Corporate Governance - Quantity Versus Quality - Middle Eastern Perspective. Saleh Hussain

      •Board charter, duties and responsibilities.

      •Board members' responsibilities

      •Board committees and number of meetings

      •Board remuneration

      •Monitoring, audit and controls within the company

      •Corporate succession plans

      •Risk management and compliance

      •Performance indicators

      •Reporting and communication

      •Disclosure requirements

      •Publication of periodical and annual reports

      All of the above quantitative issues are important for the good governance of a company and indeed create many new but important posts within each company - financial controllers, risk managers, internal auditors, compliance officers and others. In certain cases these could add to the burden, financially and administratively, of the company and impact its efficiency.

      In talking to a number of senior officers of companies about these requirements, some of them indicated that it is becoming difficult for them to strike the right balance between gaining the benefit of these requirements and the ability to implement them. In fact, some claim that their officers spend more time worrying about implementation than actually doing the work they are supposed to do. Some went so far as to say that their sales teams get bogged down in compliance at the expense of generating new business for their companies.

      Certainly one cannot generalize such phenomena; nevertheless it is an issue for some companies depending on their size and sophistication.

      Other questions that we ask: Are these quantitative regulations really addressing the requirements of CG within the companies? Do they help the corporations make quality decisions? To answer these, let's address qualitative elements of corporate governance and make a comparison to highlight what could be done to improve CG practices. However before doing so, let's examine what is happening in the world as a result of the current crisis.

      Impact of the current Crisis worldwide

      The year 2008 will be remembered for a very long time as the year when the world economy witnessed its worst downturn since 1929. Stock markets around the world lost more than 50% of their value. Collapse of some long established banks, insurance companies and financial institutions in a way that was not imaginable just a year ago are examples of the disaster.Let's look at several examples:

      Sub-prime Loans

      The mortgage loan problem that surfaced in the United States in late 2007 was initially thought to be an American-only issue.This proved not to be the case as it impacted many investors and banks outside the boundaries of the United States. Major banks and financial institutions have suffered great losses and needed to find the capital to cover those losses. Many banks in the GCC have also applied for fresh capitalization.

      The sub-prime mortgage loan disaster proved to be the start of a greater financial collapse that would unfold in 2008 and beyond.

      Stock Markets

      All stock markets in the world without exception suffered great losses. In the United States alone more than US$10 trillions in value were destroyed. On average other countries' stock markets lost at least 50% of their value.

      Banks and Financial Institutions

      The financial market is the true mirror of any economy, and banks, financial institutions and companies are the reflection of such a mirror. Therefore, what the financial crisis brought to the surface is the collapse of many banks and financial companies, some examples of which are:

      •Lehman Brothers - no longer in existence.

      •Bear Stern - bought by JP Morgan

      •Merrill Lynch - bought by Bank of America

      •Goldman Sacks and Morgan Stanley - became commercial banks

      •AIG, the biggest USA insurance giant - rescued by the US Government at US$85bn

      •Citigroup - received a rescue package in excess of US$300 billion from the US Government.

      •UBS - rescued / bought by the Swiss Federation

      •Jerome Madoff, a fund manager in the United States - the disappearance of US$50 billion in funds.

      State & Government Aid

      Many countries of the world, including their respective Central Banks, had to come to the rescue of their economies by introducing measures designed to ease or reduce the impact of the crisis. Some of those actions and measures were:

      •Ease the liquidity and credit difficulties - liquidity was injected into the market and made available to banks and financial institutions.

      •Direct investment in the stock market through the purchase of shares in troubled companies.

      •Deposit Protection Schemes were introduced.

      •The U.S. produced an aid package of $700bn to assist troubled banks. In addition central banks around the world in Europe, China and the Middle East pledged sizeable amounts to help their banking sector.

      •The U.S. provided a package in excess of US$200 billions to acquire Freddie Mac & Fannie Mae, the two largest mortgage loan companies in the United States.

      •Foreign exchange control and interest rate cuts were among the measures applied.

      •The United States pledged $540bn to support mutual fund companies.

      Oil Prices

      Oil prices,which saw their peak in the middle of 2007 at around US$150 per barrel, took a dive in late 2008 to approximately US$36 per barrel, contributing further to a squeeze in liquidity that oil-exporting countries were experiencing.

      Economists' forecasts for the oil price for 2009 varied from US$30 to US$70. At any level below US$50, oil-exporting countries will have liquidity and budget deficit issues, as some of them based their budgets for 2009 and 2010 on prices ranging from $50 to $60.

      Other Economic Sectors

      The impact of the current economic crisis on other sectors of any economy will not be limited to banking and energy. In fact, we have seen little impact on other sectors so far, but what is to come might be frightening. The two sectors that we have started seeing an impact are real estate and automobile manufacturing.

      In real estate we've seen only in the beginning of major projects being halted, canceled or scaled down. In 2009 and 2010 we will witness major changes in this sector, including prices decreasing by as much as 50%, if not more. Rental rates on existing and new units of property will also suffer a major correction.

      The automobile industry has already entered a difficult phase. The United States has pledged close to US$20 Billion to help major auto makers. Certainly Japan, UK, Germany and other car-making countries will be subjected to the same difficulties.

      The degree of such impact is still to be seen in other sectors. However, building materials including steel, cement, blocks and others have already shown signs of receiving their share of it. The downstream retail sector will soon show signs of decline as well.

      Job Losses

      Millions of jobs will be lost around the world in 2009 and 2010, compounding the problem of an economic slowdown worldwide. In the United State alone, the number of job losses for the next two years is estimated at 2 to 3 million and in Europe no less than 1 million. The number for Asia is bigger than the U.S. and Europe combined.