Corporate Governance Success Stories The experience of 19 MENA companies that have embraced corporate governance – what they changed and the impacts they have reported. In partnership with the United States, the United Kingdom, Japan, the Islamic Development Bank, Canada, Netherlands, Kuwait, France, Switzerland, Denmark, Yemen, Visa International, and the OPEC Fund for International Development. About IFC IFC, a member of the World Bank Group, is the largest Corporate governance also contributes to development. global development institution focused exclusively on Increased access to capital encourages new investments, the private sector. Working with private enterprises boosts economic growth, and provides employment in about 100 countries, we use our capital, expertise, opportunities. Businesses that operate more efficiently and influence to help eliminate extreme poverty and tend to allocate and manage resources more sustainably. boost shared prosperity. In fiscal year 2014, we provided Better stakeholder relationships help companies address more than $22 billion in financing to improve lives environmental protection, social, and labor issues. in developing countries and tackle the most urgent challenges of development. With strong donor support, IFC continues to strengthen corporate governance programs in underserved regions, IFC provides leadership in promoting good corporate particularly in Sub-Saharan Africa, Latin America, and governance practices in developing and emerging the Middle East and North Africa, by closely integrating markets. Good corporate governance helps companies its investments and advice, and focusing on capacity operate more efficiently, mitigate risk and safeguard building of intermediaries, resulting in improved against mismanagement, and improve access to capital operational efficiency. that will fuel company growth. Further, companies become more accountable and transparent to Second Edition: investors, which gives them the tools to respond to Available in Arabic and English. stakeholder concerns, including implementation of © 2015 IFC good environmental and social practices. International Finance Corporation 2121 Pennsylvania Avenue, NW Washington DC, 20433 USA IFC, a member of the World Bank Group Disclaimer IFC, a member of the World Bank Group, creates opportunity for people to escape poverty and improve their lives. We foster sustainable economic growth in developing countries by supporting private sector development, mobilizing private capital, and providing advisory and risk mitigation services to businesses and governments. This report was commissioned by IFC through its Transactional Risk Solutions Department to highlight Corporate Governance practices across the Middle East and North Africa. The conclusions and judgments contained in this report should not be attributed to, and do not necessarily represent the views of, IFC or its Board of Directors or the World Bank or its Executive Directors, or the countries they represent. IFC and the World Bank do not guarantee the accuracy of the data in this publication and accept no responsibility for any consequences of their use. More information on the IFC’s Corporate Governance services is available online at ifc.org/corporategovernance For information about this report, please contact: Khawar Ansari | Program Manager IFC Corporate Governance Advisory Services, Middle East and North Africa kansari@ifc.org 2 3 Foreword Corporate governance remains the bedrock of business In short, effective response to the challenges and sustainability and sound stewardship, serving the opportunities for improved corporate governance within long-term interests of investors and societies. How any given market or company must be a sustained and this is manifested in the day-to-day operations and committed partnership between industry, government, the business culture of companies is the subject of 19 investors and stakeholders in seeking to attract capital company case studies contained in this latest series of that will drive job creation and economic development. Corporate Governance Success Stories in the Middle East and North Africa (MENA). An important aspect of the corporate governance success stories is how the featured companies have This publication presents successful reforms introduced taken an incremental approach to finding a path and by a diverse set of companies—in size, sector, and appropriate solutions, which respond to their particular organizational structure. Commitment to improved circumstances in seeking corporate governance performance, transparency, accountability, and value improvements most applicable and relevant for creation are the common denominator, demonstrating their size, industry, market, ownership structure, and real examples that reinforce the business case for corporate strategy. The cases demonstrate how key good corporate governance. We observe that changes principles can be translated into visible operational that clarify the composition, diversity, independence, procedures relevant to the company’s priorities, but capacity, role, authority, and evaluation of boards, requiring strong internal champions to inspire and lead committees, and individual directors’ help improve efforts for business transformation and improvement. company performance, profitability, and organizational efficiency, sometimes with immediate impact. Equal The power of this publication stems from its illustration benefits are observed through actions that improve that efforts to improve corporate governance do not risk management practices, internal audit functions, come without challenges, and that good corporate disclosure and transparency standards, succession governance practices can be associated with better planning, and shareholder rights. operational performance. The publication reflects IFC’s global experience in improving corporate governance Some of the key findings from these case studies are the through more effective allocation of resources, lowering important role that investor perspectives play in driving the cost of capital, and enhancing firm valuation, business transformation, and that improving corporate which increases access to external financing and governance yields positive real returns. For the first enhances prospects for higher growth and greater time ever, in 2012, developing economies absorbed a employment creation—all important conditions for greater proportion of global foreign direct investment, economic prosperity in the MENA region. with the larger proportion going to countries noted for their good corporate governance. However, given These success stories will prove invaluable in helping the current situation in MENA and the consequent similar companies in the region, which can also be political and economic uncertainties, the resilience adapted to other regions and markets. of companies to these challenging and uncertain circumstances is being tested on an almost daily basis. These case studies reveal, therefore, that governance success requires the concerted and sustained effort of multiple reform champions, including corporate governance institutes, regulators, media, and other Philip Armstrong market participants along with the private sector. Senior Advisor, Corporate Governance 4 5 Contents 30 Company Profiles 32 Abu Dhabi Commercial Bank 96 Jordan Duty Free 38 ASK 102 Kashf 44 Bank Audi 108 Medgulf 52 Bank of Palestine 114 Microfund for Women 58 Butec Holding 120 NRSP Microfinance Bank Limited 64 Cairo for Investment and Real Estate 126 SABIS® Development 132 Tourism Promotion Services Pakistan 72 Capital Bank 138 Wadi Holdings 78 Credence 144 Yemeni Group for Contracting and 84 Dana Gas Engineering Limited 90 Egyptian Transport and Commercial Services 08 Summary 150 Investor Perspective 12 Introduction 156 Final Word 16 Common Themes 158 Annex 1: Contributors 17 Board Effectiveness 21 Management Control and Other Improvements 160 Annex 2: About the IFC Corporate 27 Impacts Reported Governance Program 6 7 The purpose of this report is to help demonstrate the business case for good corporate governance in MENA. This report shares the experiences of 19 companies that have made governance improvements over the past few years, summarizing the changes they made, and the impacts they reported. In this edition, four of the companies profiled in the earlier publication have provided updates on their continuing efforts to improve their governance. The publication also features the experiences of eight companies that are profiled for the first time. Overall, companies reported highly positive impacts as a result of their corporate governance changes. Companies made improvements at all levels of the organization, from the board level to the management level. Taken as a whole, several common themes emerge. These commonalities are summarized here. Common Themes I. Board Level Improvements Enhancing board stewardship through more diverse boards. The majority of the companies made changes to their board composition, adding new skillsets and, in most cases, recruiting independent directors. Reinforcing board roles and strengthening the board’s posture towards management. Many companies took steps to clarify the relationship between board and management, which, in many cases, was indistinct. Maximizing board efficiency and effectiveness with improved procedures. Most of the companies made substantial improvements to their board work procedures in some form, such as setting annual work plans, formalizing board papers, and improving agendas and proceedings. Adding depth of analysis through board committees. Nearly all of the companies made changes to their committee structure, setting up more formal committees with active agendas and proper work procedures. Summary Structuring board nomination and evaluation processes. Most companies took action to put in place more formal nomination, appointment, and evaluation procedures to ensure their board composition is structured appropriately and not simply hand-picked by key investors. 8 9 II. Management Control and Other Improvements Strengthening enterprise risk management and improving to improve organizational transparency through control improvements, such as establishing more risk dialogue. Nearly every company took strides enhanced disclosure, such as increasing the non- formal processes and controls, clarifying roles and to enhance their risk management practices to financial information in annual reports and on authorities, and improving the level of automation, improve monitoring and mitigation at all levels of websites. Several companies took other actions to as leading to efficiency gains. their organization. strengthen shareholder relations, such as improving minority shareholder protection. Improving crisis response. The global financial crisis Upgrading the role of internal audit. Nearly half of the of 2007 followed by the wave of uprising in 2011 companies lacked an active internal audit function; Governing the family’s role in the business. Five of the throughout the Middle East has significantly affected most that did require further improvements. As a companies in this report are family owned. These firms across the region. Key governance changes— result, many companies strengthened their internal firms addressed governance issues related to family particularly relating to risk management and board audit by expanding its scope and ensuring its proper aspects of the business. Typically, the actions were stewardship—helped improve the crisis response of independence in the organization. aimed at putting in place structures and policies many companies profiled in this report by controlling to help govern the family’s role in the business and costs and managing liquidity. Enhancing In-house financial management practices. to prepare the organization for future generations Several firms required significant improvements of leadership. Higher sustainability. Sustainability rated consistently in their finance function—especially in the areas high among the companies; all firms rated the impact of accounting and control, financial statement on sustainability (the company’s ability to continue preparation, and business consolidation—and took III. Impacts Reported as a prosperous, operationally-viable entity over the appropriate steps to strengthen their in-house long term) as strong or substantial, highlighting the Increasing access to finance. Nearly all companies rated expertise. long-term benefits associated with good governance, the corporate governance impact on their ability particularly in the area of succession planning. Addressing succession and “key-person” risk. Management to access finance as strong or substantial. They succession was an issue for all types of companies, cited the impact that governance changes had on but was especially acute for fast-growing companies instilling market confidence and providing added that were transitioning from one generation of assurance to investors, creditors, or other debtors. leadership to the next. Thus, there were several The changes have reportedly helped these firms examples of companies taking action to address access significant financing ranging from $25 million succession planning and mitigate overdependence in one company to $2 billion in another. on one or two key people. Substantial impact on reputation. Most companies Making human resources more of a strategic partner to experienced a significant positive impact on support growth. The ability to attract, retain, and firm reputation. Respondents noted significant develop the right human capital is an ongoing challenge for most companies in this region. It is improvements in firm reputation based on feedback Investor Perspective from various market actors, including shareholders, a particularly critical issue for companies in fast- To help understand how important corporate governance is to investors, we solicited input from three regional investors, customers, business partners, and other growth mode. Many of the companies profiled in private equity firms. The investor feedback confirmed that corporate governance is a crucial part of their stakeholders. this report took significant action to strengthen investment cycle, noting: their human resources (HR) functions. Contributing to a better bottom line. Though difficult to An investee company must be committed to making governance changes or they probably will not invest quantify, most companies reported that profitability Improving reporting and analytics. Many companies has been impacted in a positive way. For example, Following investment, corporate governance is a key component of the value creation process, by establishing formal made significant improvements to their internal several companies said that actions taken to control board and management structures, and enhancing firm transparency management analysis and reporting capabilities, costs and avert losses helped their bottom lines. which supported effective risk management and Several examples were cited of companies benefiting from improved performance and access to capital, as well as board oversight. Reducing organizational inefficiencies. A majority of valuation premiums. For example, one investor noted a 40 percent market premium achieved due to governance changes. companies reported that the governance changes The collective evidence shared by companies and investors leaves little doubt as to the potential positive impact Improving transparency and shareholder relations. Nearly had a strong or substantial impact on organizational of good corporate governance in MENA. all companies in this report made significant strides efficiency. Companies mostly cited management 10 11 The message is clear. Despite the momentous effort to date, substantial Change is happening. challenges remain. A 2008, pre-crisis, region-wide corporate governance study by IFC and Dubai’s Good corporate governance can help companies improve Hawkamah Institute of Corporate Governance found their performance and gain access to capital. In the that more than half of the companies in the region (56 past few years, significant progress has been made in percent) lacked a thorough understanding of corporate spreading this message across MENA. This is due to governance and its benefits. In addition, 95 percent the determined efforts of various institutes, regulators, of the firms indicated that their governance practices and other market participants that have been actively needed some form of improvement (see figure below). promoting corporate governance in the region. In particular, companies cited the need to improve their board structures and roles, as well as key control In Egypt alone, for example, the Egyptian Institute areas such as risk management and internal audit. of Directors (EIoD) has trained more than 859 board members and 2,892 non board members. Similar results The 2008 financial crisis escalated the need for change can be witnessed across the region from the Gulf by showing that good governance is no longer an option, to the Maghreb, the Levant, and Pakistan. For our but an imperative. Firms in all markets are rethinking part, over the past six years IFC Advisory Services and reinforcing their governance structures from the and our various partners have helped launch eight boardroom to the management level. In this region in director institutes, implemented 23 codes of corporate particular, there has been a strong emphasis on improving governance, and trained thousands of individuals from organizational transparency to assure investors that all sectors of the market, including private and public they have a full accounting of the impact of the financial companies, regulators, investors, consultancies, and crisis (2008) and 2011 uprising in the region. the press (see Annex 2 for more on our program). Corporate Governance Survey: Need for Improvement (%) Incomplete understanding of CG Benefits - 56 CG Practices need improvement - 95 Demonstrating the business case in MENA “We had one new investor tell us that our corporate governance changes played a major factor in their investment decision. In the MENA region, the challenge remains in convincing companies to adopt a culture of change. A large part Specifically, he noted the changes we made at the board level of the effort involves reinforcing the business case for good governance using local, quantitative, and anecdotal and our efforts to prepare the company for its second generation of leadership.” evidence from the region. While numerous studies in other regions clearly demonstrate the effects of good governance, to date there has been little documented evidence to support this in MENA. Mohamed El Kalla Chief Executive Officer, CIRA This report aggregates the experiences of 19 former IFC Advisory Services clients that have embraced good Introduction governance and have reported substantial impacts. It also shares insight into the perspective of investors for a better understanding of investor expectations and the ways in which investors reward well-governed companies by ascribing market premiums. By demonstrating the very real benefits of corporate governance through the experiences of other local firms, the expectation is that more companies in the region will be inspired to take similar action. 12 13 Reporting on Impacts A key aspect of each company profile is the “Impact Report,” to explicitly demonstrate the reported benefits. It “For us corporate governance is about shining a is important to note that quantifying impacts related to corporate governance in absolute dollar or percentage light through the whole organization. It gives us a clearer picture on how we are performing and Companies and Approach terms can be difficult. For example, while many companies reported a significant positive impact on profitability, they were unable to put specific numbers around the reported impact, due to attribution and other extenuating where we can improve. At the same, it provides This report summarizes the experiences of 19 companies factors that affect firm performance. In light of this, companies were asked to rate impacts in various categories, assurances to our key stakeholders.” from across the region. Each of the case studies using a scale ranging from “No Impact” to “Substantial Impact.” Each company’s results are summarized in the highlights the key corporate governance changes made Roshaneh Zafar impact report scorecard. An aggregate scorecard is provided in Section II. C. In addition to the ratings, companies and the positive impacts that resulted, as reported Managing Director/Chief Executive Officer, Kashf by the company. were asked to provide specific examples and other evidence of impact to help demonstrate the results. The companies represent various countries, sectors, As shown in the following sections, the collective evidence reported by the companies provides a compelling types, and sizes (see the following table). All of the case for corporate governance in MENA. companies featured are former IFC Advisory Services clients. Some are IFC Investment clients as well. IFC conducted an in-depth corporate governance Key Dimensions of IFC assessment for each of these companies using IFC’s Participating Companies Methodology Corporate Governance Methodology (see key dimensions *Family Owned Business **Unlisted in Figure 2, and more detail in Annex 2). The assessments resulted in specific recommendations on ways to improve each company’s governance framework and identified implementation plans. Company Sector Location Type #Employees IFC assessment The assessments were conducted at various points over the past few years. The time taken to implement ADCB Financial UAE Public 3,000 Oct-07 changes and realize benefits varied. However, all Commitment Board Ask Education Jordan Private 90 Nov-12 companies reported that governance changes are to Corporate Functioning Governance continuous and the corresponding benefits manifest Bank Audi Financial Lebanon Public 5,894 Oct-05 themselves in different forms over time. This report BOP Financial Palestine Public 1, 160 July-09 provides examples of companies in various stages of change – from recent changes (e.g., Medgulf) to Butec Construction Lebanon Private* 2,822 Aug-08 ongoing, longer-term changes (e.g., Bank Audi). CIRA Education Egypt Public 2,200 Jul-08 Capital Bank Financial Jordan Public 411 Dec-12 This report also includes testimony from three MENA private equity firms (all IFC investment clients). Credence Services Egypt Private* 1,500 Apr-09 Collectively, these firms have worked with 72 investee Dana Gas Energy UAE Public 400 Apr-06 companies (past and present funds). Selected based Management Disclosure & EgyTrans Transport Egypt Public 380 Dec-07 Controls (Control Transparency on their association with IFC and their willingness to Environment) JDF Retail Jordan Public 443 May-12 share their insight and experiences, these firms offer a valuable window into the importance of corporate Kashf Financial Pakistan Private 1,000 Jul-08 governance from an investor’s perspective. Medgulf Insurance Bahrain Public 1,600 Oct-12 The material in this report is based on feedback gathered MFW Financial Jordan Private 200 May-09 through individual interviews with each organization NRSP Microfinance Financial Pakistan Private 1,033 Aug-09 featured, resulting in well-considered responses. The Bank achievements highlighted are all the more notable SABIS® Education Lebanon Private* 4,500 Oct-07 given that the interviews and information gathering TPSP Tourism Pakistan Public** 1,370 Aug-07 process took place in in late 2009 (first edition) and Treatment of 2013 (for current edition), when the region was still Wadi Holding Agribusiness Egypt Private* 3,100 Jun-07 Shareholders & Stakeholders under the stress of the crisis. YGCE Contracting & Eng. Yemen Private* 50 Aug-10 14 15 This section highlights common themes that emerged across all of the companies. It first highlights common improvement themes and then provides an aggregate view of the impacts achieved. I. Board Level Improvements All of the companies profiled reported significant changes at the board level in some form, related to composition, structure, procedures, roles, or other practices. The table below summarizes each company’s board composition and committee structure before and after governance changes were made. The right composition and structure varies by company, but in each company, changes were made to improve board stewardship and oversight. Following are common improvement themes that emerged at the board level. Summary of Board Composition and Committee Changes Before | After Composition Committee Structure Company Executive Non-Executive Audit Nomination Remuneration Other ADCB 0 | 3 9 (0) | 8(3) Ask 3 | 3 0(0) | 2(1) Bank Audi 9 | 5 3 (1) | 5(4) BOP 1 | 1 10 | 10(8) Butec 2 | 2 1(0) | 4(3) CIRA 2 | 2 7(0) | 7(3) Capital Bank 4 | 3 7(2) | 2(1) Credence 2 | 1 3(0) | 4(3) “We now have banks running after us. They have noticed the Dana Gas 1 | 2 15(8) | 16(10) governance changes, and it has greatly aided our access to credit. Also, our partners and customers have noticed the positive change.” EgyTrans 3 | 1 4(0) | 8(2) JDF 1 | 1 8(0) | 8(0) Mona Akl Vice President, Butec Holding Kashf 2 | 1 10(10) | 11(11) Common Medgulf 1 | 1 2(2) | 4(4) MFW 1 | 1 6(3) | 6(3) NRSP Microfinance Bank 1 | 1 6(1) | 6(1) SABIS® 8 | 7 0(0) | 2(0) Themes TPSP 1 | 1 8(0) | 8(2) Wadi Holding 1 | 3 4(0) | 4(0) YGCE 4 | 1 1(0) | 4(2) 16 17 Of Note: Gender Diversity : MFW considers gender diversity a business imperative. With a customer base that is 96 percent female, the company notes that increased gender diversity helps them relate better to their customers. In some cases, it enables easier access to the homes of female clients. Studies have demonstrated the positive correlation between gender diversity and firm performance 1. In the US and Europe, approximately 10 percent to 15 percent of board directors are women, 2 while in the MENA region, percentages are much lower. For example, in the Gulf countries, only 1.5 percent of directors are female3 and across the region, nearly 90 percent of companies have either one or zero female directors. 4 By comparison, 42 percent of MFW’s directors are women. Beyond Reinforcing board roles and the boardroom, 70 percent of MFW’s workforce is female, including 80 percent of its branch managers. MFW’s posture towards management top three executives—general manager, chief operating officer, and chief financial officer—are all women. Several companies took steps to clarify the relationship 1-Women in the Boardroom and Their Impact on Governance and Performance Renee Adams & Daniel Ferreira, 2008; 2-Ibid; 3-TNI between board and management, particularly Market Insight, May 2008; 4-IFC/Hawkamah Corporate Governance Survey, March 2008 firms in transition from first-generation owner- controlled leadership to second- or third-generation leadership. In such cases, the lines between board and management were blurred. The board, typically the chairman, maintained active decision-making roles at the management level. Butec addressed this issue by setting up a process to transition the chairman from an active operational role. The company set up a formal management executive committee and defined clear terms of reference for the committee and the board. The decision-making authorities were clarified and the board’s posture towards management was Maximizing board efficiency Adding depth of analysis Enhancing board stewardship strengthened. In other companies, the separation and effectiveness with through board committees through more diverse boards between board and management was unclear due improved procedures Most of the companies profiled in this report said that The majority of the companies made changes to their to the board structure itself. For example, Tourism they made changes to their committee structure. For Most of the companies made substantial improvements board composition, adding new skillsets and, in most Promotion Services Pakistan’s (TPSP) board-level example, the MFW board met nearly a dozen times to their board work procedures. The purpose was cases, recruiting independent directors. Several also executive committee included an inner-circle of directors in 2008. After setting up more active committees to add more structure to proceedings to make more reshuffled the mix of executive and non-executive and executives who made many day-to-day decisions. (Audit, Remuneration, and Product Development), efficient and effective use of director time. SABIS® directors, especially in the case of Bank Audi, which This often created confusion about the board and the general board was able to reduce the number of instituted a formal board work plan to ensure a balance used to be two-thirds executive and now requires management roles. To sharpen the distinction between meetings while deepening and focusing its discussions. of topics was covered during the year and now utilizes that at least half of the board be non-executive. board and management, TPSP decided to eliminate In other cases, committees were designated, but were more formal agendas for each meeting. They also Companies were seeking to improve stewardship and this board-level executive committee. not actively functioning. For example, both Butec and took steps to standardize management reports to oversight of the organization, which was especially the board to help focus discussions on key issues and CIRA had designated audit committees, but they did Abu Dhabi Commercial Bank (ADCB) faced a similar critical for fast-growing entities expanding into new required information be distributed to members at not meet routinely or function as intended. Therefore, issue, with several board-level working committees products and markets. Microfund for Women (MFW), least five days in advance of each meeting. ASK and both companies took positive steps to establish new performing certain management-level tasks related for example, revised its board composition by adding MFW have reduced the number of board meetings charters, authorities, and working procedures for their to loan recoveries and others. ADCB modified their deeper microfinance skills to help guide the company held in the year with discussions in the board meeting audit committees, as well as new committees, which structure and terms of references to sharpen the as it diversified into new products and services. Given focusing more on strategy. Dana Gas increased overall has triggered increased activity and functionality. board/management distinction. In the case of Bank of that 96 percent of its customers are female, MFW board efficiency and effectiveness by improving the Meanwhile, the two firms added new independent Palestine (BOP), the roles of the board and management placed great emphasis on boardroom diversity with 42 working procedures of its committees. While the full members to their boards and appointed them to needed to be clarified. Hence an authority matrix that percent of the board seats taken up by female directors. board continues to meet about eight to 10 times each these committees. This has helped ensure committee distinguished the function of the board from that of Other examples of change in board composition include year, meetings are shorter, with a sharper focus on key independence. Of note, for most of the companies, the management was created. NRSP Microfinance Bank and Cairo for Investment and issues due to improved analysis and reporting from most typical committees setup were audit, nomination, Real Estate (CIRA) adding independent directors and Yemeni Group for Contracting and Engineering (YGCE) its committees and standardized discussion papers. and remuneration, consistent with international a female board member. Medgulf also added four new formed an executive committee that is responsible Capital Bank and YGCE have improved board procedures practices. Companies cited board committees as a directors, bringing the total to nine, of which four are for day-to-day, operational issues so the board could wherein board meetings are planned in advance and means to improve time utilization and depth of focus. independent directors. focus on strategy and guidance. are structured with formal agendas. 