1 The Supporting Environment for Corporate Governance: Identifying Challenges, Proposing Solutions Andrew Cunningham Darien Middle East Presented to the Kuwait Capital Markets Authority 2 February 2013 Kuwait City

2 Supporting Environment: What are our objectives? An environment in which:  Those trying to improve corporate governance in their companies are helped, guided and supported.  When good corporate governance is achieved, it is recognised, celebrated, and rewarded.

3 Which Areas of Corporate Governance Present the Greatest Challenges in the Middle East?  The Functioning of the Board of Directors  The Risk and Control Environment  Managing Conflicts of Interest  Involvement of Controlling Families

4 The Functioning of the Board of Directors  Do Directors understand their roles? e.g. How does the role of a director differ from that of a senior manager?  e.g Directors should work for the good of the company as a whole, not a single shareholder. Do they devote sufficient time to the role as directors to be effective?  Does the Board include Independent Directors?  Does the Board include more than one executive?  Do directors have the skills to do their jobs effectively?  Do the Board Committees operate effectively?  Does the Board have high-level administrative support? E.g. A “Company Secretary” with legal training, not just an “executive secretary”

5 The Risk and Control Environment  Is there a clear process to assess and manage risks?  Do the people involved in the control process have clear job descriptions and responsibilities (even if they do not do those jobs full time)  Does the internal audit “function” have a clear plan, and does it command respect and authority within the firm?

6 Conflicts of Interest/Related Party Transactions*  Are conflicts of interest disclosed? Because some economies in the Middle East are quite small, or are dominated by a small number of companies, conflicts of interest are an area of particular importance in the Middle East. Nonetheless, conflicts of interest exist everywhere and it is often hard to eliminate them. The important thing is to ensure that conflicts of interest do not change the decisions that people make. * “Related Party Transactions” are one type of conflict of interest. (e.g. A director company A is the owner of company B, which is a major supplier to company A).

7 Families as Dominant Shareholders  Does the family manage its shareholding in a manner which is coherent, consistent and “institutionalized? (e.g., Is there a “Family Council” which manages the family’s shareholding?)  Does the family understand the value of having outside (non-family) shareholders, and does it treat non-family shareholders appropriately?

8 Solutions 1: Create a Corporate Gov. Institute  Establish a “Corporate Governance Institute” and attach it to the CMA (not to a local training institute).  The Corporate Governance Institute should have a Board of Directors comprising about five well-known people, who are committed to spending one day per week working for the Institute. The Chairman should work half-time. There should be a Secretary General to manage day-to-day affairs, and this can be a younger person.  The institute should publish a magazine every three months, in Arabic and English.

9 Solutions 2: Create a Director Training Programme  Work with a local university/business school to create a training programme for directors. (South Africa Reserve Bank did this successfully a few years ago for directors of local banks.)  Create a “Family Governance Programme” to educate family shareholders on how to manage their holding efficiently.  Publish “Terms of Reference for Directors”, outlining their responsibilities, and indicating how much time they are expected to spend on their duties as directors.  Also create a training programme for “Company Secretaries”.

10 Solutions 3: Create a “Governance Assessment Programme”  The Corporate Governance Institute should create a programme to offer detailed Governance Assessments and consulting advice to individual companies. (e.g. Six companies in the first year.)  A small team of experts would assess existing governance practices at a single company, make recommendations on how governance could be improved.  The team of experts/The Governance Institute would agree with the company a realistic one-year action plan to implement some of the recommendations.  The team would act as a “mentor” to the company as it implemented the action plan.  Companies would be expected to pay some of the costs, to ensure that they were “invested” in the process.

11 Solutions 4: “Best Practices for Risk Management and Controls in Kuwait”  Work with the local accounting and audit firms to create a basic document outlining best practices for risk management and controls in Kuwait. This could be issued by the CMA or the Public Authority for Industry.  This document would be aimed specifically at Kuwaiti companies, and would take into account the particular circumstances and challenges of Kuwaiti companies.

12 Final Thought  Training staff in companies on corporate governance is important…  …but if you want to make an impact in the short/medium term you have to get board members and company chairmen involved…  …and the only way to do that is by having very senior people involved in your corporate governance programmes.

13 GOOD LUCK!