commentary

The Financial Crisis, Corporate Governance, and Change in the Middle East

Does the current financial crisis undermine the credibility of corporate governance efforts--or prove they are needed now more than ever?

by Danya Greenfield

Published on December 2, 2008

As economists and politicians weave elaborate explanations about the causes of the current financial crisis, from greed to deregulation, it is worth articulating the vital role that corporate governance—or rather the lack of it—has played. According to Rainer Geiger, OECD Regional Advisor for the Middle East, “The crisis provides an opportunity for change. With corporate governance, it is not only the rules that matter, but the practice of them.” Clearly, the practice has fallen far short, and improving it rests as much on high ethical standards as it does on laws and regulations. Just as the Asian crisis of the late 1990’s and the Enron debacle highlighted the dire need for improved corporate governance, recent market failures should provoke re-evaluation of corporate governance standards and their implementation. This is not an easy argument to make at this moment, when the very fundamentals of free market capitalism are under attack.

There also is a clear link between improved corporate governance, necessary for an economic rebound, and the eventual development of democratic institutions. Good governance in the private sector will lead to the demand for transparency, accountability, and responsibility in the public sector. According to Hilton McCann, Senior Vice President for Abraaj Capital, “corporate governance merely reflects how a company behaves when no one is looking.” When leaders in the business community adopt these ethical values, the precedent can be leveraged as a powerful tool in the political sphere as well.

This connection between economic and political governance is particularly salient in the Middle East and North Africa, where the door to political reform is barely open in most countries and economic reform is often the only avenue for participation. In the private sector, corporate governance connects transparency with investment and improved performance, which gain the buy-in of the business community. As values of accountability, fairness, and responsibility take hold in the private sector, it will become more difficult for governments to reject demands for such standards in their own actions. This is, of course, not a foregone conclusion, but it is worth pursuing when political parties, journalists, and civil society organizations are under attack. Just as corporations should be judged by the way they behave “when no one is looking,” so too should government institutions.

In several Arab countries, the private sector is working with the government to create a culture of transparency and accountability. In Egypt, where political expression is still significantly limited, Minister of Investment Mahmoud Mohieldin has championed corporate governance and corporate social responsibility as a means of engagement between the government and civil society. In North Africa, Morocco has instituted a code of corporate governance, Tunisia has produced a manual of best practice guidelines, and Algeria is nearing completion of its code.

In Yemen, there is new interest in corporate governance because the government is working toward the establishment of a stock exchange. Those tasked in the Ministry of Finance with creating the long-awaited stock market understand that companies wishing to be listed on the exchange will have to fulfill listing requirements that mandate a level of transparency and disclosure that is far beyond current practice. The effort to prepare companies to be listed is primarily oriented toward state-owned enterprises (SOEs), which are accused of rampant corruption. If SOEs can make such changes, it could set the stage for more wide-reaching impact.

As the United States, the European Union, and other hard-hit economies weather an economic meltdown, the values of good governance have never been more relevant. The transformation of stronghold regimes to citizen-focused governments in the Middle East and elsewhere will depend upon the ability of the private sector, the judiciary, political parties, and other civil society organizations to keep good governance front and center. When the culture of accountability takes root firmly, the region will be poised for fundamental change.

Danya Greenfield is a program officer for the Middle East and North Africa at the Center for International Private Enterprise. The views expressed in this article are the author’s alone.

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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