18 19 Structuring board nomination II. Management Control and evaluation processes (Control Environment) and Many of the companies had board directors who were For example, NRSP Microfinance Bank set three-year Other Improvements appointed by major shareholders and/or handpicked limits for board members with possibility of reelection, Management control is a crucial aspect of corporate by the chairman and other members. Several also BOP set a four-year limit with possibility of reelection, governance. It covers a wide range of operational had long-serving directors, with no set term limits, and TPSP introduced three-year term limits to a functions, including risk management, internal control, who had never been subjected to routine performance maximum of 10 years total service on the board. TPSP internal audit, external audit, compliance, information evaluations. To address the issue and ensure appropriate also adopted an annual evaluation process to asses technology, HR, and financial management. board composition, most of the companies profiled that group and individual director performance to identify Companies took a variety of steps to improve control faced this situation set up more formal nomination, areas for improvement. This information feeds into the across these functions, as well as in other areas, such appointment, and evaluation procedures. Companies annual nomination and appointment process, which as disclosure and transparency, shareholder relations, also took initiative to set term limits for their directors. is overseen by a nomination committee. and family governance. The common improvement themes that emerged in these areas are summarized in the table below. Key Management Control and Other Improvement Areas Management Control Improvement Areas Other Improvements Company Risk Internal External Internal Compliance IT HR FM Company Disclosure Shareholder Family Management Audit Audit Control Relations Governance ADCB ADCB Ask Ask Bank Audi Bank Audi BOP BOP Butec Butec CIRA CIRA Capital Bank Capital Bank Credence Credence Dana Gas Dana Gas EgyTrans EgyTrans JDF JDF Kashf Kashf Medgulf Medgulf MFW MFW NRSP Microfinance Bank NRSP Microfinance Bank SABIS® SABIS® TPSP TPSP Wadi Holding Wadi Holding YGCE YGCE 20 21 Strengthening enterprise risk Upgrading the role of internal Enhancing in-house financial “Corporate Governance was always a very management and improving audit management practices important part of Egytrans, but now corporate risk dialogue Nearly half of the companies profiled lacked an active Several firms required significant improvements in their governance is a part of our culture from the Risk management is important for all organizations. internal audit function. Of the companies reporting the finance function—especially in the areas of accounting board down to all levels in the organization. Our Better risk management proved particularly important existence of an internal audit function, most said they and control, financial statement preparation, and reputation has benefitted substantially. We now needed further improvements. In general, companies business consolidation. Many smaller companies have companies calling us asking how they can for this group of companies. All of the assessed companies made two major changes. The first was to expand that had expanded rapidly needed to upgrade their make similar changes.” sought to improve their risk management practices to some degree. Some companies—primarily the the role of the internal audit function beyond financial internal processes and controls, including the level Rania Farouk financial institutions— already had relatively sound risk control and into operational areas. The second change of automation, while other companies placed too Corporate Secretary, Egytrans management practices in place, but sought to strengthen was to ensure that the internal audit function reports much reliance on their external auditor for account them further while others were more nascent, requiring directly to the board and not to the chief financial officer consolidation and financial statement preparation. In fundamental processes to be implemented. Most (CFO) or chief executive officer (CEO), as was the case general, the companies realized that a strong finance took a wide view, looking at how best to integrate at many companies. Butec setup a new internal audit function was the key to driving many other management their risk management, internal control, and internal function to focus on all types of activities—including risks control changes. SABIS®, for example, made significant audit frameworks to ensure that they worked together associated with the company’s construction projects— strides in this area. They appointed regional controllers and were able to inform the right discussions in the and provide consolidated risk reporting directly to the in the United States (US) and Lebanon to improve organization. For example, Egytrans created a position audit committee. MFW engaged a top outside audit oversight, help consolidate accounts, and coordinate firm to partner with its in-house unit. The goal was control activities. They also upgraded their accounting Addressing succession and key for a chief risk officer and designated risk champions in each department to improve risk identification, to strengthen the company’s focus on financial and systems to better integrate data and improve reporting. person risk particularly in their transport business activities, and portfolio risks while developing in-house capabilities. Wadi made similar system upgrades in the finance Management succession was an issue for all companies, to increase risk dialogue at all levels of the company. Now, MFW’s audit committee approves the annual function and other operational areas, which enhanced but was particularly acute for fast-growing companies BOP also appointed a chief risk officer and risk appetite internal audit plan, which is informed by a formal monitoring of key performance indicators and helped that were transitioning from one generation of leadership is clearly defined. For Bank Audi, which already had operations risk assessment to ensure proper focus on implement a balanced scorecard framework. Bank Audi to the next. This often resulted in “key-person” risk, in place sound risk management practices, the effort the highest risk branches, product types, and processes. created a group CFO function, centralizing all finance, a situation in which a company is overly reliant on focused on strengthening its existing framework. The Several other companies, including Egytrans, Bank Audi, accounting, strategic planning, and investor relations one or two key individuals, who essentially run the bank set up a management-level risk committee, which and CIRA, strengthened the independence of their activities under one umbrella to improve coordination. organization. Many companies took steps to address has helped to aggregate risk management at the top internal audit functions by granting them unfettered Medgulf restructured its group financial management this risk by developing formal succession plans for of the bank’s organizational structure and improve reporting access to the board. Credence and NRSP function and hired departmental finance heads who key executives to prepare for the next generation enterprise-level monitoring. As a result of the crisis, Microfinance Bank developed an internal audit function report to the CEO. YGCE also hired qualified people of leadership. For example, CIRA created a formal Kashf sharpened its focus on liquidity risk management that reports directly to the audit committee. YGCE and upgraded the financial reporting function. CIRA management executive committee and assigned the in particular, taking steps to secure alternative funding invested in hiring a manager who looks after internal hired a CFO and has made changes to strengthen deputy CEO (the likely successor) as committee chair. By sources and strengthen the balance sheet. Medgulf audit and reports to the audit committee. ASK hired the finance function. Credence restructured its group doing so, the company has helped mitigate key-person created a risk management department at the group external consultants to structure its in-house audit financial management function and departmental risk, prepare the deputy CEO for his eventual accession level. Capital Bank also installed a risk management function. heads were hired who report directly to the CEO. into the CEO role, and accustom other executives to department with direct reporting to the general Several companies that operate in several geographic this deputy’s leadership style. Kashf has identified a manager. markets, including SABIS®, Dana Gas, and TPSP, took leadership pipeline, with formal succession plans for the the important step of adopting International Financial CEO and other key executive officers. The company Reporting Standards (IFRS). delegates the management of certain high-profile assignments to its future potential leaders as a way to develop their leadership skills. NRSP addressed the critical issue of dual role played by the CEO of the NGO and the NRSP Microfinance Bank by appointing a separate CEO for NRSP Microfinance Bank. 22 23 Making human resources Improving analytics and Improving transparency and Governing the family’s role in more of a strategic partner to reporting shareholder relations the business support growth Many companies made significant improvements to Many of the companies featured in this report focused Four of the companies profiled here had particular The ability to attract, retain, and develop the right human their internal management analysis and reporting on improving disclosure. This was particularly important family governance issues that were addressed. Typically, capital is an ongoing challenge for most companies in this capabilities. There were two primary areas of focus: given the heightened emphasis on transparency in the the actions centered on establishing structures and region. The issue is particularly acute for companies in 1) Upgrading management information systems to region (in the wake of particular scandals and crises policies to help govern the family’s role in the business. fast-growth mode, with rapidly expanding work forces. improve data capture and integration from back to in the Gulf). For example, CIRA and ADCB disclose For example, the owning families of SABIS®—the Saad Many of the companies profiled in this report have taken front office; and 2) Upgrading in-house analytical skills financial and non-financial information on their website and Bistany families—conducted family meetings significant actions to strengthen their HR functions. For to make better use of the data to support management and in the annual report. Capital Bank has also placed and developed policies on family employment and example, ADCB took steps to attract talented banking reporting and decision-making. Management reporting significant importance on disclosing non-financial share ownership. The owners also addressed family sector personnel, as it, looks toward expansion into was also a key factor in improving board effectiveness, information. NRSP Microfinance Bank has put in place succession planning, allowing the co-chairpersons new markets. Meanwhile, by addressing specific HR since boards often complained about getting lots of a disclosure policy specifically outlining what will be to relinquish much of their day-to-day operational issues, CIRA improved staff retention and employee data, but little analysis. Bank Audi has developed disclosed through public documents and the internet. activities and focus on more strategic issues. Wadi morale. Other companies took action as well: Credence highly effective internal reporting capabilities, with MFW and BOP place significant importance on social made marked progress as well, establishing a family and NRSP Microfinance Bank hired HR managers and the implementation of new MIS systems capable of responsibility and disclose their activities on their website. council that has conducted several meetings. An developed terms of reference for key positions, BOP generating in-depth financial and non-financial analytical Egytrans made substantial upgrades to its annual important early outcome from these meetings was put in place 360 degree feedback from employees, and reports for management and the board. MFW improved report and website, in line with international disclosure a family employment policy for the entire holding Medgulf developed a group-level HR manual. SABIS®, its reporting by better analyzing business trends by standards. This resulted in a dramatic increase in market group that all family members approved. Wadi’s owners which was facing growing personnel needs as its product, branch, customer, and other dimensions to reputation and several formal recognition awards. also designated one family member to serve as lead network of schools expanded, strengthened its HR strengthen strategic decision-making and support Bank Audi and ADCB vastly improved their disclosure corporate governance champion for the entire group. function by hiring a group HR director who works new product development. in the past few years. Now, they are showcased as Credence hired a consultant who helped address the towards improving HR and recruitment policies and best practice examples. Several other companies in unique governance needs of a family-owned company processes. Of note, SABIS’s HR operation now functions this report have taken similar steps to improve their by putting in place governance policies for the family. as more of a strategic partner to senior management transparency, which has the added benefit of helping and the board, helping to think through and formulate to communicate positive changes to the market and HR strategies that will support the company’s overall providing much needed assurance. Beyond disclosure, business plans. several companies took additional steps to improve shareholder relations, such as NRSP Microfinance Bank and BOP. They established new policies to protect shareholder rights. ADCB also improved minority shareholder protection by removing the share ownership requirement to serve as a director. TPSP modified the special consent rights that had been granted to its primary investor as a means to improve minority shareholder protection. Bank Audi modified its articles to allow for unrestricted trading of its shares by eliminating the requirement to secure board approval for new shareholders. 24 25 Aggregate Impact Scorecard III. Impacts Reported “Our brand recognition both regionally and internationally in the sector is substantial. Companies reported a number of positive impacts Banks took notice of our governance No Impact -- as a result of improved corporate governance. The improvements and it played a key factor in Moderate Impact following are the common themes that emerged our financing [about $1.5 billion] the past two Strong Impact from the impacts reported by companies; The Table years.” Substantial Impact provides the aggregate impact scorecard, summarizing the impacts as reported by each company. Dr. Mohammed Nour El Tahir General Counsel, Dana Gas Company Access to Profitability Reputation Sustainability Organizational Board Management Capital Efficiency Effectiveness Control Effectiveness ADCB Nearly all companies rated the corporate governance impact The impact on firm reputation was reported as strong or Ask on their ability to access finance as strong or substantial. substantial in almost all companies. Respondents noted Bank Audi They cited that governance changes instilled market significant improvements in firm reputation based BOP confidence and provided added assurance to investors, on feedback from various market actors, such as Butec creditors, or other debtors. In fact, for two companies— shareholders, investors, customers, business partners, Butec and CIRA—the changes sent such a strong signal and other stakeholders. For example, Egytrans received CIRA to the market, that they had to turn away interested substantial publicity and brand recognition in 2008, Capital Bank investors. Others, including MFW and Kashf, cited following their governance upgrades. The company Credence that the improvements enabled them to reduce their won citations for best disclosure practices in Egypt, Dana Gas -- cost of capital by refinancing existing debt with better and was acknowledged as a corporate governance terms and rates. Many of the companies said that champion. Other companies have contacted them, EgyTrans -- corporate governance played a significant factor in the seeking to learn from their efforts. Egytrans also JDF amount of financing accessed in recent periods. CIRA, reported a remarkable 53 percent increase in share Kashf for example, has obtained approximately $8 million price immediately following the new disclosures. Medgulf in financing, which has helped fuel the expansion of Bank Audi, ADCB, and Dana Gas—all now regarded new schools. The company is considering private as having best-in-class corporate governance practices MFW equity placements as well. It reported an approximate in their respective markets —reported similar positive NRSP two-fold increase in a valuation estimate received experiences following their improved disclosure Microfinance Bank by one prospective investor, which CIRA attributes and transparency practices. Credence has received to governance improvements. Dana Gas said that by several awards due to the changes made, significantly SABIS® -- demonstrating sound governance to their investors, improving its market reputation. Several companies TPSP -- the company was able to raise about $1.5 billion in noted the internal reputational impact resulting from Wadi Holding financing. ACCB noted that corporate governance has improved governance. Both CIRA and Kashf said that the YGCE -- -- played a role in its ability to raise approximately $1 actions taken to strengthen their organizations have billion to $2 billion in debt financing (2009). Since, profoundly influenced employee morale and culture, much of this funding was US-sourced debt, it required reinforcing staff confidence in the company’s future. a high level of diligence in the company’s corporate BOP reported that its customers call it their “favorite” Approximate financing accessed ($)* governance practices. bank. Pakistan’s central bank has taken note of NRSP *Estimate of $ in financing accessed in which corporate governance was a significant factor from 2008 to 2013 Microfinance Banks’s successful efforts to improve governance, and this has reverberated throughout ADCB More than $ 2 billion the market. ASK reports improved relationship with Butec $ 30-35 million MFW $ 25 million its clients, business partners, and employees due to Dana Gas $ 1.5 billion in debt NRSP 4 times of Equity more structured operational framework. EgyTrans $ 20-40 million TPSP $ 20-30 million Kashf $ 26 million Wadi Holding 68 million 26 27 Though difficult to quantify, most companies reported positive A majority of companies reported that governance changes Key corporate governance changes helped several companies Sustainability is the longer term result of several other impacts on profitability. However, they cited challenges had a strong or substantial impact on organizational efficiency. improve crisis responses. Changes, particularly relating positive impacts and rated consistently high among the in linking corporate governance directly to profitability. Primarily, companies attributed efficiency gains to to risk management and board stewardship, helped companies. In this context, firm sustainability measures Specifying precise dollar amounts or percentage proves management control improvements, such as establishing improve the crisis response of many companies profiled the company’s ability to continue as a prosperous, difficult and there are many extenuating factors can more formal processes and controls, clarifying roles in this report, most notably the financial firms, which operationally-viable entity over the long-term. This was affect firm profitability (e.g., the financial crisis had and authorities, and improving the level of automation. faced severe portfolio risk. For example, in 2008, especially challenging for family-owned enterprises like severely affected all companies, even those with They also noted that efficiency gains manifested as Kashf ’s microfinance borrowers were stricken by CIRA, Butec, Wadi, and SABIS® that were transitioning good governance practices). Nevertheless, companies themselves in different forms. For example, Butec said the dual blows of the financial crisis and inflationary from one generation of leadership to the next; or for were still able to acknowledge a clear connection. that the various process changes in the organization food prices, nonperforming loans skyrocketed while other companies that were quickly expanding in size NRSP Microfinance Bank reported that the corporate have led to reduced re-work, higher productivity, and commercial lending dried up. However, due to newly and complexity, like Dana Gas and MFW. In these governance changes had improved efficiency, thus, decreased backlog. Dana Gas’ process changes have established crisis response strategies and strengthened situations, there is significant stress placed on the contributing to its profits in its first full year of operations. enabled an efficient and well-structured organization risk management practices stemming from improved organization and a very real risk that the firm may Prior to economic slowdown in 2009, Wadi recorded with formal processes, clear lines of authority, and board leadership, Kashf successfully minimized the not sustain itself over the long-term. CIRA cited the strong increases in profitability: 80 percent growth for effective decision making. Many companies also impact on its loan portfolio. Bank Audi posted strong various improvements taken to add more structure to 2008 and 60 percent for the first three quarters of 2009. noted that board-level procedural changes enabled results in 2008, citing governance enhancements as its operations and explicitly address succession issues The company attributed these impressive numbers better board and committee decision making, further a crucial part of its crisis management. ADCB has as having a substantial impact on sustainability. In in part to the overall improvements in organizational contributing to improved organizational efficiency. incorporated corporate governance principles more fact, one of the firm’s investors cited CIRA’s efforts to effectiveness. MFW credited significant improvements in During 2008-2009 the region continued to face the firmly into its own credit review processes to further address sustainability as a key factor in the financing managing market risk and cost of funds as strengthening fall-out from the financial crisis. The global recession mitigate portfolio risk. decision. SABIS® and Wadi both reported that their family the bottom line. Dana Gas said that transparency and the subsequent credit squeeze had profoundly governance efforts have helped align the respective and control improvements helped avoid unnecessary affected all types of firms. families’ interests and secure the next generation of losses. Similarly, Kashf noted that improved liquidity leadership. risk management, especially during the crisis, helped avert potential losses and bolster profitability. BOP reported that governance improvements significantly improved the bank’s profitability and sustainability. Despite the instability of the Egyptian market in 2011, Credence reported increased profits. This is due to the changes made to the board structure resulting in increased effectiveness of the board. INVESTOR PERSPECTIVE Corporate Governance Key to Value Creation: Foursan Group, a private equity firm in Jordan, reports that corporate governance is a significant factor in investment and pricing decisions. The firm says that it is simply one of those things that any good company should have in place. Foursan noted that family-owned companies, in particular, are reluctant to set up proper boards because they do not want to relinquish control. Nor are they inclined to become more transparent, even with potential investors. In fact, Foursan noted that most companies do not sufficiently appreciate the competitive advantage and value creation that governance can offer. Exit attracts 40 percent premium: Foursan citied that when it exited an investment in MENA, it attracted a 40 percent premium over the market price, due in large part to good corporate governance. The company was an insurance company that had taken great care to put in place proper governance structures, including a diverse, well-functioning board, sound management control processes, and strong reporting and transparency practices. Foursan noted that the changes were apparent to the investor, a North American investment firm, resulting in a high comfort level with the investee, a smooth deal closure process and a substantial market premium (approximately 40 percent). 28 29 Company Profiles 30 31 Abu Dhabi Abu Dhabi Commercial Bank (ADCB) is a financial institution operating in the United Arab Emirates (UAE), Jersey, and India. It is majority-controlled by the Abu Dhabi government and publicly traded on the Abu Dhabi Commercial Bank Stock Exchange. ADCB was established in 1985, following the merger of Emirates Commercial Bank, Khaleej Commercial Bank, and Federal Commercial Bank. ADCB is the third largest bank in the UAE in terms of total assets. At the 2012 Banker Middle East Awards, ADCB received several honors, namely: the Best Bank in UAE, the Best Transaction Bank, and the Best Corporate Bank. The bank’s areas of strategic focus have included expanding business in its consumer and wholesale client franchising, and expanding its business to a market or markets similar to the U.A.E. market, where ADCB can leverage its core assets and capabilities. Why Change? ADCB first embraced the importance of corporate To keep up with the increasingly globalized and governance several years ago. As part of a strategic competitive international landscape and to implement review in 2003, ADCB commenced a restructuring the financial requirements of the rapidly developing program assessing its products and services, with UAE market, ADCB elected to re-assess its corporate the goal of making the bank capable of sustainable governance framework and identify ways to strengthen growth and profitability. The bank reorganized its it even further. In this way, the bank hoped to stay board and management structure and revised the current with international best practices and serve board’s operational and financial profile. ADCB also as a model for the market. took significant steps to improve transparency. ADCB Ownership Structure (%) Abu Dhabi Investment Council 58.1 Other National Investors 34.9 Foreign Investors 3.5 Government of Abu Dhabi 3.5 Why did they Change? The original IFC corporate governance assessment Since the initial assessment and implementation of Business : Commercial banking, investment “The board’s overall effectiveness and the for ADCB took place in October 2007. While the bank changes, the bank has continued to make changes banking, asset management and bank’s reputation for governance has benefitted already had in place many strong governance practices, in governance structure, while bringing in corporate ...Islamic banking significantly as a result of the improvements.” additional changes were made to strengthen the overall governance policies and procedures to its Islamic Location : United Arab Emirates framework. At the board level, changes were made banking group in India. ADCB has continued to make Simon Copleston Sector : Financial to clarify board and management roles and to revise enhancements in its board functioning and board General Counsel and Board Secretary, ADCB Type : Publicly Traded (Abu Dhabi) board composition. The bank also made changes at committees. Today, the board includes independent “Corporate governance is a mindset before being 2012 Net Profit : $ 1.4 billion (+11.2%) the management level to improve the coordination of directors with required skill-set and committees anything else. It’s about doing the right thing (1 Year Growth) risk management. Board and management committees are formed with sufficient independent director because you want to, not because you have to.” # Branches : 52 were restructured as well. ADCB also made changes representation. Other recent governance efforts have # Employees : 3000+ to particular shareholder policies and improved their improved the functioning of the HR department. As Rami Raslan disclosures to put it on par with the highest international Senior Corporate Secretary, ADCB IFC assessment : October 2007 part of training, it has initiated corporate governance standards. e-learning courses for all its employees. 32 UAE | Financial Sector 33 Summary of Key Changes: Abu Dhabi Commercial Bank Key Challenges Key Changes Composition: ADCB adopted a target of one-third independent directors. Newly appointed directors come with international banking and risk management expertise. The bank appointed a board advisor who also has international banking experience. Composition: The nine-member board had no independent directors, and included six directors who Roles: Clarified distinction between board and management, emphasizing the Board’s role to monitor were Abu Dhabi government officials. Board skills performance of the latter. Removed directors from the combined executive committee. in risk management and information technology (IT) function needed strengthening. Structure: ADCB adopted a revised committee structure including audit, risk, nomination/remuneration and human resources, and corporate governance. The bank developed clear terms of reference for Roles: The lines between board and management were each committee, detailed composition to ensure sufficient independent representation, and clarified blurred in some areas due to existence of an executive roles so that committees were no longer handling management tasks. Committee charters are committee that included representatives from both. reviewed each year. Board Effectiveness Structure: Had several working committees, though Procedure: With the help of the board secretary, the board now follows a formal schedule and a some were performing management type tasks (e.g., structured agenda for meetings. Discussions are focused on key business issues. loan collections and recoveries). Terms and Appointments: The bank established three-year terms for directors with the possibility Procedure: Board discussions tend to include areas of of re-election by shareholders and one-third of the board seeks re-election on an annual basis. day-to-day management issues. Established a formal process for identifying and nominating appropriate directors for approval by the Annual General Meeting (AGM), led by the nominations committee. The bank also Introduced Terms and Appointments: Unclear terms of directors and a formal induction program for new board members. appointments were made by shareholders directly without a formal board nomination and selection process. Evaluation and Training: A standardized internal and external evaluation process is now in place to assess board performance. Established new training programs and seminars on various topics, board members have a variety of learning options to enhance their knowledge. Executive Committee: Committee composition was altered and roles were clarified. As the top Executive Committee: An executive committee made up management committee, it now only includes executive directors. of board directors and senior executives created some confusion and undermined management authority. Risk Management: Established a management-level risk committee (distinct from the board) and reports regularly to the board risk committee. A chief risk officer was hired to oversee the bank’s Risk Management: Risk management needed to be better risk management activities and report to the board. The bank now makes use of more advanced coordinated centrally to improve information flow. tools to help address market risk and operational risk. Management Control Human Resources: With high turnover, a shortfall of Human Resources: ADCB took several steps to improve HR, as a way to attract and retain qualified key skill sets and an expanding business, ADCB faced staff, to support the bank’s changing needs, and enable the bank’s expansion into new markets. A significant HR risks. new HR head has initiated several beneficial changes. In addition, an independent consultant has helped restructure management remuneration and variable pay scales, so that the compensation Compliance: The profile of the compliance function framework is in line with international standards. needed to be elevated in the organization and its scope expanded. Compliance: A new central compliance unit, embedded within the risk function, has helped raised the profile of compliance, while ensuring accordance with internal codes and external laws and regulations. 