Corporate Governance TRUST IS THE NAME OF THE GAME

1. Corporate GovernanceTRUST IS THE NAME OF THE GAME A legal Analysis of the Corporate Governance Survey Results by Nada Abu-Samra and Chadia El-Meouchi

2. “The genius of the corporation is its internal dynamic of accountability” The corporation's vitality is based on trust bridging law, tradition, and management theory trust -managers will work loyally and effectively to realize the full potential of value for the owners, -the owners can be counted on to ensure that the venture operates in their interest, their interest standing for everybody's interest. • If the corporate structure is inadequate to maintain that trust, then all of the changes in laws, monetary policy, and trade agreements cannot solve the problem… Robert A.G. Monks and Nell Minow

3. Where do we stand in Lebanon? Trust in what or in whom ? the management ? the system ? the community in general ?

4. Perception and Trust • Trust from within the Company • The management • The Shareholders • The Auditors • Trust in the System • Anti-competitive behavior • Corruption • The judiciary/legal system • Monitoring agencies, associations and SRO’s

5. Trust from within. Corporate Governance is key in attracting investors Survey analysis: ~62% consider Access to Finance as a major, severe or moderate impediment for the Operations and Growth of Businesses. OECD recent review of CG principles, 2004: • Access to finance can be improved by good corporate governance practices, hence contributing to the growth of the business. • The degree to which corporations observe basic principles of good corporate governance is an increasingly important factor for investment decisions.

6. Our approach shall mainly focus onthe Rights of ShareholdersandThe Impartiality of Management

7. Shareholders’ RightsPutting Answers in Perspective (1) • Form of the companies: 51.9% are sole proprietorship and partnerships 27% are limited companies 8.4%are joint stock companies 8.7%arepublicly listed companies • The largest stakeholders: Families, in 57.8% of the companies. Individuals, in 37.4% of the companies. Foreign investors, in 6.2% of the companies. • Number of full time employees: 68.2% have15 full time employees or less 21.8% have between 16 and 50 employees 4.5% have between 51 and 99 employees 4.5% have between100 to 800 employees 1% have between 1000 and 8500 employees

8. Shareholders’ RightsPutting Answers in Perspective (2) • Persons who were interviewed in the survey were mainly Chairmen, executive directors and general managers. • The position of the interviewed must be taken into consideration when analyzing all answers relating to shareholders’ rights. • It would actually be interesting to run a similar survey with shareholders who are not part of the management, and compare the results to those of the present survey.

9. The Rights of ShareholdersOECD 2004 Principles A- The corporate governance framework should protect and facilitate the exercise of shareholders’ rights; such basic rights including the right to: 1) secure methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant and material information on the corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect and remove members of the board; 6) share in the profits of the corporation. B- Shareholders should have the right to participate in, and to be sufficiently informed ondecisions concerning fundamental corporate changes such as: 1) amendments to the statutes, or articles of incorporation or similar governing documents of the company; 2) the authorization of additional shares; 3) Extraordinary transactions, including the transfer of all or substantially all assets, that in effect result in the sale of the company. C- Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings and should be informed of the rules, including voting procedures, that govern general shareholder meetings.

10. Shareholders’ rightsAnalysis of Survey Results • 73.5% agree that Companies have regular shareholder meetings • Only 71% (noting that management was interviewed) agree that Shareholders obtain information on the company upon request and without delay. • Only 69.5% (noting the position of the interviewed) agree that Shareholders are sufficiently informed on decisions concerning fundamental issues like amendments of statutes or articles of incorporation, authorization of additional shares.

11. What’s the point in having shareholders’ meetings and upholding shareholders’ right to vote, if shareholders are not sufficiently informed on the issues they are voting? • The right combination? -Transparency is at the heart of good corporate governance. -Confidentiality is important and business secrets are one of the components of success.

