Corporate governance in the Middle East – Which way to go?

Abstract

The Interest in corporate governance is not a new phenomenon in the transition economies of the Middle East, but corporate governance is especially important in these economies since these countries do not have the long-established (financial) institutional infrastructure to deal with corporate governance issues. This article focusses on a cross-country analysis of the most important topics in corporate codes – shareholder rights, board systems and executive remuneration. By analysing three representative MENA countries, we discuss if codes based on directives or standards are better for these economies. The introduction of corporate governance codes for these economies seems useful but should not rely on broad standards but on legally enforced binding rules accounting for the discussion of directives versus standards. The paper argues against the blindfold implementation of corporate governance codes and argues for country specific solutions

Full text

Journal of Governance and Regulation / Volume 2, Issue 1, 2013
57
CORPORATE GOVERNANCE IN THE MIDDLE EAST –
WHICH WAY TO GO?
Udo C. Braendle*
Abstract
The Interest in corporate governance is not a new phenomenon in the transition economies of the
Middle East, but corporate governance is especially important in these economies since these
countries do not have the long-established (financial) institutional infrastructure to deal with
corporate governance issues. This article focusses on a cross-country analysis of the most important
topics in corporate codes – shareholder rights, board systems and executive remuneration. By
analysing three representative MENA countries, we discuss if codes based on directives or standards
are better for these economies. The introduction of corporate governance codes for these economies
seems useful but should not rely on broad standards but on legally enforced binding rules accounting
for the discussion of directives versus standards. The paper argues against the blindfold
implementation of corporate governance codes and argues for country specific solutions**.
Keywords: Corporate Governance, Transition Economy, Shareholder Rights, Board Systems,
Executive Remuneration
*American Univarsity in Dubai, UAE
**The author is grateful for the comments received during a conference in Helsinki in April 2012. Special thanks go to Seppo
Ikaeheimo, Alexander Kostyuk and Yaroslav Mozghovi.
1 Introduction
The Interest in corporate governance is not a new
phenomenon in the transition economies of the Middle
East. When referring to the Middle East, we follow the
international definition of the MENA (= Middle East
North Africa) region, which consists of 18 to 24
countries. Corporate governance issues are especially
important in these economies since these countries do
not have the long-established (financial) institutional
infrastructure to deal with corporate governance
issues [3].
Corporate Governance issues were not discussed
before a series of emerging market crisis in 1997 [28].
All this has changed and corporate governance codes
as a measure of dealing with each country’s specific
governance problems have been adopted by most of
the MENA counties. In the framework of various
public and private initiatives where the codes were
discussed, this has resulted in improvements of formal
legal rules as well as in the drafting of soft-law
recommendations.
Especially the financial scandals at the beginning
of the 21st century led to a huge number of corporate
governance codes all over the world [12]. As a
common denominator they want to shape
comprehensive standards of good governance. These
are the avoidance of conflicts of interests and the
request for disclosure and transparency [2], the
constitution of the board of directors of independent
directors, managerial compensation, as well as the
claim for shareholder rights [1].
In this contribution the development of Corporate
Governance Codes in three chosen countries, which
represent the different systems in the MENA region,
will be described (section 2.). These are Egypt (EG),
Saudi Arabia (SA), and the United Arab Emirates
(UAE). A cross-country analysis of the major
corporate governance topics (such as Shareholder
Rights, Board Systems and Managerial
Compensation) will highlight the general and specific
corporate governance performance of these countries
(sections 3-5). In section 6 we ask if directives would
be more appropriate than standards in addressing these
corporate governance issues. Section 7 presents the
implications.
2 Development of Codes
2.1 The MENA Region
The MENA region consists of countries with
significant distinctions in levels of per capita
income [6]. This is a fundamental fact regarding the
aims and their implementation of Corporate
Governance Codes in such countries.
According to Piesse et al (2011) countries of the
MENA region can economically be divided into three
groups. The countries of the Gulf Cooperation Council
(GCC) are forming one group. Because of their crude
oil resources and the steady increase in oil prices

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“[t]hese countries are generally in surplus and are net
capital exporters.” [22] The GCC is a trading bloc
involving the six Arabian Gulf states of Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia and the United
Arab Emirates [16]. Representative for the Gulf States
within this study are the corporate governance
regulations of Saudi Arabia and the United Arab
Emirates are highlighted. “Saudi Arabia is best
identified by its religious status as the spiritual
destination for Muslims all over the world […]” and
its “oil revenues presented Saudis with an abundance
of entrepreneurial opportunities.” [24] Equipped with
these specific features, Saudi Arabia is a highly
interesting country in the manner of this paper. The
UAE is the most developed GCC country and a hub
for financial services.
