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

on the Gulf Cooperation Countries "GCC"

      Gulf Cooperation Council countries "GCC" are not immune from the worldwide economic crisis. In fact they are as much involved as other countries, if not more so, due to the fact they are blessed with reserves emanating from oil revenues. Therefore, the crisis had its spill over to the GCC as well. The impact and severity of the crisis will certainly take time to be determined. Below are the areas of impact on the GCC:

      •Losses on GCC stock markets in 2008 were estimated to be between 35% and 50% compared to the value of the indices at the end of 2007.

      •Credit / funding cost increased in the last quarter of 2008 by 250 to 400 bps compared with costs prevalent in the first three quarters of the year.

      •Liquidity tightening was apparent especially in money market transactions.

      •International investors started offloading their GCC positions due to the financial crisis at home and the need for liquidity. There were no immediate buyers of those positions anyway, and those that managed to sell did so at prices lower than asked.

      •The regional banks had to reduce lending activities and avoid large ticket transactions. In fact some signed and committed contracts had to be canceled or renegotiated.

      •Some GCC countries announced the halt of planned projects. Most of those projects were planned over the past few years at the peak of high oil prices.

      •The real estate sector started to experience a setback, and the coming years will certainly see a major correction.

      •The GCC sovereign wealth funds "SWFs" had already shown signs of big losses in 2008. Some reports spoke of US$450 bn. The estimated value of those SWFs at the end of 2008 was US$850 billion (US$1.3 trillions less the estimated loss of US$450 billion).

      •Provision for sub-prime loans in 2007 and 2008 for banks and financial institutions in the region were estimated at a figure close to US$10bn.

      •The impact on investment banks is still unknown. There are two types of investment banks, those that operate within the principle of Sharia laws, i.e. Islamic banking financial institutions and those that handle traditional, conventional banking. Due to the way their balance sheets are structured, it might not be readily possible to know the impact of the crisis on their operations. Some of them are thinly capitalized and might be assuming responsibility for large transactions on behalf of their investors. The extent of their position and viability will only be established over the next two years.

      GCC State and Central Banks Actions & Support

      •The United Arab Emirate Central Bank injected DH50 bn (US$ 13.6 bn ) to support the market and provided a 3 year guarantee on bank deposits

      •The Kuwait Central Bank also provided the public with a guarantee of bank deposits. It provided a bailout package to the collapsed Gulf Bank. The Kuwait government thereafter pledged KD1 billion (US$.3.3 bn ) to buy shares in the stock market

      •The Saudi Arabian Monetary Agency "SAMA" injected liquidity in the market worth SAR40 bn (US$.10.7 bn ) to support the banks. It further approved a reduction in the bank deposit reserve requirement from 13% to 11%. Reports circulated of further undisclosed liquidity sums injected in the market to ease the liquidity crunch.

      •The Central Banks of Bahrain, Qatar and Oman issued various circulars and made a number of announcements to assure markets that support to the banking industry would be provided as required.

      •A high level meeting of finance ministers of the GCC was held in Riyadh on 24 October 2008. The attendees issued a communique assuring that the position of GCC - in dealing with the crisis is sound and pledging support to the banking sector in the GCC as needed.

      •Central banks established committees to supervise daily liquidity and monitor the positions of banks and required daily returns and reporting from banks and financial institutions.

      Relevance of CG to the Crisis

      With increased awareness of and introduction of corporate governance codes and practices worldwide, why is the world still faced with financial crisis? Aren't these CG regulations designed to mitigate risks and avoid such disasters from happening? Understandably, many frustrated stakeholders and the public at large question the effectiveness of the regulations and soundness of their implementation.

      It is an accepted fact that all corporate governance regulations,like all other laws, are designed to address principles of governance that render best practices of businesses. In addition, they are sometimes issued to rectify certain circumstances or actions that happened in the past. In other words, these regulations could be a reaction to malpractices and improper human behavior. On top of this, no matter what regulations and laws are issued, the human mind is capable of finding ways and means to get around them. Then the question becomes: what would the situation have been if there were no regulations? Certainly the damage could have been far more severe.

      The thinking about the relevance of CG in the current world crisis leads us in the direction of implementation and monitoring. The regulations are issued, yes this is good, but is the implementation monitored at the corporate level and by regulators? There are a number of parties people can look to for answers regarding the role played in monitoring, following and respecting issued regulations. In addition to corporate boards and regulators, the roles of the following remain to be known: corporate risk managers, internal and external auditors.

      Corporate Governance is an active and dynamic activity and so are the pertinent regulations. The regulations need to be reviewed and updated regularly. The board of directors of any corporation is fully responsible to undertake such review on a regular basis and update corporate codes as frequently as needed. The regulators' responsibility to monitor and update CG regulations cannot be overly emphasized. Most countries in the world issue corporate governance regulations in the form of directives to ensure speed for any further changes to be made. If CG regulations were treated as laws, the cycle of approval through legislative systems and governments would be very long and impractical.

      As the reasons for the collapse of large and mega-corporations unfold in future, the current worldwide crisis could offer all of us many lessons to learn about corporate governance. CG would also gain more importance as a result of these crises, and we would witness more emphasis on disclosure and transparency. Lack of or inadequate disclosure and transparency may prove to be one of the major causes of this crisis.

      CG Qualitative Issues

      We covered in the previous pages the quantitative issues and elements of corporate governance and the impact of the current crisis worldwide and in the GCC. Let's now talk about the equally, if not more important, qualitative elements of corporate governance. We believe these are part of human nature and the personal qualities that are the most difficult to deal with.

      Corporate Governance Quality Principles

      The pillars of good corporate governance practice consist of:

      •Fairness

      •Honesty

      •Accountability

      •Responsibility

      •Transparency

      Board of Directors’ Duties - Leading Qualitative Issues

      For a board director to discharge his duties in a quality way the following leading duties must be integral in all his actions and decisions.

      •Good faith

      •Care

      •Skill

      •Diligence

      These duties are human competencies, i.e. they cause a director to act independently, responsibly and responsively - to act as a decent corporate citizen.