The enemy within

We've all heard the arguments. The huge impending job shortage, the lack of infrastructural investment and political instability are all touted as the major stumbling blocks to the GCC's future economic development. But perhaps the biggest long-term threat to the region is its lack of focus on corporate governance. Despite companies and institutions across the GCC paying lip service to corporate governance drives, delegates at last month's Corporate Governance Forum (CGF) in Dubai warned that the region has a long way to go before it meets international standards of disclosure and transparency. And, if the GCC doesn't act fast, there could be a huge Enron-scale disaster waiting to befall the Middle East region.

In fact, speakers at last month's Gulf Regional Audit conference, said that the region's breakneck growth and lagging auditing controls made it prone to the factors which brought down Enron and Barings Bank.

While the rate at which the GCC has developed into a global centre of commerce has been nothing short of phenomenal, its corporate governance movement is struggling to keep up with the pace. "I'd like to think that companies in the region are aspiring to higher corporate governance standards but my experience is that they are eons behind the rest of the world in terms of disclosure and investor relations," says Darren Smith, vice president of the UAE's Gulf Capital Group (GCG).

To date, in a region where oil continues to fuel rapid commercial development, there has been no real need for an obligatory push towards better corporate governance.

And, although GCC markets have suffered some recent security issues and fluctuations, they are yet to experience a catastrophic financial disaster that would "shock" them into action, according to Dean Rowan, chief risk officer at Bahrain's Gulf One Investment Bank. "We've had no Enrons, 9/11s, Madrids or Istanbuls [so] historically we've had a lack of focus on risk in the GCC," he explains.

"The GCC has been slow to price risk into its business operations primarily because of the stability of oil revenues and a lack of exposure to the fluctuations in business cycles that other global economies have faced," he continues. One of the biggest shortfalls of the region's corporate governance set-up is the low volume of financial information being sent out by companies to the investor community. With the exception of the KSA - which, according to delegates at last month's forum, is head and shoulders above the rest of the GCC in terms of disclosure - the majority of the region's companies fail to live up to the international standard. According to Smith, a GCG report found that company-offering documents from the GCC (minus the KSA) had an average of 57 pages compared to 163 in "developed markets" and 122 in Saudi. "In developed markets, if a company has a major announcement to make, investor relations will communicate to a group of analysts, they will then write [reports] and communicate to the clients and the investor community. There is a huge lack of research in this region," says Smith.

Of course, by holding businesses and their financial dealings to account, the media also has a major role to play in generating an environment of openness and better corporate governance: After all, it was the media that essentially unearthed the Enron scandal - one of the biggest breakdowns in corporate governance in US history.

According to Justin Connor, director of legal and regulatory affairs at Emirates International Telecommunications however, the Gulf suffers from a weak media sector.

"We have major problems with the independence of the media from the businesses that they are covering and problems with the degree that advertising revenue drives the media," he says.

While he admits that there is an increasing awareness of corporate governance in the region, David Cafferty, former internal auditor at ZADCO and Align Consulting (UAE) - a former UK police financial investigator and fraud examiner - also sees an inherent problem with the way GCC companies implement their strategies.

"I think there is too much of a trend in the GCC to look at what's new and hot and say ‘we should have some of that. I want to say that my company has world-class corporate governance so I've got to have this tick in the box, or this badge'. But that badge is never totally understood, it's never used as a vehicle for change and never goes past senior management," he explains.

There's no doubt that there is a genuine shift in the region towards a more transparent, open market. And, the GCC governments are making a concerted effort to address the lack of corporate governance. Last year, the Emirates Securities and Commodities Authority and the Hawkama Institute for Corporate Governance agreed to develop a framework for a new corporate governance code on UAE-listed companies.

Meanwhile, the BASEL II bank regime, due to be adopted globally by 2008, looks set to further tighten things up. The set of international standards will "force a change in the mindset" of how GCC businesses price risk according to Rowan.

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