerationoftheBoardascollectivegroup RemunerationofKeyExecutives DividendPolicy PolicyofCorporateS ocialResponsibility Noneoftheabove
FigureC54:Internetbasednonfinancialdisclosedbylistedcompanies
CompanyCharter CompanyObjectives Materialforeseeableriskfactors
38%
19%
Listofaffiliatedparties Identityofbeneficialowners
17%
48%
RemunerationoftheBoardasindividuals RemunerationoftheBoardascollectivegroup
19% 9% 6% 8% 5% 26%
RemunerationofKeyExecutives DividendPolicy PolicyofCorporateSocialResponsibility Noneoftheabove
32%
b. Disclosureintheannualreport A vast majority of banks and listed companies comply with those disclosure requirementstypicallymandatedbylaw,suchasthechairmansreport,financial information and the external auditors report. Nonfinancial disclosure in the annualreport,again,remainsweak,andFigureC55showsthatfewrespondents includedasectiononmanagementsdiscussionandanalysis(28%),orindeedthe banks or companys policies towards corporate social responsibility (33%) or corporategovernance(32%). FigureC55:Informationdisclosedintheannualreport
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ReportoftheChairmanoftheBoard FinancialStatements Ownershipstructureanddividendpolicy Marketshare,sales,andmarketingdata Futureplansofthecompany Dividendhistory RemunerationoftheBoard Thenamesofbeneficialowners BiographicalinformationonthemembersoftheBoard Environmental,socialandeconomicsustainability Corporategovernancepoliciesandprocedures Managementanddiscussionandanalysis Stockoptionspolicy Noneoftheabove
8% 11% 28% 34% 33% 31% 41% 41% 46% 58% 67% 63%
82% 79%
Of note is that listed companies show a slightly higher degree of information disclosure than banks, with the exception of disclosure in the area of environmental, social and economic sustainability as well as corporate governance policies and procedures, where banks rank slightly higher. This maybeduetothesecretivenatureofthebankingindustryasawhole,aswellas the difficulty of quantifying and qualifying financial information for banks, whichincontrasttocompaniesisforwardlooking. iii. Howbesttodiscloseinformation? The corporate governance framework should not only ensure that timely and accurate disclosure is made on all material matters regarding the corporation, but that that information is be prepared and disclosed in accordance with high quality standardsoffinancial(andnonfinancial)disclosure. ItisincreasinglyconsideredbestpracticetoadoptIFRS,whichtodayareviewedas the acceptedinternational standard for financial reporting, and which improves the quality,reliability,transparencyandcomparabilityoffinancialinformation,andthus improvesinsightintocompanyperformancecomparableacrosscountries.Asseenin FigureC56below,67%ofrespondentsstatedthattheydiscloseinformationbasedon IFRS,alongwiththe59.6%alsoreportingaccordingtolocalreportingstandards;only 4.6%reportaccordingtoUSGAAP. FigureC56:ReportingaccordingtoInternationalFinancialReportingStandards
5% 2%
60%
67%
Yes(IAS)(IRFS)
LocalStandards
Yes(USGAAP)
No
Page57of85

Because most central banks in MENA require the banking sector to report in accordancewithIFRS,incontrasttothemarketregulators,77%ofbanksindicatethat theirfinancialreportingisdoneinaccordancewithIFRS,comparedto58%oflisted companies(seeFigureC57). Figure C57: Reporting According to International Financial Reporting Standardsbreakdown per banksandlistedcompanies
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes(IAS)(IRFS) LocalStandards Yes(USGAAP) Banks ListedCompany No 7% 3% 1% 3% 58% 53% 77% 65%
However, this datashould be treated with caution, as most countriesin the MENA regionhavenotfullyadoptedIFRSbyissuingalaworregulationreferringtoIFRS as developed by the International Accounting Standards Board (IASB)but have either opted out of individual IFRS or have translated IFRS but have not updated thesetranslations.Asaconsequence,notallrespondentsthatstatedtheircompliance withIFRSmaybeactuallydoingsoinpractice. iv. Specialfocus:consolidationoffinancialinformation Complete disclosure of intragroup relations, transactions and their financial terms, andconsolidatedaccountsisacrucialprerequisitetomakethegroupsfunctioning transparent. When preparing consolidated accounts, companies should follow uniform accounting policies for the parent and its subsidiaries or, if this is not practicable, the company must disclose that fact and the proportion of items in the consolidatedfinancialstatementstowhichdifferentpolicieshavebeenapplied. Figure C57Error! FigureC58:Financialconsolidationingroupsofcompanies Reference source not 100% found. demonstrates 80% that financial consolidation is 60% widespread among 40% banks and listed 20% companies that are 0% part of a groupand Yes No consequently might 84,09% 15,91% Banks consolidate their 72,92% 27,08% Listedcompanies financial statements however, that listed Banks Listedcompanies companies are less pronetodosothanbanks,73%vs.84%.
Page58of85

v. Whoisresponsiblefordisclosure? Establishing the disclosure policy should be the responsibility of the board; management in turn is responsible for implementing that plan, and communicating with stakeholders under the framework of that policy. As shown in Figure C59, 80.6% of respondents comply with this best practice, however, there is a significant differencewhenconsideringbanks(85.3%)andlistedcompanies(76.1%). FigureC59:Approvingdisclosurepolicies
100% 80% 60% 40% 20% 0%

Banks Listed companies Board 85,30% 76,10%
Banks
CEO 25,00% 29,60%

Listed companies
GM S 5,90% 12,70%
vi. Factorspreventingdisclosure The main barriers cited by banks and listed companies as to why they do not fully implement best practice in the area of disclosure are shown in Figure C60. Accordingly,mostrespondentscontinuetoviewdisclosurefromacompliancepoint ofview,ratherthananeffectivetoolformanagingstakeholderrelationsandadding valuetotheirbusiness. FigureC60:Mainreasonspreventingdisclosure
Page59of85

80%
76% 69%
70%
60%
50%
40%
34% 29%
37% 33% 26% 13% 3% 7%
30%
20%
12% 7% 4% 0%
10%
0%
No legal requirement
No economic No demand value
Lack of resources
Security issues
Fear of unfair
Fear of from regulatory authorities
competition repercussions
Banks
Listed companies
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V.
ProtectingShareholderRights Shareholders are the owners of the corporationit is their propertyand it is in their interests that the corporation operates and directors and managers must exercise their dutiesandresponsibilities.Themostbasicrightsthatshareholdersshouldenjoyinclude the right to: (i) secure methods of ownership registration; (ii) convey or transfer shares; (iii) obtain relevant and material information on a timely and regular basis; (iv) participateandvoteingeneralassemblies;(v)shareintheprofitsofthecorporation;and (vi) participate in, and be sufficiently informed on, fundamental decisions such as amendments to the articles of association, issuing additional shares and conducting extraordinarytransactions.27 Thequalityofshareholderprotectionwillaffectthedepthofcapitalmarkets,ownership patternsandtheefficiencyofallocatingresources.Wherelawsandcorporateactionare protective of shareholders and well enforced, shareholders tend to be willing to invest theircapitalandfinancialmarketstendtobebroaderandmorevaluable. Shareholder rights are generally provided by law and directors and managers do not havetherighttoabridgethem.However,followinglawsandregulationsbytheletter orbookratherthaninspiritaretwodifferentmatters,anddirectorsandmanagerscan influencewhetherandhowlegalrequirementsarecompliedwithinpractice. Did you know that director should have the interests of the company and all of its shareholders at heart? In some cases, a director nominated by a certain shareholder mightfindthattheirpositionconflictswiththatofotherdirectors(andtheshareholders they represent). Equitable treatment may not mean that all shareholders are treated equally;someshareholdersenjoydifferentrightsaccordingtotheirlevelofshareholding andmayhavedifferentgoals.Itdoes,however,implythatshareholdersaretreatedfairly and with equal regard and respect. This precept conforms to the requirement that directors act in the best interests of all shareholders and not just the company or shareholderthatmayhavenominatedand/orelectedthemtotheboard. i. Participatingingeneralassemblymeetings Shareholdershouldhavetherighttoparticipateandvoteingeneralassemblies. ThefollowingFigureC61showsthatshareholdersintheregiondoattendedgeneral assemblies.
FigureC61:Percentageofshareholdersattendingthegeneralassembly
ListedCompanies 8% 15%
29% Banks 8% 18%
21%
21% 36% 50%orless 51%to65% 66%to75% 76%to85% Morethan86%

