Corporate transparency and disclosure is a key component of the corporate governance framework needed to promote private sector development in MENA economies. This chapter presents the current legal framework for transparency and disclosure in MENA economies. It begins by describing the corporate governance landscape in the MENA region. It then reviews international standards on transparency and disclosure, including the G20/OECD Principles of Corporate Governance, and examines transparency and disclosure practices in MENA economies. The chapter looks in particular at two areas of significance in the region: disclosure of beneficial ownership and of related party transactions. It reviews the disclosure practices of some of the region’s largest companies, investigates monitoring and enforcement of disclosure rules and presents key challenges for policy makers as they seek to strengthen disclosure policies and practices. The chapter concludes with policy options, based on international good practices.
Corporate Governance in MENA
Chapter 3. Improving transparency and disclosure in MENA
Abstract
3.1. Introduction
Transparency and disclosure are a key part of the corporate governance framework necessary for promoting private-sector development in the MENA region.
Without relevant and timely dissemination of information to the market, investors cannot properly evaluate opportunities and risks. Companies need sound financial information in order to make business decisions, and shareholders need accurate and timely disclosure to monitor the company’s management. Disclosure is also fundamental to facilitating access to finance, and this is particularly important for growth companies. Given that investors look at corporate governance frameworks and practices in making their investment decisions, countries with better transparency are in a better position to attract finance.
MENA economies have endeavoured to improve their corporate governance structures, yet gaps remain in terms of transparency and disclosure regulations and practice. Foreign investors have cited the quality of disclosure practices in the region as one of their main concerns (Crescent Enterprises, 2016).
This chapter aims to identify the key challenges faced by MENA economies with respect to disclosure and transparency. It examines the region’s corporate governance landscape, including legal framework, role of regulators and stock exchanges, ownership structure and business culture. It reviews international disclosure standards, as well as initiatives to enhance transparency after the 2008 global financial crisis. It then addresses the challenges facing the MENA region, with a focus on two areas: beneficial ownership and related party transactions. The chapter concludes with a discussion of policy options for improving transparency and disclosure in MENA in order to foster economic growth.
3.2. Corporate governance landscape in the MENA region
A country’s corporate governance landscape impacts the effectiveness of its policies and regulations. This landscape includes the legal framework for corporate governance, the role of regulators and stock exchanges, company ownership structure and the predominant business culture. A review of this landscape in MENA economies can help to determine the extent to which challenges in these areas affect transparency and disclosure.
3.2.1. The policy framework for corporate governance
The legal framework covering transparency and disclosure in the MENA region, in line with global practice, includes national corporate law, securities law, listing rules and corporate governance codes. MENA authorities acknowledge the role of strong disclosure and transparency for developing capital markets and attracting investors, and initiatives to strengthen this area are taking place across the region (World Bank, 2018; World Bank, 2017b). Between 2015 and 2018, eight jurisdictions under review (Bahrain, Egypt, Jordan, Kuwait, Morocco, Qatar, Saudi Arabia and UAE) updated their company law (OECD, 2019).
Although corporate governance is a relatively new issue in the region, codes have been developed across MENA since 2002. Oman and Egypt were the region’s first countries to adopt corporate governance codes, and 11 countries had followed by 2009 (Koldertsova, 2011). The revision of codes has gathered pace recently: since 2015, Bahrain, Egypt, Jordan, Kuwait, Oman, Qatar, Saudi Arabia and UAE have revised their corporate governance codes (OECD, 2019).
Implementation of corporate governance codes varies across MENA. Bahrain and Egypt use the comply-or-explain approach, which provides flexibility for companies to decide not to implement certain of the recommendations. Egypt has also incorporated mandatory governance requirements into the Egyptian Exchange listing rules. Jordan, Oman, Qatar and UAE Federal impose binding requirements, while Kuwait, Palestinian Authority, Saudi Arabia and UAE Dubai International Financial Centre (DIFC) take a mixed approach. Algeria, Lebanon, Morocco, Tunisia and Yemen have opted for voluntary implementation (Table 3.1).
Table 3.1. Corporate governance codes in MENA
Note: This table includes information provided by MENA jurisdictions in May 2018. Information was provided for 15 of 18 jurisdictions covered in this chapter.
Source: OECD (2019), OECD Survey of Corporate Governance Frameworks in the Middle East and North Africa 2019, www.oecd.org/corporate/oecd-survey-of-corporate-governance-frameworks-in-mena.htm.
Disclosure of corporate governance reports is not mandatory in some MENA jurisdictions, such as Algeria, Lebanon, Tunisia and Yemen (OECD, 2019).
3.2.2. Regulators and other institutions
The development of modern securities legislation began in the region during the 1990s. Algeria and Morocco were the first to establish regulatory institutions, in 1993, while the most recent countries to create a capital market regulator were Kuwait (2010) and Lebanon (2011). Most countries in the region accept the sectoral model of financial supervision.1 However, Egypt has a sectorial-integrated model (a single supervisor for capital markets and insurance), and Bahrain has a single authority for financial markets (Central Bank of Bahrain).
In addition to securities authorities, other institutions with responsibilities related to corporate governance enforcement include the Ministries of Commerce and Industry in Bahrain; the Ministry of Commerce and Investment and the Monetary Authority in Saudi Arabia; and the Central Banks of Egypt, Jordan and the GCC countries. The regulators promote good corporate governance through training and public awareness activities.
Stock exchanges promote good corporate governance by issuing listing rules and disclosure standards and by monitoring compliance (OECD, 2012), but their role varies from country to country. Exchanges in Oman, Jordan and Egypt have incorporated governance requirements into listing rules. Stock exchanges monitor the corporate governance code in seven economies: Egypt, Morocco, Oman, Palestinian Authority, Qatar, Saudi Arabia and Tunisia (OECD, 2019). The websites of MENA stock exchanges also provide information on the corporate governance practices of listed companies.
In recent years, MENA stock exchanges have stepped up efforts on sustainability issues. The Egyptian Stock Exchange in 2012 became one of the world’s first five stock exchanges to make a public commitment to advancing sustainability via the United Nations Sustainable Stock Exchanges initiative (Box 3.1). The initiative aims to enhance corporate transparency and performance on environmental, social and corporate governance (ESG) issues and to encourage sustainable investment. Of the initiative’s current 78 partnering exchanges, seven are from the MENA region (Egypt, Jordan, Kuwait, Morocco, Qatar, Tunisia and UAE).
Box 3.1. Promotion of disclosure by Egypt’s stock exchange
Egypt’s stock exchange (EGX) has made considerable efforts to boost the transparency of listed companies. Listing rules include disclosure requirements (financial reporting, corporate actions, material events, shareholding structure, board of directors and general assembly meetings), the obligation to have an independent audit committee and rules on related party transactions. The Electronic Disclosure System, which enables listed companies to send their disclosures to EGX electronically, was introduced in 2015.
These rules have affected the number of companies listed on EGX. The Egyptian Exchange, the first in the MENA region, was established in the late 19th century. The number of listed companies increased sharply after the 1990s, partly due to significant privatisation, but has since decreased dramatically, from 1 075 in 2000 to 254 in 2017 (WB, WFE). This is because companies that were untraded and/or not complying with listing rules were delisted. Despite the large number of delistings, EGX remained the largest MENA stock exchange in terms of number of listed companies as of 2017.
The EGX has also worked to promote greater transparency of ESG information. After joining the UN’s SSE initiative in 2009, it launched its S&P EGX ESG index in 2010 and the EGX Model Guidance for Reporting on ESG Performance and SDGs in 2016.
Source: EGX, UN Sustainable Stock Exchange Initiative.
Private institutions focusing on corporate governance have also been established in the region. The first was the Egyptian Institute of Directors, established in 2003 to promote corporate governance. Hawkamah, The Institute for Corporate Governance was established in Dubai in 2006 to help companies to develop globally recognised corporate governance frameworks. Institutes of directors or corporate governance centres have since been established in seven countries,2 while regional institutions, such as the Union of Arab Securities Authorities (UASA) and the Arab Federation of Exchanges, also have activities aimed at enhancing corporate governance in the MENA region.
