The MENA region’s corporate sector is undergoing significant change. Examples include the recently announced merger of Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank, while other GCC companies are exploring the possibility of going public.
At a conference in November, the Governor of the UAE Central Bank predicted more consolidations in the UAE’s banking sector.
While corporate governance is always important, it is essential during mergers, acquisitions and IPO launches. In major corporate re-engineering, clear roles and responsibilities, robust control processes and adherence to company policies pave the way for a smoother strategic change process.
Governance determines if a company’s financial performance is real and sustainable, fake, or the result of non-recurring circumstances or transactions. According to the S&P/Hawkamah ESG Pan Arab Index, stocks of companies with good governance tend to outperform others in the same markets.
The RoI (return on investment) on portfolios with these stocks are much higher than the market average. Good governance practices also benefit private companies in terms of better access to finance and higher operational efficiency and profitability.
During significant change, the greatest challenge is changing people’s mindsets. The MENA region is unique in terms of ownership structure; most large companies are either family-owned or government-owned. During transitions, companies can experience region-specific challenges.
As part of the IPO-preparation process, entrepreneurs and family businesses must learn to run their companies for the benefit of a wider group of investors and relinquish control to the board. Company executives and the family may need to make significant adjustments in approach and thinking.
Clear business strategy
Selling a company to investors requires a compelling story and a clear business strategy. Investors want to know how their money will be managed and what controls are in place before they can trust a company. The company’s leaders must try to view the company from an outsider’s perspective, assessing its financial track record and determining how investors will perceive the management team.
Privacy is highly valued in this region while going public requires transparency. Although CEOs may find it uncomfortable to reveal sensitive details such as directors’ remunerations, this information must be disclosed to the public. Mergers also require transparency; companies must share information candidly despite a well-established culture of secrecy.
Paradoxically, confidentiality is also an issue. The news of an impending float or potential merger must be kept tightly under wraps to avoid information leaks.
The exchange will have requirements regarding the composition of the company’s board and its level of independence, and it can be a challenge to find qualified, independent board members in this region.
Someone must manage the flow of information among board members and the CEO. Company officials need to understand market obligations and disclosure requirements, and someone has to gather and share all pertinent information. These responsibilities are often shouldered by a governance professional such as the board secretary.
The challenge? The region has very few qualified, stand-alone board secretaries, and the understanding of this role is still developing. A good secretary acts as a gatekeeper, ensuring that the right people get accurate information.
They work very closely with the CEO and chairman to keep board members working as a dynamic unit, and check whether senior management is adhering to the board’s directions.
Good governance practices can improve the chance of a successful IPO or merger. When a company is preparing for a major undertaking, qualified, empowered governance professionals can balance regulatory and legal requirements and governance while asking, “Is this in the company’s best interests?”.
In conclusion, the region needs sustainable corporate governance strategies and more qualified board secretaries and board members.
Ashraf Gamal El Din is CEO of Hawkamah, The Institute for Corporate Governance.