Saudi Arabia published its Corporate
Governance code as well in 2006, the United Arab
Emirates in 2007 for joint-stock companies and in
2011 for small and medium enterprises, being a leader
in this area.
Furthermore, the corporate governance
regulations in the Arab Republic of Egypt are part of
the analysis. The stock markets of the Arab Republic
of Egypt are amongst the most active in the MENA
region [22]. According to the Egyptian Exchange
Monthly Statistical Report by the end of August, 2012
the total market capitalization of shares in the main
market reached US$ 60.54 billion with 212 listed
companies on the main market. According to OECD’s
report on the Role of Stock Exchanges in Corporate
Governance issued in 2009 ”[t]he primary direct
contribution of exchanges to corporate governance has
been the issuance of listing and disclosure standards,
and the monitoring of compliance.” Additional
contributions to enhancing corporate governance have
taken two forms. First, stock exchanges contribute to
an effective corporate governance framework by
collaborating with, or acting as an agent of, other
supervisory, regulatory and enforcement agencies.
Secondly, stock exchanges have established
themselves as promoters of corporate governance
recommendations for listed companies.” [19] Hence,
with regard to the market capitalization of EGX and
its non membership in GCC, it seems reasonable that a
country like Egypt should be established within a
cross national analysis of corporate governance
models in the MENA region.
Egypt, one of the “early birds” in corporate
governance, embarked its economic reform programs
since mid-1980s to attract foreign investments and
liberalize trade [6]. Egypt announced its first code for
State Owned Enterprises (SOEs) in July 2006, shortly
after the relevant OECD guidelines have been
published in September 2005, whereas the codes for
the private sector were introduced in October of the
same year. Interestingly is the fact, that codes for
listed companies have been just recently announced
(February 2011) – the opposite way we have seen in
the Western hemisphere, where codes for SOEs are
currently “in discussion”, but by far neither announced
nor adopted.
Based on the different corporate governance
codes, the following sections will analyse the
differences of the most important issues in these
codes.
2.2 The MENA Region compared to global
corporate Governance standards
Ever since the OECD published its Principles of
Corporate Governance in 1998, most codes developed
over the years follow these principles, which are
mainly based on
 Ensuring the protection of shareholder rights,
including the rights of minority and foreign
shareholders, and ensuring the enforceability of
contracts with resource providers (Fairness);
 Requiring timely disclosure of adequate, clear,
and comparable information concerning corporate
financial performance, corporate governance, and
corporate ownership (Transparency);
 Clarifying governance roles and
responsibilities and supporting voluntary efforts to
ensure the alignment of managerial and shareholder
interests, as monitored by boards of directors
(Accountability) and last but not least
 Ensuring corporate compliance with the other
laws and regulations that reflect the respective
society’s values (Responsibility).
These principles are non-binding and do not aim
at detailed prescriptions for national legislation.
Rather, they seek to identify objectives and suggest
various means for achieving them. Their purpose is to
serve as a reference point [20].
In 2005 the MENA-OECD Working Group on
Corporate Governance comprised of MENA and
OECD officials as well as other public and private
sector actors was established. It represents a network
of exchange for corporate governance priorities, a
sharing of best practices and enables to evaluate the
implementation of the principles in the region. The
intention of the working group is to raise awareness of
government structures and processes in this region, to
improve the policies and environment for investments
in this region.
3 Shareholder Rights
One of those aspects is the right for shareholders,
regardless of their holdings, to participate and vote in
general meetings. Three of the four investigated
countries grant such right as a statutory law to
shareholders; Saudi Arabia is the exception [21]. The
local company law allows only shareholders holding
at least 20 shares to attend a General Meeting and vote
unless otherwise defined in the companies’
constitution.
Another interesting variable in the environment
of shareholders is the threshold of ownership

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necessary to convene an extraordinary general
assembly. This values starts at 5% in Saudi Arabia and
ends 30% in the United Arab Emirates, which shows
how minority rights for shareholders are being treated.