50%orless 29% 51%to65% 66%to75% 76%to85%
15%
Morethan86%
27
FromtheOECDPrinciplesofCorporateGovernance,2004.
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Thevastmajorityofbanksandlistedcompaniesconfirmedrelativelyhighattendance levelsduringtheirpreviousgeneralassemblies,demonstratingthatshareholdersare interestedandwillingtoengagewiththeircompanies. Itisonethingtoattend,anothertoactivelyparticipateinandbeabletoexercisebasic shareholder rights during these general assemblies, such as nominating, and then electingordismissingboardmembers. One such right is the right to vote, either in person or in absentia. The following FigureC62showsthemechanismsinplaceandavailabletoshareholders.Ascanbe seen,votingatthemajorityofgeneralassembliesisstillconductedbyshowofhands (66.2%),andonlyslightlymorethathalfofrespondents(54.3%)citedproxyvotingas analternative.At1,3%,electronicvotingisvirtuallynonexistent. FigureC62:Votingmechanismsinplaceandavailabletoshareholders
2,56% 1,28% 2,56% Listed Companies 3,85% 28,21% 24,36% 0,00% 1,37% 0,00% Banks 2,74% 28,77% 21,92% None of the above Other distance voting mechanisms 56,41% 57,69% Electronic voting Proxy Absentee voting Show-of-hands voting Ballot paper voting Card voting 52,05% 75,34%
Another basic right is the right for shareholders to elect board members. In the MENA region, Figure C63 demonstrates that board members are elected by shareholdersinthevastmajority(81%)ofbanksandlistedcompaniessurveyed. FigureC63:Electinganddismissingboardmembers
24%
4%
81% Board CEO GMS
However,whileitisgoodpracticetoallowshareholderstovoteondirectorships,itis alsoconsideredgoodpracticetoestablishapropernominationsprocess,allowingfor shareholder and the board itself, through and independent nominations committee, to nominate directors for shareholder approval. Of note is that an independent nominationscommitteeisbestplacedtobuildaboardwithanappropriatebalanceof
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executive,nonexecutiveandindependentdirectors,aswellasanappropriatemixof skills. ii. Safeguardingtherighttoshareintheprofitsoftheorganization Shareholders invest in companies to receive a return, and as such they hold an exclusive claim on the residual profits of the corporation. There are two ways in which shareholders can share in the profits of the organization: they may benefit from capital gains and/or receive dividends, i.e. if the bank or companies declares dividends (there is as such no right to receive dividends). Unfortunately, there are many ways in which this fundamental right can be evaded or eroded, primarily through insider dealing, conflicts of interest and/or related party transactions undertakenbycompanyinsiders. Not all related party transactions are contrary to good corporate governance. Nevertheless,relatedpartytransactionsareparticularlyvulnerabletoabuseandthus require special supervision. Best practice in this area calls for related party transactionstobeevaluatedbynonconflicteddirectorstothetransactions,andthat thetransactionisconductedatarmslength.Properinternaldisclosureofpersonal interests by managers and directors ex ante, as well as expost disclosure to shareholders,alsoconstitutesgoodpractice.Finally,theconflicteddirectorsshould abstain from voting on the issue at hand; best practice would further call for conflicted directors to excuse themselves from the deliberations on that particular agendaitem. In order for the board to exercise proper oversight, it should assure itself that: (i) thereisaclearwrittenpolicywithrespecttorelatedpartytransactions;and(ii)that there are sufficient systems and internal controls in place that will signal these transactionstotheboard. AscanbeseenfromFigure C64,mostlawsorinternaldocumentrequirebanksand listedcompaniestodiscloserelatedpartytransactions. FigureC64:Mandatorydisclosureofrelatedpartytransactions 13% As
Yes No 87% Banks
ListedCompanies
22%
78%
Yes
No
shown
in
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Figure C65, a number of banks (80%) and listed companies (71%) have establishedpoliciesonconflictsofinterestandrelatedpartytransactions;ofthose that had not, only 34.7% of respondents showed interest in developing such policiesinthefuture.
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FigureC65:Establishingpoliciesonconflictsofinterestandrelatedpartytransactions
100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% Banks ListedCompanies 71% 80%
However, such policies are only effective when respected by managers and directors. Unfortunately, 54.7% of respondents thought that directors failed to avoid conflict of interest situations, and that 62.7% used inside information for theirbenefit. iii. Participatinginandbeingsufficientlyinformedonfundamentaldecisions Oneofthemainfunctionsusuallyassignedtotheboardistocontrolandsupervise extraordinary transactions, including major capital expenditures, mergers and acquisitions,anddivestitures. ThefollowingFigureC66illustrateswhohascompetenceovertheapprovalofmajor transactionstakingintoconsiderationthebookvalueofcompanysorbanksassets. FigureC66:Approvingextraordinarytransactions
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Approvingtransactionswitha Approvingtransactionswitha Approvingtransactionswitha valuebelow25%ofthebook valueof25%50%ofthebook valueofcompanys/banks assets valueofcompanys/banks assets valueofover50%ofthe bookvalueof companys/banksassets
Board
CEO
GMS
Asignificantmajorityoftherespondents,approximately70%,statedthattheirboard isgenerallyresponsibleforapprovingextraordinarytransactions,regardlessoftheir
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value. An importantminority stated that the competence to approve extraordinary transactionsaboveacertainthreshold,e.g.over50%ofbookvalue,isassignedtothe shareholders(40.8%). And while there is much debate in the corporate governance communityastowhethershareholdersarebestplacedtovoteonsuchtransactions, or whether instead directors working with management and their detailed knowledge of the situation should do so, it may well be prudent to allow shareholdersafinalsayonsuchmatters. iv. Protectingminorityshareholderthroughpreemptiveandtagalongrights Both preemptive and tagalong rights are means of promoting equitable treatment amongshareholders. Preemptive rights allow a shareholder to maintain a proportionate share of the ownership of a corporation when it issues new shares. Otherwise, their relative percentage of share ownership would be diluted. In most MENA jurisdictions, an existingshareholderhastherighttobuyadditionalsharesofanewissuetopreserve equitybeforeothershavearighttopurchasesharesofthenewissue. Tagalong rights on the other hand are a contractual obligation used to protect minorityshareholders.Whenamajorityshareholdersellshisorherstake,thenthe minority shareholders have the right to join the transaction and sell their minority stake in the company at the same price. This means that all shareholders can effectivelyselltheirsharesforthesamepriceratherthanhavingtieredpricing. ThefollowingFigureC67showsthatwhileapproximatelyhalfofbanksprotecttheir minorityshareholdersthroughtagalongrights(51%),onlyaminorityoflisted companies(31%)doso. FigureC67:Theuseoftagalongrights
ListedCompanies
31%
69%
Banks
51%
49%
Yes
No
v. Obtainingrelevantandmaterialinformationonatimelyandregularbasis The majority of disclosure and transparency issues are covered in the previous section. In addition, best practice calls for shareholders to be furnished with sufficient and timely information concerning the date, location and agenda of the general assembly, as well as full and timely information regarding the issues to be decided at the assembly. General assembly notices should provide shareholders reasonable time to receive agendas, consider voting items, make arrangements to attend the meeting, and vote in time. It is generally thought that such information should be provided to shareholders at least 20 days in advance of the assembly.
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Figure C68 showsthat most banks (55%) followed this best practice,however, that only22%oflistedcompaniesdidso.
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FigureC68:Notificationperiodtodistributeinformationpriortothegeneralassembly
80% 70% 60% 50% 40% 30% 20% 10% 0% ListedCompanies Banks 0% 22% 1weekbefore 2,60% 3% 0,00% Shareholdersarenotnotifiedinadvance 42% 20daysbefore 75% 55% 15daysbefore
ThefollowingFigure C69showstheinformationprovidedtoshareholderspriorto the meeting. In summary, all banks and the vast majority of listed companies provide an agenda, and information on the assembly time andplace. On the other hand, less than half of listed companies (47%) provide additional information on agendaitems,while64%ofbanksdidso.Proxyvotinginstructionsstillrequiremore attention,asjustoverhalf(56.3%)disclosedproxyvotinginstructions. FigureC69:Informationprovidedtoshareholderspriortothegeneralassembly
Banks Liste dCompanie s
93,59%
96,15% 74,36% 69,23% 67,95% 47,44% 64,38% 52,56% 60,27% Proxyvoting instructions
100,00%
100,00%
78,08%
72,60%
69,86%
Time andplace
Age nda
Financial State me nts
Exte rnalAuditor AnnualRe port sRe port
Additional informationon the age nda ite ms
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MENAWIDECORPORATEGOVERNANCESURVEY SECTIOND:SPECIALFOCUSONBANKS,FOESANDSOES

