A report by Fitch Ratings found that rating levels of GCC corporates are being constrained by weak corporate governance, particularly when compared to businesses in more developed markets. This issue was primarily due to an absence of effective governance mechanisms such as an independent board, weak transparency and limited disclosure practices that tend to be found in private companies of our region.
Without their implementation, there is a risk that our privately owned companies will lose the competitive advantage when it comes to equity and debt funding options, therefore constraining them from achieving their potential and, subsequently, that of the wider regional economy. Such funding options are required for investment and expansion, but poor corporate governance will mean such it is less available and more expensive to GCC companies.
Corporate governance practices are gradually improving, particularly among publicly-listed companies, largely driven by regulatory reforms introduced in both the UAE and Qatar. But for many of our private companies, there remains a perception that the families or shareholders are failing to embrace a culture of independence, accountability and transparency in the corporate governance of their companies.
If governance can be improved across the board, companies of our region will become even more formidable, making them key players on an international stage, as well as regionally, and improving our overall competitiveness.
For example, few private regional corporates have fully independent boards, and of those that do, their effectiveness remains questionable. In addition, these are typically owned by individuals or family groups, and yet they also have complex group structures in place under the owners making it difficult to trace accountability.
Having just one person as either owner or as the decision maker leaves the company open to risk in terms of succession planning and generally planning for the strategic future. Such risks can lead to periods of uncertainty, and on occasion disputes will arise and negative influences on corporate strategy and planning will materialise.
That is not to say that family or private ownership structures are flawed. They can operate alongside strong corporate governance practices.
It is important to note that implementation of good governance policies and frameworks does not mean family firms or private companies have to suffer a loss of control. Assembling an independent board, for example, is a way of drawing on outside expertise without effecting the ownership of the company or the influence of the family or shareholders.
The members of the board are accountable to shareholders, investors or family members and therefore their advice should purely benefit the decision making process, as opposed to dictating it directly. Good governance does not put at risk family or private ownership, but goes to the very heart of making those businesses as successful as possible in all respects.
Families that are in transition between generations and preparing for succession require appropriate structures with careful planning and consultation to ensure their interests are protected. Structures reflecting strong corporate governance protect against these risks.
Passing down principles of best practice built on transparency and accountability enables family businesses to maintain their value, plan for the future and safe guard against inherent risks that are encountered with generational change and succession.
On the wider stage, it is quite clear lagging governance standards discourage international investors from looking for opportunities in the GCC. Listed entities can improve their access to capital markets and cut the cost of raising debt by strengthening governance practices by implementing high quality and timely financial reporting.
This will encourage confidence among those looking for investments in our region’s companies and draw investment that will in turn bolster liquidity in our markets. Additionally if our most successful private companies are looking to invest and do deals in international markets, then good corporate governance will be seen as a positive advantage.
Improved governance practices alone will not positively affect a credit rating. But, weak governance practices will result in lower ratings than quantitative and qualitative credit factors.
If we want the family and private companies of our region, which in themselves are such a major success story, to compete on a global stage, we must encourage and adopt globally recognised standards of governance.
The writer is Partner and Head of the Commercial Litigation and Compliance, Pinsent Masons.