These figures stand in comparison to the threshold
necessary to place items onto the agenda of a general
meeting – 5-10% of the capital depending on the
country.
Egypt and Saudi Arabia follow a one share/one
vote principle, whereas multiple share classes (e.g.
preferred shares) are available in Egypt and the UAE.
One share – one vote is in the meantime without
reflection incorporated in most Corporate Governance
Codes all over the world. But Khatchaturyan points
out that one share – one vote is a sub-optimal voting
mechanism in a world of specific investments [14]. As
different modes of finance have different costs, the
level of asset specificity determines the mode of
finance. Ownership and ex-post residual decision
making should be allocated to the party making the
most specific investment. The latter would economize
on the information asymmetries and high agency cost
of monitoring on the one hand and extend them
adequate incentives to perform on the other hand.
One share – one vote, however, implies that high
and low agency cost factors get equal ex-post voting
rights. This in turn increases information asymmetries
and agency costs of monitoring, while reducing the
incentives of high agency cost factors, thus including
further costs to the firm and affecting its value [27].
If it comes to proxy voting – which is essential
especially in the financial service sector [15] – certain
countries in the region are far ahead to the Western
world. Voting via proxy is a well-known approach in
all of the three countries, but voting via e-mail or other
electronic means [21] is an obligation in Egypt and
allowed on a voluntary basis in Saudi Arabia. Such
modern style in voting will not be on the surface in
other countries for a very long period. Worth to
mention is the fact that voting via normal mail is not
allowed in any of the researched countries – an
interesting paradox.
In terms of the financial sector proxy voting
requires that banks vote in the best interest of the
shareholders [26]. But as banks maximize their own
interests which may not align with those of the
shareholders, the sense of proxy voting is
questionable [21].
When we now turn our perspective from the
minority shareholders to the institutional investors, the
question arising is if such investors are obligated to
disclose their voting policy and/or their voting record?
Saudi Arabia is the country affected by such
framework, based on a comply-or-explain level, which
could be interpreted the stricter a country is being
ruled, the more information needs to be disclosed.
This circumstance can also be seen by comparing the
possible restrictions regarding the number of shares
and the relevant voting potential. In Saudi Arabia such
voting caps can be defined in the company’s
constitution.
How do matters like M&A or Insider Trading are
being treated in those countries? Are there any favors
for minority or majority shareholders? First the
thresholds for notifications need to be inspected. The
United Arab Emirates start with a value of 5% and
Egypt offer 10% in that deal, whereas Saudi Arabia
imposes a threshold of 30-50% - by far not a
percentage good for the minority and its
protection [17]. But are these numbers identical for a
possible mandatory offer? Yes, that is the fact in Saudi
Arabia, where a 50% stake requests such offer. In
Egypt the barrier is set to 30% and there no such value
in place in the United Arab Emirates, which is
definitely not a protection for minor investors in a
country.
Beside the facts that minority shareholders are
not needed to be informed at a very early stage for
M&A transactions in some of those countries, it is
interesting to investigate if a legal framework for
crimes like insider trading does exist and/or “helping
hands” like whistleblowing is supported or welcome
by the authorities. Most of the countries, except Egypt,
have imprisonment terms for such violations in place,
which last between 3 months and 5 years. Saudi
Arabia has also a law enforced that gains realized by
insider trading must be paid to the authorities. Only
the United Arab Emirates have legal and regulatory
provisions to protect whistleblowers – a very rare case
among the MENA countries [21].
4 Board System
The board system is influenced by the ownership
structure of the companies, which is characterized by a
majority of small to medium-sized family-owned
companies in the Middle East. “Within this structure,
the roles and relationship between the family, board,
shareholders, and management tend to be overlapping
and unclear.” [10] (Global Corporate Governance
Forum, 2011)
In the Middle East the one tier board structure is
predominant. In non-financial companies most studies
confirm the common knowledge that there is a
negative correlation between board size and
performance. Some reasons of this effect may be that
some activities like communication, coordination and
decision making are more difficult with larger boards.
A very recent study, however, shows that the situation
seems to be different in the banking sector. In this case
board size and performance are positively
correlated [5].