SectionD. AFocusonBanks,FamilyandStateOwnedEnterprises
I.
CorporateGovernanceIssuesRelatedToBanks Corporate governance is particularly significant for the banking sector due to the importantroletheyplayinaneconomy.Firstandforemost,banksacceptdepositsfrom and are liable to the general public. These deposits constitutea significant portion of a nations wealth, and must therefore be managed appropriately. Should this wealth be managedinadequately,peoplesmoneyandlivelihoodscouldbeatstake.Anotherissue thatmakesbankgovernancesosignificantisthefactthatbanksprovideloans.Indeed, banksarethesolesourceoffinancingforthegreatmajorityofenterprises,inparticularin emergingmarkets.Theassessmentandselectionofcustomersandtheensuingdecisions to extend or refuse credit are important processes that fundamentally influence the growth of the economy. Finally, some banks are expected to make credit and liquidity availableindifficultmarketconditions.Theimportanceofbankstonationaleconomiesis underscored by the fact that banking is, almost universally, a regulated industry. It is thusofgreatimportancethatbankshavestrongcorporategovernancepractices. Withthisinminditisimportanttonotethatcommercialbanksandotherdeposittaking financialinstitutionshavespecialgovernancerisksandcomplexitiessince:(i)bankstake largeamountsofriskbearing(andthusforwardlooking)obligationsontheirbooks,and hence weak internal controls and accountability can cause urgent and rapid crises, as currently witnessed in the wake of the US subprime mortgage crisis with its global implications;(ii)thecollapseofabankwillusuallydestroyvalueforitspublicdepositors, notjustshareholders,andmayevenrequireacostlybailoutbythefiscalauthorities;and (iii)thereisthesystemicriskthatthecollapseofasinglebankcanunderminetheentire bankingsystem.Becauseofthesespecialgovernancerisks,banksareusuallyrequiredby laworregulationtohavecertainspecificgovernancestructuresandreportingstandards. i. Demonstratingcommitmenttogoodcorporategovernance Seventythreepercentofbankmanagersanddirectorsreportedtheirfamiliaritywith the BCBS Guidelines,28 as shown in Figure D1. On the other hand, as can be determinedfromthebelow,translatingthisknowledgeintoactualpracticeremainsa challenge. FigureD1:AremanagersanddirectorsfamiliarwiththeBSBCGuidelines?
Yes 73% No 27%
Indeed, an understanding by the surveys respondents as to the business case for implementinggoodcorporategovernance,beyondcompliance,appearstobelacking withbanksaswell.
28
BaselCommitteeforBankingSupervisionanditsGuidelinesforEnhancingCorporateGovernanceforBanking Organizations,publishedin1999andrevisedin2006.
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Did you know that Romanias Banca Comerciala Romana (BCR) was upgraded by Fitch Ratings (individual rating to C/D from D) and S&P (longterm counterparty rating to BB from B+) due to improvements to its corporate governance? Both agencies cited improvements in corporate governance and risk management as the main reasons for the upgrades.29 This is but one of many case studies that demonstratethatcorporategovernancecanaddvalue. In addition to their responsibility to shareholders, banks also have a responsibility towards depositors. Sound corporate governance contributes to the protection of depositorsofthebank,requiringtheboardtoapprovethestrategicobjectivestaking intoaccountandbalancingtheinterestsofshareholdersanddepositors.Figure D2 below shows that most banks expressly include in their formal documents the responsibility of assuring levels of liquidity and the protection of depositors. It should be noted that according to best practice depositors interests should be considered in conjunction with any applicable deposit insurance systems in place maintainingenoughliquidityinthebankingsystem. FigureD2:Istheboardformallyresponsibleforprotectingtheinterestsofdepositors
41% Yes No 59%
ii. a. Implementinggoodboardpractices Specificfunctionsoftheboard A banks board is ultimately responsible for the operations and financial soundness of the bank. In carryingout their responsibility, directors should primarilyoverseeandguidemanagement.Moreover,directorsshould,interalia: (i) understand and execute their oversight role, including to understand the banks risk profile; (ii) approve the overall business strategy of the bank, including approval of the overall risk policy and risk management procedures; (iii)exercisetheirdutyofloyaltyanddutyofcaretothebankunderapplicable national laws and supervisory standards; and (iv) avoid conflicts of interest, or the appearance of conflicts, in their activities with, and commitments to, other organizations.Figure D3,however,illustratesthatbankdirectorsdonotalways followthesebestpractices. FigureD3:Functionsbankboardsapproveandoversee
29
TheIrresistibleCaseforCorporateGovernance(IFC,March2006).Seewww.ifc.org/corporategovernance.
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Preventionofselfdealing/insidertrading Internalc ontrols,externalaudit,preparationoffinancialstatements Moneylaundering/terrorismfinanc e Legal/regulatorycomplianc e CodeofEthic s/S takeholderrelationships Lossreserves/provisions Loan/creditc lassific ations Largeexposures Creditoperation CreditPolicy 0 10 20 30 40 50 60 70 80 90
Monitor
FormallyApproved
None
b. Boardstructure Asalreadyestablishedabove,boardlevelcommitteescanhelpmaketheboards work more efficient and effective. The same holds true for managementlevel committees. Allsurveyedbanksindicatedthattheyhaveoneormorecommittees,atboththe management and board levels, however, as
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Figure D4demonstrates,thereisconfusionastowhichissuestheboardshould focusitsattentionon,vs.thoseundertheexclusivepurviewofmanagement. Typical boardlevel committees as previously mentioned include the audit, remuneration, and nominations and corporate governance committees. Some bank boards chose to establish separate risk committees, while others chose to assign this responsibility to the audit committee. The credit, asset and liability (or ALCO), information technology or product development committees are typicallyestablishedfindsatthemanagementlevel.Manybanksalsochooseto establishriskcommitteesatthemanagementlevel. Of note is that only 19% of banks have boardlevel risk committees, which due andthat31%ofboardshavecreditcommittees.Andwhiletheboardshouldbe settingpoliciesonriskandcreditissues,possiblythroughariskcommittee,the implementation of these matters should be left to the management team and management level risk and credit committees. Credit decisions in particular shouldbehandledbymanagement,withtheboardestablishingthebankscredit policyunderwhichmanagementoperates.
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FigureD4:Boardandmanagementcommitteesestablished
100% 90% 90% 80% 69% 70% 60% 50% 40% 30% 20% 10% 10% 0%
Management Management Management Management BoardLevel BoardLevel BoardLevel BoardLevel Level Level Level Level
88% 81%
31% 19% 12%
AssetandLiability ManagementCommittee
InformationTechnology Committee
RiskManagement Committee
CreditCommittee
iii. a. Buildingarobustcontrolenvironmentthroughclearreportingstructures Reportinglinesforthechiefriskofficer The CRO should be independent of any business line, so as to avoid any conflicts of interest. Best practice further calls for the CRO to report to the CEO, or to a managementlevel risk committee and the board;shouldtheCRO reporttotheCEO,s/he has a dotted line reporting relationship to the board or a relevant board committee, such as the audit or risk FigureD5:Reportinglinesforthechiefriskofficer
RiskManagement
80%
72%
70%
60%
50%
40%
RiskManage ment
30%
20%
18% 13%
10%
7% 2%
0% Audit Committe e Boardof directors CEO Chairman Share holde rs me eting
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committees.AndwhileFigureD5providesevidencethattheCROdoesindeed reporttotheCEOin72%ofthecases,thereislittletodemonstratethatthereis anyreportingline,fullordotted,totheboard(13%)oritsauditcommittee(18%), letaloneariskcommittee. b. Reportinglinesforthechiefcomplianceofficer Compliance means FigureD6:Reportinglinesforthechiefcomplianceofficer complying with the ComplianceOfficer conduct of business rules imposed by 80% regulators, the law, 70% the capital markets, 70% established market 60% practices and other regulatory 50% requirements and 40% standards,aswellas Compliance Office r internal processes 30% andprocedures.The 20% compliance function 20% plays a particularly 11% 10% important role in 5% banks due to the 0% importantnumberof Audit Boardof CEO Chairman Share holders Committee directors me e ting processes and procedures required to properly operate a bank. The CCO needs to be independent of any business line, so as to avoid conflicts of interest. At a minimum, s/he reports to a senior level managerbut not less that two steps removed from CEOand has unrestricted access to the CEO and CFO, or to a relevant managementlevel committee. Best corporate governance practice is increasingly calling for the CCO to have a dotted reporting line to the boards audit committee as well. Figure D6Error! Reference source not found. demonstrates that the CCO reports to the CEO in the great majority of cases (70%),butthatreportingtotheboardcanbeimprovedupon.
%
c. Reportinglinesforthechiefinternalauditor As previously established, best practice calls for the CIA to report to the board through its audit committee on a functional basis and to the CEO on an administrative basis. Figure D7 provides evidence that reporting lines for the CIA remain muddled, with only 40% of CIAs reporting to the boards audit committee. FigureD7:Reportinglinesforthechiefinternalauditor
