Cronyism poor transparency and the state's dominant role in business. These are just some of the issues blighting the Gulf's business community according to a new report on corporate governance published last week.
But is weak corporate governance really an important issue facing the region? Or just another buzzword from the West with little substance or relevance for this part of the world?
What is this research?
A survey by the Institute of International Finance (IIF) and Dubai's Institute for Corporate Governance, Hawkamah. It says standards of corporate governance in many Gulf states "lag significantly behind international corporate governance best practice".
What exactly is corporate governance?
Good question. It is a phrase that is often bandied around boardrooms these days. Everyone has heard it but few understand it. In practice it is about good ethics and good housekeeping. Enron was a textbook example of bad corporate governance. Cooked up accounts directors setting up shady offshore companies and lying to shareholders, analysts and the media.
How good or bad are standards in the UAE?
Pretty poor. The UAE scores two out of five in the report. That is the worst in the Gulf (on a far with Bahrain and Qatar). Oman is the region's best performer with a score of 3.5 out of five.
The Emirates scores badly in a number of areas including:
Accounting standards
The role of boards of directors
Regulatory environment
Protecting the rights of minority shareholders
Anything positive to report?
It is not all bad news. The report acknowledge that standards are improving the Abu Dhabi Securities Market is singled out for praise for its new corporate governance code. Dubai International Financial Centre (DIFC) also gets a pat on the back for its efforts to boost standards as does Qatar Financial Centre. (Hawkamah is part of DIFC but the research is independent. The IIF is based in Washington and represents all the world's major banks).
Why should we care about it here in the UAE?
In a nutshell weak corporate governance threatens to drive away foreign and local investment.
Put yourself in the shoes of an investor either an international fund manager or a wealthy Arab national. You can place your cash anywhere in the world. Are you really going to place your money in a country where companies cook the books? Or where business is done on a nod and a wink? No. You'll place it where you know it will be looked after.
Shouldn't we just leave business to get on with it rather than impose rules and red tape that will just get in the way?
Fair point. Too much regulation can be a bad thing. Many business leaders think the United States went too far in the wake of Enron with the Sarbanes-Oxley rules which they argue stifle business.
But done well corporate governance is a force for good. Arif Naqvi at private Dubai based equity firm Abraaj Capital reckons that applying stringent corporate governance codes to regional firms can boost their value by between 20 and 30 percent.
Isn't the UAE getting more than enough investment as it is?
Yes, but remember these two points. We are in the middle of an oil price boom but history suggests that cannot last. If and when oil goes back down to $40 a barrel (and it's fallen almost 20 percent since July) there will be less money in the region and it will become far more discerning.
Also think about the kind of investment we are attracting. Virtually all of it is going into real estate. That is not bad as such but it is not going to create a dynamic, innovative and diversified economy.
What should we are doing?
Dr. Nasser Saidi head of the Hawkamah says the region should be investing in research and development. He single out nanotechnology as one possible are for growth much of nanotechnology research is based on hydrocarbons which could give the region a clear edge.
But he says the Middle East and North Africa attracts just three percent of global capital flows partly because of weak corporate governance. It also helps explain why Gulf investors still place most of their wealth overseas.
Dr. Saidi is no ivory tower economist he is a former Lebanese economy minister and central bank official who has worked extensively in the private sector. I believe him "corporate governance is a major factor in encouraging foreign and local investment," he insists. "We need to find out where the gaps are and take remedial action."
What happens next?
There is cause for optimism . The government back in the 1970's much of the oil surplus was badly invested.
Now commentator agree that Gulf government are being smart, investing in infrastructure and education.
Perhaps even more important the fact that Gulf investors are buying international firms will inevitably expose local organizations to international standards, raising the bar in the region.
By Zarina Khan
© Emirates Today 2006
