Having been at the helm since 2014, can you tell us how corporate governance practises in the MENA region have evolved?
When the Dubai International Financial Centre Authority, DIFC, established Hawkamah back in 2006, governance was relatively new in the region. Much of our work were focused on the basics—What is the meaning of corporate governance?
Why is good governance important? Is governance just another layer of regulation? Why does the MENA region have to copy concepts coming from other regions? And many more questions of this basic nature. Some of our initial surveys highlighted the mismatch between the acknowledgement of the importance of good corporate governance and the understanding of what constitutes good corporate governance.
The region’s corporate governance landscape has changed and there have been several key milestones in the region’s governance developments. One of the first milestones for the regional banks’ corporate governance journey was when Hawkamah issued, with Union of Arab Banks (UAB) and the organisation for Economic Co-operation and Development (OECD), the main drivers of global and regional corporate governance, a Policy Brief on Corporate Governance of Banks.
The Policy Brief was converted to a number of initiatives by Hawkamah, UAB, and OECD to push for better corporate governance practises. Hawkamah produced policy briefs for Islamic financial institutions, private equity firms, state-owned enterprises, as well as on insolvency and creditor rights.
On the back of our engagement with regulators and market players for each of these policy briefs, we hoped to frame and evolve regional corporate governance discussions away from the basics to how corporate governance can actually add value to the region’s corporates. Since these initial steps, we have witnessed countries in the region develop their own codes of corporate governance.
Many of them have also established institutes that focus on governance creating awareness and improvement in their respective countries.
Listing rules have changed massively to reflect almost all of the well-established best practices including defining independent and non-executive directors, related parties, conflict of interest, and the like; mandating audit committees and pushing for the development of risk committees; introducing minority shareholder rights protection such as cumulative voting; mandating minimum disclosure requirements (some of which mandate disclosures in multiple languages to account for the needs of potential international investors) and the appointment of investor relations officers.
A good number of these codes, introduced in the early 2000’s, have gone through several updates and iterations reflecting some of the lessons learned from the financial crisis and the regulators’ desire to stay on top of global corporate governance developments.
One of the key milestones that we are proud of at Hawkamah is the launch of the first, and only, MENA region Environment, Social and Governance (ESG) Index in 2011. The index was a result of our work with Standard & Poor’s with the support of the International Finance Corporation, IFC, of the World Bank.
The Hawkamah S&P Pan Arab index tracks the status and disclosures of the region’s top and most active companies in the areas of governance, environment and social practises. Our work on the index have shown that the issuance of national codes of corporate governance helped regional companies in increasing their governance disclosures.
Over a decade of tracking the ESG Index, we have noticed considerable improvements on the region’s governance disclosures. There is, however, far less improvements in the social and environmental practises and disclosures. In parallel, we have also witnessed increasing interest from existing and aspiring board members to go through a structured capacity building programme to enable them to become stronger corporate governance advocates in the boardroom.
Since Hawkamah started its director development programme in 2009, over 2000 directors have gone through our programme. This year, we accredited our 100th director which is a milestone in itself given that director accreditation is not mandated by regulators. The accreditation programme includes a rigorous exam and requires all accredited directors to maintain their corporate governance knowledge by participating in programmes for continuing professional development (CPD) credits.
We have also seen a considerable increase in the number of corporate governance professionals and the introduction of certain governance related functions in companies. This includes professional company secretaries, investor relations officers, compliance officers, and corporate governance managers. These changes were quite important as previously most of the governance work was non-one’s job. Now responsibilities are assigned, accountability is established, and professionalism is on the rise.
More than a decade since Hawkamah started, we have seen a confluence of regulators articulating a framework for good corporate governance practices through the corporate governance codes and regulations, boards slowly starting to be aware of the need to implement these frameworks, directors and corporate secretaries that realise that corporate governance goes beyond mere implementation of these codes and regulations, and an evolving (although admittedly still nascent) interest on ESG practises and disclosure.
The region has come a long way, but more work still has to be done.
Particularly for the banking sector, what were the major issues faced then? How were they resolved and what are the challenges ahead?
The banking sector is the most important one in any economy. It is the sector that leads development and affects every other sector and every single organisation in the economy.
One of the main issues then was the localization of a naturally global industry. Banks can be abused and money can be channelled into illegal activities. Regulators were concerned with maintaining strong banking sectors while making sure that they are not used to finance terrorism, finance illegal business or evade taxes.
While developments led by the Bank for Information Settlements in Basel, Switzerland handled many of the risk and governance challenges, other regulations such as Anti-Money Laundering (AML) and Countering Terrorist Financing (CTF), were also developed. Central banks had to include international regulatory developments into their own governance rules and had to supervise the implementation and adherence to those regulations.
The role of the banking sector in protecting the environment and the social fabric of societies have also been high on the agenda of banks and various interest groups in the region. Globally, we have general business initiatives such as the Global Compact that call for businesses to act responsibly. For the financial sector there are many other initiatives such as the Equator Principles and Principles for Responsible Investment and Sustainable Finance.
