Corporate governance in Gulf nations has been a topic of debate due to growing concerns about business complexity, economic diversification, and the global trend towards more transparent and responsible business practices. According to Statista, the UAE’s economic diversification is the highest, with a rating of 94.8 among the countries and is driven by real estate and infrastructure megaprojects. While corporate governance structures in the GCC are improving, significant challenges remain, particularly around issues like board independence, transparency, and risk management.
Table of Contents
Lack Of Disclosure & Market Discipline
Transparency remains one of the serious concerns in the GCC, particularly for non-financial corporates, where reporting practices can fall short. While banks and insurance companies are generally better at adhering to international financial reporting standards, many non-bank entities face weaker regulations. Moreover, another significant challenge is that GCC countries need to develop the proper guidelines for the disclosure of companies’ environment, social and governance (ESG). These have increasingly become the crucial factors that investors look to before committing to funds.
Board Independence
One of the main governance challenges in GCC is the lack of board independence. Founding families control many companies in the GCC countries or have government stakes. According to Alarabia, family-run businesses contribute 50% of the GCC’s private economy. This compromises the board’s ability to oversee effectively and hold management accountable. Often, board members are selected based on personal relationships rather than skills or experience, resulting in a lack of diversity and expertise in decision-making processes. This issue is further exacerbated by some directors sitting on multiple boards, raising concerns over conflicts of interest and inadequate attention to their governance duties. According to S&P Global, in 2015, a small group of major shareholders collectively held an average of 52.7% of the shares in listed GCC companies. They further stated that controlling shareholders may weaken the independence and effectiveness of the board, which may result in poor governance checks in the organisation.
Financial Crimes & Frauds
Effective risk management is another area where GCC companies are lagging. A weak risk culture and inadequate board oversight increase the potential for management fraud and financial misconduct. For instance, S&P Global, in their report mentioned in early 2019, the Central Bank of Bahrain identified major weaknesses in Arig’s internal controls, noted a lack of strategic direction due to prolonged vacancies in key positions, and discovered fraud at one of its subsidiaries.
Progress in Governance Practices
Despite these challenges, there are signs of progress. Companies listed on international or regional exchanges or those that access capital markets generally demonstrate stronger governance practices. Additionally, the growing focus on Environmental, Social, and Governance (ESG) factors is pushing many GCC companies to enhance their corporate governance framework.
