August 2008 L esso ns L e a rned S eries 52183 Implementing Corporate The Corporate Governance Code “ Development program in the MENA Governance Codes in MENA region was conceived at the outset of a wave of interest in corporate governance I nterest in corporate governance was building throughout the Middle East and North Africa (MENA) as the region’s reform in the region. It has been highly successful in accelerating the early stages of this reform process and has been The Global Corporate implemented in a manner to support Governance Forum is an countries and territories underwent rapid International Finance national initiatives and to encourage transition amid strong economic growth, Corporation (IFC) multi- national ownership.” financial sector reform, and rising demands donor trust fund facility. The Forum was co-founded for private sector development. Rajeev Pillay, by the World Bank and The Global Corporate Governance Forum Independent Evaluation Consultant and the Organisation for General Partner, Abacus International Economic Co-operation and saw a tremendous opportunity in 2006 to Management L.L.C. Development (OECD) in be a catalyst in fostering national codes of 1999. corporate governance in MENA. These codes are essential tools for enhancing region-wide strategy that would encourage Through its activities, the Forum aims to promote corporate governance practices at the national the sharing of one another’s expertise, the private sector as an and corporate levels, seeking to reconcile lessons learned, and private sector experts. engine of growth, reduce the international standards and local practices The Forum’s strategy stressed approaches vulnerability of developing and transition economies to in a way that improves investment prospects. that would foster ownership of the code financial crisis, and provide World Bank corporate governance country development process within each country. incentives for corporations to assessments (CG ROSC) recommend the Advisory services were targeted at those invest and perform efficiently in a socially responsible development of such codes. countries that sought assistance. manner. The Forum sponsors To help developing countries and transition regional and local initiatives economies with this task, the Forum The 18-month effort surpassed expected that address the corporate produced a toolkit on crafting, developing, governance weaknesses of results. Although the preliminary goal middle- and low-income and implementing corporate governance was to foster the development of three countries in the context of codes. corporate governance codes in the region, broader national or regional 14 codes had been adopted or were being economic reform programs. The product—translated into Arabic, developed or revised when the workshops French and Spanish—was widely were completed. Donors to the Forum disseminated, yet, very few countries in include the IFC and the Governments of Canada, MENA had developed their own national France, Luxembourg, the codes. Netherlands, Norway, and To leverage existing resources and maximize Switzerland. the efficiency of delivering advisory work, the Forum with IFC’s Private Enterprise Partnership for the Middle East and North Africa facility (PEP-MENA)1 pursued a 1 PEP-MENA is a multi-donor facility that supports private sector development across the Middle East and North Africa. Covering 19 countries from its main office in Cairo, IFC PEP-MENA's mandate is to stimulate private sector growth and income opportunities throughout the region. IFC Advisory Services are an integral part of IFC activities in the region. IFC PEP-MENA is funded jointly by IFC and the following donors: Canada, France, the Islamic Development Bank, Japan, Kuwait, the Netherlands, the United Kingdom, and the United States. STATUS OF CODES DEVELOPED WITH GLOBAL CORPORATE GOVERNANCE FORUM SUPPORT * Country Code Type Status Egypt Code for State-Owned Enterprises Passed Egypt Code for Listed Companies Passed Jordan Code for Listed Companies Passed Lebanon Code for Small and Medium Enterprises Passed Lebanon Code for Listed Companies In Process West Bank and Gaza Code for Listed Companies In Process Saudi Arabia Regulation for Listed Companies Passed United Arab Emirates Regulation for Listed Companies Passed (Emirates Securities Commission Authority) United Arab Emirates Code For Listed Companies (Abu Dhabi Securities Market) Passed United Arab Emirates Rules for Listed Companies (Abu Dhabi Securities Market) Passed Bahrain Code for Listed Companies In Process Morocco Code for Listed Companies Passed Tunisia Code for Listed Companies In Process Algeria Code for Family and State Owned Enterprises In Process *As of August 2008. CASE STUDY: MOROCCO The Forum was asked to provide technical assistance to the Moroccan Corporate Governance Commission and guide their development of a corporate governance code. This commission was jointly established by CGEM and the Prime Minister’s Economic Affairs department. Abdesslam Aboudrar, who heads the Ethics and Anti-Corruption Committee of CGEM, chaired the organization and Amina Benjeloun, from the Prime Minister’s Department of Economic Affairs, served as the project’s manager. Commission members included the Stock Exchange, the Securities Commission (CDVM), and various business associations representing large and small companies. This commission was