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InternalAuditor
45%
40%
40%
35%
35%
30%
25%
25%
22%
Inte rnalAuditor 20%
15%
10%
4%
5%
0% Audit Committe e Boardof dire ctors CEO Chairman Share holde rs me e ting
iv. KYCsCG:Assessingthecorporategovernanceofborrowers As much as banks have traditionally looked after the financial performance of its borrowers, they may also be well served to pay attention to their governance practices. Indeed, assessing, improving and monitoring the corporate governance practicesoftheirclientsmaynotonlyhelpminimizetheirportfolioriskbutalsoadd valuetotheirclientsbusiness. Results indicate that a significant majority of banks (58%) do not include an evaluationoftheirclientscorporategovernancepractices,asseenontheFigure D8 below. FigureD8:Doesthebankevaluateitsclientscorporategovernancepractices
42% Yes No 58%
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II.
CorporateGovernanceIssuesRelatedToFamilyOwnedEnterprises30 SeveralstudieshaveshownthatFOEsoutperformtheirnonfamilycounterpartsinterms ofsales,profitsandothergrowthmeasures.31Thishighperformanceistheresultofthe inherent strengths that FOEs have compared to their counterparts. Some of these strengthsinclude:(i)identificationwithandstrongcommitmentbythefamilymembers to the family business; (ii) knowledge continuity, i.e. families pass their accumulated knowledge,experienceandskillsontothenextgenerations;and(iii)reliabilityandpride, inparticularwhenthefamilynameisassociatedwiththebusiness. However,mostFOEshave averyshort lifespanbeyondtheirfounders stage. Indeed, some 95% of family businesses do not survive the third generation of ownership. This high rate of failure among FOEs is attributed to a multitude of reasons. Some of these reasons are the same ones that could make any other business fail, such as poor management,insufficientcashtofundgrowth,inadequatecontrolofcosts,industrylife cyclesandothermacroconditions.However,FOEsalsoshowsomeweaknessesthatare especiallyrelevanttotheirnature.Someiftheseweaknessesare:(i)complexity,i.e.family businessesareusuallymorecomplexintermsofgovernancethantheircounterpartsdue totheadditionofanewvariable:thefamily;(ii)informalityinthatbecausemostfamilies manage their businesses themselves during the first and second generations, there is usuallyverylittleinterestinsettingclearlyarticulatedbusinesspracticesandprocedures; and(iii)lackofdisciplinewithrespecttofinancialandoperationaloversight,succession planning,andattractingandretainingskilledoutsidemanagers. Did you know what steps familyowned enterprises take when they get serious about corporategovernance?They: 1. Establishafamilyconstitution 2. Establish a family employment policyand separate family members rights and responsibilitiesasshareholdersandasemployees 3. If the firm will not pay dividends, set up a fund or other mechanism to buy out familyshareholderswhoprefer,forexample,annuityincomeoverowningagrowth stock 4. Createasuccessionplanfortheowner/founder/CEO/chairman 5. Develop transparent systems for financial accounting, management accounting, humanresourcesandstrategydevelopment 6. Createaboardwhichcanseriouslyaddvaluetothebusinessitself. i. Establishingafamilyconstitution The family constitution is commonly defined as a statement on the familys core values, vision and mission of the business. The constitution also defines the roles, compositions and authorities of key governance bodies of the company and family, including family members, shareholders, managers and directors. In addition, the familyconstitutiondefinestherelationshipsamongthegovernancebodiesandhow familymemberscanmeaningfullyparticipateinthegovernanceoftheirbusiness. Insummary,theinstrumentationofafamilyconstitutionprovidesFOEswithatool to differentiate the family interests from those of the company and regulate the policiesthatwillguidetherelationshipbetweenthefamilyandthecompany.
30
31
FormoreinformationonbestpracticesintheareaofFOEgovernance,pleasevisitwww.ifc.org/corporategovernanceto downloadacopyofIFCsrecentlypublishedHandbook Denis Leach and John Leahy, Ownership Structures, Control and the Performance of Large British Companies, EconomicJournal,1991.
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Figure D9clearsillustratesthatwhile50%oflistedcompanieshadadoptedafamily constitutions,notasinglebankhaddoneso.Thisislikelyexplainedbythefactthat banksoperateunderastrictregulatoryenvironment,whichoftencontainownership restrictions,aswellasfitandpropertests,thatfamilymembersaresubjecttohence alleviatestheneedforsuchadocumentforbanks. FigureD9:Presenceoffamilyconstitutions
100% 100% 80% 60% 40% 20% 0% 0% Yes Banks No Listedcompanies 50% 50%
ii. Implementingsuccessionplanning Succession planning is defined as the process of continuously searching for future leaders and the systematic development of their professional, managerial and leadership qualities. Succession planning is neither limited to the board chairman and CEO,nor does itsufficetosimply appointa deputy. Best practicecallsforthe process of succession planning to begin many years before the actual transition, in ordertoidentifyanddevelopthesuccessor. A planned succession process allows for the gradual transfer of responsibility from onebusinessleadertothenextandincreasesthelikelihoodofasuccessfultransition, i.e.onethatishardlynoticed.Eventuallythetransitionfromonebusinessleaderto the next must end on an agreedupon date at which time the incumbent transfers authority. The ideal method of choosing a successor is through the consensus of the existing business leader, the directors, the management team and the family. It works best when the incumbent business leader sees it as his or her responsibility and follows throughonthenecessaryactionsinatimelymanner. Unfortunately,familysuccessionplansarenotwidespreadintheregion,andresults from
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FigureD10showthatonly29%ofrespondentshavepreparedasuccessionplan.
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FigureD10:Presenceofsuccessionplans
29%
71%
Yes
No
Didyouknowthatthefollowingfivestepsareconsideredbestpracticeinproperly managing the succession planning process in family businesses: (i) prepare the incumbentbusinessleaderstoeventuallyrelinquishcontrolanddevelopnextcareer moves or retirement plans; (ii) prepare the business to function without the incumbent business leaders; (iii) develop the successor for future roles in the business,includingthebusinessleadersrole;(iv)preparethefamily,e.g.byhaving the family agree on a family mission statement, the values stated in which will influencethesuccessionplanningprocess;and(v)preparetheownersofthebusiness foratransferofownershipfromonegenerationtothenext? iii. Developingafamilymemberemploymentpolicy FamilymembersoftenplayanimportantroleinFOEsthatshouldnotbeminimized or underestimated, supporting the mission and values in which the company was foundedindeed, what many consider to be an essential part of the success and future growth of FOEs. At the same time, family members can often lead to a companys downfall. How? Many FOEs that do not establish a clear employment policy for family members endup with more employees from the family than the company needs. In some instances these family members are illequipped for the jobsthattheyaregivenwithinthebusiness.Evenworse,someFOEsfindthemselves acquiringbusinessesthathavenorelationshipwiththeiroriginalbusinessorkeeping someunprofitablebusinesslinesjusttoensurethateverybodyinthefamilyreceives orremainsemployedwithinthecompany. BeforeaFOEentersintothesiblingpartnershipstage,goodpracticecallsforfamilies toformalizetheirfamilymembersemploymentpolicies. Did you know that a family member employment policy should be regularly reviewed and updated, and contain the following seven elements: (i) entry into the business (age, qualifications, skills, and requirement for prior experience outside of the business);(ii) permission of parttimework; (iii) remuneration;(iv) training and personal development; (v) employment of spouses; (vi) termination; and (vii) retirement?Thiswouldrequiresettingupclearrulesaboutthetermsandconditions offamilyemploymentwithinthefirm. Once developed and agreed upon by the family, the written employment policy should be made available to all family members. This will help set the right expectations about family employment among all family members from the very beginning.
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Finally, the appointment of external managers and directors allows the FOE to receiveimpartialandobjectiveopinionsprovidedpurelyonbusinessgrounds. Figure D11 shows that family membership at the boardlevel is prevalent in listed companies, with 75% of respondents citing that their boards are composed of a majority of family members. Banks on the other hand show a substantially higher degree of nonfamily membership, with only 33% of boards being composed of a majority of family members. A reason is likely to be the strict fit and proper requirementsimposedonfamilyownedbanksbytheregulator.Indeed,allfamily ownedbanks(FOBs)respondingtothesurveycitedthatfamilyboardmemberswere required to comply with eligible qualifications for being board member, while this percentagefallsto50%forlistedcompanies. FigureD11:Boardcompositioninfamilyownedbanksandenterprises
75% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes Banks No Listedcompanies 33% 25% 67%
Atthesametime,thepositionofCEOisheldbyanonfamilymemberamong67%of FOBs,whilethispercentagefallsto50%forFOEs,asshowninFigureD12. FigureD12:IsthepositionofCEOheldbyafamilymember?

