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Lack of corporate governance dampens investor climate in Arab world

This state of affairs is reflected in the Fortune 500 list, which features just one or two Arab companies, compared to several from the Asian and neighbouring non-Arab countries.

Corporate governance has become a prime requisite for attracting foreign investors. According to the 2002 Global Investor Opinion Survey recently released by McKinsey and Company, nearly 63 per cent of investors cited corporate governance as a major factor that would spur investment decisions. These investors were prepared to pay a premium on investment in companies demonstrating high governance standards.

Hussein Rifai, Chief Executive Officer, Injazat Technology Fund E. C., said Arab family businesses need to be converted to business institutions, supported by high corporate governance standards, if Arab businesses are to find acceptance in the global investor community and capital markets.

"Today's corporate scenario demands a complete paradigm change in the attitude and mindset of business houses of the Arab World. It is only by applying globally accepted corporate governance standard in areas like separation of Board and management, elimination of conflict of interest, arms length business and transparency, can the Arab countries boost the investment climate in the region. For example; there should be a clear delineation between any company's management and its board of directors. The board should confine itself to providing direction, contributing to business strategy and monitoring performance though proper guidelines and steer clear from getting involved in the company's day-to-day management," said Rifai.

Corporate governance provides the tools for migrating traditionally run businesses into professionally managed market-driven enterprises, enhancing competitiveness in the global market.

Rifai added, "It can lead to further integration with globalisation, and trigger transparency and accountability. Many of the obstacles to good governance can be overcome by developing an institutional environment, which requires that companies hire, and delegate specific tasks to qualified and independent, adequately empowered managers who have expertise in financial and managerial matters. This implies that the Board needs to appoint strong managers and try not to manage the company when going through difficult times."

"While good corporate governance has gained top priority in the world of investors, considerable time and efforts are often required to get to a better understanding of global benchmarks and to successfully implement a good reporting system. Injazat has been helping its portfolio companies achieve this goal by providing a system of 'checks and balances' in reporting systems, measuring systems and even processes for board meetings and interaction protocols between the directors and management," Rifai concluded.

Corporate governance is a key barometer of a mature or maturing economy. It will enhance a company's performance. The performance, boosted by increased investor confidence and triggered by the presence of competent professionals at the helm will facilitate the attraction of capital and ensure that the company command higher value.

Accordingly, creditors will reduce the costs of capital, as the business risks will have diminished.