Corporate governance standards among GCC firms lag global levels

Lagging corporate governance continues to hold back companies in the Gulf from attracting international investors, according to a new report by S&P Global Ratings.

Regional firms are unable to “unlock capital markets and cut the cost of raising debt,” it said.

According to S&P Global Ratings’ management and governance (M&G) scores, governance standards among companies rated in GCC countries still lag those of corporations globally.

“Just two companies (or 6 per cent) of the 33 we rate in the region have strong M&G scores, the highest of our four categories,” said S&P Global Ratings analyst Tommy Trask.

“This compares with 9 per cent for Europe, the Middle East, and Africa as a whole. What’s more, M&G scores tend to be correlated with rating levels (higher ratings normally means higher M&G standards). This is, however, not the case in the GCC, where we have relatively high ratings by global standards (median rating of ‘BBB’ and ‘BBB-‘, including government support), but M&G scores below the rest of the world.

“This indicates that GCC corporates’ M&G governance standards are clearly lagging behind global peers’ at the same rating level.”

Lagging governance standards can deter international investors from looking for opportunities in the Gulf region, the report claimed.

Potential investors face closely controlled company ownership, a general lack of transparency, and the vagaries of individual states’ jurisdictions with respect to creditor protection, it added.

“We believe the main corporate governance weaknesses of Gulf companies are a lack of independence of the board, insufficient oversight and scrutiny of key enterprise risks, and weak transparency and disclosure practices,” said Trask.

While companies in the region recognise that strengthening their management and governance practice could improve their access to capital markets, there has been a lack of progress in the area.

“While corporate governance is a key focus area for many GCC corporations, we don’t expect change to take place overnight,” said Trask.

“Past experience shows that effective governance practices take time to take root in a given jurisdiction and will necessitate a cultural change in the way companies do business.”