67% 70% 60% 50% 40% 30% 20% 10% 0% Yes Banks No Listedcompanies 33% 50% 50%
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Resultsofthesurveyshowthatmostofthefamilyownedbanksandfamilyowned listedcompaniessurveyed(67%and75%respectively)demandthesameprofessional requirements for family members applying for a position within the company than fornonfamilymembers,asobservedinthefollowingFigureD13. FigureD13:Presenceoffamilyemploymentpoliciesorrequirements
75% 80% 70% 60% 50% 40% 30% 20% 10% 0% Yes Banks No Listedcompanies 33% 25% 67%
However,asstatedabove,itappearsthatfewcompanieshaveformallycaptured suchrequirementsinafamilyemploymentpolicy. DidyouknowthattheperformanceoffamilyownedUKfirmstendstosufferwhen theyaremanagedbytheeldestsonofthefounder?Astudyofinheritedfamilyfirms and management practices in the UK shows that while family ownership seems to improve a companys management practices, family management of familyowned firmsoftenleadstoperformancewoes.32 Thetwoproblemswithfamilymanagementarethat: Selecting a CEO from the small group of potential family members severely restrictstheavailablepoolofmanagerialability Assuring family members of managerial positions later in life can lead to the Carnegieeffect,inwhichfamilymembersworklesshardatschoolandearlyin theircareerswiththeknowledgeofaguaranteedfamilyjob. Even worse, choosing a CEO by primogeniture (selecting the eldest son to lead) tends to lead to extremely bad performance. The lack of a selection pool and the Carnegie effect become much more severe in situations of primogeniture, since the CEOpositionisdeterminedfrombirth. iv. Establishingafamilycouncil The family council is a working governing body that is elected by the family assemblyamongitsmemberstodeliberateonfamily(business)issues.Thecouncilis usually established once the family reaches a critical size, i.e. more than 30 family members.Inthissituation,itbecomesverydifficultforthefamilyassemblytohave
32
FromInherited FamilyFirmsand ManagementPractices: The Casefor ModernisingtheUKsInheritanceTax.Centre forEconomicPerformance,LondonSchoolofEconomics.
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meaningful discussions and make prompt and qualified decisions. The family councilisestablishedatthispointasarepresentativegovernancebodyforthefamily assemblyincoordinatingtheinterestsofthefamilymembersintheirbusiness. Didyouknowthatthedutiesofatypicalfamilycouncilwouldinclude:(i)beingthe primary link between the family, the board and senior management; (ii) suggesting anddiscussingnamesofcandidatesforboardmembership;(iii)draftingandrevising family position papers on its vision, mission and values; (iii) drafting and revising family policies such as family employment, compensation and family shareholding policies;and(iv)dealingwithotherimportantmatterstothefamily.33 Justasanywellfunctioningcommittee,thefamilycouncilshouldhaveamanageable size,i.e.fromapproximatelyfivetotenmembers.Onegoodpracticeistosetlimited termsforthecouncilsmembershipsoastoallowmorefamilymemberstobepartof thecouncilandcreateafeelingoffairnessandequalopportunitieswithinthefamily. Depending on the complexity of issues facing the family, the council would meet fromtwotosixtimesperyear. As seen in Figure D14 below the survey shows that this body is not commonly establishedintheregion,neitherforbanksnorforlistedcompanies. FigureD14:Presenceoffamilycouncils
75% No 100%
25% Yes 0%
0%
20%
40% Banks
60% Listedcompanies
80%
100%
33
Ivan Lansberg, Succeeding Generations: Realizing the Dream of Families in Business (Harvard Business School Press, 1999);FredNeubauerandAldenG.Lank,TheFamilyBusiness:itsGovernanceforSustainability(RoutledgeNewYork, 1998).
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III.
CorporateGovernanceIssuesRelatedToStateOwnedEnterprises Bestpracticecallsongovernmentsto:34 1. Ensure a levelplaying field for stateowned enterprises competing with the private sectorby;(i)clearlyseparatingthestatesownershiprolefromitsregulatoryrole;and (ii)allowingmoreflexibilityincapitalstructureswhilemakingsurethatstateowned enterprisesfacecompetitiveaccesstofinance. Become more informed and active shareholders by: (i) simplifying the chain of accountability through centralising or more effectively coordinating shareholding responsibilities within the state administration; (ii) reducing political interference in daytoday management; and (iii) introducing a transparent nomination process for boards,basedoncompetenceandskills. Empowerboardsby:(i)clarifyingtheirmandatesandrespectingtheirindependence; (ii) separating the role of chairman and CEO and providing boards the power to appointCEOs;and(iii)systematicallymonitoringtheboardsperformance. Improve transparency by: (i) strengthening internal controls; (ii) carryingout independent, external audits based on international standards; (iii) disclosing any financialassistancefromthestate;and(iv)producingaggregateperformancereports.
2.
3.
4.
Indeed, corporate governance helps governments evaluate and improve the way SOEs perform, and manage their responsibilities as company owners more effectively. This holds particularly true given the fact that most SOEs traditionally operate in strategic sectors,suchaselectricity,telecommunications,infrastructureandutilities. Several specific governance challenges affect SOEs, including conflicts in reconciling competing social and profitseeking objectives, poor board practices and opaque nominating procedures for directors and senior managers, lax control processes and procedures, poor transparency and disclosure, and competing ownership interests betweengovernmentagencies. i. Exercisingpropertyandownershiprights ThemaincorporategovernancechallengeregardingSOEsistheexerciseofproperty rights and the performance of the ownership function, considering the potentially diffuseidentity of themajor shareholder(the State). The control over thecompany canbeseenfromadualperspective:ontheonehand,whohasthepropertyrights;on theother,whoexercisesthepoliticalrights. IndifferentcountriesSOEsarenotownedbytheStateitselfbutbyadifferententity, suchasamunicipality,oraspecialholding,suchasacentralnationalunitthatputs togetheralltheparticipationsofthestateandactsastheowner. Figure D15belowshowsthatasignificantmajorityofthesamplesurveyed(67%)is owned by the state itself. Only one fifth of the respondents (19%) are owned by a central national unit acting as an ownership entity. Best practice is increasingly, althoughnotunequivocally,callingforcentralizednationalunitstoactasanowner and,ataminimum,coordinatecorporategovernanceimprovementsinSOEs. FigureD15:Ownershipofstateownedenterprises
34
TheOECDGuidelinesonCorporateGovernanceforStateOwnedEnterprises,April2005.Seewww.oecd.org.
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14%
19%
67%
ACe ntralNationalUnitactingasowne rshipe ntity The State /Municipality Anothe rState owne dcompany/bank
Figure D16 reveals that the exercise of political rights is usually a competence of a highprofile public officer or delegate (80% of responses in aggregate terms), regardless the shareholders identity. (Of note is that an overwhelming majority of stateownedbanks(SOBs),over90%ofrespondents,declaredthatpropertyrightsare exercisedbyahighprofilepublicofficeroradelegate,whilethispercentagefallsto 62%ofrespondentsforSOEsthatarepartiallylistedonanexchange.) FigureD16:Exerciseofpoliticalrights
10% 10% 35%
45% Ahighprofilepublicofficer Adelegatefromahighprofilepublicofficer Anoutsiderappointedonaprofessionalskillsbasis Other
In exercising its ownership, the state should act as an informed and active owner, establishing clear and consistent ownership policies, ensuring that the affairs of its SOEs are carried out in a transparent and accountable manner, with the necessary degreeofprofessionalism. AnyobligationsandresponsibilitiesthataSOEisrequiredtoundertakeintermsof publicservices beyond the generally accepted norm should beclearly mandated by laws or regulations, and publicly disclosed, with related costs being covered in a transparentmanner.
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Figure D17illustratesthatthereisaneffectiveseparationbetweenpublicpolicyand the business objectives of SOE, with 67% of SOEs citing an existing difference betweensocialandprofitseekingobjectives.
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FigureD17:Differenceinsocialandprofitseekingobjectives
33%
67%
Yes
No
Most state owned enterprises report to the controlling agency on an adhoc basis, upon request (45%), and not on a predetermined and periodic basis, for example annually(25%) ii. Demonstratingcommitmenttogoodcorporategovernance TheOECDGuidelinesonCorporateGovernanceforStateOwnedEnterprises(OECD SOEGuidelines)representthefirstinternationalbenchmarktoassistgovernmentsin improvingthecorporategovernanceofSOEs,andhowtheyperformtheirownership function.TheGuidelinesprovidetheframeworkapplicabletoSOEsandsynthesize thecoreelementsofagoodcorporategovernanceregimeforSOEs. ItappearsfromFigure D18thattheOECDSOEGuidelinesarenotasknownasthe OECD Principles or BSBC Guidelines, as just over half of the respondents (56%) declaredtobefamiliarwiththeircontentandscope.Andsoawarenessraisingonthe importance of corporate governance for SOEs should be pursued by the relevant publicandprivatesectorstakeholders. FigureD18:ArekeyofficersanddirectorsfamiliarwiththeOECDGuidelines?
44%
56%
Yes
No
Importantly, only 33.3% of government ownership entities have a policy or requirement for their SOEs or SOBs to adopt good corporate governance practices, demonstrating that corporate governance does not appear to be of primary concern formostgovernments(seeFigureD19). FigureD19:PublicpoliciesrequiringSOEsorSOBstoadoptgoodcorporategovernance
33%
67%
Yes
No
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iii. a.
Implementinggoodboardpractices Thecompositionoftheboard The boards of SOEs should have the necessary authority, composition and competency, and structure to strategically guide and monitor management. In doingso,itisofgreatimportancetohaveappropriatenominationproceduresto ensurethatonlythosedirectorsarenominatedtotheboardthatdemonstratethe highestintegrity,competencyandaccountability. The procedure for appointing board members in SOEs has traditionally been opaque. However, the nomination and election of directors is one of the major challenges to finding a balance between the states responsibilities for actively exercising its ownership functions while at the same time refraining from imposingunduepoliticalinterferenceinthemanagementofthecompany.35 Figure D20 shows that being a highprofile public officer (62%) remains the primarycriteriafornominatingadirectortotheboardofaSOE,contrarytogood practice. Competency and skills are a secondary requirement, fortunately consideredasanimportantcriterionby52%ofSOEs.
FigureD20:Nominationcriteriaforboardmembership
Highprofile publicoffice r(Ministe r,Dire ctorofanAge ncy Compe te nce le ve landskills Agre e withpoliticsofthe Gove rnme nt Functionaryofthe owne rshipe ntity Othe r None ofthe above 0% 5% 10% 20% 30% 40% 50% 60% 70% 10% 10% 14% 52% 62%
Finally, results show that just over half of those surveyed (52%) state that directorsareremuneratedfortheirboardservices(seeFigureD21). FigureD21:Remunerationofdirectors
48% 52%
Yes
No

