Dubai: Efforts to improve governance of state-owned enterprises (SOEs) in the region are posing great challenges for policymakers and enterprises. Policymakers find it difficult to implement new regulations, while enterprises themselves lack the capability to implement reforms.

Wissam Adib, managing consultant at TCO Management Consultants, an advisory firm focused on public sector and semi-government clients in the UAE, said the sudden rush of efforts to implement governance reforms is creating a huge gap between what advocates aspire to and what the current situation is.

"And what that means is we're making good people look bad," he said during the 6th Regional Corporate Governance Conference in Dubai.

"A lot of times, policymakers create policies that are difficult to implement and so when they regulate implementation of the policies, they can be a bit [lenient]. The end result of that is that when SOEs realise that the hammer has not come down yet, the policy becomes retrospective."

Adib also noted that since the decision-making environment in the region is a little bit different compared to other countries, formulating codes that are well suited to the Arab world is not an easy task for policymakers.

Governments and regulators in the region have come up with codes and guidelines in response to calls for better governance practices in companies in the region.

But one of the challenges faced by state-run enterprises is that there are not enough people in the board or organisation to carry out reforms effectively. "Every time you try to implement something new across the board very quickly, you will find that the capabilities are missing," Adib said.

"Another challenge for SOEs is that there is intense pressure to implement good corporate governance and it's causing them to say, tell me very quickly what needs to happen so we can make it happen. So, it's really a tick in the box situation."

Forums

Adib suggested that forums should be created so that the concerned enterprises can come together, talk about the challenges they are facing and possibly come up with ways to overcome these challenges. And as governments implement and require SOEs to carry out new governance practices, they should also provide the firms with access to support and knowledge.

"It's important to always listen to and solicit some feedback from enterprises themselves. As policymakers, they should be listening to their SOEs and looking at what is working or not and how the policy could be modified."

Diversity is the key

Companies in the region are encouraged to create more diversity and fairness in the boardrooms by appointing non-executives who are not afraid to bring constructive dissent to the deliberations of the board.

Seamus Gillen, director of policy at the Institute of Chartered Secretaries and Administrators (ICSA), the world's leading authority on corporate governance, said that boards should not just have directors who know the company really well, but also individuals who can help create a culture of challenge and do away with autocratic leadership.

"The best model is probably a board where some of the directors know the company really well and in exchange for that, they accept as a gift from their non-executives exercising independent oversight," Gillen said during a corporate governance forum in Dubai.

Considering the culture in the region, he acknowledged that it is indeed "culturally difficult" to bring challenge in boardroom discussions. "Is there enough independent oversight in this part of the world? I don't think so. But everyone wants to run their company better. Everyone wants to make more money. Everyone wants to beat competition.

"Everyone wants to be more successful and the way to achieve that is to have a good board running the company and the best way to have a good board is to have a challenge in the boardroom."

A lot of emphasis has been placed on how the boards of corporations and other organisations function because their decisions can affect the lives of people and have ripple effects over the rest of the world.

Following the instability that rocked the UK's banking industry, Gillen said, they went about looking to see what actually happened in the boardrooms of major firms like Northern Rock, Royal Bank of Scotland and Lloyds TSB.

"The big conclusion was that some of these companies were extremely well managed. Some had superb governance systems in place, but what was lacking was appropriate boardroom behaviour," he said.

"There was no sufficient challenge in the boardrooms. There was no sufficient challenge to stand up to poor business models, poor execution, poor risk management. So the question is how do you make the good governance model work and the answer is you have to have the appropriate culture, values and behaviours. How do you introduce the appropriate culture, values and behaviours? One of the primary means of doing that is to have challenge in the boardroom."

To help boards function effectively, and avoid some of the problems that contributed to significant value destruction during the recent financial crisis, ICSA issued a new piece of guidance on boardroom effectiveness for the UK's Financial Reporting Council.

The guidance highlighted among others the need to develop an environment of challenge in the boardroom, carry out board evaluation and provide board members with adequate induction, ongoing training and professional development programmes.

ICSA has also tied up with the Hawkamah Institute of Corporate Governance to strengthen governance practices in the Gulf.