34 35 Key Challenges Key Changes Public Disclosure: While the bank’s disclosure was Public Disclosure: Today, the bank discloses significant financial and non-financial information on its Disclosure & adequate, by way of an annual report and company website. An electronic version of the annual report is posted on the site, within formation about Transparency website, there were opportunities to better align with the board, compensation, meeting attendance, and company performance. The annual report also international standards. includes extensive detail on the ADCB’s governance framework. Director Share Ownership: The bank’s articles required Director Share Ownership: The share ownership requirement has been removed from the bank’s articles. board members to hold a minimum, and quite large, Requirement to own shares to be a director is no longer part of the bank’s director nomination criteria. Family Governance number of shares in the bank. This requirement was not conducive to minority shareholder interests. Minority Protection: Updated articles have improved protections for minority shareholders. Impact Report Abu Dhabi Commercial Bank has reported the Impact Scorecard following impacts in the four-to-five years after How have the changes impacted... embarking on the corporate governance changes. Minor Moderate Strong Substantial ADCB’s governance reputation in the market The board has demonstrated a higher level of Access to Capital has improved significantly. The added disclosures effectiveness. Board has strengthened oversight and are widely considered best in class among peers provides strategic stewardship to the bank. and helped improved the bank’s profile and image. Profitability The bank reports that its organizational efficiency The bank has become an award-winning corporate has improved significantly since it streamlined its decision-making process. Reputation governance standard bearer in the region. As a result of disclosure and transparency improvements, Risk management changes have improved ADCB regularly achieves “Gold Category” honors Sustainability monitoring and mitigation of all types of risk. from the Emirates Securities and Commodities Board oversight of risk is stronger and improvements Authority (ESCA) for the submission of financial to the audit committee and compliance function statements. In 2012, the ADCB earned “The Hawkamah Organization Efficiency have enhanced controls throughout the bank. Bank Corporate Governance Award” for superior governance practices in the Middle East and North ADCB’s process efficiency and effectiveness has Board Effectiveness Africa region. In 2013, World Finance honored ADCB improved significantly due to the tightening of with its “Best Corporate Governance in UAE” award. controls, use of more automation, and clarification of roles. Management Control ADCB has enhanced the diversity of its board, with an eye toward building shareholder value. Bank subsidiaries have benefited from the For the first time, ADCB appointed a woman to its Access to Finance Over $2 billion approximately over 2012 prioritized focus on governance. The corporate board, additional evidence of the bank’s commitment governance changes made have not only helped their to global best practices in corporate governance, and own (bank’s) governance practices, but has raised in alignment with the government of Abu Dhabi. corporate governance standards of its subsidiaries, including the Islamic finance group and its India operations. 36 37 ASK for Human ASK for Human Capacity Building (ASK) is a Jordanian learning organization that specializes in quality education, monitoring, evaluation, and human capacity building services. Established in March 2011, ASK provides services in Capacity Building the education and employment sectors. The firm’s acronym reflects a mission is to empower proactive citizens with: Positive Attitude Twenty-first century Skills Relevant Knowledge ASK has worked with both the public and private sector and has successfully managed capacity-building projects in the country and throughout the region. ASK continues to grow and expand into different focus areas as it delivers advanced, tailored, capacity-building solutions. ASK is owned by three shareholders and has a three-member board. ASK is also governed by an advisory board includes six distinguished representatives of the local and global community. Dr. Amin Amin, President and Chief Executive Officer of ASK, handles the day-to-day operations of the business. Dr. Amin’s considerable knowledge and expertise enables strong management of the enterprise. Why Change? Why did they Change? In the 18 months since its founding in 2011, ASK grew The Jordan Institute of Directors (JIoD), having been from its five-employee roots to a larger enterprise trained by IFC and using IFC methodology, conducted a with 90 employees. Such dramatic growth required corporate governance assessment for ASK in November ASK to revisit its organizational structure to ensure 2012. continued success and sustainability. To strengthen the board’s commitment to good This rapid growth also gave rise to an immediate need governance and transparency (as witnessed by the to revisit existing governance policies and put in place company’s code of ethics), important changes were new governance policies and procedures. Against this made at the board level. The focus was on raising backdrop, ASK requested technical assistance from awareness of governance issues and elevating the IFC, through its intermediary the Jordan Institute of importance of audit and risk. Several non-executive Business : Training, consulting services, Directors (JIoD), to help develop a robust governance directors were added, and an audit committee was “The issue of corporate governance is so critical and capacity building framework that could serve the needs of its growing established. for our growth and sustainability. Your feedback Location : Jordan has been an eye opener and I truly appreciate all business. Sector : Education As a young enterprise, the firm also had some your efforts to enhance corporate governance in management-level gaps, which were addressed through Jordan.” Type : Private Shareholding Company changes to audit and internal controls and procedures. 2012 Revenues : $ 1.5 million (+108%) Dr. Amin Amin (1 Year Growth) The first priority was establishing internal audit and President and Chief Executive Officer, ASK for Human Capacity Building # Branches : 1 internal controls and procedures. ASK accomplished # Employees : 90 this by engaging with external experts to develop IFC assessment : November 2012 internal control systems and manuals. Currently, the organization is in the process of setting up an internal audit unit. 38 Jordan | Education Sector 39 Summary of Key Changes: ASK Key Challenges Key Changes Structure: ASK had no formal committees. Procedures: As a start-up firm, ASK required a great Structure: The firm set up a three-member audit committee, which has an independent chairman. The deal of support. The board met more than once a board and committees meet regularly and are in the process of formalizing a work plan for their meetings. month—about 14 times—throughout 2012. Procedures: As the firm has solidified its business model, it requires less day-to-day support, so the Roles: The board limited its activity to addressing issues board does not need to meet with the same level of frequency. The reduced meeting schedule is also Board as they arose and monitoring key financial information. due to the increased activity of the audit committee, which enables board focus on more strategic Effectiveness It was not carrying out the full range of typical board growth and expansion-related issues. responsibilities. Roles: A new, formalized board charter highlights key board roles and responsibilities. Relationship with management: Although the board was Relationship with management: The board set up an authority matrix that clarifies board and management not involved in the day-to-day management of the roles and responsibilities and helps streamline decision making for improved efficiency. business, there was no clear distinction between board and management roles. Internal Audit: To close the gap, ASK brought in external consultants to structure an in-house internal Internal Audit: There were no written policies and audit function. This function will cover financial management and key operational activities, especially procedures to manage the internal audit function. high-value contracts. Management Internal Controls: ASK did not have formalized internal Internal Controls: ASK brought in external consultants to review current structure and set up formal Control control policies or procedures. internal control policies and procedures. The consultants helped build the administrative team’s monitoring capacity to ensure proper implementation of the new policies and procedures. Risk Management: ASK did not have a formal risk management process. Risk Management: Although not completed yet, but review of the organizations risk management process was undertaken and the necessary policies and procedures are being reviewed to be put in place. Disclosure: Disclosure was minimal and lacked in-depth Disclosure: ASK is in the process of upgrading its website, with plans to share more information about Disclosure & information about the company’s business. the firm’s structure, processes, and activities. Transparency 40 41 Impact Report ASK reported the following impacts from the Impact Scorecard changes it made before and after the corporate How have the changes impacted... governance assessment. This was reported about six months after recommendations were made to the board and about three months after the implementation of major management changes. Minor Moderate Strong Substantial Operational efficiency has improved substantially. ASK’s market reputation has been enhanced Access to Capital ASK has more structured internal audit, and control significantly. Relationships with clients, business systems and procedures, which has helped streamline partners, and employees have improved as a result of a operations. clarified and more structured operational framework. Profitability Access to capital has improved dramatically. ASK has become a more efficient firm. Improvements With a better governance structure, investors interested include more rapid decision making, streamlined Reputation to invest have only had to undertake minor due diligence processes, and better follow-up for staff at all levels. reviews instead of long lasting reviews and with more Sustainability positive terms and results. The board functions more effectively and addresses Organization Efficiency more strategic issues, such as regional growth and diversification of product portfolio. Time is utilized more efficiently with the new committee in Board Effectiveness place. Management Control 42 43 Bank Audi * The history of Bank Audi dates back more than 175 years. With operations in Lebanon, the Middle East, North Africa, and Europe the bank offers a full range of products and services for commercial, corporate, investment, private, and retail, banking. Bank Audi has been listed on the Beirut Stock Exchange and the London Stock Exchange (represented by global depository receipts) since 1997. While strengthening its activities beyond traditional commercial banking, Bank Audi undertook a significant local and regional expansion. It is the largest Lebanese bank and ranks among the top 20 Arab banking institutions in terms of deposits. Bank Audi has long been considered the vanguard of best practice among Lebanese banks, with consistently strong performance in recent years. Even during the global financial crisis, the bank’s net profits rose. In 2008, profits increased by about 19 percent with total assets showing an 18 percent increase and total deposits were rising by 21 percent. In 2009, net profits climbed an additional 21 percent, with assets increasing by 30 percent and deposits showing a 33 percent rise. In 2012 and 2013, amidst the regional turmoil, assets grew by 9 percent and 16 percent respectively. Bank Audi’s compounded average annual growth rate over the past six years has been strong: 13 percent growth in both the asset base and deposits, with 8 percent increase in profits. Bank Audi Ownership Structure as of March 31, 2014 ***In its capacity as depositary under the Bank’s GDR Program (%) Deutsche Bank Trust 29.3 Executives and employees 4.7 Company Americas*** Investment Finance 4.4 Audi Family 7 Opportunities Ltd. Al Homaizi Family 6.1 Middle East Opportunities 4.4 For Structured Finance Ltd. Saradar Family 5.8 Investment and Business 3.9 Sheikh Dhiab Bin Zayed 5.1 Holding sal Al Nehayan Al Hobayb Family 2.6 FRH Investment Holding sal 4.9 Said El-Khoury Family 2.4 Al Sabbah Family 4.8 Others 14.6 Business : Commercial, Corporate, Retail, * Bank Audi is also featured in the 2010 edition of this publication. This profile includes an update of accomplishments Private and Investment Banking since the first edition was published. services in the MENA region, Turkey and Europe ** (before the exceptional profits related to discontinued Location : Lebanon operations), decreasing by 15.6 percent mainly due to the initial Sector : Financial launching stages of the Turkish banking subsidiary, whose network encompasses 31 branches with the subsequent normal Type : Publicly Traded (Beirut & London) time lag between immediate operating expenses and expected revenues. 2013 Profit : $305 million** # Branches : 189 # Employees : 5894 IFC assessment : October 2005 44 Lebanon | Banking Sector 45 Why Change? Why did they Change? Despite its continuous success, Bank Audi realized that In conjunction with Nestor Advisors in the United Among the key management-level changes were changes were needed in its governance structures Kingdom (UK), IFC conducted a corporate governance formalizing and consolidating activities related to risk to keep up with international best practices. Prior assessment for Bank Audi in October 2005. The management, financial management, and compliance. to the 2005 initiation of a corporate governance assessment confirmed that Bank Audi was a well- From the time of the initial assessment and subsequent enhancement program, the bank’s board of directors run bank with a staff comprised of highly capable implementation, the bank has had in place a functional was largely a validating body for the decisions of the individuals. governance framework for six-to-seven complete fiscal primary shareholders. Board meetings resembled periods. During this time, the bank worked to promote mini-shareholder meetings. With two-thirds of its The assessment also showed that crucial changes a sound governance structure throughout the group. members being executives, the board’s ability to were required to reconfigure its board of directors. In particular, the board took action to revise its composition This 2005 assessment represents the beginning of the independently oversee the company was compromised. by changing the mix of executives and non-executives. bank’s ongoing governance development process. With More importantly, the bank understood that better It also revised its structure by setting up key board well-established processes and annual agendas, Bank governance will bring added value. They understood that committees and took steps to clarifying the previously Audi’s board and committees now function well, but value creation would come from better management blurred lines between board and management. enhancements continue. Bank Audi also added a board of risks. As a result, Bank Audi’s management decided risk committee to its structure. There are a lot of board to spearhead a corporate governance review, once and management efforts directed at ensuring that the again, demonstrating foresight and a proactive stance. controls put in place are well monitored throughout the bank. Summary of Key Changes: Bank Audi Key Challenges Key Changes Composition: Bank Audi adopted a formal policy on board composition, requiring 50 percent non- executive membership, with independent directors representing at least one-third of the membership. This is the current structure of the board. Composition: Comprised of two-thirds executives and functioned as a ‘mini-AGM’ given low level of Director nomination: A formal process for the appointment of directors has been set. independence. Many shareholder interests were represented by particular executives. Structure: Board committees were established, including audit and corporate governance and remuneration, as well as an executive committee. After 2010, they have also added board risk Board Structure: There was no audit committee or other committee. All committees have charters that are updated on a regular basis. Effectiveness types of formal board committees. Roles: Developed formal corporate governance guidelines and an organization chart to identify the Roles: Given the large number of executives on the chain of authority have helped clarify board and management roles and enabled more focus on bank board, the distinction between board and management strategy. With clear lines of responsibility and accountability identified, there is continuous oversight was unclear. and supervision of the entire group. Evaluation and Training: The board now has an annual process in place to evaluate performance and identify areas for improvement. Training is available for board members. 46 47 Key Challenges Key Changes Structure: Organization structure required more clarity; it was confused by large number of executives on Structure: Structure was clarified with the creation of a more formal executive committee, which the board. also has helped to improve the coordination of the bank’s planning, monitoring, and management activities Chaired by the CEO, the committee includes senior bank executives. Risk Management: Needed to formalize risk management coordination and setting of risk policy and overall Risk Management: Established a board-level risk committee to assist the board in discharging its risk- enterprise monitoring. related responsibilities, such as adopting risk policies, approving risk limits, setting risk appetite, and monitoring the bank’s risk profile. Also reinforced and expanded the risk management division Management Finance: Bank Audi did not have a group-wide CFO. in charge of identifying, measuring, monitoring and reporting risks. Control Various individuals handled financial management oversight. Finance: A group CFO position was created. All finance, accounting, strategic planning, and investor relations activities were centralized under one umbrella to improve coordination and oversight. Internal Audit (IA): The IA reporting lines were blurred. There was no direct, unfettered reporting to the board. Internal Audit: IA now reports directly to the bank’s audit committee to help ensure independence. MIS: Information systems were not well integrated MIS: A more integrated MIS was developed, with improved reporting functionality. The system can and had limited functionality. generate in-depth financial and non-financial analytical reports for the board and management. Disclosures: A management committee was set up to coordinate disclosure, ensure compliance with all requirements, and better communicate the bank’s many positive governance and management practices. The annual report was enhanced with more in-depth, non-financial information about Disclosure & Disclosure: The bank’s annual report and website provided the bank including corporate governance, vision and strategy, values, and risks. The website was Transparency limited detail on key non-financial information. upgraded to feature more content on governance and investor relations. Social Responsibility: The bank adopted a formal corporate social responsibility (CSR) policy. Implementation of Bank Audi’s code of ethics and conduct is routinely monitored. Shareholder Rights Approval of New Shareholders: The bank’s articles required Shareholder Policy: The bank’s statutes were modified to allow for unrestricted trading on the all and Stakeholder board approval for new shareholders, limiting the of the bank’s shares. Relations liquidity of common stock. 48 49 Impact Report Bank Audi reported the following impact as a result Impact Scorecard of the changes about six years after implementing How have the changes impacted... the key changes. Minor Moderate Strong Substantial Bank Audi reports that the corporate governance Board committees have strengthened oversight of Access to Capital changes that it started to make in 2006 with the key activities (e.g., audit, risk) and separating oversight board have ‘created a corporate governance seed’ from management. The board risk committee effectively and changes have been ongoing throughout the monitors the risks faced by the bank and supports the Profitability group. Sound corporate governance is also reflected board in setting the risk appetite of the bank. in the material subsidiaries and is given the highest The Bank achieved clarity of roles, improved Reputation level of priority. coordination, improved transparency and oversight, The corporate governance changes have had a through the changes made in key management Sustainability strong impact on the bank’s capacity to access control functions (e.g., risk management, finance, capital, by providing added assurances to investors and compliance). and the market. Organization Efficiency Organizational efficiency has been enhanced with Strong corporate governance was a key factor in improved decision-making at board and management helping Bank Audi manage the crisis period. Over levels. The corporate secretary has been instrumental Board Effectiveness the past six years, Bank Audi reported a compounded in streamlining this process. Improved information average annual growth rate in profits of 14 percent. sharing and communication across the bank have resulted in better functioning of the bank. Management Control Bank Audi’s already strong reputation in the Lebanese and UK markets has been reinforced. There is recognition among shareholders, the The market has reacted favorably to the bank’s board, and senior management that the corporate demonstrated commitment to international best governance changes are critical to maintain corporate practices in corporate governance. longevity and sustainability. The board functions more effectively in providing strategic stewardship to the bank. 50 51 Bank of Palestine Bank of Palestine (BOP) is Palestine’s first and largest national bank, providing financial services in Palestine since 1961. With 48 branches and sub-branches, serving more than 600,000 customers, BOP has a widespread operation throughout Palestine. The Bank was listed on the Palestine Exchange (PEX) in 2005 and represents around 15 percent of total PEX market capitalization. BOP has $150 million in paid-up capital, and has captured about 23 percent of market share of deposits and loans in the Palestinian banking sector. In 2007, BOP set up a brokerage subsidiary, providing access to stocks listed on the Palestine Stock Exchange. A second subsidiary—PalPay®—was created in 2011, offering electronic payment solutions for bank and non-bank customers alike. BOP has been promoting the financing of the small and medium enterprise and microfinance sector in Palestine and, thus, helping its customers gain wider access to finance. It is the only bank in the region with its own card processing center. BOP has played a leading role in some of the largest syndication projects in Palestine. Through the years, BOP has demonstrated a commitment to community-based economic development. Therefore the bank has adopted a holistic sustainability strategy and has been the leader in Corporate Social Responsibility (CSR) in Palestine; BOP designates a 5 percent annual set-aside for CSR initiatives. Bank of Palestine Ownership Structure (%) Other Investors 55.3 (Include foreign & local, intitutional & individual) Shawa Family 26.8 (Directly & Indirectly) A.M. Al-Kharafi & Sons Trading Co. 7.6 Blakeney Management 5.3 IFC 5 Why Change? What did they Change? BOP, a very profitable bank, went through a change IFC conducted a corporate governance assessment of of leadership in 2008 and was seeking additional BOP in 2009, and the bank took action on the findings. financing. Although BOP was doing well, its leaders For example, with some overlap among the board, realized the importance of improving the bank’s its committees, and management, BOP made several corporate governance framework and upgrading board-level changes to help improve its functioning, internal control and risk management frameworks, including a revised board committee structure and Business : Commercial banking “I am proud that Bank of Palestine now has as part of the process to move forward. Management charters for each of the committees. BOP also clarified Location : Palestine in place a clearly defined and well-structured also wanted the bank to serve as a role model for the roles between the board and the management, corporate governance framework to support Sector : Financial the region and become aligned with international by developing, an authority matrix and, thus, created our aim of achieving long term sustainable Type : Publicly traded (Palestine standards of corporate governance. a clear line of authority and decision-making. growth. Over the past few years we have Exchange) realized the benefits of having a framework to 2012 Profit : $38.4 million (12.85%) For these reasons, BOP’s leadership decided to engage Additional changes included upgrades to internal control provide us with the guidance for promoting the with IFC for assistance in assessing the bank’s risk frameworks and HR functions. Steps were taken at (Year growth) highest standards of corporate governance, thus and corporate governance structures. the management level to improve the coordination of creating trust and engagement between the # Branches : 48 risk management throughout the bank. Modifications, bank and our various stakeholders.” # Employees : 1,160 from certain shareholder policies and enhancements, to IFC assessment : July 2009 disclosure, have helped align the bank with international Hashim Shawa Chairman and General Manager standards. of Bank of Palestine 52 Palestine | Banking Sector 53 Summary of Key Changes: Bank of Palestine Key Challenges Key Changes Composition: The board brought on directors with financial expertise, risk management skills, and regional and international banking experience. Roles: Clarified distinction between board and management, by creating an authority matrix and Composition: Existing board size of 11 members was delineating roles and decision making authorities. appropriate, but they lacked the necessary skills needed on the board. Structure: Adopted a revised committee structure including audit, risk, credit, HR and corporate governance, and investment committee. Developed charters with provisions for adequate representation Roles: Missing detailed charters for board, management, of independent directors on each committee. Board and committees. Effectiveness Terms and Appointments: To ensure healthy turnover of directors, four-year terms with the possibility Structure: Audit, credit, and investment board committees for reelection were set. The HR and corporate governance committee charter specifies the process existed but lacked charters. for nomination and approval of new directors. Succession Planning: BOP did not have succession plans Evaluation and Training: A formal annual evaluation process to assess board performance was introduced. for key senior management positions. Formal training programs on various topics were made available over the course of the year. Succession Planning: Senior management succession plans have been put in place to mitigate against key person risk. Risk Management: A board risk committee was created and a chief risk officer was hired to oversee Risk Management: Risk management needed to be more the bank’s risk management activities and report to the board. The bank’s risk appetite is now centrally coordinated to improve information flow. strictly defined. Management Human Resources: Bank faced substantial HR risk given Human Resources: The bank put in place HR policies for its employees and seeks yearly 360 degree Control expansion and evolution of business. feedback from employees. Positions in the bank have defined terms of reference. Compliance: Although a compliance function existed, Compliance: A newly-established compliance unit ensures compliance with external laws and regulations it was limited in scope. and internal codes and expansion of the business in Palestine. Public Disclosure: Disclosure has improved significantly, with financial and non-financial information Disclosure & Public Disclosure: The annual report lacked non-financial included in the annual report and on the bank’s website. A dedicated section in both offers detail Transparency disclosure. on the bank’s corporate governance framework. Shareholder Rights Shareholder rights: Key codes and policies needed and Stakeholder Shareholder Rights: Explicit policies related to shareholder protection were added to the relevant charters. improvement and better documentation. Relations 54 55 Impact Report Bank of Palestine has reported the following Impact Scorecard impacts three years after embarking on the changes. How have the changes impacted... Minor Moderate Strong Substantial BOP’s decision-making process has improved BOP’s market reputation has been enhanced Access to Capital significantly because the board functions more considerably. The bank’s customers refer to BOP as effectively and board meetings are planned with more their “favorite bank.” BOP has been honored for three efficient discussions and quick decision making. Adopting years running (2011, 2012, and 2013) with Euromoney Profitability the new committee structure has resulted in better magazine’s Award for Excellence, and along with it information flow between committees, management, the designation as “Best Bank in Palestine.” The bank Reputation and the board. takes seriously its important role in developing the Palestinian economy and society and has set up several Clear delineation of roles: The bank has placed clear social programs to help the community. Sustainability responsibility of roles between management and board, thus, making