Investcorp was one of the founding corporations of the GCC Board Directors Institute (BDI) in 2007, along with Saudi Aramco, Saudi Basic Industries Corporation (Sabic), and Emirates NBD. The Bahrain-based provider and manager of alternative investment products has played an active role in promoting corporate governance in the Gulf.

Mohammed al-Shroogi, president of Gulf business at Investcorp, says the firm has always been committed to a culture of strong corporate governance.

“Investcorp makes large investments in illiquid asset classes, such as corporate investments, and it places a proportion of these investments on its balance sheet,” he says. “These investments carry above average levels of risk and this has led to the development of a comprehensive risk management infrastructure and strong corporate governance over the past 30 years.”

Skills upgrade

The message is that good practice begins at home. “Investcorp is an international company with a very wide investor base that requires strong financial performance and transparent reporting of results,” says Al-Shroogi.

“Investcorp’s board is aware of its roles and responsibilities, and it is focused on understanding the risks of the business and the systems to manage those risks.”

In recent years, there has been an “active upgrading” of boards of directors in the Gulf region as a result of which directors are more conscious of the skills that should be included on a board, says Al-Shroogi. Investcorp has been actively working on placement programmes that attract individuals with the necessary skill set.

“The firm has been supporting the BDI since inception. BDI’s programmes are aimed at raising awareness on corporate governance and are in line with our objectives to be transparent to our shareholders and to maximise their investment value by taking the most responsible decisions,” says Al-Shroogi.

“Stakeholders are demanding financial institutions to be safer, more innovative and transparent — all of which puts pressure on firms to implement better metrics for measuring and demonstrating strong performance to shareholders, as well as better corporate governance.”

Modern corporate governance frameworks are being developed with a view to their impact on overall financial performance, integrity and risk adjusted incentives aimed at attracting and maintaining investors.

“Supervisory and regulatory authorities in many GCC countries have also enforced the implementation of corporate governance on publicly traded companies and these authorities are regularly monitoring public firms’ compliance with the new regulations,” says Al-Shroogi.

“After the global financial crisis, many Gulf financial institutions embarked on major restructuring projects of different kinds, including projects to re-assess current practices on the corporate governance side. Some key challenges have been identified such as not having the appropriate board composition of executive, non-executive and independent directors.”

Basel paved the way for a stronger supervision process and improved regulation of the financial sector

Another important challenge is the poor risk management structures and the inability of boards to question chief executives and management on whether they understand the risks to which their firms are being exposed as a result of incurring excessive leverage or otherwise. It is also important to understand these roles within family-owned businesses, which make up more than 80 per cent of the companies in the region, says Al-Shroogi. “For family firms, succession planning is one of the challenges that should be addressed as businesses move into the third generation. The ability to implement a successful governance model for family-owned businesses will help them refocus their business portfolios and become more competitive and profitable organisations,” he says.

Particularly important is the management of risk, a key step towards completing the corporate governance structure. “It helps in improving growth, lowering the cost of capital and attracting international flows of capital which leads to a healthier financial statement and increased investor confidence,” says Al-Shroogi.

Investcorp’s board has a range of responsibilities, from ensuring that financial statements accurately disclose the firm’s financial condition to monitoring management’s implementation of strategy and reviewing risk management systems.

Raising the bar

The newly introduced Basel guidelines also encompasses corporate governance issues. “The Basel guidelines set standards both for regulators and financial institutions, with the latest being Basel III,” says Al-Shroogi.

“Basel paved the way for a stronger supervision process and improved regulation of the financial sector. When Basel III was introduced, it was seen as leveraging on the impact of Basel II when it introduced new capital requirements and liquidity standards for banks.”

Basel succeeded in “raising the bar” for the risk management practices of financial institutions, which are key to the well-structured implementation of good corporate governance practices. However, the road to achieving a more mature risk management model could be a long one and it might not see the light until a few years later, says Al-Shroogi. Regulators might be challenged to maintain the momentum especially as memories of the financial crisis start to fade.

“Within publicly listed companies, the future corporate governance challenge lies in the ability of financial institutions and banks to meet the requirements and deadlines of regulators, and supervisory authorities,” says Al-Shroogi.