These institutions have been actively involved in promoting corporate governance activities through research, conferences, training and advisory services. In 2011, Hawkamah launched the first MENA-wide ESG Index in co‑operation with Standard & Poor’s in order to encourage MENA listed companies to pursue sustainable business practices. The Index covers the 50 companies scoring highest on ESG commitment from the 150 biggest companies in Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and UAE. In July 2017, the UASA issued a guideline for listed companies in Arab financial markets aimed at reducing the obstacles faced by Arab countries in applying the rules of governance. Also in 2017, the Governance Centre at Alfaisal University’s College of Business launched a Corporate Governance Index to monitor and promote good governance practices among corporations doing business in Saudi Arabia. These activities are important since the results of corporate governance reforms depend on public-private co‑operation and high-level awareness of best practices.
Morocco offers a good example of strong public-private co‑operation to build commitment for corporate governance reforms. A National Corporate Governance Commission was established in 2007, led jointly by the Ministry of Economic and General Affairs (public sector) and the General Confederation of Moroccan Enterprises (private sector). The commission issued a National Code of Corporate Governance in 2008, and the Moroccan Institute of Directors was established in 2009 (OECD, 2012).
International co‑operation can strengthen countries’ efforts to adopt and implement best practices. Currently, securities regulators of 12 MENA economies3 are ordinary members of the International Organisation of Securities Commissions (IOSCO). However, only two (UAE and Egypt) are members of the International Forum of Independent Audit Regulators (IFIAR). Participation in international dialogue is especially useful for the exchange of experiences, improving institutional capacity and implementing effective enforcement for securities markets.
3.2.3. Other factors affecting corporate governance practices in the MENA region
Corporate governance practices in the MENA region are often perceived as not sufficiently developed to attract investors and contribute to capital market development. Improving corporate governance principles is challenging, however, due to the region’s distinctive features: concentrated ownership, a relatively non-transparent business culture and the level of capital market development (as described in the Overview).
Ownership structures can affect disclosure and transparency, with the quality of voluntary disclosure increasing when ownership is less concentrated.
The majority of listed MENA companies have concentrated shareholders in the form of sovereign investors or founding shareholders, such as families (Amico, 2014). The 600 largest firms listed on the region’s exchanges constitute 97% of total market capitalisation4. A recent analysis of these firms demonstrates that sovereign investors are the largest investor category in all MENA markets except Iraq, Lebanon and Tunisia, while family offices are the second biggest investor group (GOVERN, 2016).
A country’s legal system (common law or civil law) affects disclosure levels. Most MENA jurisdictions follow a civil code, while research indicates that disclosure levels are substantially higher in common-law markets.
A country’s historical/economic relations with other countries can also play a role. A study of the annual reports of 216 companies from 13 MENA economies (Othman and Zeghal, 2010) found that disclosure levels were higher in countries with privileged economic ties to Anglo-America (Egypt, Jordan, the Gulf Co‑operation Council countries) than in those with ties to Continental Europe (Tunisia, Morocco, Lebanon).
3.3. Transparency and disclosure: Key issues
3.3.1. International standards on transparency and disclosure
The G20/OECD Principles of Corporate Governance (hereinafter referred to as the Principles) identify building blocks for sound corporate governance and offer practical guidance for policy makers. Chapter V states that timely and accurate disclosure should include material information on the following:
the financial and operating results of the company
company objectives and non-financial information
major share ownership and voting rights
remuneration of members of the board and key executives
information about board members, including their qualifications, the selection process, other company directorships and whether they are regarded as independent by the board
related party transactions
foreseeable risk factors
issues regarding employees and other stakeholders
governance structure and policies.
The Principles state that disclosure should be carried out through periodic reports and all material developments that arise in between.
A 2105 update of the Principles places greater emphasis on disclosure of beneficial ownership, clarifies recommendations on related party transactions and encourages disclosure of non-financial information, directors’ and non-executives’ shareholdings, and the roles and responsibilities of the chief executive officer (CEO) and Chair.
Since the global financial crisis, international organisations have accelerated efforts to foster investor protection via a fair, efficient and transparent market. The IOSCO revised its Objectives and Principles of Securities Regulation in 2010 to stress the importance of regulations on auditor independence, oversight and the disclosure of conflicts of interest.
An increasing number of countries are using international accounting and auditing standards to ensure the truth and fairness of financial reports. As of April 2018, 144 jurisdictions required International Financial Reporting Standards (IFRS) for listed companies and financial institutions in their capital markets. These standards are now permitted or required for approximately 35 000 listed companies on the world’s 93 major stock exchanges (IFRS Foundation, 2018). Similarly, 128 countries are using or in the process of adopting the International Standards on Auditing (ISA) (IAASB, 2018). Improvements in the standards have a direct impact on global capital markets by increasing transparency and cross-border comparability.
A major European Union initiative was the 2012 European Company Law and Corporate Governance Action Plan, which stresses the transparency of listed companies. Recent EU legislation also covers disclosure of directors’ remuneration; audit quality; non-financial (ESG) reporting; shareholders’ rights; and disclosure requirements for companies’ issuers.
In the United States, an initiative to update and modernise the disclosure requirements of listed companies was introduced in 2013. In 2017, the Securities and Exchange Commission (SEC) proposed amendments to eliminate redundant, overlapping, outdated or superseded provisions in light of changes in the information environment, and the Public Company Accounting Oversight Board adopted a new auditing standard to provide additional information to investors.
To enable sustainable finance and promote responsible investment, greater attention is being paid to disclosure on environmental and social matters. The 2015 edition of the Principles encourages companies to disclose non-financial information relating to business ethics, the environment and, where material to the company, social issues and human rights. Disclosure of non-financial information on environmental and social issues has started to become obligatory for large companies in many countries.
3.3.2. Transparency and disclosure in the MENA region
Corporate governance frameworks and disclosure practices in the MENA economies have evolved in the last two decades, according to evaluations by international organisations. These evaluations include: corporate governance assessments conducted by the World Bank and the EBRD; an OECD-UASA survey on related party transactions; and World Bank Doing Business reports that measure the protection of minority investors.
This section seeks to highlight issues that still need to be addressed. It reviews the disclosure obligations of MENA listed companies, based on the international evaluations, and presents the disclosure practices of the region’s top 15 listed companies.
Disclosure obligations of MENA listed companies
Transparency and disclosure practices of MENA listed companies include both periodic and ongoing disclosure, in line with international standards and best practice. Periodic information generally includes financial information (yearly, interim financial reports, annual reports, etc.). Ongoing disclosure includes material changes in direct and indirect beneficial ownership and ad hoc price-sensitive information.
International Financial Reporting Standards are required in most MENA economies (IFRS Foundation, 2017), and eight jurisdictions (Bahrain, Jordan, Kuwait, Lebanon, Palestinian Authority, Tunisia, Saudi Arabia and UAE) are using or in the process of adopting International Standards on Auditing (IAASB, 2018).
A 2017 report by the Hawkamah Institute found that MENA listed companies had significantly improved transparency and disclosure levels since 2007. The study compared several categories of disclosure, including disclosure of non-financial information, among the 50 largest and most liquid companies listed on 11 MENA markets: Bahrain, Egypt, Jordan, Lebanon, Kuwait, Morocco, Oman, Qatar, Saudi Arabia, Tunisia and UAE. Its findings highlight the impact of efforts by MENA authorities and listed companies in the area.
In order to limit administrative burdens on smaller companies, and in line with the Principles, proportional disclosure requirements have been adopted in specialised SME markets in the MENA region. For example, for companies listing on Saudi Arabia’s Tadawul Parallel market (the region’s newest SME market), disclosure standards of annual reports are indicative rather than mandatory, and the deadline for publishing financial statements is more lenient than the deadline of the main market.
