Diseño de un programa de estrategias tecnológicas para desarrollar

MENA Region

This section considers the levels of recognition of the OECD corporate governance principles in the MENA region in general and in the scrutinised stock exchanges in particular. As is discussed in more detail in Chapter Four, Egypt developed its code of corporate governance in 2005 as a further step towards globalising its capital market and attracting foreign direct investments. In 2007 Jordan developed a code of corporate governance for its banks, followed by a code of corporate governance for listed shareholding companies in 2008, on a comply or explain basis. However, the requirements for corporate governance best practices under these codes are initially supported by the regulatory framework in Egypt and Jordan (company laws and security exchange laws), that were issued before the codes as part of the regulatory reforms that took place since the mid 1990s.

3.4.1Ensuring the Basis for Effective Corporate Governance

“The foundation of any corporate governance framework is provided by the basic legal framework, as reflected in the basic company, civil, and securities laws, the regulations of the stock exchange (especially the listing rules), and the basic accounting standards in place. These laws are the basic rules for board and management behavior and in the long term tend to reflect the values of the underlying business culture” (CIPE, 2003:22).

This argument highlights the importance of developing a supportive infrastructure for the corporate governance framework. The assessment of such infrastructure in the MENA region generally and in the scrutinised stock exchanges in particular, reveals that company laws and capital market laws (securities laws) are the main sources of corporate governance legal frameworks and practices. Most of the rules and regulations that govern the MENA capital markets including Egypt and Jordan are either recently issued or updated in conjunction with international practices, as are the codes of corporate governance that broadly comply with the OECD principles (CIPE, 2003; Al- Shammari et al., 2008; IFC & Hawkamah, 2008; Al-Akra et al., 2009; Samaha & Dahawy, 2011)8. Nevertheless, de jure compliance with the international regulatory framework in the MENA region is only one face of the coin, and the other more important face in the researcher’s opinion, is compliance in practice.

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For details of the regulatory framework for listed companies in different MENA exchanges, see the MENA stock exchanges Websites.

The majority of the MENA listed companies including those listed on the Egyptian Exchange (EGX) and Amman Stock Exchange (ASE) have a unitary board structure (one-tier board)9 (CIPE, 2003). In most cases, the controlling shareholders are able to choose all board members and the assigned persons are either inexperienced in the field of activity of the firm or in financial matters, or are closely connected with executive board members or the Chairman, and may feel obligated to act in the interest of the controlling shareholders (CIPE, 2003; ROSC, 2009). Furthermore, rules and regulations are not supported by a code of ethics that would help in instituting moral commitment within management. This may be attributed to the lack of efficiency in the MENA capital markets, insufficient development of the judiciary bodies to support strict enforcement of capital market laws and regulations, and an issuer’s culture, as issuers are not yet accustomed to transparency and corporate governance sound principles (CIPE, 2003; Asfour, 2004; Sharar, 2007; Al-Shammari et al., 2008). This argument implicitly highlights the importance of appreciating that corporate governance good practice is not only influenced by formal laws, accounting standards, and regulations, but also by their actual enforcement and most importantly, by societal values. Consequently, cultural values operate as a significant antecedent that cannot be ignored when evaluating corporate governance practices.

3.4.2The Rights of Shareholders and Key Ownership Functions

As reported by CIPE (2003) and IFC and Hawkamah (2008), shareholders’ rights are identified under capital market laws and by-laws and company laws in the majority of the MENA capital markets. The regulations indicate shareholders’ rights in securing ownership registration, participating and voting in general shareholders’ meetings, as well as involvement in decisions concerning fundamental corporate changes (e.g., articles 144, 170, 172, 175 of the Jordanian Companies Law 22 of 1997; articles 59, 66, 72, 157 of the Egyptian Companies Law 159 of 1981). In general terms, shareholders’ rights identified by the majority of MENA region countries comply with the OECD principles (CIPE, 2003; ROSC, 2005; IFC & Hawkamah, 2008; ROSC, 2009). However, still directors and managers can influence the extent of compliance with legal requirements in practice (IFC & Hawkamah, 2008). For instance, in Egypt boards do not generally safeguard a formal and transparent director nomination and election process and in practice the general nomination and election processes are controlled by the major owner and far from formal and transparent (ROSC, 2009). Consequently, many boards in Egypt are constituted with family members, government officials, and related parties and are often selected for their loyalty to the major owner regardless of their qualification (ROSC, 2009). CIPE (2003) attributed such situation

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Is also known as the 'arm's length' system because shareholders maintain their distance and give executives a free hand to manage (Mavrommati, 2008:100).

to the lack of culture, poor awareness among small investors, and the speculative nature of stock trading.

3.4.3The Equitable Treatment of Shareholders

Regulations in the majority of MENA countries, require shareholders to be treated equally as they have the same voting rights (CIPE, 2003). Furthermore, in the majority of MENA countries, shareholders have the right before others to buy additional shares of the new issue to preserve equity (IFC & Hawkamah, 2008). However, in practice, many directors such as the case of Egypt feel accountable only to the major owner and minority shareholders may find it difficult to get their rights mainly, due to inefficient court system (ROSC, 2009). The situation is not different in Jordan. Although articles of the Companies Law 22 of 1997(articles 157 and 159) state that the Chairman and the board of directors are responsible before shareholders for any violation of law or any negligence in the management of the company, due to the lack of experience in commercial matters by the Jordanian court system it is difficult for minority shareholders to hold directors accountable for their violations (Sharar, 2007).