4.1 Board of directors − CG Code of Egypt
The following findings for Egypt are based on the
Code of Corporate Governance for the Private Sector
in Egypt (Egyptian Institute of Directors, 2006) The
latest Code of Corporate Governance for Listed

Journal of Governance and Regulation / Volume 2, Issue 1, 2013
60
Companies issued in February 2011 is only available
in Arabic
4.1.1 Structure of the board
Egyptian companies have the single tier board system
in which the board members are elected by the general
assembly. Board members are jointly responsible for
the management of the company and they cannot
dispose accountability to third parties by assigning
duties to them. It is stipulated by Egyptian laws that
the board is elected to represent the shareholders and
that the final result should be proportional to the
capital distribution [8].
The number of board members should not be less
than three and the tenure of mandates is limited to
three years for listed companies only. The board
should consist of a majority of non-executive directors
with the necessary skills and knowledge, and it is
important that they are able to assign enough time to
perform their duties; other assignments that could
cause conflicts of interest should be avoided. New
members should be informed in a proper way,
meaning that they should have access to the important
facts and figures of the company to be able to perform
their duties efficiently [8]. There are no rules about
independent directors.
The chairman and the chief executive officer are
appointed by the board. The corporate governance
rules only recommend that the two functions should
be separated on a voluntary basis, if the functions are
combined, then reasons for it should be argued in the
annual statement and the deputy chairman should be a
non-executive member of the board [8].
To support the work of the board, committees
could be formed. The possibility to form committees
does not mean that responsibilities for certain tasks
can be transferred. The committees inform the board
about their proceedings, and the board supervises the
committees. These committees are chaired by non-
executive members. Committees for internal audits
consisting of non-executive members should be
formed [8].
Board meeting should regularly take place at
least four times a year, and the number of the meetings
as well as the names of the absent directors should be
stated in the annual report. The topics of the meetings
should be listed in the agenda which should be passed
on before the meeting. If necessary, non-executive
board members may consult directors within
additional meetings. Executive members should be
informed about these additional meetings, and it´s up
to them to join the meetings or not [8].
A secretary appointed by the board is responsible
for administrative duties such as files, reports, and the
communication between board members [8].
In the study about advancing corporate
governance in the Middle East and North Africa
(Global Corporate Governance Forum, 2011), success
stories of companies in the region are presented as
well. BISCO MISR an Egyptian producer of cookies
benefited from investing in corporate governance
measures by restructuring the management and
organization, and by increasing the shareholder
value [10].
4.1.2 Responsibilities of the board
The board of directors is appointed to manage the
company, and the corporate governance codes make
clear that irrespective of the possibility of forming
committees or consulting third parties, the board
members are absolutely responsible. They should
supervise the company on their own and set out
guidelines and instructions for the company to secure
accordance with existing laws, regulations, and
codes [8]. The board is accountable for an appropriate
risk profile in alignment with the business area and the
company structure, the risk profile must fit with the
risk strategy of the company, and shareholders should
be informed about the company’s risk situation [8].
4.2 Board of Directors - CG Code of Saudi
Arabia
The following findings for the Kingdom of Saudi
Arabia are based on the Corporate Governance
Regulations in the Kingdom of Saudi Arabia (Capital
Market Authority, 2006).
4.2.1 Structure of the board
Similarly to the Egyptian companies, the companies in
the Kingdom of Saudi Arabia have the single tier
board system. Board members are appointed by the
shareholders in the general assembly.
The number of board members should be
between three and eleven. It is left to the companies to
choose a suitable number which should be defined in
the articles of association. The number of independent
members of the board is defined as one third. The
tenure of mandates should not exceed three years but
companies may decide if re-election is possible in
their by-laws. For listed companies it is mandatory
that the majority of board members are non-executive
directors. According to the Code, the combination of
the two roles of chairman of the board and CEO is
prohibited as stated in article 12 of the Code: “It is
prohibited to conjoin the position of the Chairman of
the Board of Directors with any other executive
position in the company, such as the Chief Executive
Officer (CEO) or the managing director or the general
manager.” [4] Nevertheless in the OECD survey
mentioned above, the separation of the two roles is
stated as a recommendation on the “comply or
explain” basis [21].
The rules for the termination of mandates should
be defined in the articles of association but the general
assembly has the irrepealably right to dismiss the

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members of the board. This right cannot be overruled
by the articles of association [4].