Evaluations of corporate governance disclosure in MENA economies
International evaluations of disclosure and transparency in the MENA region have identified areas that need regulatory improvements.
The World Bank Doing Business report, which covers 11 areas of business regulation across 190 economies, measures issues relating to corporate governance through its “protecting minority investors” topic. One set of indicators (extent of conflict of interest regulation) measures the protection of minority shareholders against misuse of corporate assets by directors for personal gain, while another (extent of shareholder governance) measures shareholder rights and corporate transparency requirements (World Bank, 2017a). Countries and regions are ranked on a scale of 0-10, with 10 showing the strongest performance5.
Figure 3.1. Extent of conflict of interest regulation index (0-10)
Source: World Bank, Doing Business 2019.
The 2019 rankings, displayed in Figures 3.1 and 3.2, show that the MENA region performs less well than other regions in both aspects of “protecting minority investors”. However, scores vary widely across the region. The GCC countries (except Qatar) perform generally better than other regional averages in this area. Djibouti is the MENA economy with the most notable improvement in the 2019 rankings, while Saudi Arabia receives a high score of 8.7 out of 10 points for the shareholder governance index. In both indexes, certain MENA economies outperform some OECD countries.
Figure 3.2. Extent of shareholder governance index (0-10)
Source: World Bank, Doing Business 2019.
Saudi Arabia now ranks 7th globally in terms of protecting minority investors. The World Bank reports that Saudi Arabia strengthened protections by “providing clear rules for the liability of directors and increasing the role of shareholders in major decisions” (Box 3.2).
Box 3.2. Recent improvements in Saudi Arabia’s corporate governance framework
The Saudi authorities have pushed for better corporate governance since the establishment of the Capital Markets Authority (CMA) in 2003. New measures to regulate disclosure and strengthen transparency have been adopted recently in line with Saudi Vision 2030, a comprehensive plan to diversify the economy. They include requirements for:
annual disclosure of remuneration policies, and mechanisms for determining such remuneration
annual disclosure of cash and in-kind benefits to each board member in exchange for any executive, technical, managerial or advisory work or positions
disclosure of related party transactions or arrangements equal to or greater than 1% of the gross revenues of the issuer
disclosure of changes in the composition of the directors or CEO of the issuer
disclosure of the entering into or unexpected termination of any material contract.
In addition, corporate governance regulations were updated in 2017, becoming more comprehensive, with 85% of the code’s provisions now binding.
Source: CMA representative, “Transparency and Disclosure in the Saudi Capital Market”, 2017 meeting of the MENA-OECD Working Group on Corporate Governance.
The World Economic Forum’s Global Competitiveness Report assesses the quality of accounting and auditing standards (Table 3.2). In its Strength of Auditing and Accounting Standards Index for 2017-2018, Qatar and Bahrain are ranked globally as 25th and 29th respectively and lead the MENA region with scores of 5.6 and 5.4 on a scale of 1-7.
Table 3.2. Strength of auditing and accounting standards, 2018 (1-7)
Source: World Economic Forum, Global Competitiveness Report 2018.
Transparency on beneficial ownership, board members and audits
The World Bank Doing Business report’s “protecting minority investors” topic also assesses corporate transparency on matters like beneficial ownership, the activities and compensation of board members, and disclosure of audits. The findings for the MENA economies under review are presented in Table 3.3.
Table 3.3. Extent of corporate transparency index, 2019
1. Egypt has recently strengthened disclosure regulations on remunerations of directors. Currently, all amounts received by the chairman and each member of the board of directors, including salaries, compensation and bonuses, should be disclosed by listed companies.
Source: Adapted from World Bank, Doing Business 2019.
Various issues emerge from analysis of this table.
Disclosure of beneficial ownership stakes (representing 5% or more of capital) is required in only half of the MENA economies under review.
As noted by the Principles, investors have a basic right to have transparent information on the ownership structure of companies. This information is especially important for investment decisions in economies characterised by concentrated ownership, such as those in the MENA region. Although most MENA jurisdictions have passed legislation obliging companies to disclose substantial ownership of shares, the true ownership of a company can remain opaque (OECD, 2016).
Disclosure of information on board members’ other activities and directorships is mandatory in only six of the 18 MENA economies under review.
The Principles note that investors require such information, which can shed light on potential conflicts of interests and on whether board members devote adequate time to their activities. This is relevant for MENA economies, where family members and government representatives often hold seats on company boards (Othman and Zenghal, 2010), and where one member may hold seats on the boards of multiple companies.
Disclosure of the individual compensation of company directors and high-ranking officers is required in only six MENA economies.
The Principles state that shareholders need such information to evaluate links between remuneration and long-term company performance. The 2017 OECD Corporate Governance Factbook, which covers 47 economies, reports that 89% have introduced general criteria on remuneration, mainly through the comply-or-explain system.
Disclosure on an individual basis, including termination and retirement provisions, is increasingly regarded as good practice, but remains a sensitive issue in some countries (OECD, 2017a). Although individual remuneration disclosure is now required or recommended in most OECD member states (OECD, 2017a), emerging markets prefer aggregate reporting on remuneration (IOSCO, 2016). Alternative approaches are taken by several emerging markets. For example, companies in Argentina must submit individual remuneration information to the capital market authority only, while companies in Brazil must disclose the minimum, maximum and average individual remuneration for the last three years (IOSCO, 2016).
As shown in Table 3.3, and similar to other emerging markets, disclosure of individual remuneration is not required in most MENA economies. A specific format for disclosure of the remuneration of board members and executives is now required under Saudi Arabia’s corporate governance regulations, adopted in February 2017.6
Public disclosure of auditing reports is not mandatory in all MENA economies.
Investors need high-quality comparable and consistent financial information to make informed investment decisions. Capital markets could not function properly without the accurate and timely disclosure of financial statements. The auditing of financial statements by independent auditors, in line with international standards, and the disclosure of auditing reports are thus of vital importance for capital market development. The financial statements of listed companies are audited in all MENA economies, with Algeria, Iraq, Libya, Mauritania and Yemen not having compulsory requirements to disclose auditing.
The audit report is the main tool for auditors to communicate with shareholders, and its disclosure is crucial to achieve the intended benefits of auditing. In line with the IOSCO Principles for Periodic Disclosure by Listed Entities, global good practices indicates that company annual reports should contain an audit report for the period.
Table 3.4. Information disclosed by 15 of the largest MENA companies
Source: Company annual reports and company websites. See full list of companies reviewed in Annex 3.A
Transparency on related party transactions
Related party transactions (RPTs) are another important aspect of disclosure regulations, especially where concentrated ownership and business groups exist. As stated in the Principles, “it is essential to fully disclose all material related party transactions and the terms of such transactions to the market individually”. Regulation of RPTs varies around the world, but their disclosure is a legal requirement in almost all economies (OECD, 2017a).
A detailed survey of RPTs among MENA economies, conducted in 2014 by the UASA and the OECD, found that ex-post disclosure of RPTs is required in MENA economies in line with global practice, but that immediate reporting was less common in MENA markets (OECD-UASA, 2014). However, the OECD’s 2017 survey on corporate governance frameworks in MENA indicates that disclosure requirements on RPTs have been strengthened in the region since 2014.
Disclosure practices of the largest listed companies in the MENA region
This section analyses the current disclosure practices of 15 the 20 largest MENA listed companies. Seven of the 15 companies are traded on the Saudi Stock Exchange (Tadawul), the biggest market in the region, while the others are traded on the Kuwait, Morocco, Qatar and UAE markets (A list of these companies is provided in Annex 3.A).
The Principles were used as the main benchmark for the analysis, which aims to evaluate the disclosure level of the top listed companies from the perspective of international investors. Annual reports for 2016 in English were evaluated, and company websites were checked if a disclosure was missing from the annual report.
It should be noted that this research presents the existence or not of the disclosure item, and not the quality of the disclosure, nor does it address disclosure regulation. Company practices based on both voluntary and mandatory disclosures have been examined.
