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Corporate Governance Undergoing Major Development In GCC Region

by Lorys Charalambous,, Cyprus

21 September 2006

Downward corrections in Gulf Co-operation Council (GCC) stock markets and increased corporate activity by GCC corporations in Western markets are driving improvements in corporate governance standards, according to a report released by Hawkamah, the Institute for Corporate Governance, and the Institute of International Finance (IIF).

The report ‘Corporate Governance in the GCC – An Investor Perspective,' is part of a co-ordinated strategy toward the harmonization of corporate governance standards in the GCC and their alignment with international best practice, and is the first study to benchmark standards in the region.

It is the result of a series of meetings held with senior officials from capital market authorities, central banks and stock exchanges, local fund managers, lawyers, experts, accountants and management consultants involved in corporate governance in the GCC.

Dr. Omar Bin Sulaiman, Governor of the Dubai International Financial Centre (DIFC), commented:

“Hawkamah and the DIFC are dedicated to improving standards of corporate governance in the region, thus supporting sound financial markets development. The findings of this survey will help GCC policy makers identify key areas for reform and promote awareness of the benefits good corporate governance brings to companies and markets."

Dr. Nasser Saidi, Executive Director, Hawkamah, added:

“The Hawkamah-IIF survey shows that corporate governance in the GCC is generally at an early stage of development. However, it also notes that real progress is being made as countries amend existing company laws, strengthen accounting frameworks, and introduce corporate governance requirements for companies."

"Good corporate governance is a key factor in sustaining economic growth and development in the GCC. Policy makers are taking the lead and committing to secure significantly higher standards of corporate governance in the member countries of the GCC (UAE, Saudi Arabia, Kuwait, Oman, Qatar and Bahrain).”

Charles Dallara, IIF Managing Director, noted: “We welcome this first joint report with Hawkamah. We are encouraged by the co-operation we received across the GCC while collecting information for this report."

"Corporate governance practices across the GCC are lagging behind global standards in a number of areas. However, there appears to be considerable agreement that a stronger equity culture needs to be fostered and that high priority should be assigned now to programs to enhance corporate governance. We are encouraged by the determination of Hawkamah, the DIFC and national authorities in this area.”

Developments have been largely driven by four key factors:

  • Capital market regulators are using the recent price correction in GCC stock markets to ‘upgrade’ corporate governance frameworks. While authorities recognise that price corrections were not directly related to poor standards of corporate governance, there was public pressure to intervene, due to their past encouragement of widespread public participation in IPOs. Corporate governance codes are being drafted and introduced by capital market authorities in the GCC. The Muscat and Abu Dhabi exchanges introduced codes in 2003 and 2006 respectively, while regulators in the UAE, Saudi Arabia, Bahrain, Qatar and Kuwait have draft codes that are expected to be implemented in 2007.
  • Increased corporate activity by GCC corporations in international markets is contributing to improvements in private sector standards, in-line with international best practice. GCC corporations have conducted USD25.9 billion of acquisitions in the UK, Europe and North America so far this year, according to Bloomberg. This trend is expected to continue as the private sector in the GCC continues to expand through the acquisition of foreign assets.
  • The banking sector in the GCC has made a significant contribution, following undertakings by central banks to comply with Basel I and II requirements. Central banks in all six GCC countries have amended their banking regulations to include corporate governance-related requirements such as establishing transparency and disclosure in financial statements, establishment of a board level audit, nomination and compensation committees and improved risk management.
  • The opening of GCC stock markets to foreign investors is expected to improve standards in GCC-listed companies, due to higher expectations from these investors.

Mr. Edward Baker, Chairman of the IIF’s Equity Advisory Group (EAG) and Chief Investment Officer of Global Emerging Markets, AllianceBernstein Ltd., noted: “In the case of the GCC report, as has been the practice in all EAG reports, we have reviewed corporate governance frameworks through the lens of professional investors active in global markets, with assessments based on the IIF Code of Corporate Governance."

"From an investor perspective, it is important that there is visible movement in the right direction across the region, which can contribute to building confidence. We are hopeful that the public and the private sectors in the region can work together in the period ahead to secure improvements in the GCC’s overall corporate governance framework," he concluded.

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