New regulations, increased focus on ESG, and reinvigorated law enforcement require companies in the Middle East to rapidly advance their corporate governance agendas to stay ahead of government and shareholder demands. 

James Daniell and Steve Spiegelhalter, Managing Directors with Alvarez & Marsal’s Disputes and Investigations’ team in the Middle East and U.S., respectively, and Ali Anwar, Managing Director with Alvarez & Marsal’s Global Transaction Advisory Group in the Middle East, recently discussed how businesses are stepping up to this challenge on the webinar “Investigations as a Key to Good Governance in the Middle East,” hosted by intelligence platform Mondaq. 

KEY INSIGHTS:

Companies in the Middle East are advancing their corporate governance agendas at pace to respond to the need to attract investment and to deliver on the region’s ambitious growth and diversification plans. 

The current boom in M&A activity is also accelerating the governance transformation in the Middle East, with ESG-conscious investors pushing for improved procedures and policies at portfolio-company level as part of their due diligence processes. This trend shows no sign of abating as countries in the region continue to encourage private sector participation amid their efforts towards diversifying the predominantly oil-based economy. 

The Rise of Anti-Bribery Legislation and ESG Investor Agendas Are Driving Change in the Middle East

Especially when compared to those in the U.S. and Europe, many companies in the Middle East are still seen as lagging behind when it comes to good corporate governance. This reflects the dominance of ownership structures centered on families and the state as well as the less-mature regulatory environment.

This gap has been closing in the past few years with significant changes in legislation and enforcement. Some of the recent developments include the extension of anti-bribery legislation to the private sector in countries such as the UAE and the growing profile of 
the Saudi government anti-corruption authority Nazaha in pursuing investigations. International agencies and regulators are also increasingly working together and being proactive in enforcing legislation at ground level. 

Regulatory enforcement is not the only driver of improvement. An increase in IPOs amongst Middle East companies has pushed companies to rapidly improve their controls. And foreign investors forcefully pushing the ESG agenda are the ultimate driving force behind the “sea of change” taking place in the region’s corporate governance. As a result, investors are conducing due diligence at a much deeper level than in the past, with private equity buyers and other investors putting a lot of focus on the quality of management teams and governance structures when originating deals. 

Due diligence now goes beyond corporate valuation, and investors are now closely scrutinising contractual governance. Companies in the region have historically maintained contractual arrangements with third-party partners for years, or even decades, without performing regular assessments to review them against changes in regulation and the business environment. This creates significant risks from a compliance perspective, and business leaders must be proactive in ensuring that they are implementing controls over third parties in a timely and effective manner.

Opportunities for Business Transformation Require Moving from Relationship-Based to Rule-Based Governance Models

While many firms are implementing the structures necessary to comply with new market reality in corporate governance, there needs to be a transformation in the business leaders’ mindset to make them successful. Moving from a relationship-based to a rule-based governance model is therefore crucial and involves assigning risks and responsibilities across all levels of the organisation as well as constant evangelism. 

As governance models evolve from a risk-management strategy towards one of value creation, companies able to embrace that mentality are more likely to thrive. Good governance should not be seen as a reactive, burdensome set of rules and practices aimed at satisfying regulators. Rather, it should create efficiencies and help management make better informed decisions, freeing up crucial time and resources to do what leadership does best: help businesses grow.