decision making more effective. The bank’s profitability has increased appreciably and sustainability has been strengthened markedly. Organization Efficiency These improvements are attributed to the governance improvements, which have also contributed to a dramatic increase in the bank’s share price over the Board Effectiveness past three years. Management Control 56 57 Butec Holding Butec Holding, founded in 1963, has expertise in design civil engineering, installation of specialized plant and equipment, public works, and building construction. Butec focuses primarily on oil and gas, utilities, waste-water management and infrastructure projects, which accounts for around 90 percent of its revenues. In its projects, Butec partners with international contractors, such as Vinci, Suez-Degremont, Siemens, and others, where Butec provides general contracting services within the contract structure. Butec is in the first generation of leadership, but approaching the second. Its founder, Dr. Younes, serves as the Chairman/General Manager (GM), while his son, Ziad Younes, serves as a Deputy GM. Butec possesses a very strong corporate culture, primarily stemming from the values and principles espoused by its chairman and other long-serving executives. As a result, Butec has a solid reputation in the marketplace and has enjoyed financial success over the past several years: with revenues increasing from $24 million in 2005 to $88 million in 2007, representing a 266 percent increase. Much of Butec’s success is a result of its market diversification strategy—approximately 73 percent of 2007 revenues came from markets outside Lebanon. Looking forward, Butec is positioning itself as the preferred local partner for international engineering and contracting companies by teaming up with them on large projects around the region. Butec Ownership Structure (%) Younes Family 90 Other Investors 10 Why Change? What did they Change? Despite its success and promising outlook, the company IFC conducted a corporate governance assessment Business : Provides engineering, procurement, and construction recognized that it faced many significant governance of Butec in August 2008. The primary changes that operations in Lebanon, Algeria, challenges as it prepared for the future. Foremost, Butec pursued were to improve the functioning of its Qatar, and Abu Dhabi board of directors. They moved from a small, limited the company had a limited board of directors and Location : Lebanon little separation between the owners, directors, and functioning board, to an expanded board that performs Sector : Construction management of the company. In addition, the company much stronger oversight and strategic roles for the Type : Family-Owned had mostly outgrown its management infrastructure company. Butec also made several changes in its 2008 Revenue : $114 million (+33%) and needed to strengthen its control environment. management control environment, especially regarding The company knew that it had to make crucial changes risk management in its large project work. It has (1 Year growth) to support its fast-expanding business and attract also made significant improvements in its financial # Employees : 2,822 staff & labor new investment. management and control processes. Butec is still IFC assessment : August 2008 in the process of making other management-level changes, especially in the area of HR. 58 Lebanon | Construction Sector 59 Summary of Key Changes: Butec Holding SAL Key Challenges Key Changes Composition: Butec elected three new members to the board, all of whom are independent; one has Composition and Structure: Lacked a fully functioning financial expertise to serve as chair of the audit committee. board with only three designated members, all of Structure: Created an audit committee and planning to create an HR/nominations committee. Audit whom were executives. committee staffed with independent members and is designing formal charters and procedures. Procedures: Meetings were held infrequently and Board proceedings were primarily perfunctory with topics Procedures: A formal board schedule, with more frequent and more formal meetings covering a Effectiveness focused on basic issues. variety of topics was introduced. The audit committee will report back to the board once it adopts its own formal procedures. Now, discussions are more in-depth and focused on key business issues. Succession Planning: The company had not specifically Succession Planning: The company strengthened the senior management team and developed a formal addressed the succession issue of the chairman/ executive committee, giving needed support to the chairman’s son, who will soon take over the general manager, leaving significant ‘key-person’ general manager position. The son is now overseeing the day-to-day management of the company, risk in the company. allowing the chairman to focus on more strategic issues. Internal Audit: The company had no internal audit function. Risk Management: Risks were considered reactively and not managed according to any formal process. The company Internal Audit: Butec established a new internal audit function, that will focus on all types of risks and has significant inherent risk in its large construction controls, including financial, operational, and project risks, and report directly to the new audit committee. projects and required a more proactive approach. Risk Management: Improved risk management by escalating risk discussions throughout the organization Management Structure: There was no central management and embedding formal risk assessments in project decisions. committee; decisions were centralized with the Management Structure: Established a management committee consisting of senior management staff Management chairman/general manager and communication relied to take key decisions, coordinate activities, and monitor overall performance across the company. Control on informal channels. Financial Management: Butec hired a well-qualified CFO who made many upgrades to the FM function Financial Management: In-house FM capabilities required and is implementing more structured planning, risk management, and control processes. upgrading as they relied on external assistance to consolidate and prepare financials. Human Resources: Searching for a new HR lead to oversee upgrade of HR function, including new benefits and compensation schemes to attract and retain qualified staff; improved staff training; Human Resources: Recognized as one of the company’s and upgraded HR management processes and systems. biggest risk areas given anticipated growth, rising labor costs, and increased competition; the previous HR programs required upgrading to address these issues. 60 61 Impact Report Butec reported the following impacts about one Impact Scorecard year after the review. How have the changes impacted... Minor Moderate Strong Substantial Access to capital has improved substantially with Organizational efficiency has improved due to a Access to Capital many banks offering credit to Butec on more much sharper focus on backlog and cut down of favorable terms; helped them access about $30 rework; many internal administrative processes are million to $35 million (around 2009), largely due to also being automated and streamlined. Profitability recognition of positive changes by investors/banks and supported by better quality of information provided The company has more informed decision making, supported by more insightful information and better Reputation to them – both financial and non-financial. discussion of issues. Reputation, especially with banks, has improved Board oversight of management is much stronger; Sustainability significantly as they are reassured about the current management and stewardship of the company and the board challenges management on particular about its future sustainability into the next generation. issues and requires better reporting and analysis at Organization Efficiency meetings. The firm’s clients, business partners (e.g., joint venture partners), and suppliers have reportedly Risk management has improved significantly Board Effectiveness noticed the changes and are responding with throughout the organization with more dialogue and increased confidence in Butec as a long-lasting discussion of risk mitigation, especially when assessing partner. large projects. Management Control $ Financing Assessed* $30 million to $35 million approximately in 2009 * where CG was major factor 62 63 Cairo for Investment and Cairo for Investment and Real Estate Development (CIRA) was founded in 1992, with Dr. Hassan El Kalla as Chairman and Chief Executive Officer. The company’s primary purpose is building, owning, and operating schools Real Estate Development (CIRA)* throughout Egypt, with the goal of improving Egypt’s educational standards. CIRA’s flagship business is the Futures Educational System (FES). FES is considered the largest network of schools in Egypt, with 18 schools and five international education systems. It offers a university-level curriculum. The company has plans to further expand its schools, including into the areas of special needs education. The company went public in 1998, with a listing on the Egyptian Stock Exchange (EGX). In the course of a single year (2007 to 2008) CIRA’s stock ownership skyrocketed, from only about 100 shareholders to over 1,000 (see chart below). CIRA has enjoyed financial success, from about $0.5 million in 2004 net consolidated operating profits having grown steadily, reaching more than $5 million in 2008. By 2012, CIRA posted a net profit of $8.2 million. CIRA Ownership Structure (%) El Kalla Family 46 Free Float 28 Other Investors 26 Why Change? The company faced many significant challenges as it prepared for the future. The company had essentially outgrown its governance framework and management infrastructure. In 2008–2009, the company was run as a small, closely-held business. The company was transitioning to a new generation of leadership as its chairman/CEO and other board members approached retirement. As a result, the company was in need of key actions to strengthen its corporate governance framework. Business : Builds/operates the Futures Schools * CIRA is also featured in the 2010 edition of this publication. This network of private schools Of Note: Eliminating Key-Person Risk Key-person risk occurs when an organization becomes highly dependent profile includes an update of accomplishments since the first edition was published. Location : Egypt on one or two individuals to function effectively. This is a common risk in many MENA companies, particularly for Sector : Education those that have evolved from a small, closely-held organization to a larger company, while the strong founder/ Type : Publicly traded (Cairo) CEO continues to makes all key decisions. 2008 Profit : $8.2 Million (+27%) This was the case for CIRA. CIRA’s chairman also served as CEO and made many day-to-day decisions. (1 Year growth) # Employees : 2,200 To mitigate this, CIRA set up a management executive committee to improve management-level communication # Schools : 18 and coordination, but also to take on key decision-making responsibilities. The Chairman’s son now chairs the # Students : 16,000 committee, helping with his own succession plan. With most of the day-to-day responsibilities shifted to this IFC assessment : July 2008 group, the chairman can focus more on offering strategic guidance. 64 Egypt | Education Sector 65 What did they Change? IFC conducted a corporate governance assessment To tackle these challenges, the company made key for CIRA in July 2008. One of the key challenges changes to staff composition and functional capacity. In for CIRA over the medium term was to change the addition, CIRA focused on strengthening its management composition and structure of its board. CIRA altered infrastructure, such as internal control, internal audit, its board composition, bringing independent directors risk management, and financial management, and and individuals with more diverse of backgrounds, other key control functions. and improved financial expertise. It also added Since the initial assessment in 2008 and subsequent functioning committees, which it did not have before. implementation, CIRA has continued to make changes CIRA also addressed the critical issue of succession in its governance structure. Additional board-level planning. Then Chairman and CEO, Dr. Hassan, was improvements include enhancing gender diversity with heart and soul of the company. But as with many the addition of a female director. CIRA’s ongoing efforts organizations that have evolved in this manner, the at the management level include strengthening the company risked losing sight of its vision and diminishing management control environment and human resource its cohesiveness once this key figure departed. Following function, while improving day-to-day decision making the assessment, CIRA began a formal succession and communication within the company. Succession planning process, naming Dr. Hassan’s son, Mohamed planning for senior management is in now place. El Kalla as CEO. CIRA also addressed important challenges at the management level, such as growing pains associated with the increasing size and complexity of its business. Summary of Key Changes: CIRA Key Challenges Key Changes Composition: CIRA created a more diverse board, adding three independent directors, including a Composition: Most of the board’s nine members woman with a business and marketing background, and individuals with international finance and had served for 10 years or more. The board had no HR expertise. independent directors and lacked financial expertise. Structure: Committees for audit, HR and nominations, and strategy and investment were set up. The Structure: While an audit committee existed, it was non- audit committee is chaired by an independent, financial expert. Both the HR and strategy committees Board functioning; there were no sub-committees in place. are chaired by non-executive directors. The audit committee now has its own charter. Effectiveness Roles: The division between the board, especially the Roles: Board and management roles were clarified. A new authority matrix has been adopted that chairman, and management was unclear. helps clarify the roles and responsibilities between management, CEO and board and its committees. Procedures: The board met infrequently and the chairman Procedures: The board meets regularly (six-to-seven times a year), with formal agendas, structured made many key decisions. briefings, and an annual plan. Committees also meet regularly. 66 67 Key Challenges Key Changes Financial Management: CIRA did not have a CFO and Financial Management: The company hired a CFO, who has made many changes to strengthen the was in need of more in-house financial management finance function, including strengthening of controls and redesign of processes. expertise. Internal Audit: An internal audit function was established and a senior executive was hired to oversee Internal Audit: There was no internal audit function. internal audit and internal controls. Today, IA generates regular reports for senior management and the board, including on previously unaudited areas. Management External Audit: A small, long-serving external audit Control firm also provided advisory work. External Audit: The long-time auditor was replaced with a new, reputable firm to reinforce independence. Key-Person Risk: The chairman/CEO made all key Key-Person Risk: CIRA set up an executive committee that includes key senior managers who share decisions on a day-to-day basis. decision-making responsibilities and coordinate activities. The chairman/CEO relinquished many day-to-day responsibilities to focus on strategy. HR: The company was dealing with high staff turnover and had a hard time attracting high quality candidates HR: Hired a HR lead, reviewed staff compensation, invested in staff training, and lowered turnover. for key positions. Succession planning for senior management is done on an on-going basis. Disclosure: The company reported only the most basic Disclosure: Improved the non-financial information disclosed to the market each quarter beyond the Disclosure & financial statements—without notes or explanation. basic financials to include key corporate events and news; developing a dedicated web-site for the Transparency CIRA did not have a dedicated company website or parent company and annual report. annual report. Conflict Policies: CIRA required formal conduct policies Conflict Policies: CIRA has documented and disclosed formal policies for insider trading, conflict of Shareholder Rights to safeguard against potential misconduct. interest, and related party transactions. and Stakeholder Other Policies: CIRA did not have a governance code Relations Other Policies: CIRA adopted a corporate governance code and a code of ethics. or code of ethics. Succession Planning: With a strengthened senior management team and a formalized executive Succession Planning: The company had not specifically committee, the new CEO—the chairman’s son—has much needed support and expert assistance, Family Governance addressed the chairman/CEO succession issue, leaving as he oversees the day-to-day management of the company, allowing the chairman to focus on the company exposed to significant key-person risk. more strategic issues. 68 69 Impact Report CIRA has reported the following impacts four Impact Scorecard years after making corporate governance changes How have the changes impacted... in the organization. Minor Moderate Strong Substantial Access to capital improved dramatically. There Financial processes are more efficient and mistakes Access to Capital has been increased interest from several investors and rework have been reduced significantly. following the changes. Streamlining of processes includes eliminating a layer of management review. Overall, the company has Profitability Market reputation has been solidified. Making experienced significant efficiency gains as a result governance changes has added value. The market is of changes. buzzing about CIRA and the improvements made as Reputation it transitions to the next generation of the company. CIRA’s sustainability has been strengthened substantially. The company has gone from a one- The board is very involved in strategic planning Sustainability person show to a firm that has established systems process. The board meets on a regular basis with a and plans in place. One investor took special notice of formal agenda. Discussions are open and issues are the progress in preparing for the second generation Organization Efficiency presented in a structured manner. Decisions are made of leadership, such as strengthening the senior following candid deliberations. management team, eliminating key-person risk, and preparing the chairman’s son for succession. The Board Effectiveness CIRA functions very efficiently due the chairman himself noted that his time has been freed organizational changes made in the company. up to address the company’s more strategic needs, The authority matrix has effectively distributed Management Control rather than spending his days dealing with multiple responsibility between the management and board. large and small daily decisions. Management provides appropriate input, so that the board can make good decisions. CIRA’s profitability has increased despite instability in the Egyptian market. CIRA has experienced the Management control is much stronger, including in positive impact of having an efficient board, effective the schools. CFO has strengthened financial processes management and robust systems in place during a with improved internal controls. Management reporting challenging market situation. has also improved, leading to better transparency in all subsidiaries. 70 71 Capital Bank Shareholder Structure (%) Saad Asim Abboud al-Janabi 10 Black Pearl Global Opportunity Fund 9.7 Social Security Corporation 9.3 Said Samih Taleb Darwazeh 7.8 IFC 7 Investment & Integrated 5 Industries Co Raad Asim Abboud al-Janabi 5 Abdullah Saad Asem al-Janabi 5 Bassem Khalil Salem al-Salem 4.8 Muhammad Bin Mousaed 4.2 Bin Sail al Saif Abdull Raouf Waleed Al Bitar 3.5 Hitaf Investment Company 3 Darhold Limited 1.8 Kim Fouad Saad Abu Jaber 1.5 Muhammad Ali Khaldoun 1.5 Sate Al Husari Mazen Samih Taleb Darwazeh 1.5 Salah Al-Din Mahmoud Bitar 1.4 Saad Abu Jaber Company & Sons 1.3 Middle East Specialized Cables 1.1 Company Jordan Total 84.4* * Remaining shares are floating shares on the stock market. Capital Bank is a Jordan-based financial institution that recently expanded operations into Iraq. Publicly traded on the Amman Stock Exchange, Capital Bank is a Jordanian bank that serves corporate, small and medium enterprise, and high-end retail customers. The bank’s financial services offerings include commercial banking and investment banking through capital investments. It offers easy access to Iraq through its subsidiary, National Bank of Iraq (NBI). In 2012, Capital Bank was ranked eighth (out of 25 banks) in Jordan, based on its total assets. In recent years, the Business : Commercial banking, bank’s areas of strategic focus have included: expanding into new sectors and additional markets. “Strong corporate governance and prudent risk investment banking, brokerage management are crucial for sustainable growth. and asset management This will remain a priority for Capital Bank, as it Why Change? Location : Jordan focuses on maintaining its unique positioning in Capital Bank has always recognized the value and More broadly, the MENA economy has continued to grow Sector : Financial the market and implementing its expansion plans importance of corporate governance and has integrated in recent years, with an increasingly developed financial in Iraq.” Type : Public shareholding Company key governance elements into its operations. Some sector. Capital Bank has been a part of this growth and 2011-2012 Profit : $ 31.1 million (after tax) governance practices were based on best practices development. But with growth comes an occasional Basem Khalil Al Salem # Branches : 13 while others were driven by regulatory requirements. need for new capital. The bank’s leaders recognized Chairman, Capital Bank that corporate governance plays an important role in # Employees : 411 As part of a broader review of the organization’s the ability to attract the capital needed to fuel future IFC assessment : December 2012 performance to ensure sustainable growth and increased growth—yet another reason that they have placed profitability, areas of improvement were identified emphasis on governance improvements. and corporate governance became a priority. 72 Jordan | Financial Sector 73 What did they Change? As part of its efforts to support growth and address the board members and senior executives helped identify Other recent changes include strengthening the credit risk, market risk, liquidity risk, and operational increased investment needs, the bank decided to new directors with specialized skills, diversifying board bank’s risk management framework. A new chief risk risk) were reviewed and updated. In addition, a review arrange for an IFC-conducted corporate governance composition and enhancing the board’s capabilities. officer (CRO) has been hired for the risk management of Basel III looked at how implementing this would assessment. Board committee composition was addressed as well, department and the department reports directly to impact the bank and its liquidity. with particular emphasis on improving the make-up the general manager. This department has developed As a highly developed and advanced financial institution, of the bank’s risk and compliance. Efforts also focused an action plan based on a proposed risk strategy. In The bank hired a full-time board secretary to help the bank made changes across every dimension following on enhancing the board’s working procedures. addition, the board updated and approved the charter implementing the governance recommendations. the assessment, with a focus on the board of directors, for its risk management committee. internal controls and disclosure practices. Several additional recommendations that emerged from the assessment have been approved and are A risk appetite framework was drafted for the board The first priority was altering the composition and being implemented now, such as board evaluations and risk management committee approvals. The risk structure of the board and committees. Engagement of and establishing a formal nomination process. management policies (general risk management policy, Summary of Key Changes: Capital Bank Key Challenges Key Changes Composition: The board only had two independent board members. Composition: The number of independent directors was increased to three. Committee Composition: The membership of the audit Committee Composition: Board members with specialization were identified and assigned to committees committee and the risk committee overlapped for a broader membership base and reduced membership overlap between the audit and risk committees. Board considerably. Procedures: A formal work plan lays out issues to be discussed and a timeline for discussion Effectiveness Procedures: No formal work plan existed for board throughout the year. meetings. Relationship with Management: The board put in place a clear board charter and is working on an Relationship with Management: No board charters were authority matrix that integrates all authorities identified in existing policies making it accessible in place. The bank lacked an authority matrix to define ensuring accountability of management and the board. board and management roles and responsibilities. Risk Management: The bank needed to formalize risk Risk Management: Among the many changes made, risk management department reports directly to management, update the committee charter and risk the general manager; the update and board approval of the risk management committee charter, policies. and the review and update of the bank’s risk management policies. Risk management policies Management (General Risk Management Policy, Credit Risk, Market Risk, Liquidity Risk, and Operational Risk) Control Internal Audit and Controls: There was room for were reviewed and updated. improvement of internal audit and control through a more equipped audit committee. Internal Audit and Controls: The composition of the audit committee was altered to include more independent members, which have helped strengthen internal audit and controls procedures. Disclosure & Disclosure: Focus on non-financial and corporate Disclosures: Now, Capital Bank is more focused on non-financial and corporate governance disclosure. Transparency governance disclosure was minimal. 74 75 Impact Report Capital Bank reported the following impacts Impact Scorecard from the changes it made before and after the How have the changes impacted... corporate governance assessment about two years after recommendations were made to the board. Minor Moderate Strong Substantial The control environment improved significantly. Access to Capital With a more specialized and independent audit committee in place, the bank experienced a clear and positive impact on the effectiveness of the control Profitability environment. Operational sustainability was enhanced. The Reputation collective impact of structure and composition changes implemented contributes to improved sustainability. Sustainability The board functions more effectively and is more engaged. With deeper board engagement comes Organization Efficiency increased management sustainability. The board operations run smoother making Board Effectiveness engaging the board easier and more productive. With clear work plans and a full- time board secretary board meetings and board engagement has improved. Management Control 76 77 Credence * Founded in Egypt in 1983 by Mohammed Mahdy, Credence is a private family owned enterprise wholly owned by the Mahdy family. The company has four primary lines of business: real estate, hotels, attractions, and restaurants. Credence is in its second generation of family leadership. Its strong corporate culture stems primarily from the values and principles of the late founder, the current family leadership, and other long-serving executives. Credence Ownership Structure (%) Mahdy family 100 Why Change? Why did they Change? Over the past 30 years, the company has experienced In August 2009, IFC conducted a corporate governance aggressive growth, although it faced several challeges assessment of Credence. Following the assessment, as the market went through rough cycles. Credence one of the first changes made was the creation of a also underwent significant change, as it restructured new holding company, called Credence, which would its business and reduced its debt financing. To support oversee the two subsidiaries, Sindbad Club and Urbane. its growth, Credence recognized the need for a strong Credence implemented all of IFC’s recommendations. Business : Hotels, restaurants, and corporate infrastructure, including a sound framework “Our turning point was when our team attractions for corporate governance. The company also changed board structure and experienced the change, and finally saw that Location : Egypt composition, enabling the board to provide stronger improving our corporate governance was worth strategic direction to the company. In addition to Sector : Services all the time, effort, and money invested in it. They setting up separate committees for audit, HR and realized that having the team and resources in Type : Family-Owned Business nominations, Credence created a separate management place without a system to direct it was like having 2012 Profit : 60% (5 year average is 10%) executive committee for each of the two subsidiaries, a computer without an operating system.” (1 Year growth) which has helped strengthen daily operations. To # Employees : 1500 minimize risk exposure in key business areas, audit Islam Mahdy # Hotels & : 3 hotels Chief Executive Officer/Chairman and risk management functions were formalized and a Restaurants process was established for annual audits. In addition, *IFC conducted a Corporate Governance Assessment of Sinbad Group. Following-up on the recommendations, IFC assessment : April 2009 Credence altered the structure of its finance team, Credence was created as a holding company. and clarified lines of authority. 