Among the region’s 20 largest companies, five did not publish their 2016 annual reports in English on their websites. This suggests that websites of major listed companies may not be regularly updated. The information disclosed by the 15 companies that did publish their 2016 annual reports in English is presented in Table 3.4.
Findings from this review, in addition to those presented in the table, include the following points.
While 12 of the 15 companies published their objectives, these objectives were not explained clearly in most instances, with the information mainly provided in statements by the chairman and CEO.
Eight of the companies disclosed major ownership, but beneficial ownership is not expressed clearly. In cases where the company’s major shareholder is a public sector entity, the beneficial ownership of the state can be inferred.
Thirteen of the companies disclosed the aggregate amount of remuneration to board members and a limited number of key executives, and nine disclosed details of remuneration, such as salaries, other compensation and allowances. Only one company in the sample disclosed individual remuneration.
Six of the companies provided information about board member qualifications in their annual reports, and five on their websites. Eight disclosed procedures for the election of board members in their annual reports, without saying whether a broad field of candidates was allowed. Eleven disclosed independent board members, although the criteria for evaluating independence was not provided.
Material related party transactions were disclosed by 12 companies, mainly as part of accounting standards; seven provided information on the terms of these transactions, but used generic formulas such as “governed by limits set by the regulations” or “at mutually agreed terms”.
Financial institutions tend to provide greater detail on material risk factors. In Kuwait, the internal audit procedures of financial institutions are subject to annual independent auditing, and the auditor’s opinion is disclosed in annual reports.
Six companies published ESG reports in addition to their annual reports, while eight created separate website sections on corporate social responsibility.
Although two companies did not disclose their governance structure in their annual reports, all companies provided this information on their websites. All 15 companies had established an audit committee and 14 had a nomination and remuneration committee.
The separation of CEO and chairman is prevalent in reviewed companies with one-tier boards. A single person combines the roles of CEO and chairman in only two companies, but the rationale for this arrangement was not disclosed clearly. One company has a two-tier board system.
The results show that the level of disclosure is highest for financial statements. Companies in Saudi Arabia and UAE disclosed the most detailed information. Most of the companies in the sample provided substantial non-financial information in their annual reports; only one, from Morocco, disclosed only financial information. In some instances, information not published in the annual report appeared in the corporate governance report or the investor relations section of the company website.
This research sheds light on aspects of the region’s disclosure and transparency practices that could be improved. For example, as shown in Table 3.5, only four of the 15 companies disclosed beneficial ownership.
Table 3.5. Information least disclosed by 15 of the largest MENA companies
This analysis may not reflect the full picture across the region, as it is based on companies in just five MENA economies and on disclosures from one year only. There is also extensive literature indicating that disclosure is stronger among larger than smaller companies, since the former are more visible and subject to more intensive monitoring by different stakeholders, such as governments, investors and analysts. But although further research is needed, the results provide an indication of general trends.
The review suggests two key areas where disclosure could be strengthened: ownership and related party transactions. These areas are deeply interconnected, since disclosure of ownership provides market participants with updated information on who may exert influence on the company, and thus helps them to monitor related party transactions.
3.4. Disclosure of ownership
Knowing the ownership structure of a company is key to making an informed investment. Disclosure of ownership is especially important when concentrated ownership is prevalent, as in the MENA region.
The Principles list major share ownership as one of nine material issues that should be disclosed. Disclosure of ownership contributes to market efficiency, since inadequate, unclear or inaccessible information may affect the functioning of markets. Disclosure of ownership is also important for corporate governance as it enables shareholders and potential investors to evaluate agency costs7.
In concentrated ownership – or “blockholder” systems – majority shareholders can play an active or passive role as owners of a company. Non-disclosure may lead to self-dealing, such as abusive related party transactions, insider trading or share dilutions. It may also lead to tax evasion, or even money laundering, financing of terrorism or other financial crimes. Conversely, disclosure may discipline blockholders and prevent them from engaging in abusive behaviour (Siems and Schouten, 2009).
Disclosure of ownership is also crucial for stakeholders such as employees and creditors, who cannot properly exercise their rights if the ownership structure of a company cannot be identified. Regulators and supervisory agencies also need to know the owners of a company in order to enforce rules and prevent financial crime (Vermeulen, 2013).
3.4.1. Legislative and regulatory approaches
In most economies, the ownership disclosure obligations of listed companies are regulated by securities laws and listing rules. Economies often require disclosure of beneficial ownership data starting from the IPO stage, mainly through prospectuses. After the IPO, disclosure of beneficial owner information is required at least annually, and as soon as the ownership threshold requiring disclosure has been exceeded.
Disclosure requirements on beneficial ownership generally apply to three different groups (OECD, 2016):
Major shareholders are required to disclose their shareholdings when the size of holdings reaches, exceeds or moves below certain thresholds. The thresholds requiring disclosure are generally well below controlling ownership.
Listed companies are generally required to disclose their shareholder structure through their prospectus, annual report, company website, shareholder meeting circular or other materials such as listing applications.
Management and board members are also required to disclose share ownership in many countries, regardless of their actual shareholding percentage.
The effect of these disclosure requirements largely depends on the definition of beneficial ownership.
Definition of beneficial ownership
A beneficial owner is usually defined as a natural person who is entitled to the benefits accruing from securities and/or has power to exercise controlling influence over the voting rights attached to shares.
International efforts to improve the transparency of beneficial ownership have accelerated in recent years. These efforts, carried out by G8 and G20 leaders, the Financial Action Task Force (FATF), governments and international organisations, generally aim to prevent the misuse of corporate vehicles for illicit purposes, such as tax avoidance, money laundering or financing of terrorism.
Nonetheless, the “true”, “ultimate” or “de facto” beneficial owner of a company can remain opaque. Ultimate beneficial ownership information can be concealed through structures such as shell companies; complex ownership and control structures involving many layers of shares registered in the name of other legal persons; bearer shares; nominee shareholders and directors; trusts; and other legal arrangements that enable a separation of legal ownership and beneficial ownership of assets (FATF, 2014).
Applying the concept of ultimate beneficial ownership can mean that disclosure obligations extend to any party who has access to voting/control rights, including those who hold shares indirectly through controlled parties. For example, securities held by a person’s spouse and/or children would be considered as securities held by the beneficial owner. This would also be the case for owners who employ control-enhancing mechanisms, such as pyramid structures, cross-shareholdings, dual class and non-voting shares, derivative products of shares and shareholder coalitions, agreements and other “acting in concert” arrangements. When another company holds the shares of a listed company, the disclosure of beneficial ownership should also be required up to the ultimate level (OECD, 2017a).
Deadlines for disclosure
As noted in the Principles, it is good practice to call for “immediate” disclosure of material developments. This is usually defined as a prescribed maximum number of days, although some countries use vaguer formulas like “as soon as possible”, “promptly” or “without delay”.
The EU’s Transparency Directive requires major shareholders to inform the issuer of the acquisition or disposal of major holdings in listed companies, and the issuer then to disclose this information to the market. The deadline for notifying the issuer can range from within the same day to four trading days after the shareholder is informed of the triggering event. Most European Economic Area (EEA) countries (20) apply a deadline of four trading days for notification. The publication deadline varies among EEA countries from the same date to three trading days after notification is received.
Practices in MENA
Disclosure of beneficial ownership stakes representing 5% or more of capital, the common international threshold, is mandatory in only half of the MENA economies under review: Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Saudi Arabia, Tunisia and UAE (WB Doing Business, 2018). Other MENA markets, such as Iraq and the Palestinian Authority, require disclosure of ownership above 10%,
In all MENA economies where a disclosure obligation exists, the issue is regulated by securities law and regulations including listing rules. Substantial shareholders, directors and listed companies in many MENA economies are required to disclose beneficial ownership, in line with global practice, although the rules vary (Table 3.6).
