In the wake of the financial crisis, companies around the globe are reexamining the way they manage their business. In particular, the crisis has highlighted the need for firms to reassess their overarching corporate governance frameworks, clearly showing that good governance is no longer an option, but is now a business imperative.
Significant progress has been made recently in spreading the message of good corporate governance across Egypt and the Middle East and North Africa (MENA) region. However, one of the key challenges that remain — which has now been hastened by the crisis — is demonstrating the business case for good governance using local evidence from the region.
There have been numerous studies in other regions that clearly show the effects of good governance (for example, improved firm performance, access to financing); but little evidence has been accumulated in MENA thus far.
Recently, the International Finance Corporation (IFC) published a report that helps provide such evidence. The report, “Corporate Governance Success Stories in MENA,” describes the experiences of 11 companies that made corporate governance improvements, summarizing both the changes they made and, importantly, the impacts they reported. It offers critical lessons for firms in Egypt and around the region that are now reexamining their post-crisis business model.
Overall, companies reported highly positive impacts as a result of their corporate governance improvements. Changes were made at all levels of the organization. For example, at the board-level every company made some form of change to their board composition and structure. This included enhancing board skill sets (in many cases, adding independent directors) and strengthening the role of board committees.
Beyond the board level, companies described critical changes in management control functions (such as, risk management, internal audit, financial management), organizational transparency (like improving financial and non-financial disclosures to the market), and shareholder relations, especially regarding minority shareholder protection.
For family-owned companies, which comprise the large majority of companies in this region, family governance was also an important area of change. For example, some of the family companies described taking a ‘business first’ approach by implementing mechanisms to more formally manage the family-business relationship (for example, family councils, family employment policies, family director nomination procedures).
This also included taking steps to mitigate ‘key-person’ risk (when one or two individuals control the entire business) and addressing succession issues to prepare the organization for the next generation of leadership.
Based on these and other improvements, the companies reported highly positive impacts. For example:
*Nearly all companies rated the corporate governance impact on their ability to access finance as strong or substantial. They cited the impact that governance changes had on instilling market confidence and providing added assurance to investors, creditors or other debtors. For example, one Egyptian firm attributed good governance to helping raise about $20 million in new financing in the past two years.
*Firm performance and market valuation was also impacted. One investor cited a recent equity sale in one of their portfolio companies that attracted an estimated 40 percent premium over the market price, due largely to good corporate governance. Another company reported that improvements at the board level and management level (separated Chairman/CEO, creation of an audit committee, clarified board vs. management roles, improved efficiency and decision-making) helped strengthen their bottom line by an estimated 20 percent in the past year.
*The impact on firm reputation was substantial in most companies. One Egyptian firm in particular noted the increased attention of investors and business partners after disclosing recent governance improvements, including inquiries from several other companies asking for guidance on how to make similar changes.
*Corporate governance helped several companies improve crisis response. Key governance changes — particularly relating to risk management and board stewardship — helped many companies better respond to the crisis by controlling costs and managing liquidity. For example, one financial firm noted that their improvements to risk governance during the crisis helped contain their overall market risk and lowered their cost of funding.
*Perhaps most importantly, all firms rated the impact on long-term sustainability as strong or substantial. This was especially true for family-owned companies that addressed their family governance issues and put in place a more structured model with a proper board of directors and well defined management roles. One Egyptian family company noted that their family governance and succession planning improvements in particular were a significant factor in a recent $8 million financing.
Many other specific examples are provided in the report (available at ifc.org/mena). In general, the collective evidence shared by these organizations leaves little doubt as to the potential impact of good corporate governance in Egypt and across the region and provides important lessons for all types of firms trying to determine how best to cope in this challenging market environment.
Christopher Razook leads IFC’s Corporate Governance Program covering the Middle East and North Africa. This article was written exclusively for Daily News Egypt.
The findings, interpretations and conclusions expressed in this article are the author’s own and do not necessarily reflect the views of IFC, a member of the World Bank Group.