78 Egypt | Real Estate Sector 79 Summary of Key Changes: Credence Key Challenges Key Changes Composition: Revised the board to include three non-executive directors and two family members, only one of whom is an executive. Non-executive members have strong financial backgrounds. Composition: Board comprised of mainly family members Roles: Today, the board is involved in oversight. It approves strategy, business plans, and investment - three of the five board directors were family and decisions and sets the company’s risk appetite. A corporate governance charter and code of conduct lacked necessary skill-set. have been developed, and, these are reviewed and approved by the board annually. Roles: The board focused mainly on reviewing company Board Committee Composition: New committees were set up, including an audit committee comprised of financials. Effectiveness all non-executive directors, and an HR and nominations committee headed by a non-executive director. The board developed charters for both committees. Committee Composition: There were no board committees. Succession Planning: HR has put in place a process for succession planning. HR conducts annual performance Succession Planning: There were no succession plans appraisals for key executives, which are a reviewed by the board’s HR and nominations committee. for key executives. Corporate Secretary: Appointed a corporate secretary of the board that organizes board meetings, and serves as the liaison between the board and the management executive committee. Management Executive Committee: The company did Management Executive Committee: A management executive committee is formed at the subsidiary not have adequate coordination and communication level that is involved with day-to-day functioning. The key performance indicators are reported across the group. and discussed with the CEO on a monthly basis. Committee meetings have formal agendas with documented minutes. Internal Audit Function: The company was in the process of developing an internal audit function. Internal Audit Function: Developed an internal audit function that reports quarterly to the audit committee. Risk Management: Credence did not have formal risk Risk Management: The company created a separate risk management department to effectively management procedures and policies. manage risks. Management External Audit: The same external auditor had been in External Audit: Credence changed the external audit and non-audit/advisory services are handled Control place for five years. by a separate firm. Financial Management: The external auditor prepared Financial Management: The group financial management function was restructured and departmental and consolidated accounts, which compromised the heads were hired who report directly to the CEO, and improved capability of the department in independence of the audit process. consolidating of financial statements. Human Resources: The HR management function needed Human Resources: A newly hired HR head has helped to organize the HR function. Among the to be formalized and policies and procedures needed additions and improvements are written terms of reference for various positions, a new annual to be put in place. appraisal system, and yearly staff training programs. Family Governance Family Governance: It did not have any family governance Family Governance: The company engaged an external consultant to develop family governance policies. policies in place. 80 81 Impact Report Credence reported the following impacts in about Impact Scorecard two years after making corporate governance How have the changes impacted... changes in the organization. Minor Moderate Strong Substantial Board effectiveness and functionality has Management control across the subsidiaries has Access to Capital increased. The appointment of non-executives with been strengthened. Replacing the group CFO with specific expertise has added an outside dimension independent heads who report to the subsidiary’s to decision making. The board’s perspective was managing director has improved reporting and increased Profitability especially helpful in dealing with a volatile market in transparency for all units. the aftermath of the revolution in Egypt. Market reputation has been enhanced. The Reputation Organizational efficiency has improved significantly. company has received several awards. Most recently, Organization-wide change, along with the the Egyptian ministry of tourism has selected one of Sustainability institutionalizing of functions like HR and finance, its hotels as the top four-star hotel from among the has reduced reliance on a single individual and has 10 cities on the entire Red Sea for 2013. Credence was made a major difference in day-to-day operations. also named among the top three Red Sea businesses Organization Efficiency for protecting the health, safety, and welfare of its Ability to attract and retain better talent has 1,500 employees by the ministry of labor. increased. Corporate governance changes have made Board Effectiveness a real difference in the company’s ability to recruit— and keep—good people. Management Control 82 83 Dana Gas Dana Gas Ownership Structure (%) Founding Investors 40 Public Float 35 Private Investors 25 Dana Gas was founded in 2005 and is the first regional, private sector, natural gas resource enterprise established in the Gulf area. It was started by Crescent Petroleum and other strategic investors to pursue particular opportunities in the gas sector. Today, the company’s primary focus is on upstream activities in the gas sector. In all, their business focuses on: Natural gas ownership through long-term supply agreements, onshore/offshore gas transmission, gas processing, sale of dry gas to federal and state-owned utilities and other large industrial natural gas consumers in the UAE, and sale of associated petroleum liquids and other related products in international markets. Driven by the vision and leadership of its chairman, Hamid Jafar, and board of directors, Dana Gas, within a very short time of its founding, became a listed entity (Abu Dhabi exchange) via a successful, oversubscribed IPO. The core founders (comprised of prominent individuals and institutions mainly across the Gulf) of Dana Gas hold 40 percent stake in the company’s equity. Dana Gas currently holds assets and contractual entitlements to the largest private sector, integrated natural gas supply chain in the Gulf. Looking forward, the company plans to expand throughout the Gulf as well as the wider Middle East, North Africa, and South Asia (MENASA) region. Why Change? Why did they Change? The leadership of Dana Gas set a goal to attain best IFC, in conjunction with Nestor Advisors, conducted an practice standards in corporate governance. Dana assessment for Dana Gas in April 2006. The primary not only sought to separate itself from its founding focus of the changes pursued by the company were Business : Natural gas producer, focusing on upstream activity company, Crescent, as a fully independent and self- aimed at improving board effectiveness, strengthening Location : United Arab Emirates sustaining organization, but it also wanted to build a elements of their control environment, and bringing strong brand name in the gas sector. A further push their transparency and disclosure practices in line with Sector : Energy came in 2007 when Dana Gas issued about $1 billion international standards. They made both composition Type : Publicly Traded (Abu Dhabi) in convertible bonds in the UK market, increasing the and structural changes at the board level and took steps 2008 Revenue : $311 million (+10%) need for a review of its governance practices. This to create more active committees. They made perhaps (1 Year growth) helped finance the acquisition of Centurion Petroleum their most significant changes at the management # Employees : 400 in Egypt, which served as a major strategic milestone level, separating the chairman/CEO position and IFC assessment : April 2006 for Dana Gas. putting in place key senior executives (e.g., CFO, IT, HR, legal). These changes have helped Dana Gas operate fully independently of its founding company in a very short time 84 UAE | Energy Sector 85 Summary of Key Changes: Dana Gas Key Challenges Key Changes Composition and Roles: The company added four new members to the board, including two executives. Ten of the 18 board members are independent. They refined roles of board and its committees in Composition and Roles: Board had sixteen members, formal charters with clearer terms of reference and director duties. with just one executive who was the chairman/CEO; all others were non-execs. Had a good mix of skills on the Chairman/CEO: The company separated the role of chairman/CEO with the chairman resigning his board, but needed to clarify roles and responsibilities. executive duties (focusing on his board chairman duties). The company hired a new CEO. Structure: Company had established four committees: Structure: They now have three committees with audit & compliance, combined business development audit and compliance, executive, compensation, and and executive into a steering committee, and expanded remuneration to include corporate governance. Board business development. They needed to refine scope The committees function more actively and the board meets every six weeks with a focused agenda Effectiveness and functioning of committees. including formal committee reports. Procedures: The board met four times a year as a whole Advisory Board: After its founding, the company set up an international advisory board of highly board, but committees did not actively meet. They had accomplished, former industry executives. The advisory group meets twice annually to provide extremely lengthy agendas for the meetings. Corporate strategic advice to the board and management. The advisory group also helps develop strategic secretary was appointed, but needed better definition. business relationships when needed. There was no annual evaluation of the board. Procedures: With more active committees, general board meetings are more efficient. Many work proceedings have been formalized, including standard reports to the board. Internal Audit: The company hired an internal auditor and expanded the role of the internal audit function to ensure coverage of financial and operational activities. The IA reports independently to the board. Internal Audit: The IA function was somewhat limited in scope and did not report directly to the board. Risk Management: Dana Gas hired an outside firm to conduct a risk assessment and help establish more formal risk management processes throughout the company. Other changes include increased Risk Management: Dana Gas lacked a formal risk level of reporting, especially in projects, and improved discussion of risks at management meetings. management system. The company also needed to Management sharpen focus and monitoring of project risks. Internal Control: Changes included improved level of documentation of controls in financial and Control operational functions, redesigned key processes to strengthen checks and balances, and improved Internal Control: As a new company, Dana Gas required level of automation of controls. improved documentation and training on internal controls in both financial and operational processes Management Team Changes: Put in place key senior executives including CFO, HR, IT, legal; overseen and an improved level of automated controls. by the new CEO (recently separated from chairman position). Performance Monitoring: Strengthened their management oversight processes by formalizing internal management meetings and oversight procedures. 86 87 Key Challenges Key Changes Disclosures: Disclosures were limited to what is required Investor Relations and Disclosures: Dana Gas set up a formal IR function to help improve company by a publicly listed company. Dana Gas sought to Disclosure & transparency and outreach to shareholders, investors, and the public. Upgraded disclosures on its become best-in-class, but lacked information about Transparency website to include more candid company information. They proactively conduct investor road shows the company’s business performance and elements and other industry outreach activities and setup an IR office in the UK. of its governance framework. Impact Report Dana Gas reported the following impacts about two Impact Scorecard years after first embarking on its key governance How have the changes impacted... changes. Minor Moderate Strong Substantial The overall changes played a significant role Board of directors is much more efficient and Access to Capital in helping Dana Gas access about $1.5 billion in effective now with in-depth discussions and better financing in the two years that followed. Banks decision-making. Committee structures and new inquired heavily into the company’s corporate governance working procedures have improved time utilization. Profitability practices and structures during the financing and the changes reportedly helped comfort the banks in their Organizational efficiency and effectiveness have improved significantly. Processes are more Reputation decision. streamlined and automated, with less manual processing Reputation of the company has improved and embedded controls. They report operating as a Sustainability dramatically, due to efforts of the new investor formal, well-structured company rather than a start- relations function and the improved transparency up despite being relatively young. practices. Dana’s brand recognition and image has Organization Efficiency been heightened both regionally and internationally Management control and risk management have and they have received very positive feedback from been strengthened, with a sharper focus on risk investors and shareholders. and more formal processes and controls in place. Board Effectiveness Performance monitoring is much more active and The improvements have helped avoid unnecessary effective given the new internal reporting activities losses for the company, especially with regard to and the level of transparency through the entire Management Control related party transactions. There is more transparency organization is at a high level. in major transactions, so the board can ensure they are being competitively sourced. 88 89 Egytrans Egyptian Transport and Commercial Services Company SAE (Egytrans) was established in 1973 by the Leheta family in Egypt. The company provides integrated transport and other related services, such as warehousing, customs, distribution, and packing, across Egypt. Since its inception, it has grown into a leader in the transportation sector with nearly 400 employees. It operates from eight branches located strategically near Egypt’s main ports, airports, and transportation centers. The company is now publicly traded on the Egyptian Stock Exchange (EGX), but the Leheta family still owns about one-third of the shares (see chart below). The family is actively involved in the company with Mr. Hussam Lehata, the son of the founder, serving as chairman and Ms. Abir Lehata, daughter of the founder, serving as board member and senior executive. The company has enjoyed financial success recently with return on equity growing 15 percent in 2008, despite the economic slowdown. Egytrans Ownership Structure (%) National Invesment Bank 24 Hussam Leheta 9 Abir Leheta 7.3 Soad Sallam 6.5 Heba Leheta 6.1 Amani Leheta 6.1 Mostafa Mostafa 5.8 Other 35.2 Of Note: Transparency as Competitive Advantage Transparency practices in the MENA region are relatively Business : Provides transport services poor. Only about 61 percent of listed companies in MENA have an annual report and, of those, only about 25 Location : Egypt percent include substantive non-financial information.2 However, 69 percent of the world’s largest institutional Sector : Transportation investors in 16 countries identified transparency as a top priority when considering an initial investment.1 In Type : Publicly traded view of these factors, Egytrans made a significant effort to upgrade its public disclosures. For example, it now 2008 Profit : $2 million (+106%) discloses information such as governance and ethics practices, performance indicators, management discussions, (1 Year growth) ownership information, director details, committee proceedings, director attendance records, and even remuneration # Branches : 8 information (less than 5 percent of MENA public companies disclose remuneration2). As a result, Egytrans won # Employees : 380 the 2009 GTM/EGX “Best Corporate Governance” award and the 2008 EIOD “Best Disclosures” citation. More IFC assessment : December 2007 importantly, they have received positive market response from investors, business partners, and clients, and even received inquiries from other companies seeking to do the same. 1-E&YSurvey, 2005; 2-IFC/Hawkamah Corporate Governance Survey 2008 90 Egypt | Transportation Sector 91 Why Change? Why did they Change? The company has long recognized the value of corporate IFC conducted a corporate governance assessment the committee’s traditional role in financial reporting governance. It began the journey to upgrade its for Egytrans in December 2007 to help them address oversightt. governance processes in 2006, prior to the engagement these issues. After the assessment, Egytrans made with IFC. At that time, the company adopted a formal immediate changes to the composition of the board, Egytrans addressed the issue of succession planning code of corporate governance and other key policies adding new executives, non-executives, and two for key senior management positions. Egytrans to help instill a strong level of commitment in the independents, that collectively offer a more complete adopted formal succession plans and is in the process of organization. In late 2007, the company wanted to go set of skills. Egytrans also adopted a formal board implementing the plans, preparing several department further and ensure it was best-in-class among EGX- charter that sets out the board’s newly defined roles heads as potential senior management successors. listed peers. Egytrans asked IFC to benchmark the and responsibilities. company compared to international standards. The One of the major areas of change for Egytrans, and company also requested assistance in making other Egytrans also strengthened its management control one which has earned them much positive recognition, key structural improvements. For example, Egytrans environment by redefining the terms of the internal is the area of transparency and disclosure. Egytrans sought changes in the boardroom to strengthen the audit function, ensuring a direct reporting line to the significantly upgraded its public disclosures, adopting board’s oversight role and establish an appropriate audit committee. This also led to audit committee the highest level of international best practices. As a mix of skills. The company also wanted to upgrade improvements, such as defining a more complete result, the company received much public praise and public disclosure and address certain succession issues work plan to focus more time on oversight of the was granted an honorary award for their efforts in to secure the next generation of leadership. company’s risk and control frameworks, in addition to 2008 by the EIOD. Summary of Key Changes: Egytrans Key Challenges Key Changes Composition: The board had seven members, with four Composition: The board composition was altered to include a mix of executives, non-executives, non-executives and no independent directors. The and two independents. Independents bring much needed skills of marketing and HR to the board. board also lacked crucial skills needed for the fast- growing company. Structure: The board now features two active committees: the audit and corporate governance committee and the nomination and compensation committee. Both have formal charters and active proceedings. Board Structure: Company had established an audit committee, The audit committee’s formal annual work plan is in place, linked with the internal audit work plan. Effectiveness but it was not very active. Procedures: The board now meets frequently during the year, plus active meetings from committees Procedures: The board met as a whole five times a year, but that report back to the full board. They have a set work plan in place and formal agendas circulated committees did not meet on a regular basis. Proceedings before each meeting. were relatively informal with no set work plan. Internal Audit: The IA function was under- resourced Internal Audit: The company enhanced the IA function to increase its scope and capabilities, while and somewhat limited in their scope. It did not report changing the authority line so that IA now reports directly to the audit committee. to the board directly. Management Risk Management: Egytrans set up a separate, dedicated risk management department to more Risk Management: Narrow in scope and lacking focus Control actively monitor all types of business risk—especially transport-specific risk. They created a chief on key risks across the enterprise, risk management risk officer position and have risk management staff sitting in each department to help increase the was handled as part of a combined unit with corporate risk dialogue across the company. governance. 92 93 Key Challenges Key Changes Disclosure: Disclosures via website and annual report Disclosures: Made significant improvements in disclosures on its website as well as in their annual Disclosure & were minimal. They required more insightful information report to include ownership information, relationship between directors and major shareholders, Transparency about the company’s business performance and composition of board, details of board member, details of committees and meetings, attendance governance framework. record of each director at board meetings, and remuneration of individual directors. Succession Planning: The company has defined succession plans for the CEO, CFO, chief commercial and Succession Planning: The company had not specifically operations officer, and chief systems officer; plans are being implemented now with key individuals Shareholder addressed the succession issue of senior management, being prepared as potential successors. Relations & Other especially the CEO, which was combined with the chairman position. Investor Relations: Added an investor relations function to improve shareholder outreach and dialogue and developed dedicated site on webpage (ir.egytrans.com). Impact Report Egytrans reported the following impacts from the Impact Scorecard initial round of changes in 2007 and subsequent How have the changes impacted... changes made in 2008. Minor Moderate Strong Substantial Share price rose about 29 percent in the three Other companies are contacting Egytrans for Access to Capital months following the first improvements in 2007 guidance on how they can initiate corporate governance and then another 53 percent following subsequent changes. Egytrans has received considerable press changes in 2008. The market reacted strongly, with a coverage, and has fielded many requests to share Profitability sharp rise in both volume and price, reportedly largely experiences and lessons. attributable to the governance changes disclosed by Management efficiency and effectiveness has Reputation Egytrans (via website and other) both in 2007 and 2008. been impacted significantly from the board’s improved oversight and stewardship. The new Sustainability Access to capital improved significantly with directors have contributed significantly to matters interest from private investors aiding Egytrans in of financial management, HR, and risk; this has also raising $20 million to $40 million in equity. Following helped transform the company’s culture. Organization Efficiency its initial changes in 2007 and then its subsequent improvements in 2008, Egytrans reported heightened Shareholder dialogue and confidence have improved activity from private equity firms and current expansion substantially, resulting from the new investor relations Board Effectiveness plans (opening three sister companies). regime and the improved transparency and disclosure practices of the company. Market reputation has been significantly impacted Management Control – Egytrans was awarded the 2009 GTM/EGX Best Corporate Governance Award and the 2008 EIOD $ Financing assessed* $20 million approximately from 2008 to “Best Disclosures Citation.” Its public disclosures via * where CG was a major factor 2009/2010 (in 18 months) its website have set the benchmark for companies in primarily in equity Egypt and are often cited as best practice examples at conferences and workshops across the MENA region. 94 95 Jordan Duty Free Shops Jordan Duty Free Shops (JDF) is a public shareholding company that operates 17 outlets in the Kingdom of Jordan. The company was founded in collaboration between the public and private sectors. As a listed company on the Second Market of Amman Stock Exchange (ASE), JDF understood that strengthening corporate governance would yield benefits, impacting operational efficiency, the quality of decision making, and improve risk management. In recent years, JDF has focused on increasing sales in all categories to reduce reliance on revenue streams from its tobacco and alcohol categories. JDF Ownership Profile (%) Jordanian Social Security Corp. (SSC) 56.5 Jordanian Company for Joint Investment (JCJI) 13.8 Investbank 9.8 Why Change? Why did they Change? JDF faced some challenges as a result of political events, To support its growth and sustainability, JDF in 2011-2012, in the Middle East that negatively affected arranged for IFC to conduct a corporate governance tourism and regional travel. In order to address such assessment. The assessment included governance challenges and enable continued growth, sustainability change recommendations that focused on improving and diversification of its portfolio, JDF recognized the the internal control environment, disclosures, board value and importance of corporate governance as a committee structure, and policies. tool to achieve such an outcome. Through the engagement of board members and In addition, JDF has grown exponentially since its senior executives, the company was able to implement establishment in 1997. The company’s leadership advanced policies and procedures to manage risk. JDF recognized that improving and upgrading JDF’s also altered the structure of its board committees, with corporate governance framework would be essential independent board members as chairs, representing for its continued success. the majority of the committee members. In addition, the company improved its public disclosure, with additional information in the annual report for Business : Outlet, sales, trading shareholders and stakeholders. Important new policies Location : Jordan and procedures, such as a code of ethics, were put Sector : Retail in place as well. Type : Public Shareholding Company The company is in the process of introducing a number 2012 Profit : $11.24 million (-7%) (1 Year growth) of key changes to its risk management framework, including a new risk structure with specific policies # Employees : 443 and procedures, for both board and management. # Shops : 16 IFC assessment : May 2012 Several other recommendations have been approved and are in the process of being implemented. Among these ongoing initiatives are changes to the board composition to include more independent members. 96 Jordan | Trading Outlet 97 Summary of Key Changes: Jordan Duty Free Shops Key Challenges Key Changes Committee Composition: Committee membership Committee Composition: Committee roles were detailed; the number of committees was reduced; overlapped a great deal. Changes were needed in committee membership was adjusted to minimize overlap and potential conflicts of interest. Board the number and types of committees. Effectiveness Procedures: A formal work plan is now in place, covering the range of issues to be addressed Procedures: The board did not have a formal annual work plan. throughout the year. Management Risk Management: Risk management was not a formalized Risk Management : Among the key changes in this area was the formation of special unit for risk Control function; risk policies and procedures needed updating. management, comprised of executives and directors. Disclosure & Disclosures: JDF needed to improve disclosure on its Disclosures: There is more focus on regular review and updates to the information that is publicly Transparency website and by way of other public documents. disclosed on the company website. Code of Ethics: There was no explicit commitment to Code of Ethics: The board approved and put in place a clear code of ethics that commits them to a a code of ethics or corporate governance. high level of ethical conduct and corporate governance. When the website update is complete, the Commitment codes will be posted. to Corporate Resources: The company did not have in place an Governance individual to manage the implementation of corporate Resources: JDF appointed a project manager to oversee the implementation of all corporate governance governance improvements within the organization. recommendations from the IFC assessment. 98 99 Impact Report Jordan Duty Free Shops reported the following Impact Scorecard impacts from the changes made, both, before How have the changes impacted... and after the corporate governance assessment, about two years after recommendations were made to the board. Minor Moderate Strong Substantial Internal controls and risk management have Access to Capital improved markedly. The formation of the specialized unit has increased the company’s focus on risk and improved overall results. Profitability Board committees are performing better. With the restructuring of board committees, the performance Reputation of board committees has improved. The board functions more effectively with greater Sustainability engagement. With a deeper understanding of the roles and responsibilities of individual directors and Organization Efficiency the board of directors as a whole, the board is adding value to the company. Board Effectiveness Efficiency, transparency and accountability have all increased. By formalizing a number of existing practices into formal policies has helped the company Management Control improve in all of these critical areas. 100 101 Kashf Kashf is one of the leading microfinance institutions in Pakistan. Kashf was set up in 1996 and is now ranked among the top 5 percent of microfinance institutions worldwide in terms of outreach. Beginning with a small operational base, five branches in Lahore, and 5,088 customers, Kashf has grown into a 152- branch network with 290,000 active clients. Kashf employs approximately 1,000 headquarter-based and field staff. Through the years, Kashf has diversified its services to include general and emergency loans, small business loans, home renovation loan products, and credit for life insurance coverage. In 2008, the Kashf family expanded to include an investment vehicle, Kashf Holding Limited (KHL), and a microfinance bank, Kashf Microfinance Bank Limited (KMBL), a for-profit microfinance bank. In 2013, KMBL was rebranded as FINCA Microfinance Bank Limited after FINCA acquired a majority stake in the bank. Why did they Change? To enhance the board’s effectiveness, after the corporate governance assessment, Kashf added to its board a non-executive member with an accounting background to enhance board’s skill mix. In addition, Kashf changed its committee structure, setting up a new nominations committee and enlarging the audit committee’s scope, while designating a non-executive as its head. Two advisors with the relevant skills and experience were appointed to the HR and program and finance committees. Kashf took several key measures to strengthen its management control environment. The internal audit function has been further strengthened by ensuring Why Change? Business : Provides microfinance that it reports directly to the board’s audit committee. services to women Kashf places high value on its governance. By virtue of At the management level, Kashf instituted a compliance Location : Pakistan its not-for-profit status, good corporate governance function that reports directly to the managing director/ practices are central to its operations and help it CEO. Sector : Microfinance leverage its relations with its customers, donors, and Type : Not-for-Profit commercial lenders. During the first round of corporate Kashf also formalized succession planning for key 2008 Revenue : $11.9 million (+47%) governance reforms in 2007, Kashf established key senior management positions. At the highest level, (1 Year growth) Board committees to enhance board’s independence Kashf created a ‘leadership pipeline’ to identify and # Employees : 1,000 and effectiveness. As a testimony to its commitment designate potential successors to the current managing # Branches : 152 to good governance practices, Kashf underwent an IFC director/CEO and other key executives. In the area IFC assessment : July 2008 corporate governance assessment in 2008. The review of transparency and disclosure, Kashf has established provided further impetus for and led to a number of an inter-party transaction committee to advise on key corporate governance reforms at Kashf. related party transactions among group companies. 