Regulation alone won't ensure best practices in UAE companies

The UAE Federal National Council in May passed the long-anticipated draft companies law. Regulation alone is not sufficient.

Failure to enforce best business practices even in the most regulated markets is said to have triggered the start of the global financial collapse in 2008. Above, traders at the Chicago Mercantile Exchange on September 15, 2008 when markets crashed after Lehman Brothers filed for bankruptcy. ReutersShow less

It is said that the formulation of a problem is often more essential than its solution. Using the same logic, before going about tackling the issue of corporate transparency, accountability and anti-corruption mechanisms, we must first define and frame the problems our corporate landscape faces in a regionally relevant context.

Wikipedia defines corruption as "spiritual or moral impurity or deviation from an ideal". It is fair to say that different regions and markets of the world have varying perceptions of what is considered ideal or immoral when it comes to business practices. This phenomenon is not one that separates developed markets from frontier or developing markets; there are indeed considerable differences even among the world's most established markets.

For example, during the 2012 presidential race, regulations in the United States allowed individuals and companies to contribute more than US$2 billion to the campaigns. In contrast, the same practices would be deemed illegal in most European Union countries, including the United Kingdom.

Similarly, facilitation payments paid to foreign officials by German companies were considered perfectly acceptable practice and even tax-deductible until as recently as 1997.

Therefore, until we develop a culturally relevant and widely accepted concept of what constitutes poor corporate practice in a specific country or region, we cannot develop mechanisms that efficiently promote good governance and stamp out corruption.

What are these mechanisms?

Regulation in itself is intrinsic to raising standards of corporate governance.

The UAE Federal National Council in May passed the long-anticipated draft companies law. This legislation is expected to encourage the adoption of international best practice and help streamline standards across the country; it is set to change the way directors and company auditors can be held to account in regards to corporate governance, by providing clear responsibilities to ensure greater transparency and accountability.

These new regulations, if instituted widely, will help to level the corporate playing field, thereby encouraging greater regional economic activity. This in turn could facilitate the boost needed to generate the tens of millions of new jobs required every year for the youth of the Arab World.

That said, regulation alone is not sufficient. We don't have to think back too far to identify stark examples where regulation failed to enforce best business practices, even in the most regulated markets. For example, it could be said that it was this exact issue that triggered the start of the global financial collapse in 2008, sending shock waves across all financial systems.

The private sector is primarily motivated by incentive, so to ensure companies and organisations actively embrace best practice principles, they must first accept that there is true potential for value creation in adopting these practices. In essence, companies need to first appreciate that good corporate governance inevitably leads to greater success and will ultimately be reflected in their bottom line.

There are a host of financial, legal, socio-economic and ethical incentives, and indeed disincentives, in place to assist in this corporate cultural evolution. Adopting good corporate governance practices can lead to tangible and immediate benefits.

For example, transparency leads to increased accountability, which in turn leads to greater levels of trust all along the value chain. According to a recent survey conducted by the IMF, 46 per cent of surveyed Arab companies view access to finance as a major constraint, and only 10 per cent used banks to finance investment last year as compared with more than 50 per cent who plan on raising capital in the next five years. Transparency enables greater access to external capital, which could prove invaluable for companies in our region at a time when global partnerships are recognised as being necessary to thrive in an ever-increasing competitive landscape.

Adopting these practices must also be a regional approach for real benefits to be realised. Changes in corporate culture will be futile without an all-inclusive process that all companies and organisations across the region can take ownership of. Should best practice transparency be adopted across the Arabian Gulf region, it would inevitably encourage a change of attitude towards corporate governance throughout the Arab world.

Corporate governance is a multi-stakeholder exercise, involving the private sector, the public sector and the wider public.

In particular, our education sector plays a crucial role in ensuring that our future business leaders in schools and universities alike receive lessons in ethical behaviour to lay the foundations for their careers. Family businesses in the Arab world make up more than 85 per cent of the region's non-oil GDP, and therefore these firms have major potential to positively influence corporate behaviour. And for most family firms in the region, improving practices in accountability and transparency is not necessarily driven by regulation or legislation, but by the strong desire to pass a healthy and well-governed company on to the next generation.

Setting the tone for best business practices must come from the top for it to become embedded in an organisation. However, we must not implement a blind rush to try to institute higher levels of trust or adhere to legislation-driven box-ticking.

Instead we must look at ways to clearly communicate the desired values and culture of our organisations, empowering management to lead by example and ingrain this culture throughout our corporate ecosystems.

Many UAE firms have been built on the basis of values passed down from one generation to the next, and now is the time to translate these values into rigorous processes that build greater levels of trust among all our stakeholders, minimise risks going forward and generate greater levels of competitiveness, enabling more business to be won in international markets.

Badr Jafar is the managing director of the Crescent Group and founder of the Pearl Initiative, a GCC-based, private sector-led, not-for-profit organisation set up to improve transparency, accountability, corporate governance and business practices in the Arab world