12. Shareholders’ Right to Information and The Lebanese Code of Commerce (1) Partnerships The LCC doesn’t expressly provide for the shareholders’ right to access information. Recommendation: Although it may be argued that the right to information is implicit to the unlimited liability of the shareholders, this remains only an argument and no legal provision expressly regulates, protects or enforces this right.

13. Shareholders’ Right to Information and The Lebanese Code of Commerce (2) Limited Liability Companies Pursuant to Article 21 of DL35, each shareholder may at his appreciation review the documents relating to the management of the last 3 years. Also, the managers must deposit at the company’s headquarters twenty days prior to the shareholders’ assembly, the following documents: -report on the activity of the company -inventory, a general investment account -profit and loss account, as well as the financial statements. -The auditors’ report, if any. Recommendation: The current text concerning the shareholders’ right to review documents on the management of the company during the last three years, remains vague and general. The text does not specify the documents that shareholders may review, nor does it provide for a penalty if the management refuses to give access to such information or documents. - Access to information must be timely and on an on-going basis. - Procedures and penalties must be expressly provided for.

14. Shareholders’ Right to Information and The Lebanese Code of Commerce (3) Joint-Stock Companies Art 197 of the LCC provides for the shareholders’ right to review or take a copy of, the following documents withini 15 days of the yearly ordinary general assembly: • Inventory • Financial statements (and the consolidated, if any) • Profit and loss statement (and the consolidated, if any) • List of shareholders • Board of directors’ report • Auditors’ report Recommendation: The provisions of article 197 should be amended to: • increase the scope of the documents and information that a shareholder is entitled to obtain within “the right combination” (possibly link the right to information to the percentage ownership right) • Provide for a procedure including delays and penalties for exercise of the right to information • Provide for timely access to information and on an on-going basis.

15. Shareholders’ Right to decide on Major Issues and the Lebanese Code of Commerce Only 69.5% (noting the position of the interviewed) agree that Shareholders are sufficiently informed on decisions Joint Stock Companies Lebanese law requires that resolutions concerning any amendment to the by-laws (for example increase of capital) as well as mergers, be taken in an Extraordinary general assembly with a quorum of 2/3 (1/2 and 1/3) and a majority vote of 2/3 of the present shareholders. Limited Liability Companies Pursuant to Art 26 of the LCC, a majority vote of ¾ of the company’s share capital is required for any amendment to the company’s by-laws.

16. ButAgain, What’s the point in having shareholders’ meetings and upholding shareholders’ right to vote, if shareholders are not sufficiently informed on the issues they are voting?

17. Shareholders’ Right to decide on Major Issues. Loopholes of the LCC Provisions Both SAL’s and SARL’s require a qualified quorum and majority for the amendment of the by-laws. However, there is no specific legal requirement on the detailed information that should be made available to the shareholders prior to voting such decisions. Concerning SAL’s, Article 190 of the LCC is a catch all provision that grants shareholders representing ¼ of the assembly, the right to postpone the meeting if they deem to be insufficiently informed on the issues to be resolved upon, regardless of the subject matter of the resolution. However, this article is seldom used and shareholders are rarely aware of the existence of such right. Also, abuse may still occur given the minimum number of shareholders required for the exercise of such right.

18. Shareholders’ Right to make Informed Decisions on Major Issues.Suggested Amendments. • Specific disclosure requirements should be introduced concerning important decisions such as amendment to the by-laws in general, increase of capital, mergers, sale of substantial assets of the company… • Speedy and efficient enforcement procedures for enforcing disclosure requirements must be enacted. • Penalties for breaching disclosure requirements must be provided for and efficient redress measures must be included. • A “miranda” like requirement to expressly mention shareholders’ right to information either on the minutes or at the outset of a shareholders’ meeting should be considered.

