Corporate Governance: A strong step towards a sustainable economy
In this week’s guest blog, Jamal Fakhro, Managing Partner for KPMG in Bahrain and Qatar, Chairman of the Board of KPMG Middle East and South Asia sub region & Board Member of Pearl Initiative talks about how corporate governance leads to creating sustainable economies.
The original article was published by Gulf Daily News.
Countries in the Gulf region have made significant headway in cultivating a dialogue around corporate governance over the last few years. Our voices, however, need to be amplified at the global stage in order for GCC-based companies to be competitive and relevant in today’s world.
Illustrating this need for a greater impact is the recently issued 2016 Ethisphere index of the World’s Most Ethical Companies, which features global enterprises operating in various sectors, and lacks representation from indigenous companies in the GCC region.
In reality, local businesses in the GCC, of which over 80 per cent are family-owned, are running successful ventures that grow year-on-year, which goes to show that they are structurally sound. Even so, their success is challenged by the absence of governance as an intrinsic part of the company’s operations.
The Pearl Initiative, in 2013, issued a report charting corporate governance practices, based on face-to-face interviews with over 100 family firm leaders across the GCC region. Interestingly 63 per cent of respondents confirmed that they have a code of ethics, but that only a third of those are implemented. In addition, 45 per cent said they have an anti-corruption policy, of which only one-third implemented them. Only 30 per cent said they have some form of a whistle-blowing policy, but very few are independent or adequately protect anonymity.
This signals the need for a stronger push to enable ethics and transparency, which in a family-business environment helps in stamping out nepotism, unfair decision-making, and instead builds a culture of competency, which promotes sustainable business growth in the long term. This applies at all levels of the business, accounting for the effectiveness and accountability of the board of directors, to mid and junior-level executives.
Specifically, with a large number of businesses operating in the SME sector, corporate governance will be crucial to attracting investment and creating job opportunities. It will also help to engage local youth and women, who will play a central role in economic development moving forward.
Robust governance policies can also foster new partnerships, new ideas and new strategies to approaching business. At a time when innovation and knowledge are priority areas for the government and private sectors, good governance can play an important role in creating a diverse, enabling environment.
On the other hand, the absence of strong corporate governance practices can act as a constraint on business sustenance. This is because the lack of transparency causes discontent, a high turnover rate, and not to mention distrust among external stakeholders. Whereas, a clearly outlined system of ethics and policies will ensure that the company and its stakeholders are not subject to varied perceptions or ambiguity. These policies should comprehensively define auditing procedures, compliance protocols, support tools, and rights of employees or other parties – to name a few essentials.
As a positive, the GCC governments, on their part, are taking steps to implement a strong regulatory framework to facilitate corporate governance at an enterprise level. In 2010, Bahrain updated and issued a new corporate governance code, consisting of nine principles, which apply to the country’s public companies, and outlines minimum standards and best practices for corporate governance, adding to the clauses which were already present within Bahrain’s legislative mandate. The code has enabled a sea-change in business fundamentals, by encouraging investment and increasing investor confidence.
Countries such as Qatar and the UAE, which are preparing for an influx of tourists ahead of mega-events and continually enhancing policies to attract foreign direct investment (FDI), will tremendously benefit from such a structural makeover. The need of the hour is a ‘decentralized control’ approach that will support entrepreneurship and responsible business in a forward-looking way.