102 Pakistan | Microfinance Sector 103 Of Note: Good Governance Helps Crisis Response In Kashf’s board and management realized the importance funding for immediate use and, at the same time, 2009 is now below 0.3 percent. Kashf also created 2008, the confluence of the global financial crisis with of strategies to ensure the organization’s continued negotiate for an additional $7 million of funds for an independent internal audit function. The head steep food price inflation caused a significant decline financial sustainability. Taking on the role of crisis the following year. of internal audit reports directly to the board, and in growth projections for Pakistan’s microfinance manager, the board met twice to formulate a new established a compliance function reporting to the sector. Several microfinance institutions struggled strategy against the liquidity risk and the prospect Kashf also strengthened its risk management activities CEO. As a result of these crisis response actions, as the number of non-performing loans increased, for a sudden increase in loan defaults. This new by increasing risk training for loan officers and reducing Kashf was able to successfully manage the crisis and while as sources of commercial financing dried up strategy focused in part on leveraging donor funds the number of branches that each area manager address its ongoing liquidity and refinancing needs. at the same time. This significantly heightened the to offset the risk of expensive commercial loans. The must supervise, which has helped to concentrate credit risk for Kashf ’s existing portfolio. approach enabled Kashf to raise $1 million in grant their focus. The result: the PAR for all loans made in Summary of Key Changes: Kashf Key Challenges Key Changes Composition: The board had 12 members, with 10 non- Composition: Elected While the board size has remained the same, a non-executive member with executive and two executive directors. It lacked finance accounting experience now heads the audit committee. Formal terms have been set at three years, and accounting skills and had no fixed tenures for with a maximum of three terms. board members. Structure: The company has implemented the recommended changes to the committee structure, Structure: Company established audit, program and establishing a new nominations committee and enlarging the scope of the audit committee. Appointed Board finance, HR, ethics and management, and formalization a non-executive head of the audit committee. Two experienced advisors were added to the HR and Effectiveness committees; the audit committee was headed by a non- program and finance committees. executive who had close family ties with the president. Most committees needed to improve their capacity. Procedures: The board now meets five times a year and is focused on improving the level and quality of discussions. Committees are meeting one-to-two days prior to board meetings. These meetings Procedures: The board met on a quarterly basis, but have become more structured and result-oriented. Work plans are in place and formal agendas are committees did not meet on a regular basis. Committee circulated before each meeting. proceedings were relatively informal, with no set agendas. Internal Audit: Changed the IA function’s authority lines to report directly to the board to ensure its independence against management’s interference. The IA function now reports to the board on a monthly basis. Internal Audit: The IA function was instituted, but the head Risk Management: Supervision of branches and various regions has been enhanced. Each area manager of IA did not report directly to the board’s audit committee. now supervises five branches—compared to 10 previously—and regional managers oversee 35 branches—compared to 70 previously. Following a smear campaign run by certain political elements Risk Management: Risk management systems were in place, Management against Kashf, which resulted in strings of defaults, the company has now placed more emphasis but the relevant staff had to monitor the high number Control on addressing political risk. Other changes include increased staff training and actions to improve of branches and regions that compromised the quality liquidity risk by targeted analysis of the balance sheet. of the company’s risk management. In addition, political risk was not identified as an important area of focus. Compliance: Kashf instituted a compliance function with a direct reporting line to the managing director/CEO. This gives the company a helpful a pre-audit tool, providing flexibility to report more frequently on compliance issues within the organization. 104 105 Key Challenges Key Changes Disclosure: Non-financial disclosures, including those Disclosure: Kashf has significantly improved non-financial disclosure in its dealings with donors and other investors. relating to its governance, were not optimal. The Disclosure & disclosure failed to provide more insightful information Transparency Related-Party Transactions: An inter-party transaction committee was created to advice on related- about the governance framework and other non- party transactions among group companies. financial aspects of company operations. Succession Planning: The company has defined a leadership pipeline. There are formal succession Succession Planning: The CEO shared her powers with the plans in place for the CEO and other key executive officers, with three potential successors to the Shareholder president, who in addition was the CEO of KMB. The managing director/CEO identified. They have taken actions to help develop their potential successors Relations & Other ‘key-person’ risk was heightened due to less emphasis by giving them explicit, high-profile assignments to manage as a way to develop their leadership skills. on succession planning for the key executive positions. To further strengthen the board-management relationship, Kashf invested in a coaching program for KMB’s new CEO at KMB. Impact Report Kashf reported the following impacts about one Impact Scorecard year after making key governance changes to its How have the changes impacted... organization. Minor Moderate Strong Substantial Board effectiveness increased significantly. The Kashf’s reputation in the donor community has Access to Capital board is more visionary now. It is actively involved in improved significantly. Kashf is a leading recipient setting strategy and guiding management. Adding of DFID grants in Pakistan’s microfinance sector. Its a member with accounting expertise enhanced its reputation has also improved internally with staff Profitability oversight capabilities. morale higher and the company’s corporate culture being highly impacted with the changes. Crisis response was strengthened. The changes Reputation in the company improved overall stewardship and Risk management and control are much improved. leadership by helping the board and senior management The various risk management and control changes have Sustainability develop effective crises response strategies, such as reportedly strengthened Kashf ’s capacity to address improving balance sheet liquidity, in the wake of the credit and other types of risk. This will help protect financial crisis. the company from potential future crises as well. The Organization Efficiency PAR for all loans made in 2009 was below 0.3 percent. Access to additional sources of funding improved. Against the backdrop of a credit crunch and commercial Board Effectiveness lenders increasing risk premium on their loans. Kashf was able to access $25 million in commercial loans and $1 million in grants. The governance changes Management Control played a strong role in this success. It also helped in negotiations with donors for an additional $21 million $ Financing assessed* $25 million in loans and $1 million in grants in grants in the coming year to offset the risk of losing * where CG was a major factor approximately over 2009 (seeking another a substantial portion of the loan portfolio. $21 million over the next three years) 106 107 Medgulf The Mediterranean & Gulf Insurance & Reinsurance Company B.S.C. (Medgulf) was founded in Lebanon in Medgulf Ownership Profile (%) SLH Holding* 60.2 1980. Since then, Medgulf has expanded into the Gulf Orix 25.7 area, specifically targeting the Kingdom of Saudi Arabia IFC 14.1 (KSA) and the Kingdom of Bahrain in addition to other countries, such as Jordan. * SLH is 100 % owned by LFZ Holding In 1995, leading investment groups and major players in the financial and insurance sectors pooled their resources to create one of the largest insurance groups in the Middle East: Al Azizia Commercial Investment Company, Saudi Oger Ltd., Saudi Investment Bank and Lutfi El Zein Holding. These subsidiaries, along with Medgulf itself, comprise the Medgulf Group. Today, the Medgulf Group is among the leading Arab and regional insurance companies. The group provides the full range of risk coverage, serving retail and institutional markets through its operations in Lebanon, KSA, Egypt, Bahrain, UK, UAE, Turkey, and Jordan. Medgulf Group is registered and incorporated in the Kingdom of Bahrain as a Bahraini Joint Stock Company. Why Change? Medgulf Group was anticipating sustained growth, including continued expansion in the Middle East and other regions. To support this growth, Medgulf Group recognized the need for a strong corporate infrastructure, including a sound framework for corporate governance. Why did they Change? In October 2012, IFC conducted a corporate governance assessment for the Bahrain office of the group as a whole, as well as three key subsidiaries in the Kingdom of Saudi Arabia, Jordan, and Lebanon. The markets in Business : Insurance Saudi Arabia and Jordan are strictly regulated, so the “We at Medgulf believe strongly that corporate recommendations for these two subsidiaries were Location : Bahrain (Group office) governance is one of the corporate pillars of any in line with the legal requirements in these markets. institution. The leadership team in our group has 6 locations Although changes were mandated by law, Medgulf has been an ardent supporter of the implementation Sector : Insurance gone beyond the letter of the law with its corporate of our corporate governance program, and we are Type : Private and Public (subsidiaries) governance changes. There is a clear process in place for grateful for IFC’s help in facilitating, monitoring 2012 Profit : $46.4 million (N/A) implementation of policies and a clear line of authority. and supporting this program.” (1 Year growth) # Employees : 1.600 Most of the changes have taken place at the group Muhammad Bachar El Zein Executive Vice President, Medgulf IFC assessment : October 2012 level, including a better board structure and improved group oversight of all subsidiaries. A newly appointed board secretary works closely with the compliance department to implement the governance changes. Bahrain | Insurance & 108 109 Reinsurance Sector Summary of Key Changes: Medgulf (group level) Key Challenges Key Changes Composition: Four new members were added, bringing the total number to nine. The board now includes four independent members with backgrounds in international insurance industry expertise, finance, and investment. Shareholders are also represented on the board. Composition: The six-member board lacked the skill set, considering the company’s future direction. Committee Composition: Audit, nomination and remuneration, and executive management committees Board Committee Composition: There were no board committees. were set up. The audit committee meets four times a year and oversees internal and external Effectiveness auditors, as well as the compliance department. The nomination and remuneration committee follows Procedures: Needed implementation of best practice up on board assessments while the executive management committee follows up on executive procedures. management. All committees have active charters. Procedures: The board meets quarterly, more often if necessary. The meeting agenda and papers are circulated – target 15 days in advance and company secretary compiles comments before the meeting. Risk Management: Medgulf lacked formal risk management procedures and policies. Risk Management: A risk management department was formed in the Saudi entity. A similar unit is being set up at the group level. Internal controls and internal audit: The internal audit Management function needed improvement. Internal controls were Internal controls and internal audit: A full-time internal auditor has been appointed with direct access to Control not documented. the audit committee. Internal controls are defined and documented. Internal audit continues to improve. Human Resources: The HR function needed to be Human Resources: The company has developed a group-level HR manual that includes detailed job descriptions. improved, with the need for increased staffing. Disclosures: Medgulf follows the regulatory requirements of disclosure through board reports and is in the process of developing its website, which will include both financial and non-financial information Disclosure & Disclosure: At the group level, Medgulf needed to improve about the company. Transparency their reporting to the shareholders. Corporate Governance Policies: Several corporate governance policies have been approved, including disclosure, investment, connected party, and introduction to the board/new board member policies. In addition, the company has approved a code of conduct and a corporate governance manual. 110 111 Impact Report Medgulf reported the following impacts about Impact Scorecard one year after making key governance changes How have the changes impacted... to its organization. Minor Moderate Strong Substantial Medgulf Group’s status in the region has been The board functions more effectively. Meetings are Access to Capital elevated. With the implementation of corporate conducted with greater efficiency and organization. governance directives, the Medgulf Group is moving With a more diverse mix of backgrounds and expertise, fast to become a leading institution in the region, board members can provide valuable input at meetings. Profitability incorporating transparent, efficient, and compliant procedures and systems, including adequate succession Company efficiency has improved. Forming planning for all levels of management as well as at committees that periodically report to the board (i.e., Reputation the board level. every quarter) has helped increase efficiency at the company. Sustainability Shareholder involvement is more measurable. With more effective communication channels, Organizational and procedural controls are shareholders get necessary and adequate information, stronger. The audit committee has been effective Organization Efficiency making it possible for them to be more involved. in putting effective organizational and procedural controls. The employees of Medgulf have reported Access to capital has increased. Changes in the a positive impact and increased confidence in the Board Effectiveness group’s structure and operations have made it easier company. for the company to access the capital it needs to fuel continued growth. Management Control 112 113 Microfund for Women* Microfund for Women (MFW) is a Jordanian microfinance organization that was founded in 1994 as a pilot program Microfund for Women (%) Sukhtian Family 60 of Save the Children, a prominent international charity. Save the Children 40 MFW has since expanded to become the leading women’s microfinance service provider in Jordan, with an overarching goal of empowering female entrepreneurs throughout the country. With an average loan size of $380, MFW provides various types of micro-loans to individuals and groups. MFW’s current portfolio of about 87,000 active borrowers is the largest in the country, with 96 percent of its customers being women. MFW has long been recognized as an innovative leader in the Jordanian microfinance sector. Now, the organization is expanding to offer forms of nonfinancial services, such as vocational training, to help customers develop their trade skills. Why did they Change? IFC conducted a corporate governance assessment for The Sukhtian family holds a 60 percent ownership MFW in May 2009. The first priority was reestablishing stake in MFW; the remaining 40 percent share is held the board of directors, following the resignation of the by Save the Children. Mr. Ghiath Sukhtian currently prior board. Through a selection committee, MFW serves as chairman of the board, while his daughter, appointed three new members with diverse skill sets Ms. Muna Sukhtian, is deputy chairperson and general to join four prior members who were reappointed. It manager (GM). It has nearly 44 branches located around established formal committees for audit and risk, HR and Jordan, including several near Palestinian and Iraqi nomination, and product development. Work processes refugee camps, to help promote female entrepreneurs were modified to delegate more responsibilities to the in those hardship areas. committees. Important management-level changes were aimed at addressing performance issues. It appointed a new GM, COO, and CFO (prior to the study) who made Why Change? substantial improvements in risk management and 2008 was a transition year for MFW. It went through control, particularly regarding credit risk at the branch an expansion, going from 13 branches and 120 staff level. This has helped reduce MFW’s portfolio at risk. to 15 branches and 200 staff. The transition placed Internal audit and financial management functions significant strain on the organization and its board. were strengthened as well. In early 2009, the entire board of directors resigned in Business : Microfinance products and “The changes have helped improve our cost of order to reevaluate its own structure and effectiveness Since the implementation of its governance framework services for entrepreneurs funds and access to financing. We are able to get (primarily female) during this transition period. following the initial 2009 assessment, the governance much better terms and pricing from the market, Location : Jordan framework that MFW had started to put in place has which ultimately helps our clients and our long- The transition also impacted management level. The continued to date. MFW has further made significant Sector : Financial term operational sustainability.” company had significant turnover at the top, with changes to its management control environment by Type : Privately held three different GMs during this period. Performance establishing an executive management committee. Muna Sukhtian 2012 Revenue : $6.5 million (17%) declined as well: Portfolio at Risk (PAR) increased from Risk management and financial management functions Deputy Chairperson and General Manager, MFW (1 Year growth) about 2 percent to 4.7 percent. These issues ultimately have been strengthened with the establishment of * Microfund for Women is also featured in the 2010 edition of this # Branches : 44 took their toll on MFW’s operational sustainability formal planning and monitoring process. In 2011, MFW publication. This profile includes an update of accomplishments # Employees : 200 and profitability and led to the company’s decision since the first edition was published. hired an independent internal auditor, which has helped IFC assessment : May 2009 to engage with IFC, as a way to help reset the path to expand the scope of internal audit function. On- forward. going efforts include additional board restructuring. Jordan – Microfinance Sector 114 115 Summary of Key Changes: Mircrofund for Women (MFW) Key Challenges Key Changes Composition: MFW reconstituted the board during the Spring and Summer of 2009, adding three Composition: The entire seven-member board resigned new independent members who have brought deeper financial and microfinance expertise to board in January 2009 because of the group’s ineffectiveness. discussions. The board’s diversity remains the same: three out of seven members are women, MFW was in need of members with new skills and representing 47 percent of board membership. experiences to improve boardroom discussions and dynamics. Structure: Three active committees—audit, HR/nomination, and product development—now meet regularly. They have formal work plans and report frequently to the board. The audit committee is Structure: No formal committees existed. chaired by an independent director. Board Procedures: The board met about 10 times during Procedures: The board as a whole meets less frequently due to the work of the committees. The Effectiveness 2008, but usually in crisis- response mode. It lacked board has a formal work plan in place. The chairperson’s role as facilitator has been reviewed to a structured annual program and the chairperson help balance discussions. often dominated discussions. Roles: A new formal board charter highlights key board roles and feeds into annual plan. The company Roles: The board was not carrying out the full range also developed terms of reference for its board of directors, clarifying expectations from each on of its responsibilities. It was limited to addressing ad time commitment, participation, and preparation. hoc issues and monitoring key financial information. Directors required better understanding of their Management Relations: Management reporting to the board has improved. Board members are encouraged individual terms of reference and expectations. to interact more with management and offer expertise as needed. For example, a new board member with banking expertise has already contributed important input on some specific banking issues. Internal Audit: An internal auditor—a female—was hired to oversee the work of the IA team, which Internal Audit: A small in-house function was focused also includes three junior auditors. This has helped expand IA’s scope and activity to cover both narrowly on certain loan functions. MFW was in need financial management and key operational activities, particularly in high-risk branches. of a stronger IA function, with a wider mandate, particularly in light of the company’s rapid growth Risk Management: MFW hired a COO who led the redesign of credit risk processes and formally and recent performance issues. documented credit risk procedures. Other improvements include the creation of a new credit committee, better training for loan officers; revised credit thresholds to add more control over credit decisions. Risk Management: Portfolio at Risk had increased from about 2 percent to above 4.7 percent in 2008 due Financial Management: MFW hired a CFO who revamped many financial management processes, Management to rapid growth and an influx of new loan officers; including the financial close and reporting process. The new finance team also streamlined the Control branch processes required strengthening. chart of accounts, strengthened key financial process controls, upgraded skill sets and job functions of finance staff, and hired a chief accountant who has improved financial reporting. Financial Management: Financial reporting processes were weak and controls needed to be improved. For Treasury: Setup more formal treasury operations including better monitoring of foreign-exchange several months in 2008 the books were not closed and market risk; more actively manage funds and monitor portfolio risk. properly. Cost of Funds Control: MFW significantly improved their control over cost of funds by improving internal Treasury: MFW did not have a formal, active treasury analysis of funds costing and strengthening market analysis to find more optimal credit terms. function. Funds were managed in a reactive manner. Human Resources: The company has compiled detailed job descriptions and implemented new HR- related policies and procedures, which has improved HR functionality. 116 117 Key Challenges Key Changes Disclosure: With minimal website and annual report Disclosure & disclosure, MFW needed to increase the flow of Disclosures: Today, MFW’s website details the company’s positive socially responsible activities as well as its Transparency information to the public. financial information. The finance department has hired staff that focuses on ensuring accurate disclosure. Impact Report MFW reported the following impacts about three Impact Scorecard years after making key governance changes to How have the changes impacted... its organization. Minor Moderate Strong Substantial Access to finance has improved dramatically. Now, MFW’s market reputation has improved Access to Capital banks approach MFW with financing proposals—a substantially. Creditors and business partners marked change from the past when MFW had to have taken notice of the changes and responded very seek out financing. This is due in large measure to positively. MFW is considered the leading microfinance Profitability the organizational changes that MFW has made that company in the country. have enhanced its reputation in the market. Efficiency has been improved significantly. Notable Reputation MFW’s cost of funds has decreased significantly, benefits include quicker decision making, more efficient which has helped profitability. The company can processes, and better follow up from staff at all levels. Sustainability negotiate better terms with creditors, and has refinanced much of its debt for more favorable terms. Sharpened Client retention is strong, and stands at 86 percent. oversight and cost monitoring have helped as well. Clients continue to renew their loans with MFW on Organization Efficency the strength of its good reputation, an important The board functions more effectively. The board aspect of MFW’s mission and vision for the community. focuses on more strategic issues now, such as new Board Effectiveness product development. The creation of the new MFW has become an acknowledged regional committees has enabled better time utilization and leader. Among the honors received are a 2011 award more in-depth focus. for financial sustainability, a 2012 award for innovation, Management Control and a designation as the best fund to support women Credit and market risk mitigation is much stronger. in the Arab world from Dubai SME, an agency of Dubai’s Better credit monitoring and analysis, and improved $ Financing Assessed* $25 million approximately from January 2011 to Department of Economic Development. management of foreign exchange and interest rate April * where CG was major factor 2013 risk. MFW interest rates are the lowest in Jordan. 118 119 NRSP Microfinance Beginning in March 2011, Pakistan-based NRSP Microfinance Bank Limited (NRSP Bank), has provided microfinance services to economically challenged people, helping to mitigate poverty while promoting social welfare. Bank Limited NRSP Bank finds its roots in the National Rural Support Program, an NGO, which is the largest rural support program in Pakistan in terms of outreach, staff, and development activities. NRSP was established in 1991, and microcredit became one of its main activities. NRSP Bank was formed to develop a range of microfinance services and broaden access to finance to its client base. NRSP Ownership Structure (%) NRSP 52 IFC 16 KFW 16 Acume n Fund 16 Why did they Change? IFC conducted a corporate governance assessment of NRSP’s banking operations in August 2009, with a specific focus on the nominated board and management structures. Corporate governance was part of a broader IFC package of equity financing, strategic advice on transformation, and advisory services focusing on deposit mobilization and business planning. Based on IFC recommendations, the banking operation made several changes, starting with separating the roles of the founding organization and NRSP Bank to mitigate potential conflicts of interest. Other changes focused on board composition. While the NRSP Bank already had an experienced independent director for Why Change? its board, it added more independent directors in In 2007, NRSP’s board decided to transform its response to the assessment recommendations. Board microfinance operations into a regulated microfinance committees were formed and corporate governance bank, taking a phased approach, the bank was policies were formally put in place. incorporated with a capital base of Pakistani Rupee 1 billion-- (approximately $10 million). Of this, NRSP In addition, the bank developed a risk management contributed 52 percent. A group of investors, including framework and set up internal audit functions. Before Business : Microfinance banking “Corporate governance is like coffee. It is bitter IFC, Acumen Fund and KFW Development Bank, provided it began operations as a regulated entity, NRSP Bank Location : Pakistan in the beginning but once you get used to it, it is the remaining 48 percent. addressed another critical issue: the dual role played fantastic.” Sector : Microfinance by the CEO of the non-profit founding organization, Type : Privately held NRSP Bank set a goal to become a corporate governance who also served as CEO of the NRSP banking project. A Dr. Rashid Bajwa 2012 Post Tax : $1.5 million champion in Pakistan’s microfinance sector. NRSP separate fulltime CEO for the bank was appointed under Chairman, NRSP Bank Profit (1 Year Bank faced several governance challenges during the the State Bank’s fit and proper criteria. Appropriate growth=3.65 transformation process, but it remained committed disclosure, and fair and transparent management times) to proceed to establish sound corporate governance practices, supervised by an active board of directors # Branches : 39 structures and processes, by avoiding potential conflicts have raised stakeholder confidence. The bank continues # Employees : 1,033 with the founding NGO. These actions sent positive to make changes and plans to split its audit and risk IFC assessment : August 2009 signals to its investors to participate in the bank’s committee, and conduct annual board evaluations as development and success. a way to further improve governance. 120 Pakistan | Microfinance Sector 121 Summary of Key Changes: NRSP Bank Key Challenges Key Changes Composition: Six out of seven directors were members of the founding non-profit NRSP board. Composition: The bank added two members to the board. Of this nine-member board, two are independents who have banking expertise, three were nominated by investors, and one is a woman. Committee Composition: Since the bank as a separate Three-year board term limits were established. entity was not functional in 2009, it did not have any formal board committees. Committee Composition: An audit and risk committee headed by an independent director was Board created, along with an HR committee, also chaired by an independent director. Committee roles Effectiveness Procedures: Needed implementation of best practice and responsibilities were clarified. procedures. Procedures: The bank’s board meets quarterly and more often if necessary. Key-Person Risk: One person held the dual title of CEO of the NGO and CEO of NRSP Bank. Although this was Key-Person Risk: After seeking approval from Pakistan’s state bank and with the consent of investors, preferred during the bank’s formation, a subsequent NRSP Bank appointed a new—and separate—CEO to head for NRSP Bank. transition plan was recommended. Risk Management: There were no formal risk management Risk Management: The bank set up a board committee for audit and risk management and also formed procedures. an asset and liability committee of the management that looks at risks faced by the Bank. Management Internal Controls and Internal Audit: There was no internal Internal Audit and Controls: An internal audit function was created and a fulltime internal auditor Control audit function. Internal controls were not documented. with direct access to the audit committee was appointed. Internal controls have been defined and documented and staff is trained on them. Human Resources: The bank needed to hire for key managerial positions. Human Resources: The bank developed terms of references for key positions and hired managers. Disclosure: A disclosure policy was put in place, along with a board charter, corporate governance Disclosure & Disclosure: The bank lacked disclosure and governance code and a code of conduct. Given the ownership structure and NRSP’s majority involvement, the Transparency policies. bank also established policies for related party transactions and conflicts of interest. Minority Shareholder Rights: The needed to put in place Minority Shareholder Rights: Minority shareholders are well represented on the board, with each of Shareholder Rights minority shareholder protections. the minority owners nominating a director. Shareholder agreements protect minority rights. 