19. Management’s ImpartialityRelated Parties Dealings (1) • ~51% of the Companies don’t Have a Statutory Rule Preventing Concerned Board Members and Managers from Participating in Decisions Where Conflicts of Interest May Arise. • The legal provisions under the LCC? -Partnership -Limited Company -Joint-Stock Company

20. Management’s ImpartialityRelated Parties Dealings (2) • Partnerships • Article 59 of the LCC prohibits managers from entering with the company into any contract, where they have a personal interest, and such without the prior special approval of the partners. This restriction does not apply to transactions that are usually undertaken by the company with its clients. • Limited Liability Companies - Art 18 of the LCC expressly prohibits shareholders and managers from obtaining from the company loans, guarantees or other undertakings in their favor or for the account of their spouse, ascendant and descendants.

21. Management’s ImpartialityRelated Parties Dealings (3) • Joint-Stock Companies - Article 158 of the LCC prohibits the directors from entering into any contract with the company without the prior approval of the shareholders’ general assembly. This restriction does not apply to contracts usually entered into by the company with its clients. -The same article further prohibits any physical director from obtaining a loan or guarantee from the company. -Article 187 LCC prohibits any shareholder from voting when the resolution aims at granting him/her a special advantage, or when the resolution relates to a dispute between the shareholder and the company. In practice, most companies (including banks to a certain extent) grant a general authorization at the annual shareholders’ meeting without actually being informed on the specific related transactions. This practice violates the law to the extent that the law requires such authorization to be specific and made upon two special reports, one prepared by the board of directors and the other by the auditors. Recent corporate governance scandals in Lebanon were about hidden related parties’ transactions: Bank al Madina, UBL…

22. Perceptions Corporate Governance ReformThe following factors are considered as important or very important in the Process of Corporate Governance Reform in Lebanon • 98.4% Enforcing laws, rules, and procedures • 96.1% Tax and financial disclosure • 93% Accounting standards (100% for banks) • 93% Independent judiciary • 93% Monitoring bodies to ensure compliance (100%) • 80.5% Boardroom politicization • 81.2% Financial market regulation. • 57.8% Privatization of state owned enterprises

23. TRUST IN THE SYSTEM • Does the Private Sector Trust Itself ? • Does the Private Sector Trust the Public Sector?

24. Trust in the SystemFactors perceived as constituting severe, major or moderate impediment for the growth of businesses • Tax Administration: 77.5% • Corruption: 76.1% • Anti-competitive Practices:74.4% • the Legal/judiciary system: 46.7%

25. Does the Private Sector Trust Itself ? • Anti-competitive Practices: 74.4% of the companies consider anti-competitive practices as a severe, major or moderate impediment for the Operations and Growth of Businesses. • Code of Conduct: 81.3% don’t have a formal written policy or code of conduct combating corruption. • Recommendations: - Business ethics should guide companies. - Regulations must be enacted and enforced to sanction anti-competitive behavior. - Monitoring bodies should be put in placee.

26. The Faces of CorruptionFactors deemed to have a severe, major, or moderate Impact on Businesses. • ~ 30% Private Payments to Parliamentarians • ~32% Private Payments to Judges and Judiciary Assistants • 45.3% Bribes Paid to Public Officials to Avoid Taxes and Regulations • 55.2% consider that If a government agent acts against the rules they can never or rarely go to another official or to his superior and get the correct treatment without a recourse to unofficial payments.

27. The Cost of Corruption (2) • ~71% agree that firms in their line of business have to sometimes, frequently, or always pay some irregular `additional payments` to get things done. • 33.8% consider that Gifts or Informal Payments to Public Officials would Cost a Typical Firm 1%-9.9% of Annual Sales. • “Reliable” corruption? 68.5% agree that sometimes, frequently or always, If a firm pays the required `additional payments`, the service is usually also delivered as agreed.

28. Fighting CorruptionAnalysis of Survey Results • Do we want to eliminate corruption, at what price? • Do we have the power to eliminate corruption? • What to do?

29. The Price that companies are willing to pay for fighting corruption 86.2% of the companies consider that Tax Rates are a severe, major or moderate impediment for the growth of businesses Yet, 47.8% of the companies are Willing to Pay additional taxes if the Government Eliminates corruption.

