10 May 2012

UAE: Desert, tallest building in the world, greatest marble Mosque and now corporate governance regulations

As part of the Full-time MBA programme I travelled to the United Arab Emirates (UAE) for one of the electives introducing us to the complex and exciting world of investing in the MENA Region. One of the lectures left a rather significant lasting impression. Nick Nadal, Head of Hawkamah, the Institute for corporate governance spoke of the challenges, improvements and the road ahead for corporate governance in the region. The lecture was given in the Dubai International Finance Centre (DIFC), which is a financial free zone area with exponential growth: from a starting point of 19 firms, the DIFC now host beyond 800.

This growth has captured the imagination of the businesses of the world both inside and outside the DIFC drawing particular interest in a rather touchy and often complex subject- corporate governance. Lately, corporate governance has attracted much attention due to two big corporate scandals- Japan’s Olympus and Murdoch’s News Corporation, the parent company of The News of the World involved in the hacking scandal in the UK.

Despite its recent fame, corporate governance is usually a key issue for investors such as Private equity firms and Hedge funds, and a robust governance framework helps enormously to increase foreign direct investment in any region. Nick Nadal estimates that only 33% of the companies in the region comply with the corporate governance code. Corporate governance is also perceived only as a “compliance” issue whereas in other countries such as the UK, corporate governance is perceived as lowering the cost of capital to the business and therefore increasing efficiency.

The key message from Nick Nadal was that corporate governance is in a current evolving state in the region and although major steps have been attained, the path is still long. Furthermore, whilst it is desirable that international regulations are firmly implemented in the region, certain idiosyncrasies must be respected. Savvy investors need to be aware that cultural differences do not become an obstacle for business deals.

Exploring the UAE was an eye-opening experience. Dubai and Abu Dhabi have a very concrete plan to diversify their economy and be at the forefront of the technological advancements in the world. From the very moment I stepped into one of Emirate’s A380, passing through the jaw-dropping real estate developing in the region which boasts, among other things, the tallest building in the world, an artificial palm island, and one of the largest Mosques in the world (Sheikh Zayed Grand Mosque), UAE is a great example of how a region can use its resources and decrease its liabilities to insert itself into the twenty first century. Robust corporate governance, although not as fancy as a USD 20 billion plus development in the sea, is important for the region and its future development.

Santiago Fontiveros

FT MBA 2011-2012.

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