Investors may hold the key to future progress in corporate governance practices within the Gulf region, Standard & Poor's Ratings Services said on Monday.
"Corporate governance, long considered the Achilles heel of companies in the Gulf region, is beginning to feature strongly on policymakers' radar," said analyst Amra Balic in a new report.
"While it's too early to say how far governance may improve as a result of recent pronouncements on this subject from Gulf Cooperation Council member states, we believe the region is taking positive steps in the right direction."
However, Balic added that only pressure from investors will provide for tangible and meaningful long-term change.
Balic said recent developments suggested that governments in the GCC were beginning to take corporate governance seriously, including the move by Bahrain to introduce a corporate governance code early this year.
Since April 30, 2010, publicly listed companies in the UAE have been subject to Ministerial Resolution 518, which sets out a number of key governance requirements.
"However, this resolution does not apply to companies and institutions wholly-owned by the federal government or a local government," S&P said.
Regional stock exchanges are now more willing to punish fraud and illegal activity, and to defend the rights of minority shareholders, the report added.
It noted that governance among rated GCC banks was at a "more advanced stage" than in the corporate sector.
"However, the level of problems faced by GCC banks during the global financial crisis indicates to us that there is room for improvement," Balic said.
S&P said there was a growing sophistication of insurance and other regulators in countries such as Saudi Arabia, Bahrain, Oman, Jordan, and Egypt where global best practice has been sought.
"Strong corporate governance practices are not themselves indicative of superior creditworthiness," added Balic.
"Nevertheless, we believe that weak governance practices can undermine credit quality. Although it's unlikely that corporate governance issues in itself will drive a rating decision, where they do, it's our experience that they will more likely constrain a credit rating, rather than push the rating higher."