Sunday, 4 April 2010

Lack of corporate governance holds Gulf states back

Over the past two years, the Gulf has witnessed a number of major scandals in public corporations which have come to light despite the secretive nature of the region’s business world. Even in the 1990s, it was not uncommon for rulers to get involved to resolve problems, regardless of a company’s transgressions. Not surprisingly, some remember that period as the “good old days”.

Today, corporate governance must be taken more seriously. The growing economies of the Gulf states are becoming a centre of attention in financial circles. Unfortunately, despite many people’s efforts to reform corporate governance laws and stamp out corruption, very few changes have actually been made and collective action has been largely absent.

The issue of the Saudi Arabian Al Gosaibi and Saad groups, which are in debt to the tune of $20 billion (Dh73.5 billion), much of which is owed to Gulf and Emirati banks, highlights the importance of collective reform and responsibility. Ideally, the collective leadership of the GCC would function as a board of directors, with citizens as shareholders and expatriate residents as stakeholders in the establishment. In the business world, a board of directors represents the interests of both the shareholders and the stakeholders – the latter need not own shares in a firm to still be affected by its decisions.

The recent misfortunes of the jewellery retailer Damas International, which is listed on the NASDAQ Dubai, were particularly notable. The Dubai Financial Services Authority (DFSA), the exchange’s regulator, acted swiftly when it realised that the management at Damas was taking advantage of the firm’s shareholders and spending the company’s money, raised through an initial public offering, on personal expenditures. The three brothers who ran the company were then removed from their positions.

It is hard to imagine such strict – and appropriate – measures being imposed on firms listed on the stock markets of other Gulf states. While the DFSA must be commended for its action, what is missing here is collective accountability.

The DFSA stated that its investigation into Damas revealed “the company’s board did not exercise appropriate governance after key executives drew down reserves without approval.” The board of Damas was dismissed by the DFSA and a new one appointed, but so far there have not been any other measures taken against the former board members. Isn’t the board responsible for what happens in a firm? What are its duties and obligations towards shareholders?

The lack of so-called “Chinese Walls”, ethical barriers between divisions of a company, is unfortunately prevalent among the region’s family-run businesses, so there is no clear line between family and company finances.

That leads to many of those companies being poorly run, but it should never be acceptable in companies that are listed on an exchange. Once a firm goes public, it’s a whole new ball game. And it seems that many businesses and their board members in the UAE are simply not ready to play by the new rules.

Examples are all too easy to find. One major listed company in the UAE, which will remain unnamed, was publicly sponsoring the hobbies of the son of its chief executive. In another case, a former chairman of a regional bank who is under investigation for corruption had real estate investments financed through his own bank at quite attractive terms.

When a friend of mine inquired about the brazen practice, a senior staff member at the bank answered: “How would it look if the chairman sought financing from another bank?” In both cases, members of the board should have objected privately or publicly to the lapses in corporate governance.

When businesses go bust, downsize or close down due to poor management, the entire community suffers. People lose their jobs, children’s futures are put at risk and livelihoods are destroyed.

A quick glance over the names of the previous board members at Damas, or any other firm hit by scandal, is enough to show that board members are more often than not simply “prestige picks”. They are there because their names carry weight. In many cases, the board members don’t have time to contribute to overseeing the company’s affairs because they have so many other responsibilities.

What prompts them to accept invitations to serve on so many boards if they have no time to dedicate to these firms? Regulators should consider tightening rules about board members’ responsibilities since so many are paid for doing almost nothing.

The lack of accountability in board rooms may also reflect that too many leaders in the Gulf are not accountable to either shareholders or stakeholders.

Frankly, I hope that the DFSA pursues strict measures against the former board members of Damas. Their collective responsibility to the firm demands tough action.


Sultan Sooud Al Qassemi is a non resident fellow at the Dubai School of Government

This article was first published in The National on Sunday April 4th 2010.

No comments: