GCC boards need to focus on diversity, transparency and independence

Dubai-UAE, 18 January 2022 – In the GCC, countries are under increasing pressure to align their companies’ governance practices with what are considered best practices in other regions. A new report from board and leadership advisory firm Heidrick & Struggles found that change is likely to be accelerated in the next few years, driven by ambitious government privatisation agendas, energy transition, and increasing foreign direct investment.

Company boards govern firms, set benchmarks and goals for a company, and set the overall tone for an entire organisation. Boards must be cohesive to run operations smoothly and need to be prepared for whatever comes their way.

The report surveyed 113 board directors and c-suite executives from Bahrain, Kuwait, Oman, Saudi Arabia, and UAE on corporate governance and board effectiveness trends. Arabian Business spoke with Markus Wiesner, regional managing partner, Heidrick Consulting for Asia Pacific, Middle East, and Emerging Markets, at Heidrick & Struggles and Jane Valls, executive director, GCC BDI about what boards need to do to align with global standards, the importance of board independence and diversity, and why having the right people in place is integral.

How can GCC boards align with global standards?
Wiesner: In recent years boards in the GCC have made significant progress towards aligning with global governance and board effectiveness standards. Our recent GCC Board Survey found the areas where things have progressed the most are in better awareness of board roles and responsibilities, increased presence of independent directors and separation of chairman and CEO roles. There are also a number of external factors that are positively impacting board effectiveness in the region including changes in listing rules and securities law, company law, international regulatory trends and investor interest.

The GCC is actually ahead of some regions in new workforce practices. For example, the UAE government announcing a 4.5-day work week for government entities and public schools is an excellent example of government practices that aim to create a modern solution for their workforce.

GCC-based boards need to do more is in facilitating even greater overall diversity. For example, 6 percent of companies globally have a female CEO, and the GCC is slightly behind at 5 percent. According to the Board Effectiveness Review 2021, 43 percent of GCC boards still have no female directors, and only 28 percent have one. In Europe by contrast, women filled 48 percent of new director seats last year.

Overall, GCC boards have made significant progress and are in many ways already aligned with global standards, but in order to maximise effectiveness in the region, GCC businesses must not just take global best practices at face value, but adapt them to the needs of the region. Governance practices from other regions must be tailored to local needs in order for them to take root. With global best practices as a guide, GCC boards can determine how growing investor demands for greater transparency and independence can be met on their boards with local cultural practices and nuances in mind.

How can governance be improved?
Valls: Good governance is the foundation for a company’s long-term sustainability and resilience. The quickest path to improved governance is ensuring adherence to global best practices and keeping policies and procedures up-to-date. However, in today’s fast-moving dynamic environment, with multiple risks and uncertainties for companies to manage, it is vital to focus on strategic direction and risk management, stakeholder communications, and strong ESG practices. Most importantly, the role of the board in setting the tone at the top, in providing dynamic and proactive leadership, is essential.

How does the board of executives generally view how their firm(s) navigated through the pandemic?
Valls: The majority of our respondents (61 percent) believed their boards had the right processes and skills in place to manage working through the pandemic. Twenty-two percent of the respondent pool bravely acknowledged that their boards did not manage the pandemic well, but have learned lessons in the process and have put new procedures in place. The top challenge faced by respondents’ boards included recalibrating strategies to the new markets and environments; ensuring that virtual board meetings were just as effective as in-person meetings, and responding to the changing government policies and guidelines.

Most respondents reported their belief that their organisations’ executive leadership, staff commitment, and organisational resilience are the strengths that help their companies as they operate through the pandemic. They also believe that succession planning, risk management, and ensuring employee health and safety are the key governance areas facing challenges given the impacts of the pandemic.

Why is having a lead independent director on boards important?
Wiesner: It’s increasingly more common to separate the roles of CEO and chairman, a trend that we see happening globally. By having a separate CEO and board, the board is able to act independently and impartially, and is generally seen as more effective.

However, in the GCC, the opposition against splitting the CEO from the board has previously been higher than global standards and only started to change in recent years. Since the last two surveys, opposition has dropped 15 percent, and now only 5 percent say they are not ready for this practice.

Director capabilities seems to be a big issue. What are the main competencies board directors are lacking?
Wiesner: In this case, many of the competencies lacking in boards are also the competencies that are most sought after. Almost half our respondents (47 percent) said that a diffuse board structure combined with a lack of protocols and processes negatively affects the director and works as a barrier. This goes hand in hand with 44 percent of the respondents saying that the lack of a formal board evaluation and renewal process is a hurdle. The lack of structure in boards could directly result from not having a proper board evaluation and a system of continuity with internal reviews.

The pandemic along with ongoing shifts in the global economy have created a fresh outlook on what skills and experience a newly appointed director should hold. However, it can be hard to find the suitable people since the talent pool remains small. To attract the right candidates, boards can position themselves better by adopting more progressive practices.

What advice would you have for putting together an effective board team?
Wiesner: Thinking in terms of diversity is key to building an effective board team. This does not mean appointing a token female director. Balanced gender representation is essential, but so is diversity of race, ethnicity, age and experience. We are seeing improved understanding of this need in most areas. However, it is concerning that just 4 percent of directors surveyed said they thought appointing female and international board members would improve the composition of their board.

Globally, there exists a talent shortage, and the same is true for GCC boards as well. Having progressive governance practices makes the board a more exciting prospect to lure talent. One of the biggest challenges that many boards face is not allocating enough time for strategy. Eighteen percent of our respondents said that boards do not do this as much as they should, especially on essential topics like sustainability, talent and CEO succession.

Source: https://www.arabianbusiness.com/politics-economics/gcc-boards-need-to-focus-on-diversity-transparency-and-independence