Since The Financial Crisis - Lessons Learned And Reform In The Middle East

Introduction

In this article, Clive Hopewell, a partner with Charles Russell LLP and Head of its Middle East Office considers some of the lessons learned from the recent financial crisis and those factors driving corporate governance reform in the MENA region.

What is Corporate Governance?

Corporate governance can be defined, broadly speaking, as the internal systems and processes for ensuring proper accountability, probity and openness in the conduct of an organisation's business.

Back in the early 1990's, the UK was at the forefront of corporate governance reform and development. This was in part largely due to public concern over the excesses of the boards of newly privatised utilities during the Thatcher period. Corporate governance was very much in the spotlight following the publication of a number of important reports which have had an influence on the global corporate governance environment in which we operate today. These reports include the Cadbury Report (1992), the Greenbury Report (1995) and the Hampel Report (1998), ultimately resulting in the UK Combined Code (1998) which replaced the former codes of best practice.

Whilst there is, as yet, no generally applicable global corporate governance model, corporations work within the parameters set by national laws and regulations, along with the economic goals and expectations of their shareholders and other stakeholders.

The basic principles found in good corporate governance systems around the world include the following and are often implemented in practice by a combination of statutory rules and codes of best practice:

Transparency; Accountability; Fairness; and Responsibility Corporate Governance – Since the Financial Crisis

The economic crisis has revealed severe shortcomings in the corporate governance of larger companies (both public and private) and has placed corporate governance practices back under the spotlight. There has long been a failure to provide the checks and balances needed to cultivate sound business practices and the collapse of banking giant Lehman Brothers on 15 September 2008 can in part be attributed to failures in corporate governance which allowed a dangerously complacent and insulated business culture to develop.

Weak corporate governance arrangements which failed to safeguard against excessive risk taking are partly to blame for the economic crisis. Such failures remained hidden in a prosperous market but the downturn has revealed a number of flaws.

The key areas of weakness that have been highlighted in the various reports and investigations examining the reasons for the financial crisis are:

Remuneration, including incentives that failed to manage risk;

Corporate risk management and the underwhelming performance of audit, risk, remuneration and nomination committees;

Board of directors performance and...