They all call for banks to consider the non-financial impacts of their funding and investment practises. This includes environmental impact assessment as well as social implications of projects and investments. In these areas, the MENA region is still lagging behind international best practises. Some banks have officially adopted these initiatives and are adhering to them while the majority are still in the “thinking” phase.
Moving forward, the coming years look challenging for the banking sector. On the one hand, we are witnessing a trend towards mergers of banking institutions. On the other, how to stay profitable in times of uncertainty is a major issue. While many banks in the region have liquidity, it is getting more difficult to find the right investments and to balance credit levels with the desired profitability and risk levels.
Fintech also seems to be on the rise in the region. This is a great disruptor for the sector in the MENA region. Fintech companies operate at a far lower cost structures, have more relaxed regulatory pressures, and are more flexible. How banks compete against them within their current governance and regulatory frameworks is a serious challenge.
This will sure have implications not only on the business model of the banking sector but also on the board structure and organisational structure of the sector. How detrimental is poor corporate governance for financial institutions in the region?
Financial institutions cannot afford to have poor governance structures. Regulatory pressures make it impossible for a MENA bank not to have a good governance structure. The risk is not in the lack of structure but in how agile the governance structure is.
There are two main risks associated with governance structures: focusing on the form, (i.e. not the substance of governance) and having too rigid a structure. In other words, the issue is behaviour. A bank might be at high risk, even when it complies with regulatory frameworks, if it has internal vulnerabilities.
If the audit committee is not doing its job, or if internal audit is not truly independent, or if not everyone in the bank understands risks and how to mitigate them, or if the bank has a poor corporate culture, then the bank potentially leaves itself exposed to an existential crisis. We have seen this in banks across the world and it can happen in the region if we do not learn the lessons.
The advice for banks is therefore to adhere to the core and essence of good governance. This is not about regulation; it is about how you make decisions on a daily basis. Therefore, in the coming years, corporate culture remains to be the key area that banks have to work on. Experience shows us that the first line of defence for the organisation is its strong corporate culture.
Bank boards, management, and employees must understand and respect ethics and the values of integrity, transparency, and long-term value maximisation. Unfortunately, bank management is assessed using mere financial indicators. If financial indicators continue to dominate KPIs, then it is a matter of time until we see major scandals.
Boards set the tone at the top; they need to cherish adherence to good governance, ethical practises, stakeholder value maximisation and sustainability. The use of technology in advancing banking services and how banks respond to the rise of fintech will either make or break banks. Banks have to choose whether they want to be disruptors or will rather wait to be even more disrupted.
What are Hawkamah’s plans for moving forward?
In the coming year, Hawkamah will work more with banks and other institutions to enhance board effectiveness through board evaluations, private board sessions and specialised board committee briefings.
Hawkamah’s work in ensuring that the board is composed of professional directors, enabled by an active chairman, and supported by an able and professional company secretary, will continue. As a matter of fact, we had a breakthrough engagement two years ago with the Dubai Financial Market mandating DFM-listed companies to have their company secretaries go through the Hawkamah certified company secretary programme.
Over the course of the past two years, we’ve certified close to 200 company secretaries. We urge other markets to create a mechanism to ensure that company secretaries are aware of their duties and responsibilities, (and liabilities) so that they are able to better advise the boards on good corporate governance practises.
Hawkamah is also working with a couple of regulators in the region to update listing rules to make sure they take into account latest governance developments and also include sustainability and integrated reporting as key competitive elements, not just regulatory requirements. Another important project that we are currently working on is launching a new ESG index with S&P covering all UAE markets.
The project was initiated by the Dubai Financial Market, DFM, with the support of the Securities and Commodities Authority, SCA and the Abu Dhabi Stock Exchange, ADX. The idea of the index is to create healthy competition among listed companies through which they pay more attention to good governance, corporate citizenship, and environmental policies.
To score high on the index, companies must have the right policies and frameworks in place and must have good disclosure practises as well. One of the pioneering developments on the governance landscape in the MENA region is the keen interest of the UAE government to introduce the highest standards of governance to government institutions.
At times when regulators are focusing on how to improve governance mainly for listed companies and financial institutions, the UAE government turned its attention to itself as well. This interest covers federal as well as local level government entities. We have supported many such institutions to enhance their governance structure and practises through working directly with them on long-term partnership basis.
On the national level, Hawkamah is working on major assignments to improve governance practises in government institutions through revised regulations, awareness sessions and training courses for senior government officials.
Furthermore, a tailored study tour for senior government and market regulators from the MENA region to Singapore will be held in December 2019 to exchange experience and gain knowledge of latest developments and to establish strategic relationships between governments and regulators of the region with their counterparts in Singapore.
To conclude, the MENA region has gone through an impressive journey towards achieving good governance in the last two decades. The journey is far from being completed, there is a lot more to be done. This combined with the looming global economic crisis, trade wars, and general instability, means that financial institutions and large corporations need to pay more attention to good governance, risk management, audit, and control functions.