Table 3.6. Disclosure obligations of substantial shareholders
1In Bahrain, listed companies are required to disclose information on majority shareholders. In these disclosures they should highlight any significant change in the list shareholders. The other circumstances that should be disclosed are as follows: when a beneficial owner's ownership reaches 10% or more of the issued shares and total paid capital; when an entity intends to purchase or own 20% of the issuer's shares. In addition, acquisition or disposal of 10% or more of the paid-up capital of any listed issue on the Bahrain Stock Exchange should be approved by the Bahrain Central Bank, prior to the execution of such order on the Exchange.
2 Cigna, Djuric and Sigheartau (2017), Corporate Governance in Transition Economies: Egypt Country Report.
3 Tunisia stock exchange, www.bvmt.com.tn/en-gb/content/investors-protection.
Source: The web pages of the capital markets authority except where otherwise indicated.
Table 3.7. Disclosure obligations of directors
1Cigna, Djuric and Sigheartau (2017), Corporate Governance in Transition Economies: Egypt Country Report.
Source: The web pages of the capital markets authority except where otherwise indicated.
Disclosure thresholds can apply to all shares of a listed company, to the voting shares or to both. The former approach is used by most MENA economies, while in Morocco the disclosing threshold refers to capital or voting rights. Regulations in some economies, including Kuwait, take voting rights into account indirectly.
Disclosure requirements often apply to de facto as well as de jure beneficial owners. Among MENA economies, regulations regarding de facto ownership are most detailed in Saudi Arabia and Kuwait. Under Saudi regulations, for instance, the total number of shares or convertible debt instruments held by a single person include: securities held directly by the person; those held by a relative of or a company controlled by the person; and those held by any other persons who have agreed to act in concert with the person.
Requirements on the timing of disclosure by shareholders also vary among MENA economies. In the case of significant acquisitions in a listed company, the United Arab Emirates and Bahrain require immediate disclosure. In other economies, the mandated period for disclosure varies between 24 hours and 10 days.
Company directors and senior officers must disclose beneficial ownership information in many MENA economies, although the requirements differ across the region (Table 3.7). In Kuwait and UAE, directors are required to disclose their interests regardless of their shareholding percentage. In some countries, directors must disclose their trading to the securities regulator but do not have to make a public disclosure.
Listed companies in the region are often required to disclose the names of their major shareholders in prospectuses, listing documents and annual and other periodic reports. In some economies, such as Kuwait, listed companies are also required at the beginning of each year to disclose the names of shareholders whose shares represent 5% or more in their capital, as well as any changes occurring to this percentage.
According to Hawkamah’s ESG reports (2012, 2017), the largest listed MENA companies are improving their transparency on ownership. Of the region’s 50 largest and most liquid companies, 88% disclosed their largest shareholder in 2017, compared to fewer than 40% in 2007. However, other analyses point to persistent challenges in the region concerning the identification of ultimate beneficial owners (Cigna, Djuric and Sigheartau, 2017; Cigna and Meziou, 2017b; GOVERN, 2016; Santos, 2015).
As a member of the G20, Saudi Arabia was included in a 2015 study by Transparency International of strengths and weaknesses in the beneficial ownership transparency frameworks of the G20 member countries. The analysis found Saudi Arabia’s framework to be of average strength, with the country’s beneficial ownership definition fully compliant with the Principles on Beneficial Ownership Transparency. But it also found Saudi Arabia to be non-compliant on identifying and mitigating risks like money laundering, and only partially compliant on other principles, such as acquiring and accessing beneficial ownership information.
3.5. Disclosure of related party transactions
This section focuses on transactions involving the movement of resources between a company and its major shareholders or other related parties, either directly or indirectly. Such related party transactions can take a variety of forms, including: transactions involving the sale or purchase of goods, property or assets; provision or receipt of services or leases; transfer of intangible items; provision, receipt or guarantee of financial services; assumption of financial or operating obligations; purchase of equity or debt; or establishment of joint ventures (OECD and UASA, 2014). Although executive compensation can also be considered a related party transaction, it is excluded in this discussion.
3.5.1. Legislative and regulatory approaches
Related party transactions (RPTs) are regulated around the world in order to protect minority investors. A related party transaction is a transaction that takes place between two parties who hold a pre-existing connection prior to the transaction. Regulatory measures to combat RPTs can take the form of: procedural rules (board approval, shareholder approval or opinion from independent experts); disclosure (periodic or immediate disclosure, or disclosure of policy on related party transactions); or prohibition of certain related party transactions.
In some economies, specific roles are assigned to the board of directors or independent directors for RPTs. In addition, an independent advisor’s view and shareholder approval are required for certain types of transactions. Only a minority of economies forbid specific types of RPTs. However, disclosure of related party transactions is an essential part of regulation in almost all economies (OECD, 2017a).
The Principles state that “disclosure should include, but not be limited to, material information on related party transactions”. The OECD methodology for implementing the Principles specifies essential criteria for the disclosure of RPTs:
Disclosure should be required at least annually in respect of routine and/or less significant transactions.
In transactions that are subject to shareholder approval, sufficient time should be provided after disclosure to minority shareholders to enable them to make an informed decision.
In other related party transactions that have a material impact on the price or value of the company but do not require shareholder approval, disclosure, in sufficient detail to enable minority shareholders to express concerns before the transaction is implemented, should be required.
These issues are addressed by regulations around the world. Periodic disclosure of RPTs is required under international accounting and auditing standards; immediate disclosure of certain RPTs is also a common global practice. An IOSCO review in 2015 found that timely disclosure of material RPTs was required in 26 of the 37 jurisdictions surveyed.
Another legal tool commonly used by policy makers is disclosure of policy on RPTs. UNCTAD (2011) reports that disclosure of the decision-making process for approving transactions with related parties is required in 92% of 25 emerging markets from the MSCI Emerging Markets Index.
Practices in MENA
The concentrated ownership structure of MENA economies gives grounds for concern about the protection of minority rights and the possibility of abusive RPTs. A review of disclosure practices of the 50 largest listed companies in the MENA region found that the RPTs of only 20% of companies covered by the S&P/Hawkamah ESG Pan Arab Index were conducted on market terms (Hawkamah, 2012; Hawkamah, 2017).
An OECD-UASA study found that while ex-post disclosure of RPTs is generally required in MENA economies, immediate reporting is less common. The 2014 study found that 12 of the 15 jurisdictions reviewed did not have materiality requirements for the disclosure of RPTs (the exceptions were Jordan, Iraq and the Palestinian Authority), and that no materiality conditions for approval and disclosure had been introduced by UASA member authorities (OECD and UASA, 2014).
Based on the survey findings, the OECD and the UASA made the following recommendations on the disclosure of RPTs:
To capture transactions that present a risk of abuse, the legal definition of “related parties” should be made clearly and consistently in law and regulations, and should be substantially similar to international good practices summarised in International Accounting Standards (IAS) and OECD recommendations.
Material RPTs should be disclosed in interim, quarterly or annual company reports, including their terms and the approval process. Ongoing reporting of RPTs to the regulator, shareholders and other relevant parties should be improved.
Regulators should urge companies to develop and make public a policy to monitor RPTs that makes clear which RPTs are prohibited and which are accepted, as well as the circumstances in which they can be considered as acceptable.
Electronic disclosure platforms developed by stock exchanges and securities authorities could be a useful mechanism for facilitating continuous disclosure.
As noted by the 2017 OECD survey on MENA corporate governance frameworks, several jurisdictions have changed their company laws, securities laws and corporate governance codes since 2014, resulting in a strengthening of disclosure requirements on RPTs.
The World Bank Doing Business reports have signalled improvements in RPT disclosure regulations since 2014 in Djibouti, Egypt, Saudi Arabia and UAE. However, the World Bank’s 2017 report found that Qatar had weakened minority investor protection by reducing requirements for the approval of RPTs and their disclosure to the board of directors, and by limiting the liability of directors in the event of prejudicial RPTs.
In Saudi Arabia, regulations now distinguish RPTs according to their materiality and conditions. Through an amendment in 2016, quantitative disclosure threshold criteria were introduced for the immediate disclosure of RPTs. Before the amendment, a listed company was required to disclose any RPTs regardless of size, while the new listing rules limit the requirement for immediate disclosure to transactions with a value equal to or greater than 1% of the company’s gross revenue according to the latest audited financial statements. Listed companies in Saudi Arabia must also disclose a board of director’s report that includes the nature, terms and amount of each RPT annually regardless of the size. The boards of listed companies are required to develop an explicit and written policy to deal with actual and potential conflict of interest situations, including RPTs.
In Egypt, listed companies are required to disclose to the market any arrangement concluded with related parties (Al Tamimi et al., 2016). A 2016 amendment to listing rules requires the board of director’s report to disclose all agreements concluded between the listed company and any of its founders or main shareholders, and the date of prior approval by the ordinary general meeting for each contract (Law Today, 2016).
The UAE adopted detailed transparency rules and specific procedural obligations through a new company law (2015) and new corporate governance rules (2016). The new rules establish disclosure requirements for RPTs regardless of the value of the transaction, while former rules required disclosure only when the transaction value was equal to or greater than 10% of the company’s total assets. All RPTs must be disclosed to the board of directors and securities regulator, with a written confirmation that the terms are fair, reasonable and in favour of shareholders. Under the new rules, listed companies are to maintain a register of the names of related parties together with transaction details and actions taken. Listed companies must also inform their shareholders of such transactions in the general assembly. When the value of the transaction is more than 5% of the company’s share capital, a review by independent advisors and shareholder approval are required. Shareholders representing 5% or more of the shares of a company involved in a related party transaction may access documents relating to the transaction.
The research described above yields the following on RPTs in the region:
A major step forward has been the adoption of International Financial Reporting Standards in ten MENA economies (Bahrain, Iraq, Jordan, Kuwait, Oman, Palestinian Authority, Qatar, Saudi Arabia, UAE and Yemen).
To define “related parties”, MENA economies use company law (Egypt, Iraq, Lebanon, Morocco, Oman, Tunisia, UAE), capital market regulations including listing rules (Egypt, Iraq, Kuwait, Palestinian Authority, Saudi Arabia, UAE) and corporate governance regulations (Bahrain, Egypt, Jordan, Morocco, Oman, Qatar, Saudi Arabia, UAE, Yemen) in addition to accounting rules (OECD, 2019).
The definition of a related party transaction varies across the region (Annex 3.B). In the countries under review, it clearly covers key management personnel of the reporting entity. Related parties generally comprise the parent company and/or any of its subsidiaries or associate companies. The definition of related parties commonly includes relatives of the controlling shareholder. However, in some economies (Lebanon), relatives are not stated explicitly in the definition, while in others the definition covers relatives up to a certain degree of kinship.
3.6. Monitoring and enforcement of standards
Effective monitoring and enforcement are crucial to ensure that sound corporate governance rules are applied by companies. Monitoring and enforcement can be public (provided by securities regulators) and/or private (provided by activist shareholders, institutional investors and minority investor groups). Public enforcement can involve the imposition of sanctions for breach of laws and dishonest behaviour (OECD, 2013).
3.6.1. Global trends in corporate governance monitoring and enforcement
Enforcement of corporate governance principles is challenging for public authorities due to the time, resources and expertise required. To verify the accuracy of disclosed information, some regulatory authorities co‑operate with public institutions such as tax authorities, central securities depositories, custodians and other financial intermediaries. International co-operation is also used for verification. The sharing of both public and non-public information among regulators takes place through different arrangements such as the IOSCO Multilateral Memorandum of Understanding. Enforcement approaches and regimes vary among countries. Public enforcement may be both formal (judicial/criminal penalties and fines, administrative penalties and fines, remedial orders) and informal (information requests, notice letters or norm-enhancing reprimands) (OECD, 2013).
Other market participants and institutions can play a significant role in the enforcement of disclosure rules. Stock exchanges can be effective enforcers, as they often adopt disclosure requirements as part of their listing rules, and delisting is a real threat for any listed company in cases of noncompliance. Accountants, auditors and rating agencies may discover weaknesses in corporate governance activities and may provide unofficial advice to companies. The media can play an important role in raising public awareness on the importance of good corporate governance.
3.6.2. Monitoring practices in MENA economies
In most MENA economies, the body responsible for developing the corporate governance code also performs a monitoring role. Securities regulators and stock exchanges are thus the main supervisors of corporate governance codes in 12 MENA economies. In Oman, the Muscat Stock Exchange is responsible for monitoring company compliance with the code (OECD, 2012). A monitoring report is published in seven MENA economies (OECD, 2019).8
MENA regulatory authorities use different approaches for monitoring disclosure. These include: standardisation of disclosure through regulations (e.g. shareholder statements in Oman and Egypt); co‑operation with other parties (e.g. with the stock exchange in UAE); and giving independent experts (UAE) or the board of directors (Saudi Arabia) a central role in ex-ante assessment of material transactions. Forced disclosure and cancellation of illegal RPTs are common enforcement mechanisms in MENA economies (Amico, 2014).
International evaluations indicate that there is room for improvement in the monitoring and enforcement of corporate governance in the region. Disclosure practices of MENA companies are often judged inadequate by investors (Amico, 2014; Crescent Enterprises, 2016). An OECD paper indicates that only 15% of companies in the UAE and 12% in Qatar disclose corporate governance reports (Amico, 2014), while a GCC survey found that just 42.5% of 200 publicly listed companies in GCC countries provided an annual report on their website or a copy upon request (GCC Board Directors Institute, 2011).
Efficient monitoring is all the more important in MENA economies due to concentrated ownership, which increases the probability of weak disclosure practices due to low incentives. An OECD review found that the enforcement capacity of MENA securities regulators has been growing but could be further developed (Amico, 2014). The review notes that private enforcement in the region is virtually non-existent, mainly due to weak shareholder activism and the lack of a litigation culture.
Monitoring efforts by capital market authorities have improved since this review. In Jordan, 222 of 248 companies, or 90%, disclosed their semi-annual financial reports in 2016, the Jordanian Securities Commission announced. The Egyptian Exchange reports that almost 90% of listed companies file their financial statements within the period specified in the listing rules. The high percentages may be due to effective monitoring by the securities authority. The Iraq Securities Commission decided to suspend trading on the Iraq Stock Exchange of shares of companies that did not comply with disclosure obligations (UASA, 2016). Stock exchanges also monitor companies’ disclosures, but institutional capacity building is needed, especially in newly established authorities.
Persistent challenges in monitoring and enforcement in MENA economies include: difficulties in ensuring the accuracy of information regarding ownership and related party transactions, unless directly disclosed by the company and board members.
3.7. The way forward
3.7.1. Key findings
Certain characteristics of the MENA region constitute challenges for effective corporate governance. These include small capital markets, a small institutional investor base and low shareholder involvement. As this chapter has shown, another challenge for the region is transparency and disclosure, particularly in two areas: disclosure of beneficial ownership and disclosure of the terms of related party transactions.
Findings, based on international evaluations and a review of the practices of the largest MENA companies, include the following:
Disclosure of ultimate beneficial ownership stakes and RPTs is not mandatory in some MENA economies, nor is the disclosure of board members’ other activities and directorships or the compensation of directors and executives (World Bank, 2019).
Most MENA economies have adopted or approved International Financial Reporting Standards, and eight have adopted or are in the process of approving International Standards on Auditing.
While financial statements of listed companies must be audited by an external auditor in all MENA economies, disclosure of the auditing reports is not required in five countries (Algeria, Iraq, Libya, Mauritania and Yemen) (World Bank, 2019).
Remuneration of board members and key executives is disclosed as an aggregate only and the link between remuneration and long-term company performance is usually explained in generic terms by 15 top companies in the region.
Criteria for the independence of board members and procedures for their election are generally not disclosed by the sample companies.
In some MENA economies, such as Egypt and Morocco, it is not mandatory to publish corporate governance reports as part of annual reports.
