LEGAL COLUMN: Enforcing good governance

Vanessa-AbernethyRegional corporate governance regulation has improved considerably in the past decade, with some MENA jurisdictions now having international best practice regulations and others having embodied only the most important concepts from developed markets into their regulations. There is room for further improvement, but perhaps the focus of local regulators should instead be on increasing the levels of compliance with existing regulation before making further regulatory changes.

To help raise levels of compliance with existing corporate governance regimes, the focus could be on: 

• Hiring top-quality compliance officers
A common problem in this region is a lack of seniority of compliance officers in entities with significant regulatory obligations. To attract stronger talent, salary levels may need to increase, bringing them into line with remuneration in major financial markets globally.

• Senior management commitment
Senior-level commitment should focus not only on recruitment of senior compliance teams, but also on senior managers and directors leading by example. When an issue of non-compliance is raised up to the top of an organisation, swift action taken to correct the breach would send a strong message to more junior employees that non-compliance with corporate governance policies will be dealt with appropriately.

• Enforcement 
The most efficient way to improve corporate governance is to strengthen the levels of enforcement by regulators. There are real examples of situations where heavy enforcement action taken against one non-complying entity or individual has led the market to take the regulations more seriously. The enforcement action taken needs to be strongly communicated to the market. Private censure action is unlikely to have the same effect.

• Market education 
A lack of understanding of the regulations and how they should be applied may be contributing to non-compliance in this part of the world. Local regulators put considerable effort into educating the market but they can only do so much, since corporate governance regulation should be rolled out to fit the specific size and business of the regulated entity. Market education initiatives run by regulators are often necessarily more generic. Greater understanding of the current regimes would almost certainly raise the levels of compliance. However, regulators need not pick up the extra burden for this and hopefully market understanding would improve if public enforcement action was the focus of regulators instead.

• Independent directors 
A key regulation in most corporate governance regimes requires independent directors on the board. In this region, identifying and engaging directors who are experienced and completely independent is not as easy as it is in developed markets. Some institutes are working towards maintaining databases of well-qualified directors for independent director roles, but the numbers of people on those lists needs to grow for it to become easier to find enough good independent directors efficiently.

Before MENA regulators make more changes to their corporate governance regimes, a focus on enforcement could well lead to greater levels of compliance. Public enforcement action is likely to result in entities ensuring they get fully educated on what is required of them, that senior managers and boards take more responsibility for ensuring compliance and that there is more focus on attracting strong compliance teams. Focus on enforcement could well have the greatest impact in terms of bringing up the levels of corporate governance in this part of the world up towards those seen in more developed markets.

Vanessa Abernethy is a senior corporate lawyer based in the UAE

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