122 123 Impact Report NRSP Bank reported the following impacts in Impact Scorecard about two years after embarking on the changes. How have the changes impacted... Minor Moderate Strong Substantial The board functions effectively. The inclusion Information sharing and communication have Access to Capital of women and independent directors with industry improved markedly. By reducing key-person risk and expertise has improved the board’s functioning and adding key managers, the management team functions contributed to a more effective decision-making process. more effectively, enabling better information flow. Profitability Organizational efficiency has been enhanced. Access to capital has increased. Following the Separating the non-profit from the bank has helped adoption of corporate governance recommendations, Reputation to clarify roles and streamline organizational processes. the bank has had an easier time accessing the capital it needs. Early performance indicators are strong. The Sustainability improved operational efficiency resulting from the Credit ratings have benefited. The JCR-VIS Credit governance changes has contributed to a strong Rating Company has maintained the bank’s entity Organization Efficiency performance—the bank earned about $1.7 million in ratings at BBB+ (medium-to-long term) and A – (short profit from its first full year of operations. term). Outlook from the assigned rating has been revised from “stable” to “positive.” Board Effectiveness NRSP Banks’ market reputation has been enhanced. Governance changes have not gone unnoticed, with Pakistan’s central bank reacting positively. NRSP Bank Management Control has set a goal to be a market leader in corporate governance. Access to finance Access to finance increased 4 times of equity due to the corporate governance improvements in the bank 124 125 SABIS® SABIS® is a global education management organization that operates public and private schools around the world. The first school, the International School of Choueifat, was founded in a suburb of Beirut, Lebanon in 1886. SABIS® began to expand outside Lebanon in the mid-1970s. SABIS®’s well-regarded global network includes 75 schools in 15 countries with over 56,000 students and 4,500 employees. Its main management centers are in Lebanon and the United States. SABIS®’s leadership in the education sector is a result of the vision and ambition of the current co-chairpersons, Mrs. Leila Saad and Mr. Ralph Bistany (hence, the name Sa-Bis). The ‘family touch’ instilled by these two individuals is indeed evident throughout the company as well as in the classroom. SABIS® is 100 percent owned by the Saad and Bistany families. Why Change? The company identified corporate governance as a lines, thus establishing a proper system of responsibility key factor in sustaining the company’s growth. As an and accountability across the company. SABIS® also organization that evolved from a small, family-run clarified its board responsibilities and relationship with company to a larger, multi-national enterprise, it required management through a formal charter and matrix of more formal internal structures and sounder systems authorities, with particular emphasis on the board’s of management. The company had outgrown many role in providing strategic guidance and management of its processes and needed to upgrade its oversight oversight. This has helped the board stay out of day- and control. Rapid expansion strains any company, to-day management issues so it can focus more on and SABIS® realized that its internal structures and stewardship of the company. processes, some of which remained informal, nascent, or untested, were failing to keep up with its evolving SABIS® strengthened its control environment in several business. The company also realized that, with members ways, such as adopting IFRS accounting standards of the third and fourth generations now involved at the across the group on a consolidated basis. SABIS® board and management levels, and with members of also improved its core financial and key operational the fifth generation having recently joined the company, systems and upgraded its management reporting it needed to address succession issues. capabilities. Perhaps the more important changes for SABIS® relate to succession planning and family governance. Succession plans are being developed Why did they Change? for all senior management positions to help ensure IFC conducted a corporate governance assessment the long-term continuity of the company. The two Business : Operates private and public “We expect that our governance efforts will allow schools in 15 countries for SABIS® in October 2007. The IFC review revealed families also are adopting several family governance SABIS® to continue on its impressive growth path Location : Lebanon and US that SABIS® was clearly committed to good corporate mechanisms—including employment and share transfer by creating the necessary corporate and family governance. The company had already demonstrated policies, and plans for a family council— to help manage Sector : Education structures to support that growth. Building the family- business relationship. Type : 100% Family-Owned this commitment by implementing some initial reforms robust governance structures will ensure the long- prior to the IFC review, such as revising the board’s term sustainability of the company and help guide # Schools : 75 composition and clarified its role. In the past, the future generations to continue to contribute to the # Students : 56, 000 company would mix board, management, and family SABIS® success story.” # Employees : 4,500 issues. Yet, important corporate governance challenges IFC assessment : October 2008 remained. One of the key challenges for SABIS® over Joe Achkar SABIS® board member the medium-term was to improve its accountability and decision-making structures. SABIS® developed a chart of authorities and clear reporting and communication 126 Lebanon | Education Sector 127 Summary of Key Changes: SABIS® Key Challenges Key Changes Composition: Board composition and terms of office were revised. It now consists of nine members, Composition: The eight-member board was comprised including two non-executives and another non-family member. The board is to include independent entirely of family members and executives. Dominated board members while maintaining family members at a minimum 50 percent of composition. by the families, the board had no independent directors. Structure: To increase board effectiveness and make better use of directors’ time, committees were Structure: There were no board sub-committees. set up, including for finance, nominations, and management development. Board Effectiveness Roles: In addition to traditional board topics, the board Roles: The distinction between board, management, and family duties and issues was clarified. They also handled management and family issues, all together. now have separate bodies for each of these areas. The co-chairpersons relinquished their day-to- day management role and now focus more on strategic issues. Procedures: The board met infrequently – many key decisions, including management decisions, were taken Procedures: The board’s working procedures were upgraded. It meets on a regular, quarterly basis, by co-chairpersons. making use of formal agendas that are distributed at least five working days before the meeting, along with supporting materials. Management Structure: SABIS® strengthened the senior management team by setting up regional Management Structure: Much of the decision-making management teams in the US, Lebanon, and elsewhere, which collaborate with each other frequently. and issue resolution was concentrated with the co- The group management team considers more macro-level issues, giving needed support to the CEO. chairpersons. In addition, better coordination between geographical locations was needed. Internal Audit: An internal auditor was hired to conduct objective assessments of high risk processes. Management Financial Management: To improve the management of Financial Management: To improve checks and balances and sharpen the regional focus of operations, Control company finances, more robust systems and processes— a network of regional corporate controllers was put in place. The company also implemented a new along with increased automation—were necessary. core financial system and improved management reporting capabilities. HR: Given the resource-intensive nature of schools, HR: A more formal HR function is now in place, headed by a group HR director who helps address SABIS® was in need of a more formalized HR function, more strategic personnel and HR issues affecting the company. The company is revamping its hiring which could help support business growth. process to improve control and quality of recruitment. Succession Planning: The fourth generation is now overseeing the day-to-day management of the company, allowing the co-chairpersons to relinquish control and transition on a gradual basis. A Succession Planning and Family Governance: The company formal succession planning process is being put in place. needed to develop a formal family constitution with Family Governance key family policies and formal family structures. There Family Governance: A family employment policy has been developed. Developing a policy on share ownership was no formal process for succession of chairperson that includes guidelines for ownership and transfer rights, as well as a share valuation methodology. and CEO in place. Conducted formal training for family members on board and family governance. A budget was set up to support the creation of a family council that will begin to address family issues on an ongoing basis. 128 129 Impact Report SABIS® is still in the process of making governance Impact Scorecard changes, but already reports the following impacts How have the changes impacted... about two years after beginning the improvements. Minor Moderate Strong Substantial Sustainability of the company to operate in future Board and management oversight of risk across Access to Capital generations has improved dramatically. Family the network of schools has improved sharply. The members are aligned in their approach to the families’ new systems and processes—with better information involvement in the business and there is agreement reporting—have helped management oversee its vast Profitability on how the next generation should be managed. network of schools across several countries and better Mechanisms are in place to objectively govern family anticipate and respond to potential operational issues. Reputation involvement in the company and to regulate share ownership. Management control has improved significantly. The company’s financial management is better Sustainability Board stewardship is enhanced significantly. The coordinated across the schools and less reliant on board now meets on a regular basis and has fuller, manual processing. The company can produce more in-depth deliberations. The board focuses more consolidated IFRS reports in-house and the deeper Organization Efficiency on strategic issues for the company rather than day- financial analysis has improved decision-making across to-day management issues, which has led to better- the management ranks. informed decisions. Family issues are now handled Board Effectiveness in a separate forum. Organizational efficiency and effectiveness has Management Control been strongly impacted, especially regarding SABIS®’ School Management System, which has helped streamline processes and improve school and operational decision-making. 130 131 Tourism Tourism Promotion Services (Pakistan) Limited (TPSP) is a subsidiary of the Aga Khan Fund for Economic Development (AKFED). AKFED is part of the larger Aga Khan Development Network (AKDN), a group of development agencies Promotion Services working in health, education, culture, and rural and economic development. TPSP owns and operates a network of seven hotels and a business complex in Pakistan, under the “Serena” brand name. TPSP is supported by its Switzerland-based parent affiliate company, Serena Tourism Promotion Services S.A. (TPS). The broad mandate of TPS is to realize tourism’s potential in selected areas of the developing world, in an environmentally sensitivity manner. TPS also operates Serena hotels in Kenya, Tanzania, Uganda, Zanzibar, Mozambique, Rwanda, Afghanistan, and Tajikistan. It builds, rehabilitates, and manages hotels and lodges that contribute to economic growth in an environmentally and culturally sensitive way. TPS, through TPSP has been active in Pakistan for many years. It has a strong local presence and familiarity with the local environment. Serena hotels have provided a showcase and a stimulus for local traditions and crafts, as well as accommodations in underserved regional centers. TPSP Ownership Structure (%) AKFED 75 IFC 19 Norfund 5 Pakistani Govt 1 Why did they Change? IFC conducted a corporate governance assessment for TPSP in August 2007. At the time, TPSP’s board of directors included capable individuals with ample experience in the hotel and construction industries, as well as others with accounting, finance, and legal backgrounds. To build on this, TPSP made changes to its board composition, adding new non-AKFED affiliated Why Change? Business : Owns and operates hotels directors. It also revised its committee structure to “The governance changes have had a direct effect and a business complex under TPSP was growing rapidly and its business becoming help clarify board and management roles. on our credit lines—our rates are low relative to ‘Serena’ brand name more diversified as it moved into commercial other companies in the market, stemming partly Location : Pakistan property development and leasing. To help address TPSP made several changes at the management control from our governance improvements.” Sector : Tourism Services the challenges and manage this growing business, level, including strengthening the independence of Type : Public (Unlisted) TPSP realized that it needed a higher skill level, an its internal and external auditor, enhancing internal Aziz Boolani CEO, TPSP optimal internal organization, and efficient decision- controls, and strengthening its HR function—critical for 2008 Revenue : $21.6 million (+5%) making structures. The changes were necessary to an expanding tourism sector business. TPSP also made (1 Year Growth) optimize current performance and to further prepare critical changes to its disclosure practices. In addition, # Employees : 1,370 the organization for continued growth. TPSP is also the company addressed some specific shareholder # Hotels : 7 (parent has 32 globally) considering an eventual public offering. As a result, consent rights issues to help protect and attract minority IFC assessment : August 2007 the company wanted to do what was needed to align shareholders. These efforts have helped prepare the its governance practices with market expectations. company for a future public offering. 132 Pakistan | Tourism Sector 133 Summary of Key Changes: Tourism Promotion Services Key Challenges Key Changes Composition: All nine board members were affiliated with another company that is controlled by AKFED, TPSP’s primary shareholder, thus compromising Composition: To ensure minority investor representation and that issues are vetted with alternative objectivity at times. points of view, TPSP added two new, non-AKFED-affiliated directors to the board. Structure: The board’s audit and finance committee Structure: A new charter for the board’s audit and finance committee was developed and the committee lacked independent members. now consists of non-executive directors. Board Effectiveness Roles: Board and management roles were not clearly Roles: Clarified roles of the board by developing an explicit board charter and clear lines of authority; defined, with the board handling many management- shifted some of the management duties from the board. type tasks. Procedures: Improvements include better agenda and briefing materials preparation. For example, Procedures: Agenda preparation and information flow to the chairman now sets the board agenda prior to the meeting, with input from other members. the board needed improvement. Most of management’s Briefing materials are succinct, insightful, and circulated to members well in advance of the meeting input to the board came through the CEO, with little to enable more thorough review. input from other executives. Strategic Planning: Management lacked a documented strategic plan to support financial projections; also lacked adequate board engagement in strategy development. Strategic Planning: Improved the strategic planning process by developing more robust three-year plans for review and approval by the board. The board is fully engaged with discussions of strategy Internal Audit: The IA function needed to strengthen and alternatives and formal performance reviews enable benchmarking against the agreed-on its independence by reporting directly to the board. strategic plans. It also needed to expand its scope of effort given the expanding business. Internal Audit: A new IA head was hired to expand its scope and reinforcing its independence by ensuring direct access to the board audit and finance committee. Management Internal Controls: Controls in some key operational areas Control did not conform to established policies, while many Internal Controls: Renewed focus on internal control effectiveness including increased effort by internal procedures were outdated. audit to help ensure conformity; and conformity is now also part of employee performance appraisals. Human Resources: The company did not have a head Human Resources: The company now has a head of HR which is helping strengthen the company’s of HR— a big risk given the HR challenges associated various HR policies and procedures. with the anticipated business expansion. Basis of Accounting: The company’s reporting is aligned with IFRS standards to help attract potential Basis of Accounting: Accounting standards complied with investors and other market stakeholders. Pakistan GAAP only, which hindered the company’s ability to attract international investors. 134 135 Key Challenges Key Changes Disclosure & Disclosure: Given its concentrated ownership, the Disclosure: To help prepare for a future public offering, TPSP increased the level of public disclosure of financial Transparency company disclosed limited information to outsiders. and non-financial information. Conduct Polices: TPSP has many dealings with other Conduct Policies: TPSP adopted a code of conduct, as well as formal policies and procedures for dividend payments, AKFED-affiliated companies, including the payment related party transactions, and conflicts of interest to help improve transparency in dealings with AKFED affiliates. Shareholder Rights of management fees and dividends to other AKFED Minority Protections: To attract and protect other minority investors, TPSP revised AKFED’s favorable consent right. and Stakeholder companies for various services. Minority shareholders are involved and encouraged to take part in all major/critical decisions of the company. Each Relations Minority Protections: All resolutions and board decisions shareholder has the right to participate in shareholders’ meetings and to raise questions or seek clarifications required the consent of AKFED representatives. from the company’s directors. Impact Report TPSP reported the following impacts since making Impact Scorecard the improvements about two years ago. How have the changes impacted... Minor Moderate Strong Substantial Access to credit has been impacted substantially Decision-making at the board level has improved Access to Capital as a result of the corporate governance changes significantly. Discussions are more open and candid. made by the company. As a result it was offered The board considers issues in depth including more lower rates on credit lines. discussion of alternatives and risks. Profitability The company reports that corporate governance Efficiency and transparency in the organization has played a significant factor in helping them access improved substantially; Positive changes in various Reputation credit facilities of approximately $20 million to administrative processes such as procurement have $30 million in 2008. streamlined processes, reduced costs, and improved Sustainability overall control. The changes have helped position the company for an eventual IPO and helped send a signal to TPSP-Serena Hotels was awarded the ACCA Organization Efficiency the market about the company’s emphasis on good Pakistan’s Approved Employer certificate in 2009, governance. due largely to its strong focus on HR improvements that resulted from the governance effort. Board Effectiveness TPSP and the Serena Hotel brand have an improved reputation in the market and in dealings with There is a feeling within the company and with customers and other stakeholders; improvements in key business partners that sustainability has Management Control disclosures have helped communicate many of the improved; changes have added more management company’s CSR attributes. structure to the company and positioned it for growth and performance on an ongoing basis. Access to finance $20-30 million approximately during 2008 136 137 Wadi Holdings Wadi Holdings Company SAE (Wadi) is a family-owned company with 14 subsidiaries, primarily in agribusiness. Its subsidiaries include business lines in poultry farming, olive oil production, feed manufacturing, and land cultivation. Wadi also has two companies that focus on glass container and cooling cell pad manufacturing. Wadi Holdings was incorporated in 1995, but its roots go back to the 1980s when four partners from Lebanon created Wadi Poultry in Egypt. Wadi Poultry remains the company’s leading subsidiary and its products have been awarded several quality awards in Egypt and the Middle East. In 1995, Wadi planted its first olive tree in Egypt. This quickly led to the successful rise of Wadi Foods, another prominent subsidiary, which now produces over 100 gourmet (many olive-related) products for export around the globe. Wadi is still majority owned and managed by members of the Freiji and Nasrallah families. The company now includes three generations of family members, led by the chairman, Musa Freiji. In addition to the chairman, two other family members make up the core senior management team. Wadi Ownership Structure (%) Freiji & Nasrallah Families 80.4 Institutional Investors 19.6 Why did they Change? IFC conducted a corporate governance assessment for Wadi from June to August 2007. Most of the changes were aimed at structuring the family relative to the business, improving the board’s structure, and formalizing the management control environment. Wadi initiated many of the board-level changes, including increasing the frequency of board meetings and formalizing proceedings to increase engagement. Why Change? A formal audit committee with an active annual work plan was created as well. The company, made significant Wadi has a very strong corporate culture, with a high progress in family governance. They established a level of staff loyalty and respect. The company has Business : Includes poultry farming, family council that has conducted several meetings. “Any investor seeing that we are structuring our olive oil production, long been committed to continuous improvement and An important initial outcome is a family employment business and structuring our family will have a land cultivation, feed & other new ways to maximize performance. In this spirit, policy that all family members approved for the entire greater degree of assurance to invest in Wadi.” non-agribusiness manufacturing Wadi recognized the need to address its corporate holding group. One family member—who also holds Location : Egypt governance as well as its family governance framework a senior management position—now serves as the Ramzi Nasralla Sector : Agribusiness to keep pace with its fast-expanding holding group. VP, Finance and Administration, Wadi lead corporate governance champion for the company, Type : Family-Owned Business More specifically, Wadi wanted to organize family helping to drive critical reforms. 2008 Profit : $31 million (80%) assemblies to involve all family members in broader business decisions that may affect the family. The Wadi has made strong progress in improving many (1 Year Growth) company also sought to initiate an inclusive succession control-related activities. Efforts to structure planning # Employees : 3,100 planning process. Furthermore, Wadi wanted to evaluate and control processes include developing more formal IFC assessment : August 2007 the effectiveness of its board and professionalize many business and staffing plans for each of the business of their management processes. lines and systematically monitoring performance. 138 Egypt | Agribusiness Sector 139 Summary of Key Changes: Wadi Holdings Key Challenges Key Changes Composition: Wadi’s seven-member board had diverse skill Composition: While composition has remained the same, with the board looking to hire an independent director. sets, but lacked independent directors. Structure: An audit committee was created. It has an active work plan, including reviewing the company’s Structure: There were no committees. financial reporting, risk management, internal control, and internal and external audit procedures. Board Roles: The division between the board— especially the Roles: Board and management roles were clarified. The chairman is gradually relinquishing his day-to-day Effectiveness chairman— and management was not clear. management role. Procedures: The board met infrequently and many key Procedures: Now, the board meets on a regular basis. Meetings are planned in advance and formal agendas decisions were made without a board majority. are circulated beforehand. The quality and frequency of reporting has improved. The implementation of more formalized procedures has increased the board’s engagement and activity. Key-Person Risk: The chairman/CEO made most key day- Key-Person Risk: Wadi restructured the organizational chart by business unit, appointed business unit heads to-day decisions. with more authority, started working on group strategy, and empowered leaders within the organization. Planning and Monitoring: Wadi lacked formal strategic Planning and Monitoring: The company began a formal strategic planning process each year with continuous planning, risk management, and performance monitoring board and management review. All business units prepare business plans and staffing/resource plans. Designed processes. process to monitor performance more systematically. Management Internal Audit: The company did not have an internal audit Internal Audit: Streamlined the internal audit process that is now producing reports for senior management Control function. and reporting to the board. External Audit: The external auditor was not fully External Audit: The role of external auditors was clarified. Wadi selected one firm to conduct the audit for independent—he performed some transaction work and the entire group. did not have the board’s full confidence. Financial Management: Wadi is implementing a new core financial system and other modules across the group. Systems: Required an upgrade of its core financial systems Group-wide key performance indicators were established; a more balanced scorecard is used. and other key operational systems. Disclosure & Disclosure: The website lacked many basic corporate details Disclosures: The Wadi Foods subsidiary has improved their disclosures especially for corporate social responsibility- Transparency about the group; the disclosure process needed improvement. related information. Improved disclosure for the rest of the group remains a work in progress. Succession Planning: Succession planning for key senior positions is underway. The company has defined plans Succession Planning and Family Governance: The company for family members involved in the management and directorship of the business and has carried out succession had not specifically addressed the chairman/CEO succession planning at various levels throughout the organization. Family Governance issue, elevating key-person risk. The family also needed ways to govern the expanding family, as they moved into Family Assembly and Policies: Established a family council now meets four times a year. Established a family in the third generation in the business. assembly meets on an annual basis. Developed a family employment policy governing the hiring of family members across the group. 