35
OECDGuidelinesoncorporategovernanceForeword
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MENAWIDECORPORATEGOVERNANCESURVEY SECTIONE:ANNEXES

SectionE. Annexes
I.
i. Annex1:SurveyMethodology Surveypopulation The survey population consisted of 1,044 banks36 and listed companies from11 MENA countries, divided into three separated groups: nonlisted banks (57 cases); listed banks (65 cases); and listed companies (922 cases). As shown in Table E1, banks and listed companies are distributed among countries as follows: TableE1:Distributionofbanksandlistedcompaniesbycountries Bahrain Egypt Jordan Kuwait Lebanon Morocco37 Oman SaudiArabia Tunisia UAE WB&Gaza TOTAL Nonlistedbanks 1 21 13 1 0 5 1 2 5 5 3 57 Listedbanks Listedcompanies TOTAL 6 17 2 6 0 0 5 9 9 7 4 65 41 125 204 164 9 52 139 71 35 57 25 922 48 166 219 171 9 57 145 82 49 69 32 1044
Todesignarepresentativesample,ameasureofthesizeofthebanksandlistedcompanies beingpartofthepopulationwasconsidered.Specifically,andasshowninTableE2,banks have been grouped into four categories in terms of their assets: (i) small banks with less than $1,000 million in assets; (ii) mediumsized banks, with between $1,000 and $4,000 millioninassets;(iii)largebankswithmorethan$4,000millioninassets;and(iv)banksfor
36
Lebanese banks were not included in the survey, as IFC had previously conducted a survey of banks in Lebanon, whichcanbeviewedunderwww.ifc.org/mena/corporategovernance. ThereisnoavailableinformationonthefactofbeinglistedornotforfiveMoroccanbanks.Thosebankshavenot beenincludedinthepopulation
37
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which information on assets was non available (n/a). Listed companies in turn were groupedalongsalesintothefollowingfourcategories:(i)lessthan$10million;(ii)between $10and$50million;(iii)morethan$50million;and(iv)Informationonsalesnonavailable (n/a).38 TableE2:Distributionofrespondentsbysize39
Banks ListedCOs Nonlistedbanks Small <$1,000 <10 Listedcompanies Nonlistedbanks Medium 1,0004,000 1050 Listedcompanies Nonlistedbanks Large >4,000 >50 Listedcompanies Nonlistedbanks n/a Listedcompanies Nonlistedbanks TOTAL Listedcompanies 41 125 204 164 9 52 139 71 35 57 25 922
Listedbanks
Listedbanks
Listedbanks
Listedbanks
Bah rain Egypt Jordan Kuwait Lebanon Morocco Oman Saudi Arabia Tunisia UAE WB&Gaza TOTAL
1 8 6 0 0 0 0
1 5 1 0 0 0 1
3 39 105 15 0 6 52
0 5 4 1 0 0 0
3 6 0 1 0 0 3
17 37 47 51 1 14 38
0 5 2 0 0 0 0
1 1 0 5 0 0 1
17 47 14 97 2 23 20
0 3 1 0 0 5 1
1 5 1 0 0 0 0
4 2 38 1 6 9 29
1 21 13 1 0 5 1
17 2 6 0 0 5
0 3 0 0 18
0 1 1 3 13
24 8 1 4 257
0 0 2 0 12
1 8 1 0 23
22 16 1 3 247
0 0 3 0 10
8 0 5 0 21
22 11 8 1 262
2 2 0 3 17
0 0 0 1 8
3 0 47 17 156
2 5 5 3 57
65