30. Companies 66.2% Syria (28.4% no influence) 62% Dominant Firms in Key Sectors of The Economy 54.9% International Development Agencies. 54.5% Business Associations (note: 37.4% of the Companies are not Members of Trade Association or Lobby Group) 31.3% consider that Domestic Firms Banks 100% International Development Agencies. 89% Business Associations (banking association) 55.6% Dominant Firms in Key Sectors of The Economy 33.3% Syria (and 54% consider it had no influence) The Power to change the SystemEntities deemed to have a decisive, dominant or moderate influence on recently enacted laws having a substantial impact on businesses.

31. What to do?Analysis of Survey Results • Only 50% consider that Information on the laws and regulations affecting their firm is easy to obtain. (v.s. banks: 89% of the banks consider that that information on the applicable laws is readily available.) • 36.2% consider that Interpretations of regulations affecting their firm are not consistent neither predictable. (v.s. banks: 0% of banks conside that interpretations of regulations affecting them are not consistent neither predictable)

32. What to do? • Improve Public Governance (improving public accountability, the quality of the administration) • Transparency of the Public Sector • Access to Laws and Information • Creation of Monitoring Agencies • Raising Awareness • Aligning the reform to international standards, especially the12 Key Standards For Sound Financial Systems developed by the Financial Stability Institute.

33. 12 Key Standards For Sound Financial Systems 1. MONETARY and FINANCIAL POLICY and TRANSPARENCY: Standard is formulated in the form of a Code of Good Practices on Transparency in Monetary and Financial Policies issued by the IMF. • 2. FISCAL POLICY TRANSPARENCY: Standard is the Code of Good Practices in Fiscal Transparency issued by the IMF. • 3. DATA AND DISSEMINATION: Standards are the Special Data Dissemination Standard (SDDS) and the General Data Dissemination System (GDDS), IMF. • 4. INSOLVENCY AND BANKRUPTCY PROCEDURES- World Bank • 5. ACCOUNTING- Standard is the International Accounting Standards (IAS). • 6. AUDITING- the Standard is the International Standards on Auditing (ISA). • 7. PAYMENT AND SETTLEMENT: Standards are the Core Principles for Systemically Important Payment Systems and the Recommendations for Securities Settlement Systems issued by BIS, IMF and World Bank • 8. MARKET INTEGRITY: Standard is the 40 Recommendations and the 8 Special recommendations against terrorist financing- Financial Action Task Force (FATF). • 9. BANKING SUPERVISION: Standard is the Core Principles for Effective Banking Supervision- BIS • 10. SECURITIES REGULATION: Standard is the Objectives and Principles of Securities Regulation issued by IOSCO • 11. INSURANCE SUPERVISION: Standard is the Insurance Core Principles (ICP)- IAIS • 12. PRINCIPLES OF CORPORATE GOVERNANCE- World Bank and OECD

34. The Court System • 67.8% consider the Court System As Being never, rarely or only sometimes Fair and impartial in Resolving Business Disputes. (banking: 88.9%) • 68.5% consider that Court System is never, rarely or only sometimes Honest & uncorrupt in Resolving Business Disputes (banking 77.8%) • 92.5% consider that the Court System is never, rarely or only sometimes Quick in Resolving Business Disputes. (this perception is not confined to corrupt countries. Even in developed countries, there is a perception that the court system is lengthy. This is one of the factors that explain the popularity of arbitration.) (banking 100%) • 72.5% consider that the Court System is never, rarely or only sometimes Affordable in Resolving Business Disputes (banking: 88.9%) • 75.6% consider that the Court System is never, rarely or only sometimes Consistent & reliable in Resolving Business Disputes (banking: 88.9%) • 54.4% consider that the Court System is never, rarely or only sometimes Able to enforce its decisions in Resolving Business Disputes (banking: 44.4%) • 34.2 are not confident that the legal system will uphold their contract and property rights in business disputes (banking: 33.3%)