Regarding beneficial ownership, country regulations in the region generally require major shareholders and directors of listed companies to disclose their ownership, in line with global practice. However, despite improvements in regulation, challenges persist, especially in relation to the identification and disclosure of ultimate beneficial owners.
Regarding related party transactions, definitions of such transactions have generally improved, and greater requirements for their disclosure have been introduced in MENA economies. However, requirements on the method and timing of disclosure vary across the region. Many MENA economies have not adopted thresholds for disclosure and shareholder approval. Regulation also varies on the definition of related parties.
Nonetheless, many economies have recently amended regulations on related party transactions. A future review could shed more light on the situation.
3.7.2. Policy options
MENA economies should continue their reform efforts with respect to transparency and disclosure practices in order to improve the effectiveness of their corporate governance frameworks. Attention should be devoted to the adoption of international best practices and to enhancing supervisory authority capacity and shareholder involvement.
Based on the findings presented in this chapter, two types of policy options can be proposed. The first involves improvements to the general corporate governance environment; the second concerns policies specifically targeting the chapter’s focus issues, namely disclosure of beneficial ownership and of RPTs (Figure 3.3).
Figure 3.3. Main policy areas for improving transparency and disclosure
While such efforts may be costly and time consuming, they can lead to greater investor confidence, stronger market reputations and fluid access to finance, thus contributing to the overall growth and development of the MENA economies and companies.
Complementing the efforts of policy makers, companies can take immediate action to improve their disclosure practices. In order to attract investors to the region, it is important for company websites to be updated regularly and for more reports, including corporate governance reports, to be made easily available online in English.
Key policy options for corporate governance disclosure are summarised in Table 3.8 and developed below. Not all recommendations apply to every country; policy options must be tailored to each MENA economy’s specific circumstances and needs.
Table 3.8. Policy options for improving transparency and disclosure
Models for disclosure regulation
MENA economies have upgraded their legal and regulatory frameworks in recent years. Thanks to better protection of minority investors’ rights, Saudi Arabia and United Arab Emirates are now ranked 7th and 15th in that area (WB, 2019). However, the low rankings of other MENA economies suggest that there is room for further improvement.
MENA authorities should continue to work towards full convergence with international standards and best practices. The key international benchmarks are the Principles, International Financial Reporting Standards, International Standards on Auditing and the IOSCOs Objectives and Principles of Securities Regulation.
Adoption of international standards plays an important role in helping investors decide how and where to invest. As institutional investors have started to request not only financial information but also non-financial information, policy makers should monitor the evolution of international developments on environmental, social and governance disclosure as well. International best practice recommendations can be found in the OECD Guidelines for Multinational Enterprises and the Global Reporting Initiative.
Choosing between mandatory and voluntary disclosure
Corporate governance frameworks in the region range from binding regulation to self-regulation or optional standards. Five MENA economies currently opt for voluntary implementation of corporate governance codes.
However, guidance and a voluntary code may be insufficient to achieve good corporate governance practices when there are no mandatory regulations and when, as in MENA, corporate governance is not market driven.
This chapter has pointed to important areas that are not being disclosed by listed companies in the region. When specifying the items subject to mandatory disclosure, MENA policy makers should place a priority on disclosure of ultimate beneficial ownership stakes, related party transactions, other activities and directorships held by board members, compensation of company directors and executives, and auditing reports.
Regulations should be flexible enough to take account of the needs of different types of companies according to size, sector and complexity. As emphasised by the Principles, disclosure regulations should not place unreasonable administrative or cost burdens on companies.
Regardless of the corporate governance framework used, a comply-or-explain approach and formal regulation are crucial for an effective system. The quality of disclosure becomes even more important when a comply-or-explain approach is adopted. For this reason, companies must first publish a corporate governance statement. At present, disclosure of corporate governance reports remains non-mandatory in some MENA economies, such as Morocco.
In global practice, a corporate governance statement has become a part of the annual report of listed companies (OECD, 2019). Generally such statements require that any company departing from the corporate governance code must state which sections of the code it fails to comply with and the reasons for this non-compliance.
Corporate governance reports must be of adequate quality and content to enable investors to make informed decisions. Invalid, overly general and limited explanations limit the benefits of comply-or-explain. According to the European Commission (2009), the main means used by regulators around the world to ensure the quality of corporate governance reporting include:
issuance of guidance on the fulfilment of disclosure requirements (EU)
required independent auditing of some parts of corporate governance codes, primarily those relating to financial reporting and the audit committee (UK)
adopting a specific template for governance reporting (Spain, Portugal)
publishing the monitoring findings, including best practices (France).
Supervision and enforcement
Timely, consistent and effective supervision and enforcement are needed to derive the best results from regulation. In the MENA region, this is even more essential since corporate governance is not market driven and private enforcement tends to be rare.
To achieve this objective, competent authorities should be operationally and financially independent, and have adequate powers to adopt supervisory measures and to implement sanctions. When there is more than one authority for supervision and enforcement (e.g. securities regulator and stock exchange), co‑ordination of investigations and information sharing are crucial to efficiency. A memorandum of understanding, frequent meetings and dialogue among related authorities are common methods used to improve co‑ordination.
Policy makers should analyse market conditions to define the most effective supervision and enforcement approach for their jurisdiction, taking into account market needs, priority areas and objectives, and resource allocation. It is essential to prioritise monitoring the implementation of mandatory rules and the timeliness of disclosure by listed companies.
MENA authorities could consider adopting a risk-based supervision approach, which is common among regulators (e.g. Germany, Brazil, Poland, Portugal and Turkey). A combination of a risk-based approach and random sampling, rotation between the two, or both can be considered. In developing a risk-based approach, factors that may be considered for selection criteria include risks related to a specific sector, common findings from previous examinations, complaints received, referrals by other regulatory bodies, issues raised in the media and academic research (UNCTAD, 2017).
The results of monitoring and action taken against non-compliance should be shared with market participants to encourage best practices and signal that non-compliance could be penalised. In addition to the “name and shame approach” (punishing by highlighting the name of companies with poor practices), a “name and shine approach” (rewarding by highlighting of name of companies with good practices) can incentivise companies to adopt better practices. MENA supervisory authorities could also consider using external resources, such as universities and associations, to collect and publish information for corporate governance reporting.
As securities authorities may initiate investigations based on information provided by investors and whistle-blowers, clear procedures and channels for conveying this information and measures for protecting whistle-blowers should be established.
Organising activities to raise awareness contributes to effective implementation of best practices. More activities should be conducted through public-private co‑operation to develop awareness on the benefits of good corporate governance practices.
Shareholder engagement
Investors need to play an active role in supporting better corporate governance practices. In the MENA region, however, concentrated ownership, the dominance of retail investors and the small base of institutional investors have led to low shareholder engagement.
Policy makers can promote active shareholder involvement by strengthening investor protection, providing guidance on expected best practices and improving public awareness on the rules and benefits of corporate governance disclosure.
MENA policy makers could consider requiring or recommending disclosure of voting policies and exercise of voting rights in cases where institutional investors hold more than a certain threshold of a corporation’s equity, or regarding voting on material issues. Where institutional investors are dominant in the equity market, stewardship codes can be introduced. Portfolio limitations of institutional investors can be reviewed to improve their shareholder engagement. Sovereign wealth funds, the region’s largest institutional investor category, can contribute significantly to corporate governance disclosure through active exercise of shareholder rights, by requiring good corporate governance practices from investee companies, and via direct monitoring.
Strengthening company investor relations (IR) departments can also help to improve corporate disclosure and facilitate shareholder dialogue. UAE and Qatar offer good examples from the region (Box 3.3).
Box 3.3. Initiatives for effective investor relations
UAE: A new regulation requires all companies listed on UAE exchanges to establish and develop an investment relations function starting from 2016. Under this regulation:
All listed companies must appoint an acting Investor Relations Officer with both Arabic and English language capability.
Websites of listed companies must incorporate IR-related disclosures including contact details, financial reports, minutes of general meetings and any other information relevant to shareholders.