38
Sectorofactivityhasnotbeenaprincipalcriterioninordertodesignthesample,asitwasarranged.However,when selectingthecompaniesbeingpartofthesample,wehavetriedtoselectcompaniesfromallthesectorsofactivity,in ordertobestrepresentthedifferentsectorsoftheeconomyofeachcountry. AmountsareinmillionsofUSdollars.
39
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Listedbanks 6 9 9 7 4

ii.
Theoreticalbackground:randomsampling Considerthefollowingsymbols: h=1,..,Hgroupsintowhichthesurveyedpopulationwasdivided(3classes definedbythetypeofcompany,H=3), Nhnumberofunitsingrouph(=numberofcompaniesingrouph) N=N1++NHnumberofunitsfromthetotalpopulation nhnoofunitsinthesampleforgrouph n=n1++nHtotalnumberofunitsintheglobalsample phratioofunitsingrouphthatmeetacertainrequirementA Thefollowingformulaswereusedinordertoestimateproportions TheratioofunitsingrouphthatmeetrequirementAiscalculatedas follows:
ph =
ah nh
WhereahisthenumberofmeetingrequirementA,inthehgroup,andthis numbermaybeinterpretedasasumforalltheunitsingrouphofthevalues ofabinaryvalueY,whichindicatesthefactthatrequirementAhasbeen met:
a h = Yh , j
j =1
nh
Formulasusedinordertocalculatetheprecisionoftheestimatesmadeareas follows. Estimatephfallssubjecttosampleerror,duetothefactthatonlyonesample of the population group h is being studied, not the entire group. The maximumsampleerror,withaconfidencelevelof1c,isgiventhroughthe followingformula
SAMPLE ERROR Z c
N h n h 0.5 0,5 ( N h 1) nh
WhereZc/2denotesthepercentilec/2ofthedistributionofastandardnormal randomvariable(Zc/2=1.96ifaconfidencelevelof95%isconsidered).Sample errorisstrictlylowerthanthisupperboundwhenphisdifferentfrom0.5. iii. Sampledesign Each of the three groups is treated independently of the others. Hence, three sampleswereselected,eachonebeingrepresentativeofoneofthethreegroups considered: Nolistedbanks:h=1
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Listedbanksh=2 Listedcompanies:h=3 For each of these groups,size wasdeterminedin such a way that sample error (i.e.thedifferencebetweentheratiosinthesampleandtheentirepopulationfor the units meeting requirement A) will be lower than 5%, with a confidence levelof95%.Resultsforthewholepopulationwillthenbeestimatedbyusing thecorrespondingweightsforcompaniesineachsubsample.Suchsizesare: Nolistedbanks:n1=50 Listedbanks:n2=56 Listedcompanies:n3=272 Sincethepopulationsizesaresmall,samplesarerelativelylarge:theyarealmost exhaustiveforbothgroupsofbanksand29.4%ofthelistedcompaniedneedto beinterviewedtofulfilltherequirementsonsampleerror. Eachsamplewasproportionallydistributedamongallcountries(tencountries forbanks40and11countriesforlistedcompanies)andamonggroupsoftotal assetsorgrosssalesrespectively,obtainingthefollowingsamplesdesign(see TableE3).4142 TableE3:Distributionofrespondents43
Banks ListedCOs Nonlistedbanks Small <$1,000 <10 Listedcompanies Nonlistedbanks Medium 1,0004,000 1050 Listedcompanies Nonlistedbanks Large >4,000 >50 Listedcompanies Nonlistedbanks n/a Listedcompanies Nonlistedbanks TOTAL Listedcompanies
Listedbanks
Listedbanks
Listedbanks
Listedbanks
Bahrain Egypt Jordan
1 7 5
1 4 1
1 11 29
0 5 4
3 5 0
5 11 13
0 4 2
1 1 0
5 14 4
0 2 0
1 4 1
1 0 10
1 18 11
Listedbanks
6 14 2
12 36 56
40 41
AsreferredtoinFootnote1. Pleasenotethatthedistributionoflistedcompaniesamongcountriesisnotexactlyproportional,asthesamplefor thecountrieswiththesmallestnumberoflistedcompanies(Lebanon+3,Tunisia+1andWB&Gaza+3)havebeen slightlyoversampledtoreducesampleerror.Thesedeviationswillbecompensatedbyestablishingtheappropriate weightintheprocedureofsamplecalibration. PleasenotetheconsiderationsregardingthesectorofactivityarealreadyreferredtoinFootnote3. AmountsareinmillionsofUSdollars.
42 43
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Kuwait Lebanon Morocco Oman SaudiArabia Tunisia UAE WB&Gaza TOTAL
0 0 0 0 0 3 0 0 16
0 0 0 1 0 1 1 3 12
4 1 2 14 7 3 1 2 75
1 0 0 0 0 0 2 0 12
1 0 0 2 1 7 1 0 20
16 0 4 11 7 5 1 1 74
0 0 0 0 0 0 3 0 9
4 0 0 1 7 0 4 0 18
28 1 6 6 7 3 2 1 77
0 0 4 1 2 1 0 3 13
0 0 0 0 0 0 0 0 6
0 4 3 9 0 0 13 6 46
1 0 4 1 2 4 5 3 50
5 0 0 4 8 8 6 3 56
48 6 15 40 21 11 17 10 272
Withthisdesign,thesampleerrorwithaconfidencelevelof95%foreachtypeof entityineachcountryisdepictedinTableE4. TableE4:SampleErrorforeachtypeofentity Bahrain Egypt Jordan Kuwait Lebanon Morocco Oman SaudiArabia Tunisia UAE WB&Gaza Nolistedbanks 0.0% 8.9% 12.1% 0.0% 24.5 0.0% 0.0% 24.5% 0.0% 0.0% Listedbanks 0.0% 11.3% 0.0% 19.6% 0.0% 24.5% 12.2% 12.2% 16.3% 32.7% Listedcompanies 24.1% 13.9% 11.5% 11.2% 24.5% 21.5% 13.2% 18.9% 24.8% 20.1% 24.5%
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TOTAL
5%
5%
5%
Banksandlistedcompanieswereselectedonarandombasisforeachgroupas definedbycountry,typeofcompanyandsizeofbank/company. iv. Samplecalibration Once the field work was completed, potential deviations from the designed sample wereanalyzedand corrected by consideringthe appropriate weight for eachcompanyorbankbeingpartofthesample.
II.
Annex2:CorporateGovernanceScoringMethodology(Indicators) ThecorporategovernanceindicatorsfortheMENAregionasshownin SectionC.I.ii weredeterminedasfollows: Thirtytwo(32)questionsweretakenfromthesurveyskeysections(Table E5), each of which the survey authors thought to best represent adherence to key corporategovernancepractices. TableE5::Listofcorporategovernanceindicators Section I.Demonstratingcommitmenttocorporategovernance 1. 2. 3. 4. 5. 6.
Banks and listed companies (hereinafter companies) that have a corporate governancecode. Companies that provide training for the board in corporate governance issues. Companies whose boards are responsible for developing corporate governancepractices. Companiesthatareabletoproperlydefinecorporategovernance. Companiesthathavecitedimplementingcorporategovernancepracticesasa veryimportantpriority. Companiesthathaveaformalizedcodeofethics.
Numberof indicators
II.Implementinggoodboardpractices 7. 8. 9. 10.
Companiesthathaveatleasttwo(2)independentboardmembers. Companieswhereboardmembersreceivematerialsatleastoneweekbefore theboardmeeting. Companiesthatconductanannualboardperformanceevaluation. Companieswhoseboardsmeetatleastsix(6)timesayear.
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11. 12. 13. 14. 15.
Companies that have formalized qualification requirements for being nominatedtotheboard. Companiesinwhichshareholdershaveasayonpay. Companiesinwhichthereisatleastonefemaleboardmember. Companiesthathaveasuccessionplaninplace. CompaniesthatseparatethepositionofchairmanandCEO.
III.Buildingarobustcontrolenvironmentandprocesses 1. 2. 3. 4. 5. 6.
Companies where the internal audit function reports to the board or the boardsauditcommittee. Companies that have an audit committee composed of a majority of independentdirectors. Companiesthathavedefinedapolicyofexternalauditpartnerrotation. Companies in which the external audit firm does not provide additional servicesdifferentthanaudit. Companies whose audit committee develops procedures and policies for internalcontrolandriskmanagement. Companiesthathaveaninternalcontrolfunction/internalcontroller.
IV.Strengtheningtransparencyanddisclosure 1. 2. 3. 4. 5.
CompaniesthatpreparetheirfinancialreportsaccordingtoIFRS. Companiesthatdisclosefinancialinformationontheirwebsite. Companiesthatdisclosenonfinancialinformationontheirwebsites. Companies that disclose related party transactions to shareholders, for example,viatheirannualreport. Companiesthatdisclosetheircorporategovernancepoliciesandpracticesin theirannualreport.
V.Protectingshareholdersrights 1. 2. 3. 4. 5. 6.
Companiesthathaveavotingpolicyallowingforcumulativevoting. Companieswhereshareholdersarenotifiedmorethan20daysinadvanceof theshareholdersmeeting. Companies where shareholders receive supporting documents prior to the shareholdersmeeting. Companies where their board members and management disclose and abstainfromvotingonissueswherethereisaconflictofinterest. Companies where tag along rights are in force to protect minority shareholders. Companiesthatdisclosethedividendpolicyontheirwebsite.
TOTAL
32
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Thescoresofthethirtytwo(32)indicatorswerethenusedtoconstructameasure ofgoodcorporategovernance(allitemsweregivenequalweights). The surveys authors identified the banks and listed companies that satisfied eachofthecriteriausingthesurveyresponses. Finally, we calculated the overall score for each section by averaging the individualscoreperindicatoroneachsection. i. Indicatorsbybanksandlistedcompanies Companies are grouped into five different levels of compliance ranging from underdevelopedtobestpractice,asshowninTableE6:below: TableE6:Indicatorsbybanksandlistedcompanies Ranges 07 815 1623 2431 32 TOTAL ii. Countries Levelofpractice Underdevelopedpractice Emergingpractice Improvedpractice Goodpractice Bestpractice 6
Countries are compared one by one against the benchmark for the region, creating a rankingthatdespitenotbeingstatisticallyrelevantprovidessignificantconclusionsthat will help each country determine the current state of corporate governance and the furtherstepsnecessarytoimproveit.
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INTERNATIONALFINANCECORPORATION
www.ifc.org
HAWKAMAHTHEINSTITUTEFORCORPORATEGOVERNANCE www.hawkamah.org
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A Corporate Governance Survey of Listed Companies and Banks Across The Middle East and North Africa

