Time to tighten up corporate governance practices

Oman leads fellow Gulf Cooperation Council (GCC) states when in comes to corporate governance. Such was the finding of a study conducted by the Institute of International Finance (IIF) and Hawkamah, the Institute for Corporate Governance. IIF and Hawkamah released their report, "Corporate Governance in the GCC - An Investor Perspective" last Tuesday.

The report found that corporate governance framework in Oman complies with 70 per cent of IIF's guidelines, the best within the GCC. By comparison, Kuwait and Saudi Arabia comply with 50 per cent of the guidelines versus 40 per cent for the UAE and Bahrain. Still, Qatar meets 35 per cent of IIF's guidelines. Together, GCC states comply with half of internationally accepted practices, which is below prevailing rates in other emerging markets. India and China meet 75 per cent and 65 per cent of internationally best practices code, respectively.

According to the survey, Oman is the only country in the GCC that has in place a code of corporate governance. The Omani framework dates back to 2003.

The Abu Dhabi Securities Market has issued corporate governance requirements for listed companies last February. However, the code is yet to be implemented.

The good news is that regulators in other regional markets have drafted codes but expected to be implemented next year.

Four developments explain the rush towards adopting best practices codes within the GCC. There are price corrections in stock markets, acquisitions in international markets, sophistication of the banking industry, and opening of bourses to foreign investors.

The report noted that capital market regulators are using price corrections in stock markets as ideal opportunities to improve and upgrade corporate governance codes. Thus, public pressure is forcing authorities to intervene and rectify shortcomings. This notion became necessary with the sudden outburst of initial public offerings (IPOs) over the past two years. Numerous institutions opted to tap increasing liquidity available in regional markets on the back of firm oil prices. The IPOs revealed cracks and hence the need for developing best corporate governance codes.

The second reason relates to growing activity by regional corporations in international markets. Certainly, these GCC institutions have no choice but to improve their standards in line with international best practices. Citing Bloomberg, the report noted that GCC firms have conducted almost $26 billion worth of acquisitions in the UK, Europe and the US in the first nine months of 2006.

The third development is attributed to efforts by central bank authorities requiring banks meeting Basel 1 and Basel II requirements. Amended regulations require banking concerns to ensure transparency and disclosure in financial statements, establishment of a board level audit as well as matters related to nomination and compensation of board members.

The last driving force relates to opening of the GCC stock markets to foreign investors, who in turn tend to have higher expectations.

IIF and Hawkamah have drawn up a series of recommendations to help strengthen corporate governance culture in the GCC. They call for setting up a task force comprising regulators and market participants to address issues related to cross listing of stocks on regional exchanges with the aim of developing a unified equity market.

Amongst important recommendations, the report calls for establishment of specialised courts dealing with enforcement of securities laws. Other noted suggestions call for reforming state controlled companies by virtue of their importance in local economies.

Clearly, the time is ripe for GCC states to upgrade their corporate governance framework in line with international best practices.

- The writer is head of the Economic Research Unit, University of Bahrain.