The Investor Relations section of the website should include all information or statements already disclosed to markets, regulators and investors, along with any statements on changes in the company or shareholders' rights.
Listed companies must publish investor presentations showing their financial position, strategy and outlook at least once a year.
Qatar: The Qatar Stock Exchange launched an Investor Relations Excellence Programme in 2015. The programme surveyed experts in the domestic and international investment community to recognise best practices in investor relations. The programme also featured a detailed ranking of corporate investor relations websites.
Source: www.meira.me Qatar Stock Exchange website.
3.7.3. Recommendations on the disclosure of ownership
Disclosure rules in the region must ensure full and proper disclosure of ownership structure, in line with good practice. Disclosure must be required at least annually, and on a timely basis when the ownership threshold requiring disclosure has been exceeded.
MENA policy makers must carefully determine the ownership threshold at which disclosure is required. A threshold of 5% is generally accepted as a global norm, but some countries have introduced lower thresholds (Ireland, Italy, Portugal, Spain, UK).
Some MENA economies implement a threshold of 10% or more. In economies where a threshold is not yet in place, MENA policy makers could consider setting the initial disclosure threshold at 5%, which may be sufficient to capture major shareholders’ interests given the concentrated ownership structure in the region. Other considerations can help to determine the optimal threshold level. For example, when there is a tendency by investors to keep their shareholding slightly below the disclosure threshold in order to conceal ownership, policy makers could consider lowering the threshold.
Regarding disclosure of beneficial ownership, clarification is needed. Although MENA economies have adopted regulations to cover disclosure of de facto beneficial ownership, in some countries these regulations do not list securities held by a person’s relatives as being under the control of the ultimate beneficial owner. Likewise, disclosure obligations for those acting in concert with the beneficial owner are not defined clearly.
As a possible model for policy makers, OECD (2016) guidelines specify that:
Securities held by a person’s spouse and/or minor children should be counted as securities held by that person
Ultimate beneficial ownership (through deemed and indirect ownership) should be disclosed
Beneficial owners who have crossed the 5% threshold through “acting in concert”, “trust” or “control enhancing” arrangements should disclose their beneficial ownership position.
It is also good practice to disclose the shareholdings of directors regardless of the percentage they own. This is not always the case in the region.
Regarding the time allowed for disclosure, changes in major ownership interests should be disclosed as soon as the defined thresholds have been exceeded. And as for timely access to material information by all stakeholders, and not just the securities regulator, companies should be required to make all disclosures available on their websites.
Regulatory authorities should also strive to increase the quality of disclosure. Companies in the region sometimes engage in “grudging” or “boilerplate” compliance, creating the appearance of disclosure while concealing the true nature of ownership. The OECD suggests that a good way to prevent this is to require visually accessible charts and figures in disclosure of beneficial ownership and control structures (OECD, 2017b).
Competent authorities also need access to up-to-date beneficial ownership information in order to fulfil their supervisory, monitoring and enforcement tasks. Recommendations by international organisations include creating a central beneficial ownership register and establishing information-sharing mechanisms.
3.7.4. Recommendations on the disclosure of related party transactions
Fighting abusive related party transactions is high on the policy agenda around the world. One approach that could be useful for MENA policy makers is the OECD’s Guide on Fighting Abusive Related Party Transactions in Asia9, another region where concentrated ownership is present. The guide provides recommendations focusing on disclosure and the board/shareholder approval system, a common practice in the MENA region.
A detailed definition of related parties exists in many MENA economies (Annex 3.B), but thresholds of shareholding that constitute “control” in a company vary from 5% to 30%. Improvements are needed to cover all parties who may exercise direct and indirect control in a given transactional context. For example, transactions by controlling shareholders other than board members or by relatives are not always explicitly covered. While Saudi Arabia and UAE have improved the consistency of their definitions since 2014, work should continue in the region to harmonise definitions among different bodies of law.
Requiring disclosure of all RPTs is common practice among MENA economies, but Saudi Arabia has adopted a regime distinguishing RPTs according to their materiality. Instead of requiring immediate disclosure of all RPTs, thresholds can be set for material RPTs that require immediate disclosure. These thresholds, based on the transaction’s impact on certain elements of a company’s financial position (gross assets, profits, market capitalisation or gross capital), may increase the effectiveness of the disclosure system.
The disclosure of material transactions can be accompanied by a report – by an independent expert, the board of directors or the company’s audit committee – assessing whether the transaction is fair and reasonable from the perspective of the company and the shareholders. This good practice has been adopted in the region by UAE.
If shareholder approval is required for RPTs, as is common in the region, disclosure should be sufficient to enable shareholders to make an informed decision. Oman’s regulations constitute a good example (Box 3.4). Ex-ante shareholder approval of certain material RPTs and disclosure well in advance of the relevant shareholder meeting are also essential.
Box 3.4. The Omani regime for disclosure of related party transactions
Under Oman’s Corporate Governance Code, all related party transactions must be approved by the general meeting prior to execution. The notice to the meeting must include:
name of the beneficiary related party
nature of the transaction, terms and conditions, and rationale
value of the transaction
period of completion of the transaction
any other data related to the transaction
an independent valuation in case of purchase or disposal of assets.
The notice must include a note explaining the opinions of the audit committee and the board regarding the proposed transaction, and an undertaking to bear responsibility for the related party executing the transaction as per the agreement.
Source: Oman Corporate Governance Code.
Finally, qualification and independence in the accounting and auditing sector must be ensured. For the disclosure system to be effective, it is crucial that financial statements be prepared in accordance with IFRS. Periodic disclosure of related party transactions, along with opinions of auditors and accountants, should be encouraged.
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Annex 3.A. Companies covered in the review of disclosure practices
Source: Thomson Reuters
Annex 3.B. Definition of related party transactions in selected MENA economies
Notes: The definitions provided in the table are taken directly from the English translations of the relevant country regulations.
Zreik (2009), “Related party transactions under Lebanese law (with comparative references to the UAE Law)”.
Source: The web pages of MENA securities regulators, except where otherwise indicated.
Notes
← 1. Algeria, Iraq, Jordan, Kuwait, Lebanon, Morocco, Oman, Palestinian Authority, Qatar, Tunisia, Saudi Arabia, and the UAE.
← 2. Algerian Corporate Governance Center, Jordan Institute of Directors (2012), Lebanese Institute of Directors (2011), Moroccan Institute of Directors (2009), Oman Center for Corporate Governance and Sustainability (2015), Saudi Governance Center (2017) and Tunisian Institute for Corporate Governance (2009).
← 3. Algeria, Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Palestinian Authority, Qatar, Saudi Arabia, Tunisia, United Arab Emirates.
← 4. Close to 40% of the shares of the region’s 600 largest listed firms are held by the state. These 600 firms, in Bahrain, Egypt, Iraq, Jordan, Lebanon, Kuwait, Oman, Saudi Arabia, Morocco, Qatar, Turkey, Tunisia and UAE, account for 97% MENA’s market capitalisation.
← 5. To view the World Bank’s methodology on this topic, see www.doingbusiness.org/en/methodology/protecting-minority-investors.
← 6. The Saudi Arabia Capital Market Authority, on 26/3/2018, announced that the remuneration of senior executives mentioned in sub-paragraph (b) of paragraph (4) of Article 93 of the Corporate Governance Regulations is to be disclosed collectively. Companies Law also set maximum limits on remuneration in Saudi Arabia.
← 7. Agency costs are a type of internal business cost that must be paid to an agent acting on behalf of a principal. These costs arise because of core problems, such as conflicts of interest, and an agency costs can include any expense that is associated with managing the relationship and resolving differing priorities between key parties in the business.
← 8. Lebanon, Morocco, Palestinian Authority, Qatar, Saudi Arabia, Tunisia, and the UAE DIFC.
← 9. To access the guide, go to: www.oecd.org/daf/ca/corporategovernanceprinciples/43626507.pdf.