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A Corporate Governance Survey of Listed Companies and Banks Across The Middle East and North Africa

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MENAWIDECORPORATEGOVERNANCESURVEY SECTIOND:FOCUSSECTIONONBANKS,FOESANDSOES

ACORPORATEGOVERNANCESURVEY OFLISTEDCOMPANIESANDBANKS ACROSSTHEMIDDLEEAST&NORTHAFRICA MARCH2008

Thissurveywas: CommissionedandeditedbyHawkamahandIFC, PreparedanddraftedbytheIAAGandIFC,and SupportedbytheUnionofArabBanks,Egyptian BankingInstitute,EgyptianInstituteofDirectors, LebaneseTransparencyAssociationandAbuDhabi ChamberofCommerce.

Total Banks Listed Companies

Om Sa an ud iA ra bi Un a ite Tu d ni Ar sia ab W Em es i ra tB te an s k & Ga za

41% 40% 36% 21% 38% 59% 64% 56%

No.ofindicators followed 07 815 1623 2431 32

Levelofpractice Underdevelopedpractice Emergingpractice Improvedpractice Goodpractice Bestpractice TOTALSAMPLE

%ofrespondents 5% 51% 41% 3% 0% 100%

Board of directors 47% 51% 45% Aggregated

Control environment 50% 56% 44% Banks

Transparency and disclosure 65% 73% 58% Listed companies

Shareholder's rights 42% 50% 35%

Aggregated Banks Listed companies

42,3% 38,5% Banks

60% 50% 40% 30% 20% 10% 0%

ListedCompanies 49% 47%

The Corporate Secretary

TheChief Executive Officer/ General Director

The Compliance Officer

7% 5% 13% 7% 8% 10% 10% 23%

31% 53% 47% 43%

Implement International Accounting Standards

Introduce independent directorsto theBoardof directors

Establish Corporate Secretary position

Implement remuneration systemfor executives

Establish Board committees

Approvea corporate governance Code

Seekfull corporate governance plan

TrainBoard memberson corporate governance issues

Seek consultancy onspecific corporate governance issues

FromInheritedFamilyFirmsandManagementPractices:TheCase forModernizing theUKsInheritanceTax.Centre forEconomicPerformance,LondonSchoolofEconomics.

8to10 40,7% 31,0%

2to5 43,2% 40,0%

70% 16% 69%

Beingashareholder Agelimitations Professionalexperience Integrity Qualificationsrequirementincludedinagoverningdocument Noneoftheabove

Balancingtheboardroom:thevalueaddedofwomanontheboard As can be clearly seen from

0% Meeting agenda Listed companies Banks 96,15% 93,15%

Financial statements for 89,74% 87,67%

6to9times 10to12times 13to15times Morethan16times

87,00% 3,70% 11,10%

5% Board CEO GMS

option 86,40% 5,10% 8,50%

93,00% 7,00% 3,50%

60% 40% 20% 0% Board

CEO 5,60% 2,70%

GMS 15,30% 17,60%

80,60% 89,20% Banks

vi. a. Boardevaluationandtraining Boardevaluation

Listed companies Banks

64% 80% 60% 23% 40% 20%

93% Board CEO GMS

60% 50% 40% 30% 20% 10% 0%

53% 53% 43% 32% 43%

Becausethereis apolicyof rotationofthe externalauditor Total Banks

Becausethe qualityofthe workwasnot satisfactory Listedcompanies

No additional servicesare received

35% 57% 61% 59% 61% 64% 71%

Asforlistedcompanies,resultsarequitesimilartothoseofbanksexceptforthe useofelectroniccommunication(emailandcorporatewebsite),whicharemore frequentlyusedbybanksthanlistedcompanies. FigureC50:Informationdisclosurebylistedcompanies

51% 48% 53%

19% 27% 30%

18% 26% 14% 32% 36% 26%

RemunerationoftheBoardascollectivegroup RemunerationofKeyExecutives DividendPolicy PolicyofCorporateS ocialResponsibility Noneoftheabove