검색버튼 메뉴버튼


DBR | 1호 (2008년 1월)
A version of this article was originally published by Knowledge at Wharton
Last month, news broke that Nabil al-Boushi, an Egyptian brokerage owner based in Dubai, swindled his clients for millions of dollars. His doings brought to mind Bernard Madoff, the former chairman of the NASDAQ stock exchange, who has pleaded guilty to running a $50 billion Ponzi scheme.
Investors in the region had already been spooked by the ongoing long-term probe into allegations of bribery and corruption at Dubai Islamic Bank and its subsidiaries, which sent more than 20 executives to jail.
To what extent might strong and enforceable financial regulations and good corporate governance standards have kept these frauds from happening -- or at least limited their impact? How important are such regulations to help buoy investor confidence in the Middle East, especially since oil prices have taken a nose dive?
Just having rules in place doesn't mean these things won't happen, says Wharton legal studies and business ethics professor Ann Mayer. "The United States supposedly is well regulated, but we see that numerous huge Ponzi schemes have been conducted without detection in this country."
In the Middle East, each country is at a different stage of development, explains Wharton finance professor N. Bulent Gultekin. "You often see such problems in financially-repressed markets, where there isn't much room to maneuver. They are also common during the process of liberalization in the case of emerging markets or deregulation in more developed countries. It can be very easy to swindle people."
Several countries in the region are trying to promote best practices, adds Gultekin. "Dubai is trying to bring more of an Anglo-Saxon structure to its financial markets. And in areas of the region (that are compliant with Islamic) Sharia laws, there may be fewer problems because some arbitrary structure has been conceived out of traditions. But people can always find ways to beat the system."
A 2008 survey covering corporate governance practices in the Middle East and North Africa (MENA) bears out the concerns of Wharton faculty and other experts. Conducted by the Washington, D.C.-based International Finance Corporation (IFC) and Hawkamah, a corporate governance institute in Dubai, the survey found that while the vast majority of publicly listed banks and companies in the MENA region believe corporate governance to be vitally important, more than half of the participants did not know what the expression means; they confused corporate governance with corporate social responsibility or with corporate management.
Among the most significant findings of the IFC-Hawkamah report was that "not a single responding bank or listed company could claim to have applied corporate governance reforms holistically, i.e. to have followed a set of 32 indicators which could reasonably qualify a bank or listed company as following 'best practice."'
The IFC-Hawkamah researchers recommended that in order to improve the state of corporate governance in the MENA region, several changes are needed. For starters, chairmen of the board and corporate CEOs "should set the tone at the top and champion corporate governance reforms, with the support of a professional company secretary," they wrote. "The two largest barriers in implementing corporate governance reforms are a lack of internal corporate governance know-how, as well as the unavailability of external qualified specialists in the region."
Gultekin believes that several standards are important for maintaining international investor confidence. "On the corporate side, full disclosure, international accounting standards and protection of minority shareholders are crucial. On the financial side, you need a good watchdog, such as the U.S. Securities and Exchange Commission." He adds that the SEC failed to detect the Madoff scheme despite some advance warnings. Still, for each Madoff scheme that might slip through the cracks, experts acknowledge that U.S. regulators do uncover several fraudulent activities each year and penalize their perpetrators.
Gultekin further notes the need for regulators to function with autonomy. "You also need the watchdog to be free of the political structures, and you need a framework for independent entities," he explains. Moreover, autonomous organizations must exist to enforce the legal structures.
The countries in the Middle East, Gultekin says, will need to have high standards to preserve investor confidence and keep the markets running effectively.
Corporate governance is tricky, says Gultekin. "Just by applying laws themselves, you don't achieve what you want. In the U.S., we have the Sarbanes-Oxley Act (which established standards for public companies and accounting firms), but if things worked correctly, we wouldn't be in the financial mess we're in. In the Middle East, my conjecture is that you need to involve the customs and cultures of the countries as well."
Gultekin cites Japan as an example: "The country had a different corporate culture which reflected its value system and structure. Japan was successful for a long time, but it had trouble integrating its financial markets with the rest of the world." A major issue is behavioral change. "Simply adopting rules without changing people's behavior won't get you anywhere. The laws are necessary but not sufficient." In the Middle East, many companies are family held, and as a result, their governance structures are different from those of companies in the U.S. and elsewhere in the West. "Even within the region, there is little homogeneity," notes Gultekin.
These factors may make it difficult to implement uniform corporate governance norms throughout the region. Still, some initiatives to drive change have already begun. In November, for example, IFC and Hawkamah, authors of the 2008 report, announced a partnership to offer advisory services in corporate governance to family-owned businesses in the MENA region. In addition, the Dubai-based Mudara Institute of Directors has launched an initiative to educate board members of companies about best practices in corporate governance.
If some of these initiatives pay off, companies and shareholders alike should benefit -- as will the Middle East. They might not prevent future Madoffs and al-Boushis from ripping off investors, but they could at least ensure that such scandals are fewer in number.