Companies should decide for themselves the
appropriate number of committees needed to fit their
structure and needs. The aim of these committees is to
ensure an efficient performance by the board
members. The committees are responsible to the board
of directors, and the board of directors defines the
tasks, tenure, and the scope of authority of each
committee. In committees which are most likely
concerned with topics (e.g. financial reports,
nomination to membership of the board,
remuneration) that may cause a conflict of interest, a
sufficient number of non-executive members should
be elected [4]. The corporate governance code
provides detailed rules for the formation of audit
committees and remuneration committees which are
mandatory for listed companies [4].
The remuneration committee is also responsible
for the nomination of board members, and is therefore
called “Nomination and Remuneration Committee”.
The general rules and duties for this committee are
issued by the general assembly based on a
recommendation of the board members. This
committee is responsible for the recommendation of
possible future board members to the board of
directors. Recommended candidates should fulfill the
requirements of the policies and standards, and the
committee has to ensure that the nominees are not
convicted of any “offense affecting honor or honesty”.
Other duties of the committee include the
determination of the required qualifications for
membership on the board, review of the board
structure, and the verification of the independence of
the independent board members. Finally, the
committee is also responsible for laying out the terms
of compensation to board members and top
executives. This part of the code is mandatory for
listed companies.
4.2.2 Responsibilities of the board
The board bears overall responsibility for the
management of the company irrespective of the fact
that committees might exist or that tasks are delegated
to third parties. The scope of responsibilities must be
fixed in the articles of association. The board
members have to act in the interest of all shareholders,
and in the general interest of the company. The board
of directors is responsible for the strategy and the
main objectives of the company, and it must lay down
rules for internal control and supervision. Other tasks
include the development of both a written policy that
regulates the stakeholder relationships, and of a
distinct corporate governance code for the company to
deepen the rules of the national corporate governance
code. The board has to develop a proposal with all the
necessary terms and procedures for board
membership, which has to be approved by the general
assembly [4].
4.3 Board of Directors - CG Code of United
Arab Emirates
The following findings for the United Arab Emirates
are based on the Corporate Governance Code for
Joint-Stock Companies (Emirates Securities &
Commodities Authority, 2007).
4.3.1 Structure of the board
In the company´s articles of association the structure
of the board, as well as the number of directors and
their tenure, is fixed. According to the OECD Survey
the mandates are limited to three years but re-election
is possible for one term only. The very first board is
elected by the founders of the company, thereafter the
board is elected by the shareholders. The board
members are allowed to appoint a member to the
board if a vacancy occurs to fill the gap until the next
general meeting.
The board of directors should contain a well-
balanced number of executive and non-executive
board members. The majority of board members
should be non-executive directors, and at least one-
third of the board members must be independent
directors. The code points out that it is important that
non-executive directors dedicate enough time to
perform their tasks. The role of chairman of the board
and chief executive officer may not be officiated
jointly by one person.
The board of directors should meet at least six
times a year according to an agenda submitted to the
board members; prior to the meeting, every director
may add something on this agenda. All decisions
taken or topics discussed by the board are recorded in
minutes. Decisions taken on topics concerning the
particular interests of a director are taken without the
vote of the “interested director” [9].
The board has to set up two permanent
committees with an auditing and a so-called “follow
up and remuneration” committee. These committees
should contain at least three non-executive directors
and two of them must be independent, and an
independent director has to cite the committee. To
avoid any conflict of interest, the chairman of the
board may not be member of the committee. The non-
executive members of the committees should reveal
any possible conflicts of interest.
The responsibilities of the audit committee are
not exclusively the revision of the financial
statements, the internal control systems, financial
system, and risk management [9].
The “follow up and remuneration” committee
has to secure the independency of independent
directors, and has to develop and review the
compensation and training policy of the company. The
committee also determines the needed key executive
managers and employees, and defines how they are
acquired [9].

Journal of Governance and Regulation / Volume 2, Issue 1, 2013
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Another success story in the study about
advancing corporate governance in the Middle East
and North Africa (Global Corporate Governance
Forum, 2011) is the Abu Dhabi Commercial Bank
(ADCB), the third largest commercial bank in the
UAE. Internal control concerns led to a change in
management and the formation of a corporate
governance committee. In 2010 the ADCB was
recognized for its corporate governance by the World
Finance Awards [10].
4.3.2 Responsibilities of the board
The corporate governance code includes a list of the
tasks and responsibilities of the chairmen of the board,
but is not limited to this. The listed tasks also include
administrative belongings, as well as ensure efficient
communication with shareholders and among board
members [9].
The board of directors is responsible for the
management of the company. Therefore new directors
to the board shall be introduced and informed
properly. In general the executive management has to
provide sufficient information to the board of directors
and the committees. In this regard the board of
directors may conduct additional investigations. In
cases of conflicts of interest, the majority of the board
directors have the right to call in an independent
consultant. When the directors exercise power, they
must always take into consideration the interests of the
company and shareholders, and adhere to the laws,
regulations, and decisions, as well as to the bylaws.
The non-executive directors have to control and
supervise the performance as well as participate in the
audit committees. The management has to ensure that
all directors have the sufficient knowledge and skills
to fulfill their duties [9].
5 Executive Compensation
All corporate governance codes contain rules for
executive compensation, but the shape and
development differ.
Executive compensation has become a crucial
issue in the financial sector. The crisis in 2008
highlighted the problem of remuneration because in a
period where banks made losses, managers still got
big bonuses. The European Commission published a
green paper on the issue of corporate governance and
executive remuneration in 2010, focusing on
transparency [7].
5.1 Remuneration - CG Code of Egypt
According to the CG Code of Egypt, the remuneration
of the executive directors of the board should be
determined to “attract the best calibers in the market”.
The executive directors of the board should be
remunerated in a way which assures that excellent
board members are attracted. Therefore a
remuneration committee may be formed. The
formation of such a committee is voluntary, and it
should consist of a majority of non-executive
directors. The committee negotiates with the
executives and may also consult the chief executive
officer, but the non-executive members should make
the decision. Aim of performance payment is the
motivation of executive members for long-term
improvements instead of short-term decisions. For
better motivation performance, the related part of the
payment should dominate the remuneration package.
The committee also submits proposals for the
remuneration of non-executive members to the general
meeting. It`s only required to disclose the names of
the committee members but no further details.
Questions about the compensations should be
answered in the general meeting [8].
5.2 Remuneration - CG Code of Saudi
Arabia
The general terms of remuneration are defined in the
company´s articles of the association. Remunerations
may have different forms such as “lump amount,
attendance allowance, rights in rem or a certain
percentage of profits.” Combinations of these
payments are allowed [4].
The Nomination and Remuneration Committee
frame clear rules regarding the terms of remunerations
of the board members and the top executives. This
rule is mandatory for listed companies [4].
The Corporate Governance Code provides a very
detailed disclosure rule on disaggregated manner
which is mandatory for listed companies, as the annual
financial report should include: “Details of
compensation and remuneration paid to each of the
following:
 Chairman and members of the Board of
Directors.
 The Top Five Executives who have received
the highest compensation and remuneration from the
company. The CEO and the chief finance officer shall
be included if they are not within the top five.” [4]
The Code further makes clear that any kind of
remuneration is covered by this rule, irrespective of
name the remuneration may carry.
5.3 Remuneration - CG Code of United
Arab Emirats for joint stock companies
It should be defined in the articles of association in
which way the directors are remunerated. The
remuneration may have several forms, such as fixed
and variable payments. If profit participation is
granted, this participation may not exceed 10% of the
net profit of the company [9].

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6 Directives versus Standards for the
Middle East
Directives are legal commands which differentiate
wished from unwished behaviour in a simple and clear
way. Standards, however, are general legal criteria
which are unclear and fuzzy and therefore require
judiciary decision making and classification [13]. In
the most uncomplicated sense, directives and
standards can be differentiated by the level of
complexity. Directives are inherently simple, clear and
based on a command-like system of “tell and do”. An
incomplete corporate governance report leading to a
liability for the management is a directive whereas a
norm for the management body to “disclose investor
relevant data” without defining relevance is a
standard. Such principles leave open what exactly the
right level of disclosure is and how a violation of this
standard is evaluated by a judge. A standard is
therefore less straightforward in a basic sense of the
word, only creating a point of reference.