a perfect example of a successful private-public partnership. Building on the international expertise gained through its Toolkit on Developing Corporate Governance Codes, the Forum provided guidance and support to the Moroccan National Commission for more than a year. A Forum representative attended the monthly meetings, helped gather best practices, provided strategic advice, and coordinated an international consultation exercise (PSAG peer reviewers). The drafting of the code was nevertheless left to the Moroccan members of the commission to ensure strong ownership at the local level. The code was completed in January 2008 after much public comment. It was formally launched on March 17 at a conference in Casablanca, where everyone involved in the code’s development publicly expressed their commitment to put the code into practice. The stock exchange adopted the code and began requiring its listed companies to either comply or explain why they could not do so. The drafting of the Moroccan Code has contributed to an important change in attitudes regarding what is possible to accomplish in improving governance in the country. An indicator of this attitude change is the decision by the CDVM on the day of the code’s launch to publicly identify and sanction market intermediaries and an issuer for substandard issuance. Regional Approach Flourished Amid Challenges of Diverse Economies The region’s diverse economic characteristics posed Workshop participants were mostly the heads of stock tremendous challenges for the project. At one end of exchanges or securities commissions, representatives the spectrum are Afghanistan, Iraq, and Yemen, with of professional organizations, heads of institutes of underdeveloped capital markets and a private sector directors, representatives of ministries, and private dominated by small enterprises. At the other end are sector members of code crafting task forces. Drawn the Gulf Cooperation Council (GCC) countries. from the entire region, the workshop participants were They are rich in resources, import labor, and have selected based on their involvement with corporate rapidly developing capital markets. In between are governance reform initiatives in their respective such countries as Egypt and Pakistan. They are poor countries and their ability to help disseminate in natural resources, have abundant labor, and thrive information about the codes’ substantive content and on a vibrant private sector that is heavily dominated implementation process. by small and medium-sized family-owned enterprises. As a result of the work initiated through the While some countries have numerous parastatal or workshops, the Forum and PEP-MENA received state-owned enterprises (SOEs), small companies that many follow-up requests for country-specific advisory have been transformed from being trading entities into services to develop and implement national codes. manufacturing or service companies dominate the other countries’ economies. Forum Toolkit Provided the Basis Notwithstanding these challenges, the Forum and PEP-MENA decided to roll out the project throughout for Advisory Services the region. By doing so, they could involve the greatest For the workshops and the MENA program number of clients. The team also believed that, by generally, the Forum toolkit (Developing Corporate sharing experiences, lessons learned, challenges, and Governance Codes of Best Practice) provided practical success stories within the region—no matter how tools and relevant examples. By translating this toolkit diverse it is—they could build local ownership and into the participants’ working languages (Arabic and strengthen peer networks that were needed to advance French), the Forum enhanced the participants’ ability and support corporate governance reforms. to more easily grasp the concepts. Further, they had Prior to the roll-out, the project staff carefully language that could readily be used in drafting a code. selected country representatives to attend three The toolkit outlines several options for code workshops spread over 18 months. They targeted development. One section explains the role and private and public sector stakeholders who had benefits of codes. Another uses examples from around initiated or could start developing and implementing the world to outline a step-by-step approach that a corporate governance code in their respective stakeholders could follow to develop, implement, and countries. review a Corporate Governance Code of Best Practice. The first workshop was held in Cairo, Egypt on “Without this toolkit, it would have been March 14 and 15, 2006 and focused on “Drafting much more difficult to raise awareness about the Corporate Governance Codes.” The second in codes’ value, organize the workshops, and ensure Amman, Jordan on December 12 and 13, 2006 involvement of high-caliber participants,” said Marie- guided participants through the “Content of Corporate Governance Codes and Consultation Mechanisms.” The third and final workshop in Casablanca, Morocco on June 7 and 8, 2007 We thought that the workshops were “ addressed “Implementing, Monitoring, and Reviewing not only relevant but responded to our immediate challenges. It provided us with Codes.” actionable recommendations that we can The workshops were conducted in countries implement right away to improve both the that were prepared to take a lead role in preparing content of our code and the development codes. The team initially targeted four countries process.” (Egypt, Morocco, Jordan, Lebanon). Then, the number of participating countries grew as key local Chadia El Meouchi, stakeholders expressed their willingness to improve Member of the Lebanese Code corporate governance practices through codes. Development Task Force Laurence Guy, a senior projects officer with the Forum. “The toolkit also provided the country task forces with a road map The ‘toolkit’ for the development of corporate “ to move forward.” governance codes of best practice is the product The momentum created by the workshops led to the upon which all other activities have been based, Forum and PEP-MENA being immediately swamped with and much of the success of the program is due requests for additional country-specific technical assistance. to the quality and wide applicability of the This demand was a clear sign of the project’s success, but toolkit itself.” it had not been initially foreseen by the project team. Such countries as Morocco, Algeria, Tunisia, Yemen, and Bahrain Rajeev Pillay, Independent Evaluation Consultant and General all requested specific technical assistance and advisory Partner, Abacus International Management L.L.C. services to initiate or review codes at the same time. Private Sector Advisory Group Emphasizes Practical, Achievable Steps through the drafting process. As noted by an independent Beyond the series of technical assistance workshops, evaluation commissioned by the Forum, team members and project participants were offered the opportunity to have international experts were inconspicuous throughout the their draft codes reviewed by a team of regional and process. Yet, they were highly appreciated and effective in international experts from the Forum’s Private Sector their behind-the-scenes roles throughout the code design and Advisory Group (PSAG). PSAG’s goal is to help developing drafting process in all the countries involved. When asked, countries improve their corporate governance practices. the team provided clients with technical advice, information Providing their counsel pro bono, PSAG members are about comparative experience, and comments on drafts. involved in the Forum’s international consultations, However, the project team emphasized to national partners publications, toolkits, and capacity-building programs. that they were free to accept or reject technical advice Those PSAG members who had specifically contributed to provided by the international experts. or led the drafting of codes in their respective countries were key assets for the MENA program. Mervyn King (chairman of the King Committee on Corporate Governance in South Africa), Christian Strenger (member of the German We were extremely pleased with the way in “ Corporate Governance Commission), and Patrick which the GCGF expert performed his function; Zurstrassen (director of the Association Luxembourgeoise he never interfered, but provided substantive des Fonds d’Investissement, ALFI) participated in the advice upon request and supported us fully in workshops and commented on draft codes. They shared our efforts.” actionable, concrete, and practical examples from their Member, Code Drafting Committee global experiences. The use of PSAG members in MENA demonstrates the Forum’s ability to leverage its extensive relations with international and regional experts. National Ownership Maximized When the team moved to country-specific advisory work, local institutions were fully involved from inception. The emphasis was on maximizing national ownership and giving local institutions the lead role in developing and drafting their individual codes. From the start, the strategy was to help and advise clients but not to do the work for them. The establishment of task forces and the drafting of the codes, for example, were left almost exclusively to national leaders. As a result, codes were better adapted to local needs and recognized by local stakeholders as their own. Code-crafting task forces usually met monthly over 12 to 18 months until their codes were adopted. For Morocco and Algeria, for example, the Forum secured the services of a corporate governance expert, who walked the task forces Next Steps: Replicating MENA’s Success in Other Regions To manage the growing demand for advisory services The Forum will emphasize global knowledge and ensure the project’s sustainability, the Forum transfer and staff training to ensure that, when will organize a knowledge management workshop demand grows, regional project teams will be well- in September 2008 for IFC operations officers and equipped with the necessary capacity. consultants. Participants from the MENA and Southern Europe Central Asia (SECA) regions will share their experiences. LESSONS LEARNED PERSPECTIVES Don’t do all the work. Maximizing • The Forum provided access to some of “ national ownership is key to effective the world’s top experts in corporate implementation. governance. Nothing could have been • Get pro bono support if you can. Access more valuable than to have had their to private sector experts helped eliminate counsel based on the many efforts they’ve miss-steps, sharpen focus on addressing seen in surmounting the challenges and practical, business-relevant issues. implementing corporate governance codes.” • Don’t underestimate demand. Be aware Ashraf Gamal that countries want to move quickly, Executive Director, Egyptian Institute of notwithstanding one’s own resource Directors constraints. Be prepared for handling a rapid escalation of demands as countries It helps enormously to have a network of “ advance in code development and peers you can contact to figure out how to implementation. address issues that emerge as you draft a code and build a consensus for its support.” Build staff capacity to handle the surge • in requests for assistance and recognize Rachid Belkahia that as countries become more aware, the President of the Ethics Committee, sophistication of requests for technical Confederation of Enterprises support will also increase. in Morocco Use the Forum’s Toolkits to provide a • Skepticism is high, particularly from state- “ roadmap for drafting, implementing, and owned and family-owned companies monitoring corporate governance codes. about the value of corporate governance. Provide materials in the working language • In seeing neighboring countries adopt of country pursuing code implementation. corporate governance codes, it adds This facilitates understanding and expedites another element of competition in global the process. markets. Your ability to succeed lies in • Encourage the sharing of experiences. This how you set yourself apart. Hence, you are helps build networks of peers for counsel inspired if not compelled to do better than and support in overcoming obstacles and others in your region.” reaching goals. Slim Othmani • Realize that code drafting is best influenced Chair of Code Drafting Committee, Algeria by those involved in the process. Local expertise, views on the value of corporate Code development and implementation “ governance, and the importance that a is only part of the process. Monitoring country attaches to a code and how it compliance and evaluating the code’s integrates with the existing legal, policy, and effectiveness are also key. Scorecards offer a regulatory environment in the country—all rigorous, systematic approach to accomplish are key factors in determining success. a thorough evaluation.” Christian Strenger Deputy Chairman, PSAG Developing and Implementing Corporate Governance Codes By Simon C.Y. Wong Head of Corporate Governance, Barclays Global Investors Limited Adjunct Professor of Law, Northwestern University School of Law Voluntary codes have been increasingly employed and responsibility for the interests of all stakeholders. worldwide to drive corporate governance reform. While codes can be used in place of regulation to More than 70 countries now have codes. address many issues, they do not supplant the law on It is relatively straightforward to develop corporate all governance matters. governance codes. The challenge lies in ensuring Yet, deciding where to draw the boundary their effective implementation and enforcement, as between voluntary codes and mandatory law is not evidenced by the complaints heard in some countries as straightforward as it may appear. This is due to, that their governance codes have not lived up to their among other things, the contrasting approaches of promise to spur enduring improvements in corporate countries on similar issues.* practices. The concerns voiced range from poorly At the end of the day, each country—whether written guidelines to inadequate levels of compliance developed or emerging—must devise its by companies to “box-ticking” by investors. own approach to developing and successfully Governance codes have proved popular because implementing corporate governance codes. While all they are seen as flexible instruments that rely governance codes should be benchmarked against on market mechanisms for their development, international best practices to aid comparability, implementation, enforcement, and subsequent they must also be customized to work in the evolution. In contrast to the more rigid and local environment. Careful consideration during prescriptive nature of mandatory legislation and the design phase of the principal objectives to regulation, corporate governance codes not only be achieved, the broader societal and regulatory accommodate—but in fact expect—some degree of context, and the optimal allocation of monitoring non-compliance with their provisions. and enforcement responsibilities—combined Due to differences in ownership structures, with periodic refinements after their introduction legal and regulatory frameworks, and the nature to remedy shortcomings and respond to new of agency issues confronted, the specific provisions developments—will increase the likelihood that of a corporate governance code will vary from one corporate governance codes will have the desired country to the next. Most, however, focus on the impact. same overarching principles, which include fairness *Note: This is an excerpt from a forthcoming Forum to all shareholders, clear accountability, transparency, Private Sector Opinion. LEARN MORE Global Corporate Governance Forum 2121 Pennsylvania Ave., NW Washington, DC 20433 USA Tel: +1 (202) 458–1857 Fax: +1 (202) 522–7588 cgsecretariat@ifc.org www.gcgf.org Next issue: The next issue will examine the challenges faced by securities regulators in South East Europe to improve their financial markets' integrity. The lessons learned are derived from a meeting held in June with representatives from eight countries in the region.