Corporate governance is a much used phrase, one that is bandied about usually when things go wrong and forgotten once things improve. But what does it mean? The biggest mistake is when shareholders and board members believe that corporate governance is about oversight. Although this is a crucial role, it is not the primary role. In fact, too much control and oversight kill a business. The true primary role is building the business, which includes taking and managing risk, a view that is in opposition to regional thinking. At the opposite end of too much oversight is no oversight, which unfortunately tends to be the other approach taken by board members. Physical attendance can be rare and even then mental attendance is not always guaranteed.
The UAE faces these challenges due to a unique set of circumstances. Improving governance therefore requires an understanding of these issues. The first is that as a young country the institutions that have driven the economy have predominantly been owned or controlled by the government or a single family group. Having a sole owner changes the dynamic of governance as typically the shareholder exerts more direct control than a multi-shareholder company. Furthermore, without multiple shareholders with competing interests and opinions, the role of the board reduces dramatically. In such cases the legal structure of the company may be a joint stock company but the operating model is that of sole proprietorship with the board at best acting as advisers. These characteristics usually extend to when there is a single majority shareholder.
The second challenge faced is the UAE’s social culture that includes respectful deferral, consensus and avoidance of direct confrontation. Admirable as these traits are in society they do not always translate well into business. Complying with the UAE’s societal rules can conflict with governance rules: if the majority make a decision that is not in the best interest of the business then a director in opposition is obligated to vote against.
This leads to the third and most important challenge: disagreement. Bad things happen because good people do nothing, be it in business or any other facet of life. This is exacerbated due to the group context afforded by a board and leads to the known psychological phenomenon of ‘diffusion of responsibility,’ research on which was spawned when Kitty Genovese was stabbed to death in New York in 1964 while a reported 37 witnesses did nothing. Effectively, this research shows that when a person is part of a group they are less like to take any responsibility.
This combination of issues appears daunting in terms of developing an effective governance culture in the UAE. The solution is not yet more training. It is readjusting global best practice to suit local reality. The first step is defining and publishing a Terms of Reference (ToR) for the board outlining their responsibilities and authorities. For this to be effective it needs to be clear about matters reserved for the shareholders and matters reserved for the board.
The ToR should be viewed as a living document and should not read like a legal document but instead should include how the ToR should be applied. Such examples need not be imported solely from the West, looking eastward to cultures that might share similarities to the UAE would be beneficial. An example is Japanese boardroom voting rules: the least senior person in the room votes first and the most senior votes last thus avoiding the non-confrontation issue.
The ToR should also outline how the board reviews its performance, including whether external reviewers are involved and how this information is passed on to the shareholders. An important performance indicator should be director engagement and this must include much more than attendance figures. A good way to do this is to create a forced ranking of the directors’ performance across various facets of their role and to publish this to shareholders.
The final area is to teach directors to say ‘no.’ This simple thing is arguably the greatest governance improvement. There will be arguments that there is already too much saying “no” but that is manageable against the threat of allowing incompetent decisions through the board due to a hesitance to say no. There are two main paths to do this, the first via the shareholders creating the right processes. A simple example is the chairman of the board asking for a formal yes or no, and “abstain” no longer being an acceptable response. The second, complementary path is for the introduction of legislation protecting dissenters. Commonly known by the more dramatic name of whistle-blower laws, these laws protect directors, employees and others from the repercussions of making ethical decisions.
These localised changes to global best practice will be a powerful addition to the competitiveness of UAE businesses and their ability to succeed in a regional if not global context.
Sabah Al Binali has held several board positions including chairman of Zawya, director of the board of Credit Suisse Saudi Arabia and vice chairman of Gulf Finance. He holds a diploma in Company Direction from the UK Institute of Directors.
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