There are systematic factors affecting the relative
costs of directives and standards. A standard may have
lower initial specification costs, but higher
enforcement and compliance costs than a
directive [25]. For instance, promulgating the standard
“to take responsibility for all stakeholders” is easy and
does not generate any cost at all. However, applying
this standard in practice would generate significant
costs for both judges who have to determine whether
the accused company has complied with the standard
and for the defendants who have to determine the
relevant stakeholders and the level of responsibility ex
ante in order to escape liability. Directives, however,
are more expensive to implement due to higher
negotiation costs in the legislative process (because of
active lobbying on behalf of different interest groups,
for example). But clear rules have lower enforcement
and compliance costs than standards. Table 1
illustrates the respective (dis)advantages of directives
and standards.
Table 1. Comparison of the benefits and challenges of directives and standards
Directives
Standards
Benefits
 clear
 simple
 reduce monitoring and enforcement
costs
 low initial costs
 decrease central authority
 adoption easily possible
Challenges
 high initial costs
 possible contradictions within
complicated laws
 over- or undercomplexity
 unclear, interpretation dependent on judiciary
decision
 high enforcement and compliance costs
 leave more room for corruption
For countries with a long established corporate
governance system standards seem to be the accurate
means to deal with issues. For the MENA region
being relatively inexperienced with corporate
governance issues directives might be better against
the background of their specific corporate governance
problems such as court delays, corruption and lack of
investor protection. Under these circumstances
directives seem to be a better means to attract
investors and guarantee good corporate governance.
7 Implications
Despite major differences in the transitional process
some MENA countries undergo, the corporate
governance codes of the analyzed countries show a lot
of similarities. The codes were published quite late
(2006-2008) in comparison to Europe or the US. The
codes build on the idea of transparency, trying to
mitigate the agency problems between management
and shareholders.
The corporate governance systems’ institutional
surrounding in MENA transition economies have been
shown to be characterized by problems such as court
delays, corruption and insufficient involvement and
protection of institutional investors. In this section we
want to analyse how these shortcomings can be at
least partly reduced by using more directives rather
than standards [11].
Taking court delays as a measure of
enforcement [30] we see that the enforcement of
contracts is generally weak in MENA countries. Such
delays increase the costs of using courts for conflict
resolution and therefore reduce the demand for court
services. Parties then have to resort to private
adjudication and alternative conflict settlement. Even
worse, they might be left with uncompensated
damages and have to restrict themselves to self-
enforcing contracts. Clear directives can have a
positive impact on the reduction of court delays as
clear rules are easier to administer and reduce the
complexity of cases. The reduction of complexity of
judicial decisions is an important aspect [18]. The use
of imprecise standards which give ample space for
discretionary decisions creates additional possibilities
for corrupt behavior in countries where corruption of
government officials and the judiciary is a problem.
Therefore directives might be more useful as they
leave little room for corruption due to their tight-knit
nature. Sunstein [29] contends that because authorities
have little room to interpret a rule, they are perhaps
better in protecting induividuals’ rights. This idea can

Journal of Governance and Regulation / Volume 2, Issue 1, 2013
64
easily be transferred to shareholders’ rights. If their
rights are violated, these actions can be easily seen.
Because decisions concerning standards are unique to
each case, it would be more likely that decision
makers are apt to abuse their power and act in a
questionable way. Without strict guidelines, decisions
can be tainted by personal preferences of the judge
instead of concrete legal policies. In addition, if there
is no list of strict directives, a standard may be too
vague and difficult to monitor, thus encouraging
corrupt behavior even more. For this reason, legal
areas concerning corporate governance are particularly
subject to possible corruption.
Furthermore directives make a monitoring of
companies and judges easier as directives give little
scope for interpretation. The companies exactly know
the rules and cannot claim ex post that they
misunderstood. Standards, however, leave more
questions open as far as interpretation, implementation
and compliance within the judiciary system are
concerned [23].
Against this background of the MENA transition
economies’ specific challenges we propose that
MENA countries don’t follow the path of simply
adopting corporate governance codes which are
abundant in the “western world”. Despite possible
higher costs in the initial phase MENA countries will
be better off by passing clear-cut directives on
corporate governance topics in order to provide an
explicit signal for investors and gain their confidence
because without considerably attracting foreign
investors the future development of transition
economies will be markedly hampered.
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