With respect to insider trading and self-dealing transactions, laws in many MENA capital markets including Egypt and Jordan prohibit this kind of transactions, and unlawful action is penalised by imprisonment and fines (CIPE, 2003).Thus, board members, company officers or other persons having access to information not available to the public and affecting the price of the company’s securities are not allowed to trade (e.g., articles 158 and 166 of the Jordanian companies Law 22 of 1997 and article 108 of the Jordanian Securities Law of 2002; article 64 of the Egyptian Capital Market Law 95 of 1992). However, from the researcher viewpoint, the weak monitoring, lack of strict enforcement of laws, slow court system, and the low consideration for moral hazards, may stand as barriers to compliance with this requirement.

For related party transactions, CIPE (2003) reports that disclosure requirements relating to related party transactions are well articulated in the MENA context (e.g., article 148 of the Jordanian companies Law 22 of 1997; article 4 of the EGX Listing Rules of 2002).

3.4.4The Role of Stakeholders in Corporate Governance

Stakeholders include investors, creditors, employees and suppliers (Sharar, 2007). “The role of stakeholders in corporate governance in the MENA is not as developed as in many other countries. It is a question of culture and requires education, increased awareness and in most of the cases, a wider and much more comprehensive coverage in laws, rules and regulations” (CIPE, 2003:31). This argument is emphasised by Sharar (2007: 107) who states that stakeholders are not defined in

the Jordanian legislation. However, as a source of capital, banks in the region used to be stakeholders in most of the listed companies. Whether as creditors or shareholders, banks are entitled to demand the observation of standards by the companies they finance, which should improve financial disclosure practices by listed companies, hence improve governance practices (CIPE, 2003).

3.4.5Disclosure and Transparency

As reported by CIPE (2003) and IFC and Hawkamah (2008), companies listed on all MENA stock exchanges including the EGX and ASE are legally required to disclose their financial, non-financial and operational performance on a continuous and regular basis (e.g., articles 12 to 27 of the EGX Listing Rules of 2002 and articles 64 and 65 of the Egyptian Companies Law 159 of 1981; articles 140 and 141 of the Jordanian Companies Law 22 of 1997 and article 43-a-1 of the Jordanian Securities Law). The majority of MENA countries mandate the adoption of IFRSs10, and MENA capital markets regulations require financial statements to be audited based on the ISAs (CIPE, 2003; ROSC, 2005; ROSC, 2009). Consequently, it can be argued that disclosure requirements in the MENA context are in conformity with the OECD principles. Compliance with these requirements is monitored and enforced by the capital market regulatory bodies (e.g., the CMA in Egypt and the JSC in Jordan). Non-compliance is subject to controversial sanctions such as delisting from the stock exchange (e.g., articles 34 and 35 of the EGX Listing Rules of 2002; section 17 of the Jordanian Securities Law).

3.4.6The Responsibilities of the Board

As indicated in previous sections, the majority of the MENA listed companies including those listed on the EGX and ASE have a unitary board structure. In order for boards to effectively carry out their responsibilities they must be able to exercise objective and independent judgment. In addition, they are supposed to oversee company convergence with laws and regulations (OECD, 2004). However, the review of corporate governance practices within the MENA region including Egypt and Jordan promulgates that the role of the board of directos in providing strategic guidance and overseeing management behaviour is not sufficiently recognised in practice (ROSC, 2005; IFC & Hawkamah, 2008; ROSC, 2009).

The CIPE (2003) report, and the IFC and Hawkamah (2008) MENA region corporate governance survey, emphasise the weakness of disclosure of corporate governance-related information among

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Concerning the adoption of IFRSs in the MENA region; Kuwait was the first to mandate IASs/IFRSs (1990) followed by Egypt (1997), Jordan (1998), Bahrain (2001), the UAE (2003), and finally Oman in 2007.

companies listed on the MENA region stock exchanges. Furthermore, the review of the extent of implementation of the OECD corporate governance principles in the MENA region capital markets reveals these to be recognised to varying degrees, as indicated by the findings of the IFC and Hawkamah (2008) survey, which are summarised in Figure 3.1.

Figure 3.1: Implementing Corporate Governance Principles in the MENA Region

Source: IFC and Hawkamah (2008:17)

As Figure 3.1 demonstrates, MENA region banks follow better governance practices than listed companies, attributable to the fact that banks are typically highly regulated, with specific central bank circulars and regulations. However, the IFC and Hawkamah (2008) corporate governance survey results for both MENA banks and listed companies follow a similar trend, with all respondents scoring relatively high (50% and above) on disclosure and transparency, as well as the control environment, both of which are typically codified in laws and regulations, while respondents failed to break the 50% threshold for the other indicators, namely board practices (47%), shareholder rights (42%), and commitment to good corporate governance (40%) (IFC & Hawkamah, 2008). This result implies that corporate governance is not yet completely accepted as part of the national values in the MENA region. This conclusion is supported by the findings of Boytsun et al. (2011) which show that social norms have a direct significant impact on corporate governance.