A to-do list for Gulf businesses on keeping to right side of corporate governance

Against the economic backdrop of a looming recession, soaring inflation and the war in Ukraine, the internal pressures on management teams to hit financial targets grows.

Cast your eyes back to 2020’s list of the UAE’s high-profile corporate failures: NMC Health, Arabtec, and, of course Abraaj. There is no better way to highlight to company executives that a weak culture of corporate governance within the GCC can lead to possible financial distress.

It is clear from the risk landscape, that now more than ever, companies are prone to financial distress, heightening the risk of regulatory or legal breaches. And the reputational risks associated with undue attention from regulators who continue demand tighter regulation from companies. Rising interest rates, supply chain costs, and geopolitical situations are going to put tremendous stress on companies across the region, especially those operating with low margins.

This tightening of regulations is evident in the UAE. New corporate governance rules were implemented for public companies in 2021 to bring the region in line with international best practices, including promoting accountability, fairness, gender diversity and transparency. Company executives have been warned.

It is not just the region’s businesses that must be well governed. The Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, recommended in their 2020 Mutual Evaluation that the region make ‘fundamental and major improvements’ to ensure its systems are more effective in the global battle against money laundering.

In the Dubai Financial Services Authority’s (DFSA) business plan for 2023-24, it noted an intent to allow regional growth and encourage the development of its innovation hub, while reaffirming a commitment to balance these ambitions with a drive to promote a strong corporate culture and embrace properly managed businesses.

While past crises and scandals have inevitably served as valuable lessons to corporates, they must be on the front-foot to prevent such situations from re-occurring:

Having a clear and actionable plan in place for when special situations arise allows companies to carry on with business as usual whilst protecting their reputation and stakeholder trust:

Although the economic outlook may be challenging, companies operating in the GCC should not shift their focus away from corporate governance upgrades. This is especially true in recessionary times, where companies may be under financial pressure to cut costs.

It can be risky to cut controls during such a time as a sub-standard control environment provides a greater risk of financial misstatements, and recent corporate failures have shown where that can lead. Now is the time, to be fit for the future.