The economies across the Middle East and North Africa (MENA) region are looking to mobilise investment, private sector development and entrepreneurship to support economic growth and employment. The OECD’s Fianna Jurdant shares some insights from a new OECD report on how sound corporate governance can help achieve this goal.
Priority target areas
Access to capital – strengthening corporate governance policies to facilitate access to corporate finance and capital markets, particularly for growth companies, will contribute to building the economic prosperity of tomorrow in MENA. Currently, the banking system dominates the region’s financing landscape, with bank deposits in 2015 accounting for 80% of GDP in the region, compared with a global average of 50%. This can constrain access to finance.
Transparency and disclosure play a critical role in providing the information that investors need to evaluate opportunities and risks. The majority of listed companies in MENA have concentrated shareholders in the form of sovereign investors or founding owners, such as families, which can impact transparency and disclosure. Disclosure of related party transactions in some MENA economies is not mandatory, which presents a significant challenge.
Gender balance in corporate leadership – policy makers and practitioners are starting to embrace that increasing women’s participation in corporate leadership is a means to achieve the inclusive economic growth needed to boost the region’s competitiveness. Closing the gender gap in labour force participation by 2025 could add USD 12 trillion (26%) to global GDP. In the MENA region, estimates suggest this could take as long as 157 years, given current trends.
Governance of state-owned enterprises – SOEs are a key feature of the MENA region’s economic architecture. They operate across a wide range of sectors, are strategically important and often provide public services to citizens. Improving their governance and enhancing efficiency, transparency to create a level-playing field with private companies is essential. However, a lack of data hinders evaluation of state owned enterprises in MENA. Also, improving professional ownership and governance practices are critical to maximise SOEs’ contributions to the economy and society.
While MENA economies have made progress in strengthening corporate governance frameworks in recent years, the region still faces challenges in adopting and implementing measures that support the economic efficiency, sustainable growth and financial stability needed to foster development. There is unmet potential in the region, with a collective Gross Domestic Product (GDP) of USD 2.37 trillion in 2017, representing only 3% of global GDP. Based on these findings, the Report proposes the following:
Develop strategies for capital market development, based on strengthened corporate governance policies, increase opportunities for growth companies to access finance and contribute to the region’s economic development. Analysis of MENA’s capital markets indicates that they do not reflect the potential of the region’s economies. What can help? Prepare a national action plan, enhance the monitoring capacity and accountability of securities regulators, improve market based financing alternatives, and develop the investor base, including by relaxing foreign ownership limits.
Benefit from international good practices on transparency and disclosure to improve the effectiveness of the region’s corporate governance frameworks. MENA’s corporate transparency practices highlight two areas of concern: disclosure of beneficial ownership and control and of related party transactions. What steps can boost investor confidence? Strengthened disclosure rules on ultimate beneficial ownership, related party transactions and remuneration of board members is one. In addition, effective supervision and enforcement of corporate disclosure rules is key. Including corporate governance reporting in annual reports is another. Promoting shareholder engagement is also critical.
Emphasise the importance of including gender diversity in policy frameworks as a first step towards facilitating gender balance in corporate leadership. Analysis of participation of women in corporate leadership in MENA shows that constitutional measures on non-discrimination against women have not yet translated into company practices. Action to promote women’s participation in corporate leadership roles include: introducing targeted measures to encourage gender balance; combining national goals with company strategies; and providing training and mentoring to shift values.
Gather and disclose information on state-owned enterprises to raise transparency and help improve their performance. The exercise of state ownership in most MENA economies remains dispersed across the publication administration, with individual ministries often holding ownership and regulatory roles at the same time. This can create conflicts of interest on the part of state actors, leading to inefficiencies and hindering SOEs’ performance. A first step toward reform is often improving the disclosure of individual SOEs and the state as an enterprise owner. For example, by collecting data on SOEs’ (financial and non-financial) performance, and engaging in aggregate reporting at the level of the state, transparency can be increased and an important momentum for reforms can be created.
Fianna Jurdant is Team Leader and Programme Manager for the MENA-OECD Working Group on Corporate Governance