MENA-OECD WORKING GROUP ON CORPORATE GOVERNANCE Rabat, Morocco, 12-13 December 2017 SESSION 1: The business case for corporate governance and the evolution of the concept in the MENA (Middle East and North Africa) region OPENING REMARKS Gabriela Figueiredo Dias I - First of all, I will start by thanking the OECD for the organisation of this meeting of the MENA- OECD Working Group on Corporate Governance and for the invitation to moderate a debate with such distinguished panelists. It is a pleasure and an honor to me, and I hope to be up to their quality and expertise. I also would like to share with you all my enthusiasm about the re-launch of the MENA-OECD Working Group on Corporate Governance. I feel highly honored for Co-Chairing the Working Group and fully engaged with the MENA-OECD Competitiveness Programme, from which the WG on Corporate Governance will surely constitute a relevant piece. In this first panel, we will discuss The business case for corporate governance and the evolution of the concept in the MENA region. II - As you all know, the OECD has been focused and highly dedicated to improving corporate governance at least since the publication of the first edition of its Principles on Corporate Governance in 1999. Since then, these Principles have become an international benchmark for policy makers, investors, corporations and other stakeholders worldwide. The Principles were revised first in 2004 and again in 2015, building on the idea that a high level of transparency, accountability, board oversight, and respect for the rights of shareholders and key stakeholders is part of the foundation of a well-functioning corporate governance system. Very importantly, the latest revision received relevant contributions from different parts of the World, including from some MENA countries. 1
The endorsement of the G20/OECD Principles of Corporate Governance in 2015 was in itself an unprecedented milestone in the history of corporate governance. They have also been adopted by the Financial Stability Board as one of their key standards for sound financial systems. They have been used by the World Bank Group in more than 60 country reviews worldwide, and they serve as the basis for the guidelines on the corporate governance of banks issued by the Basel Committee on Banking Supervision. From their inception, it was clear that good corporate governance is not an end in itself. It is a means to support economic efficiency, sustainable growth and financial stability. It facilitates companies' access to capital for long-term investment and helps ensure that shareholders and other stakeholders who contribute to the success of the corporation are treated fairly. In that sense, the Principles are intended to help policymakers evaluate and improve the legal, regulatory, and institutional framework for corporate governance, with a view to support those same goals: economic efficiency, sustainable growth and financial stability. The principles are not written out of divine inspiration. They are supported by extensive empirical and analytical work on emerging trends in both the financial and corporate sectors. They build on facts. They build on the expertise and experience of policy makers, regulators, business and other stakeholders from around the world. They consider experiences lived in very different markets, with very different social, economic and cultural characteristics. Such diversity and richness of underlying assumptions are reflected in the proposition that although there is no single model of good corporate governance, there are some common elements in good corporate governance. Bearing this in mind, the OECD has reflected such common elements in its Principles. However, more recently, the OECD Corporate Governance Committee has recognized the importance and has been working on the issue of flexibility and proportionality to calibrate the intensity of the recommendations according to some factors, especially considering: the size of the companies, company s ownership and control structure, geographical presence, the sectors and complexity of their activity, the systemic risk involved and their broader legal, economic, social and culture context. In the MENA region, the widespread discussion on corporate governance and the fact that many countries have introduced corporate governance codes are clear signs of the influence of the Principles in many different jurisdictions. There is a sound ecosystem in MENA countries that reflects acceptance of the importance of sound corporate governance practices. 2
III - Such sound practices are essential to foster the companies access to the market, lowering their dependence from Banks credit. That is especially important for growth companies, which are in the process of developing from a small medium size to be a large company. In many markets, we may currently observe a gap between supply and demand for bank finance. But even where and when this is not the case, bank financing may also involve serious constraints for companies and business plans, such as - the limited timeframe normally imposed for the reimbursement of the funds, which most of the times does not meet companies needs with regard to long-term investing projects; - the growing collateral requirements for bank financing; - the exposure limits defined by the new, more stringent capital requirements imposed to bank institutions; - the limits to credit bank indebtedness and counterparty credit limits; - the step in rights clauses often attached to bank financing contracts; - the lower amounts of available bank credit when compared with market financing capacity. These should be reasons enough for firms to look for alternative financing sources, other than the traditional bank credit. And the alternative is, of course, direct or indirect market financing. Access to capital markets must thus be perceived today as an essential alternative for the development of growth companies, this way contributing for job creation, innovation and productivity. Patient equity capital is usually required for long term investment. Going public also allows companies to periodically renovate its shareholding structure and thus, its financing sources, and to get targeted by analysts. But not only equity instruments are to be considered here. Market financing shall also consider other financing forms and instruments: hybrid instruments, like loyalty shares, callable shares or preferred shares, and debt instruments, including some innovative long-term financing instruments, like project bonds or long-term investment funds, may help boosting the capacity of growth companies to get appropriate funding for their business models and projects. And even indirect forms of access to the market, like venture capital, listed funds, etc. may play a key role in exploring alternative financing sources for firms. 3