140 141 Impact Report Wadi Holdings reported the following impacts Impact Scorecard about a year-and-a-half after embarking on the How have the changes impacted... changes. Minor Moderate Strong Substantial Governance changes significantly helped boost Wadi has solidified its market reputation. Wadi Access to Capital profitability in 2008. Despite economic slowdown reports that there is more awareness in the market last year, group profitability was at a record high for about the activities and performance of the group. This Wadi (80 percent growth during 2008 and 60 percent is felt even when family members attend business and Profitability during the first three quarters of 2009), largely aided by social functions, and in the qualifications of candidates the overall improvement in organizational effectiveness applying for employment at Wadi. Reputation stemming from the governance changes. Across the subsidiaries, there are improved control Changes have increased Wadi’s access to financing mechanisms and a better handle on risks. Risks are Sustainability and credit. Since the governance changes, Wadi reports more easily identified. Processes have been revised for that they are able to access bank financing and credit more active risk monitoring in all units. The company lines. The company has received better terms and has improved its compliance oversight and reporting Organization Efficiency rates. Wadi estimates that financing of $62 million of non-compliance issues. in debt and $6 million in equity has been supported by their improved corporate governance practices. The sustainability of the group for the next Board Effectiveness generation has improved dramatically. The positive The organization functions more efficiently and steps taken by Wadi to address key succession and effectively. The group has better control mechanisms, family governance issues will help ensure there is Management Control supported by efficient processes and improved systems an appropriate balance between the family and the support. business. The next generation is preparing now for $ Financing assessed* $62 million in debt and $6 million future leadership roles. in * where CG was major factor equity approximately from 2008 to 2010 142 143 The Yemeni Group for In business since 2003, the Yemeni Group for Contracting & Engineering, LTD., (YGCE) is a private, family-owned company, specializing in engineering, construction, and design. The company has completed a wide range of large- Contracting and Engineering Ltd scale construction contracting projects around Yemen. In addition to its primary business line of construction, YGCE owns three companies in the advertising, travel and tourism, and technology sectors. YGCE is currently in its first generation of ownership. It has expanded into the UAE market and collaborates on joint projects with Fares Al Sahraa for surveying and engineering consultancy. YGCE Ownership Structure (%) Mr. Abdullah Shaban 42.5 Eng. Hamoud Al-Motawakkel 42.5 Eng. Mohammed Al-Motawakkel 15 Why Change? Why did they Change? YGCE and been doing well and had been voted the IFC conducted a corporate governance assessment best Yemeni consulting firm for 2009 by Investment for YGCE in August 2010. The changes made by YGCE magazine which is supported by the investment were aimed at improving board structure, and the authority in Yemen. This further attested its success. management control environment. YGCE changed However, given the instability of the market and the composition of the board by adding independent Yemen’s economic challenges, the company decided directors. The company appointed a corporate secretary on a growth strategy focused on markets outside of who ensures the smooth functioning of board meetings. Yemen. To accomplish this, YGCE’s owners realized the The audit committee composition was changed to importance of having a well-balanced, modern company include independent directors, thereby enhancing the with the appropriate structure in place. Prior to IFC’s committee’s role. YGCE also created a HR committee Business : General Contracting & assessment, YGCE began to implement governance of the board. “With the great help of IFC advisory department, Engineering Consultancy reforms, including forming a board of directors and YGCE has achieved the most important steps establishing committees. While these measures YGCE has significantly improved its management control Location : Yemen towards a successful creative and sustainable environment by strengthening key functions in the Sector : Contracting & Engineering demonstrated a commitment to good governance, company lasting for generations. We started to finance department. Risk management activities have YGCE faced additional governance challenges that feel the positive impact of applying the corporate Type : Private, family owned business also been formalized. To improve internal controls, needed to be addressed in preparation for a planned governance rules on our company performance, 2012 profit : $600,000 YGCE hired a new internal audit manager for internal expansion and to support its evolving business. the confidence of our teamwork and more respect (1 Year Growth) audit and an external auditor. To ensure coordination from the society around us.” # Employees : 50 and communication of events and collective decision- IFC assessment : August 2010 making across the company, the management executive Hamoud Almotawakkel Vice Chairman, YGCE committee meets on a weekly basis. Additional changes focused on staffing, such as optimizing staffing levels and hiring staff with the requisite skills and qualifications. 144 Yemen | Construction Sector 145 Summary of Key Changes: Yemeni Group for Contracting and Engineering LTD Key Challenges Key Changes Composition: While the size of the board remains the same, the composition has changed, with two independent Composition: The board had five members, of which four directors who bring much needed finance and HR skills to the table. The board includes one executive director were executive. Three of these were also shareholders and and non-executives as chairman and vice-chairman. family members. Structure: An audit committee was created, headed by an independent director with a strong finance background. Structure: The board had sub-committees. However, these The committee supports the board on financial reporting, risk management, internal control, and internal and were more like management executive committees since all external audit. An HR committee was put in place as well. Board board members were executives in the company. Effectiveness Roles: Board and management roles were clarified and the board now operates as a formal board. Roles: There was no distinction between board and management. Procedures: The board meets regularly on a quarterly basis. Meetings are planned in advance and are structured by formal agendas. Procedures: The board would convene weekly on an average for three-hour meeting focused on management issues. Evaluation and Training: During its first full cycle of formal operations, the board started the process of self- evaluation and planned future training for its members. Structure: With a board comprised of all executives, there was lack of clarity of the structure in the company. Structure: A newly formed management executive committee, which is accountable for day-to-day decision Internal Audit: The company did not have an internal audit making and implementation. The chairman and the board do not get involved in this process. function. Internal Audit: An internal audit manager with appropriate qualifications was hired. This manager oversees External Audit: The company had employed the same internal audit and reports to the board’s audit committee. external auditor for three years. The IFC assessment Management recommended replacement or rotation after five years to External Audit: The external auditor’s role was clarified. YGCE selected one of the Big Four international firms Control retain independence. to conduct an external audit of the entire group. Human Resource Management: The company did not have Human Resource Management: Significant improvements have been made in the HR function. Recruitment, a workforce with the right skills, experience, or training. hiring, and promotions are now based on qualifications, aptitude, and experience. Financial Management upgrade: The lack of financial Financial Management upgrade: Hiring highly qualified people has helped to ensure the timely preparation management expertise caused delays in producing yearly of financial reports. financial statements and created considerable issues in developing financial reports. 146 147 Key Challenges Key Changes Disclosure & Disclosures: The company did not disclose any non-financial Disclosures: YGCE has strong views on the importance of social responsibility. Website upgrades are currently Transparency information to its stakeholders. underway to include additional information on YGCE values and its social responsibility-related activities. Family Governance: Because the company is in its first Family Governance generation of leadership, the family governance issue was Family Governance: As a starting point for developing a holistic approach to family governance, a new family not viewed as a priority. constitution was instituted. Impact Report YGCE has reported the following impacts one Impact Scorecard year after making key governance changes to How have the changes impacted... its organization. Minor Moderate Strong Substantial Improved decision-making process. YGCE reports Putting in place their governance practices is Reputation that the board now functions as a formal board, and helping put in place structures in other joint that adding independent directors has led to more projects. The company has diversified into other meaningful and objective discussions, resulting in a markets in response to the instability of the local Sustainability board that is fully engaged. The right skills on the market. They intend to put into practice governance board have resulted in faster decision- making and structure within all projects and joint ventures. Organization Efficiency increased confidence in the decisions of the board. Group sustainability has been reinforced. The Significant improvement in the efficiency and positive steps taken by YGCE’s first generation of Board Effectiveness functioning of the company. The clear distinction leadership increased shareholders confidence, confirming between the management and board’s role has resulted that the company was adopting the right strategies in management having clear authority and accountability to remain strong and viable for future generation and Management Control on decisions and faster resolution of issues. for the sustainability of the group. Market reputation has been strengthened. There is more awareness in the market about YGCE’s activities and performance, thereby improving its reputation in the market. 148 149 What about the investor’s point of view? How do they view corporate governance and how important is it to their investment process? A key part of the IFC Corporate Governance Program in MENA is working with private equity firms to incorporate corporate governance principles into their investment cycle. The goal is to equip these firms with the tools and knowledge needed to help their investee companies improve their governance and increase performance. This is a particularly important form of outreach to the region’s small and medium enterprises (SMEs), which represent over 90 percent of the total private sector market, since many private equity firms target these companies. For insight into the investor’s perspective, IFC solicited input from three regional private equity firms: Tuninvest, Catalyst Private Equity, and Foursan Group. Collectively, these firms have worked with 72 investee companies—15 current and 57 former investees—across MENA. In addition, IFC approached Endeavor Egypt, a non-profit supporting high impact entrepreneurs and connecting them to international investors. IFC asked them how corporate governance fits into their investment cycle and for examples of investee companies that have realized the impact of good governance. How important is Corporate Corporate Governance as part Governance in Investee of Investment Cycle Companies? The investor feedback confirmed that corporate Absolute necessity at Exit whether governance is a crucial part of their investment cycle. Key part of strategy is value creation via CG strategic sale or IPO From initial investment through to exit, corporate governance is a key part of their business model. The Promoter’s Following are highlights. commitment to change is key at this stage During the initial investment, the investors said that “Corporate governance is a core component of our Value Creation Significance (otherwise will corporate governance is important, but most firms they not invest) strategy. We generally target early stage SMEs, with the goal of target have low-to-average governance practices in place. increasing revenue five-fold in two years. About 20 to 30 percent Therefore, the critical point at this stage is the promoter’s of that value creation is from improved corporate governance.” commitment to make change. If the company appears Ennis Rimawi interested only due to the prospect of funding from Catalyst Private Equity the investor—rather than demonstrating an honest commitment to change for its own sake—they will Investor not invest. Commitment is the key to the value creation process and a prerequisite for investment. Investors emphasized the importance of working with Perspective the company at the onset during the investment to discuss and agree upon major changes needed. In fact, some suggested incorporating the most significant Initial Exit changes into the shareholder agreements. This Investment helps ensure a clear alignment of interests and expectations. 150 151 Investors reinforced the importance of strong corporate Tuninvest Helps Turn around governance practices in SMEs transitioning from small to Plastics Company through Good medium. Fast growing companies need to be set up Corporate Governance for change with appropriate systems, structures, and policies to enable companies to absorb shocks MENA private equity firm Tuninvest decided to take and respond to new opportunities and challenges. a 30 percent equity stake in a large, family-owned plastics company with a family-dominated board Investors noted the importance of establishing minority and management team. However, there were some shareholder protection mechanisms upfront. This covers governance issues: the company lacked strong control areas such as securing consent rights related to processes in various functions. And even the most management selection and remuneration, auditor basic financial information was not available, due to selection, investment and divestment decisions, weak transparency. Aware of the need to change, by-law changes, or changes to capital. the company committed to an improvement process. Through active engagement, Tuninvest helped the company address its governance gaps. Value creation through good Key Changes Impact Governance The investor feedback confirmed that corporate Value creation also comes at the management level with Revised board composition by adding new members with Tuninvest recently sold its equity stake, reporting that the governance is a crucial part of their investment cycle. particular control functions. Investors singled out the more diverse skill sets and perspectives. sale could not have taken place without the changes in From initial investment through to exit, corporate importance of additional control over the finance corporate governance. governance is a key part of their business model. function, including upgrading the CFO position, Formalized board procedures to meet more regularly, with Following are highlights. if needed. They ensure there is an internal audit formal proceedings. Board stewardship and oversight improved significantly. function that is independent and active and that Set up finance/audit committee with a mix of directors, led A more informed company strategy, including increased All the firms concurred that value creation through improved a qualified, reputable external auditor is retained. by a non-family outsider. market diversification, led to a 100 percent revenue increase corporate governance is a key part of their business model. The management team is scrutinized and changed in over a five-year period. Prior to the change, revenues After investment, the investors will immediately as needed and key processes related to planning Encouraged more active board engagement in strategy relied solely on local income. Now, 50 percent of revenue begin to work with the investees to strengthen and controls are often formalized. formulation. comes from foreign markets. their governance. Investors prioritize information disclosure as a means of Hired new CFO to oversee changes in the finance function Investor and creditor confidence grew due to better financial Value creation comes in many forms, but starts at the board level. demonstrating firm value to the market. Typically, this and improve accounting and control activities, including management, control, and transparency. Investors cited changes to the board structure and issue is addressed upfront, since it is a means of introduction of IFRS. composition, including the addition of outsiders to demonstrating firm value to the market. Investors The company attracted additional capital from a European upgrade skill sets and add different perspectives. cited the importance of improving both internal Improved management reporting and disclosure. investor who committed to a long-term relationship with the Immediately after the investment occurs, more and external reporting, disclosure of governance company and brought outside expertise to the transformation formal committees and work procedures are put and management practices, and transparency of process. in place, starting with a properly functioning audit risk and performance. These efforts are particularly committee. Investors also noted the importance important for companies interested in accessing Tuninvest estimates that the company’s valuation of the of increased board engagement in strategy and finance from banks or other investors. increased by about 50 percent over the five years, primarily financing. This contributes to better and more due to the governance changes made. comprehensive strategy development. It also ensures optimal capital allocation. 152 153 Impact Report Overall, investors cited significant impacts resulting from improved corporate governance in their investee companies. Investors reported benefits during the term of their equity participation in the form of reduced risk and improved performance, as well as benefits during investment exits in the form of valuation premiums. Some impacts were difficult to quantify or were too early to indicate, but overall, the investors offered a wealth of positive evidence supporting the power of good governance. Firm valuation improved significantly. One investor Investee companies experienced better access to Indicator Value cited a recent strategic sale exit that attracted a 40 finance. One investor said that corporate governance percent premium over the market price, due largely improvements represented 80 percent of the reason to good corporate governance. The company was that an energy company succeeded in securing $4.5 Number of Investees 72 an Insurance company that had made significant million. This company is in the process of securing an improvements to its governance structures, including additional $16 million in financing, and good governance (Past & Present Funds) a diverse, well-functioning board, sound management is playing an important role. control processes, and strong reporting and transparency % CG Improved Performance* 79% practices. The investor noted that the good governance Investee companies have improved risk practices were very apparent to the buyer, a western management and cost control. Prior to making investment firm, and gave them a very high comfort governance improvements, the new project risk factor % CG Improved Access to Finance* 63% level with the investee, making the deal go very for one energy services investee company stood at 30 percent risk factor in new projects due to poor $ Financing CG Helped Access** $ 120 to 150 smoothly. In another example, the valuation of a plastics company increased by about 50 percent over governance. This was eliminated due to improvements a five-year period, due largely to the governance in their project risk management activities and increased * Many are still in-progress and too soon to tell changes made at the board and management levels board oversight and control. The improvements ** Some could not estimate accurately (see text box). also led to better decision-making and a 20 percent improvement in process efficiency. Investee companies improved their performance. One technology investee company increased profitability Investee companies made strategic gains and by 20 percent over a two-year period due to board- became better stewards of their future. Following In 2010, IFC For emerging market fund investment decisions, corporate governance is a critical factor. level improvements— separating the role of chairman changes to its structure, the board of a beverage conducted from CEO, creating an audit committee, and clarifying investee company, which had over-expanded into an Emerging Investors are willing to pay a premium for better board and management roles—and management new products and markets, became more engaged Market governed emerging market firms. control process changes—independent internal audit, in operational strategy and oversight. As a result, the Investor streamlined procurement, and improved decision- dropped unprofitable product lines and re-focused on survey,* ** Investors often do not invest in emerging market making coordination. These actions improved creditor new markets for its core, high-value products. The which showed: companies with poor governance. confidence as well, making the more “financeable,” changes helped turnaround the company from a ***By Vikramaditya Khanna Lack of transparency is a red flag for emerging market according to the investor. net loss of 5 percent to a net profit of 10 percent and Roman Zyla, 2010 in three years. investors. 154 155 The collective evidence reported by these companies leaves little doubt as to the potential impact of good corporate governance in MENA. Nearly all firms profiled reported that corporate governance has had a substantial impact on their ability to access capital. The evidence also clearly demonstrates the significant impact on firm performance in various forms—profitability, reputation, sustainability, efficiency, and effectiveness. At the same time, investors emphasized the transformative properties of corporate governance in managing risk and creating firm value. Looking forward, there is still much progress to be made. In light of the ongoing recession and the high-profile crises that have shaken the region, efforts will need to focus across entire market systems. A stronger push for good governance from the various market intermediaries (see Figure below) will help strengthen market forces and encourage action in companies. Ultimately, this will benefit economies on a broader level, as the collective of individual firm-level improvements fuels private sector growth. Improving Corporate Governance across Market Systems for Broader Economic Benefit Intermediaries Press Market Regulators Transparency is Regulators promote improved; Engourages sound CG (codes, good CG regs) Companies improve Investors Companies Performance Sustainable Investors incorporate Take actions to CG in investment improve their CG) Private Sector process Companies Growth improve Access to Capital Institutes Consultants Other “Markets with poor corporate governance practices are less Sustainable Institutes Consultants equipped Other Intermediaries attractive to investors because of a heightened risk. The majority equipped to continue to help companies equipped to help of companies in the Middle East and North Africa are family CG advocacy companies businesses. For those companies to thrive, they need to adopt better corporate governance practices, to create businesses that perform well, employ more people, and contribute to the overall Practicing What We Promote good of each nation’s economy.” The IFC has long recognized the value of good corporate Mouayed Makhlouf governance. We have taken great strides to firmly Director, Middle East & North Africa Region, IFC integrate it into our investment processes. Every IFC investment includes corporate governance due Final diligence. IFC Advisory Services works closely with IFC investment officers and portfolio managers to help address corporate governance challenges in client companies. It is a core component of our business Word model and part of the value addition we seek to offer firms. IFC’s positive experience working with companies that have reaped benefit from governance improvements form the basis for our active promotion of good corporate governance in MENA and in markets around the world. 156 157 Annex 1: Contributors Company Contributors IFC Assessment Teams Abu Dhabi Commercial Bank (ADCB) Egyptian Transport & Commercial Services Abu Dhabi Commercial Bank (ADCB) Egyptian Transport & Commercial Services Rami Raslan, Senior Board Secretary (EgyTrans) Sebastian Molineus; Nicholas Krasno (Consultant) (EgyTrans) Amira El Saeed Agag, Martin Steindl Simon Copleston, General Counsel Rania Farouk, Corporate Secretary Ask Maali Qasem (Consultant) Jordan Duty Free Ask Jordan Duty Free Yehia El Husseiny; Andrew Cunningham, Amin Amin, Chief Executive Officer Haifa Al-Majali, Head of Legal Affairs Maali Qasem (Consultants) Bank Audi Joumana Coben, Sanaa Abouzaid, Sebastian Bank Audi Kashf Molineus, Yasser Charafi; Kashf Farid Lahoud, Corporate Secretary Rosehaneh Zafar, Chief Executive Officer Nestor Advisors (Consultant) Kaiser Naseem, Mahwesh Bilal Khan, Martin Steindl, Mohsin Chaudhry Bank of Palestine Medgulf Bank of Palestine Mahmoud Shawa, Deputy Chief Risk Officer Hoda M. Barrage, Group General Manager James Christopher Razook; Medgulf Rushdi Al-Ghalayini, Deputy General Manager, Kalyani Santoshkumar (Consultant) James Christopher Razook, Yehia El Husseiny Chief Risk Officer Microfund for Women (MFW) Fatina Abu Okab, Deputy General Manager Butec Microfund for Women (MFW) Hani Nigim, Head of Human Resources & Corporate James Christopher Razook, Martin Steindl; Badri El James Christopher Razook, Khawar Ansari Governance Committee NRSP Microfund Bank Limited Meouchi (Lebanese Transparency Association) NRSP Microfund Bank Limited Butec Rashid Bajwa, Chief Executive Officer James Christopher Razook, Khawar Ansari, Cairo for Investment & Real Estate (CIRA) Mona Akl, Vice President Mahwesh Bilal, Mohsin Chaudhry Amira El Saeed Agag, James Christopher Razook SABIS® Cairo for Investment & Real Estate (CIRA) Joe Achkar, Board Member SABIS® Capital Bank Hassan El Khalla, Chairman Martin Steindl, Sebastian Molineus, James Christopher Razook, Yehia El Husseiny Tourism Promotion Services Pakistan (TPSP) Yehia El Husseiny Mohamed El Kalla, Chief Executive Officer Aziz Boolani, Chief Executive Officer Credence Amira El Saeed Agag, James Christopher Razook; Tourism Promotion Services Pakistan (TPSP) Capital Bank Kaiser Naseem, Mohsin Chaudhry; Orouba Al Taher, Corporate Secretary Wadi Holding Kalyani Santoshkumar (Consultant) Nicholas Krasno (Consultant) Ramzi Nasrallah, Vice President Credence Dana Gas Wadi Holding Islam Mahdy, Yemeni Group for Contracting and Engineering Philippa Grant, Sebastian Molineus; Chairman & Chief Executive Officer Amira El Saeed Agag, Martin Steindl, Philippa Grant Limited Nestor Advisors (Consultant) Dana Gas Hamoud Almotawakkel, Vice Chairman Yemeni Group for Contracting and Engineering Mohamed Nour El Tahir, General Counsel Limited Amira El Saeed Agag; Afifi Ahmed Afifi (Consultant) Company Contributors IFC Report Contributors Ennis Rimawi, Catalyst Private Equity Amira El Saeed Agag Hakim Khelifa, Tuninvest James Christopher Razook Nashat Masri, Foursan Group Kalyani Santoshkumar Khawar Ansari Linda Jacqueline Clark Mahwesh Bilal Khan Martin Steindl Mohsin Chaudry Sarah Cuttaree Yehia El Husseiny 158 159 Annex 2: About the IFC program Program Activities I. Capacity building in intermediaries Program Purpose and Objectives We help build capacity in market intermediaries to support adherence to corporate governance practices across The IFC MENA Corporate Governance Program, market systems on a sustainable basis. We work with various intermediaries, such as regulators, corporate based in Cairo, aims to advance corporate governance governance institutes, centers for directors, consultancies, educational institutions, and the media. We provide practices across the MENA region. The program has subject matter training to these entities on board practices, shareholder rights, risk management and control, been active since 2005. The goals of the program are transparency and disclosure practices, and family governance. We advise regulators on development of codes to help MENA companies: and listing rules related to corporate governance. Through these various activities, we also promote diversity and gender participation. In addition, we work with small and medium enterprises (SMEs). A specialized SME Improve access to affordable financing leading to greater Corporate Governance Toolkit was designed with the specific governance needs of SMEs in mind. investment, higher growth, and more employment. Improve performance through better strategic decision II. Company assessments making and managerial oversight, leading to more A key part of our program is working with individual companies and banks in MENA to assess their corporate efficient management and better asset allocation. governance practices and identify opportunities for improvement. The goal is to demonstrate the impact of good The intended developmental impact is to stimulate corporate governance to the market by providing actual company experiences (i.e., the basis of this report). private sector development, leading to job creation When conducting assessments, we follow our IFC Corporate Governance Methodology (for more go to www.ifc. and poverty alleviation. org/corporategovernance). Broadly, the methodology considers these dimensions: To achieve these goals, the program has the following Commitment to good corporate governance: The Disclosure and transparency: The availability of primary objectives: demonstration of a clear focus on effective structures timely, accurate, relevant, complete, and actionable 1. Build the business case for corporate governance and processes for achieving the benefits of good information equally to shareholders and, as among banks and companies and help them corporate governance. appropriate, to other stakeholders, including implement good corporate governance practices; regulators. Board functioning: The existence of a competent, 2. Assist investors in improving corporate governance legitimate, well-structured, and effective board, Treatment of shareholders and stakeholders: The equal practices of investee companies; with proper composition, structure, and work treatment of all shareholders, including protection 3. Build capacity of key market intermediaries, procedures. from abuse from company insiders. including regulators, advisors, institutes, educators, and the press, leading to sound market systems; and Management controls: The presence of an environment 4. Help create sustainable corporate governance facilitating the achievement of organizational institutes and institutes of directors. objectives, management of risk, and the integrity of assets and financial information. In the event of a family owned company, it is also assessed on the existence of appropriate mechanisms to help govern the involvement of the family in the business and address other family matters. The methodology is tailored for each specific company. The primary outputs of each assessment are a list of recommended changes to improve corporate governance and a plan for implementation. The corporate governance improvements of the 19 assessment companies featured in this report have reportedly helped these firms access significant financing over the past two years, ranging from $25 million in one company to $2 billion in another. Specialized services to IFC Clients The program also provides help to IFC clients in the areas of: improving board effectiveness; improving family business governance; improving the control environment. 160 161 IFC MENA Corporate Governance About IFC Program Results IFC, a member of the World Bank Group, is the largest (Includes efforts of partners) global development institution focused exclusively on the private sector. Working with private enterprises in about 100 countries, we use our capital, expertise, and influence to help eliminate extreme poverty and boost shared prosperity. In FY14, we provided more than $22 billion in financing to improve lives in developing countries and tackle the most urgent challenges of development. For more information, visit www.ifc.org. entities received advisory companies and 6,477 services through awareness raising events, 161 banks were reached through in-depth model documents, etc. advisory services. participants from over 10 24, 586 countries in the program’s workshops, training events, seminars, and conferences. journalists trained in 4 corporate corporate governance 60+ governance workshops for the financial press in Egypt, UAE, 23 codes were launched in 15 countries with and Morocco. IFC’s assistance. corporate governance Institutes of 10 Directors in Egypt, Pakistan, Lebanon, Jordan, UAE, Yemen, Tunisia, Morocco, and Algeria launched with IFC support. entities reported an entities receiving 123 improvement in their company’s performance 82 investment and/ or financing due resulting from IFC assistance. to IFC’s assistance. new training modules recommended laws, 39 developed and 565 trainers trained on 35 regulations, amendments or codes were enacted corporate governance. with IFC support. 162 163 Regional Hub: Cairo, Egypt Khawar Ansari Corporate Governance Program Manager Middle East and North Africa 2005 C Cornich El Nile Nile City Towers, North Tower, 24th floor. Phone: + 20 (2) 2461-9140 / 45 / 50 Fax: +20 (2) 2461-9130 / 60 Ifc.org June 2015 164