JEDDAH — Barriers still exist that impede the effectiveness of the GCC Boards, the fourth biennial Gulf Board Effectiveness Survey released by the GCC Board Directors Institute (BDI) on Sunday revealed. Begun in 2009, the survey gauges the effectiveness of boards and directors' performance and provides insight into changes and improvements made in corporate governance practices in the GCC.
The 40 question survey, which polled board directors from across the six GCC countries, again found that despite positive progress, a strong majority still believe that GCC boards are not as effective as they should be. Sixty percent of those surveyed said that boards in the Gulf were only moderately effective with a further 12 percent finding boards all together ineffective.
Effectiveness was judged against six main criteria, each comprising a section of the report: Board Composition & Directors' Capabilities, Directors' Duties & Responsibilities, Board Structure, Processes & Protocols, Delivery on Roles of the Board, Board Dynamics and Board Evaluation & Renewal. As with past surveys, issues relating to Board Composition & Directors' Capabilities, lack of Formal Evaluation and Renewal Processes and ineffective Board Dynamics. continued to be the three most cited barriers to effectiveness.
“Corporate governance and board efficiency have come a long way in the Gulf but again, this year, BDI's survey reveals the need for ongoing development,” said BDI Chairman Mutlaq Hamad Al-Morished, who is also former Chief Financial Officer of SABIC and the recently appointed CEO of Tasnee. “Board effectiveness is critical to achieving growth and to maximizing the potential that exists within Gulf companies and the economies of the region overall. The GCC's ambition to develop itself and standards of business have seen individual companies and regional markets prosper significantly in recent years. However, for growth to be sustainable and to positively impact all stakeholders, good governance must continue to be strengthened. BDI's survey highlights the challenges facing GCC boards today as well as identifies the best solutions for enhancing effectiveness and the contribution boards and their directors can make.”
The first most significant barrier to effectiveness as cited by 71 percent of respondents were issues related to Board Composition & Directors' Capabilities, as was also the case in the 2009, 2011 and 2013 surveys. The major factors identified as areas for needed improvement were directors' skills relating to corporate governance and compliance (69 percent) performance and talent management (48 percent each) and risk management (44 percent). And while the survey revealed positive support for the training of directors, particularly new directors, 80 percent of respondents note there is still no formal development program in place for new members of their boards.
In terms of composition, the need for greater diversity was a strong theme that emerged among a majority of respondents. 65 percent believed boards would benefit from a greater number of independent directors despite 38 percent noting that no independents were presently on their boards. The need for more international board members was also advocated, with 67 percent of respondents believing the presence of directors from outside the GCC would bring more formality to the table and enhance the level of discussion.
The survey also revealed the need for greater gender diversity on boards today. While women still comprised on average less than 1 percent of board seats, a figure unchanged since 2009 when BDI first began to track female board participation, 56 percent of respondents now acknowledge the value that gender diversity brings to a boardroom. A promising development, respondents found that the presence of women enhanced interactions in meetings, discipline in discussion, effective probing and conflict management.
The second most commonly cited barrier to effectiveness was the absence of a formal Board evaluation process (47 percent). According to 62 percent respondents, GCC boards still have no formal review process in place.
Although there was a marked improvement from 2013 when only 16 percent confirmed a review performance to be in place, this year's 38 percent still falls considerably short of global best practices. In Europe today about 70 percent of boards review their performance on an annual basis and disclose the results of this evaluation in their annual report, as described in the European Corporate Governance Report 2014 published by Heidrick & Struggles. While in the United States, the New York Stock Exchange requires all listed entities to conduct an annual board performance review, a requirement which has been in place for several years already.
The third most cited hurdle to board effectiveness by 44 percent of respondents was the impact of ineffective board dynamics. This included a perceived decrease in the level of preparation and participation in meetings. This year only 41 percent of respondents agreed or strongly agreed that all members make meaningful contributions during board meetings compared to 50 percent in 2013. Although results show significant improvement is needed, they are a positive sign overall of directors taking a more critical view of their duties and rising expectations on the levels acceptable participation.
However, q number of positive trends were also highlighted in the 2015 report. Notably, there was a continued decrease in cross-board representation, with 23 percent of respondents now sitting on one board, and about half sitting on two or three boards. The percentage of respondents acknowledging sitting on five or more distinct boards this year reached only 17 percent. This is a positive improvement from 2009 when one-third of the GCC board members surveyed held five or more board positions.
This is a major step forward for effectiveness – ensuring directors have more time to carry out their responsibilities and make meaningful contributions to their boards. This year only 19 percent believed the chairman was too involved versus 35 percent and 39 percent in 2013 and 2011, respectively, an indication that further clarity is being reached in terms of directors understanding their duties and responsibilities.
To tackle the challenges identified and build on positive momentum gained, the report provides six priority improvement areas and recommendations for boards in the region:
Make training for new and incumbent board members mandatory; Replace ineffective board members and rotate board members more frequently;
Appoint more international and independent board members; Strengthen the board secretary role (42 percent of respondents confirmed there was currently no corporate secretary despite the critical role they play in ensuring board effectiveness);
Dedicate more time in the board agenda to talent management and risk management;
Conduct evaluations of a board's performance annually.
Al-Morished noted that “it is well documented that a significant causal relationship exists between sound corporate governance and superior company performance. We believe that with the adoption of better board practices and the strengthening of overall effectiveness, we will help drive further company and market growth in the GCC. It is good corporate governance and efficiency that leads to better performance, not the other way around. We will continue to work closely with executives, directors, shareholders and regulators to ensure this principle is put into practice and that GCC companies and boards continue to enhance effectiveness in support of ongoing growth and development in the region.” — SG