IV - For capital markets to work, however, they must be fully reliable and count on confident investors that are available to put their money in the companies projects. And to feel confident, investors must trust the companies where they are putting their money in, and perceive their rights as appropriately protected. This is the part of the story where corporate governance comes in to play a key role. Good corporate governance means transparency, less conflicts of interest, lighter agency problems, protection of the shareholders and bond holders rights, accountability, adherence to long term, collective and institutional interests, monitoring of board, etc. In a nutshell, strong corporate governance practices make firms more resilient and successful and the market more attractive, in particular for sophisticated investors. The literature demonstrates the importance of corporate governance for access to financing, cost of capital, company valuation, and performance for capital markets. Strong corporate governance structure also improves a company s performance. Nevertheless, the truth is many companies still see corporate governance as a regulatory burden that constrains their business activities and their freedom to design their governance structures and practices according to their individual interests. Therefore, the purpose of this first session is to share experiences about the need and usefulness of corporate governance for individual companies and the wider business sector as well as the challenges to implementation. The companies access to the market and the related duties of transparency despite the costs they may trigger - provides an incentive and positive pressure on companies to improve and maintain excellence governance levels (management plans, commercial and compliance) and a distinctive factor in attracting investors, as well as reputational gains. It also works as a great externalities generator (access to new markets, diversification and reducing the cost of funding). 4
V - With a view to feed the discussion, let me share the Portuguese experience, coming from an OECD country with many similitudes with some MENA markets. The Portuguese Securities Commission (CMVM) has been especially involved in the reform of corporate governance and the promotion of best practices at least since 1999. That was the year in which it published its first set of recommendations, building on the mandatory rules of the Portuguese Companies Code. In 2001, the CMVM enacted a Regulation that required listed companies to prepare and disclose an annual report on corporate governance (including statements of comply or explain ), together with the annual accounts. Performance of these duties was subject to supervision by the CMVM. Some of the former recommendations were then upgraded to hard law. In 2003 and 2005 the recommendations were slightly amended, but it was not until 2007 that they were fully revised and reorganised into what was then the first CMVM code of corporate governance. In that same year, the duties to disclose an annual report on corporate governance (including statements of comply or explain ), that had been included in a Regulation of the CMVM, were engraved directly in the Portuguese Securities Code. This code followed a major reform of the Portuguese Companies Code in 2006, in which the CMVM played a substantial role. This reform was very much centered in the basic duties of directors (duties of care and loyalty) and monitoring structures in public limited companies. It represented a major step forward in the debate on corporate governance in Portugal and the modelling of the behavior of all market players. Corporate governance became, probably for the first time in Portugal, one of the most relevant issues at the core of company law and corporate practices. In 2010 the CMVM enacted a new code of corporate governance and a new Regulation that allowed listed companies to choose which code they would abide by, under the rule of comply or explain. For the first time, listed companies had the freedom to opt for a code other than that of the CMVM, subject to some conditions, that were fully removed in 2015. The Portuguese Institute on Corporate Governance used the door then opened and started working on a Code from the self-regulation. 5
In result, the regulatory picture of corporate governance in Portugal changed very recently, as the CMVM reached an agreement with the Portuguese Institute on Corporate Governance, after a long discussion period. According to the agreement signed in the beginning of October, the CMVM will withdraw its corporate governance code at the end of the year, leaving more space for the debate and promotion of best practices by the institutions that represent listed companies. The underlying idea of this regulatory option is that the CMVM code has been essential in the past, in face of a market failure that led to a lack of adequate self-regulation. As it perceived an evolution of the market, reflected in the ability of some private institutions to ensure adequate self-regulation, the CMVM felt that the time had come to test the market maturity by switching into a self-regulation model. It goes without saying that the CMVM will remain actively engaged to ensure that the intended goals are achieved. This leaves us with what is probably the most important and most difficult issue of all: the enforcement of corporate governance rules. But the regulator cannot disregard its responsibility towards the market and its legal commitment to protect it, which means that in spite of the option of moving to a self-regulation model, the CMVM will have to remain attentive to any signs of disruption that may awake in the transition. VI - What I can tell you is that the corporate governance discussion that was held in Portugal in the last years and the developments triggered by said discussion were critical to germ a new corporation culture and awareness, which allowed the market to grow, maybe not in dimension but surely in sophistication. But the corporate governance discussion also created the basis for a second life of our capital markets, after the financial crisis and many serious corporate events and decrease of the market size, on which we are all working together policy makers, Government, regulators and market players and infrastructures. It is clear for everybody in my country that, despite a well-developed corporate governance system, part of the market events in Portugal had their roots in corporate governance failures (many of them related with weak monitoring instruments, severe conflicts of interest and significant lack of internal controls, namely with regard to related party transactions). 6
This leads to the conclusion that corporate governance must be more than a Code or a set of rules: it must be a goal and a culture, to be incorporated by companies and by all the relevant stakeholders and policy makers. It is also undeniable that corporate governance is today, more than ever, the critical piece of the companies financing capacity, especially for growth companies: it provides a high level of transparency and trust to investors while at the same time enhances the companies market culture, allowing them to make an appropriate and effective use of market-based financing. VII - The main conviction that I would like to share with you is in any case the conviction that MENA countries and markets, just like the Portuguese market, need to create an ecosystem that allows companies, especially growth companies, to effectively gain access to the market as an alternative to the classic bank financing, which is not anymore sufficient as the only financing source for a firm; and that gaining access to market-based finance absolutely requires robust corporate governance frameworks and practices, given the need to endow the financing providers the investors with the appropriate levels of transparency and confidence. I hope these thoughts are useful for our debate today and thank you all for your attention. 7