Case study

INJAZAT matches governance practices with strategy planning

7 January 2004

"For small and medium sized enterprises, the relationship between staff members as well as the clarity of job descriptions and work process are the basis of 'corporate governance'. Although it might not be documented or standardized, it should be understood and implemented in order to maximize businesses' operations and performance. For larger enterprises, it is easier to develop documentation for governance, which is usually the primary factor behind the growth of partnerships into MNCs. Without proper guidelines, policies, and processes companies can only handle a certain volume of business that in turn would limit their growth and expansion. "

This is the credo of Hussein Rifai, chief executive of the $50 million Injazat Technology Fundwhich is based within the media city zone of Dubai in the Gulf, and which invests directly in media and technology companies within the Middle East and North Africa region. It is run according to Shari'a principles.

This is a very new and competitive market - on several counts

• Investors seek high returns because of risk factors and look for funds with high probity
• A big demand for capital for non-oil ventures
• There is no real structure for the regulation of venture capital.
• Thin but improving corporate governance regimes with investors looking to companies like Injazat to place private equity in well governed companies, and to operate strong CG principles itself.

In carrying out plans for restructuring the company Injazat's owners decided that corporate governance would be a centerpiece of its architecture and strategic thinking. This year it decided to remake the company based on four basic planks:

• Separate the role of chairman and chief executive.
• Train directors properly
• Recruit only qualified members
• Establish an adequate level of remuneration.

These principles are part of the current accepted mantra of good governance worldwide, although there are many well-publicized exceptions.

What is interesting in the Injazat case is that corporate governance is built into the system by design, rather as safety is built into a quality automobile. The theory is that by adopting a clear ethical vision and mission, by setting out clear principles, by adopting a reliable auditing system, and by considering stakeholders' satisfaction. Injazat will set itself down as a model.

First it created a model corporate structure separating the powers of the chairman and chief executive. The structure itself is seen as appropriate for an investment company where those financing the company want to keep a close watch on the decisions and choices made by the executive without making the judgments themselves.

The Fund was initiated by theIslamic Corporation for the Development of the Private Sector (ICD), an affiliate of the Islamic Development Bank Group (IDB), and by Gulf Finance House (GFH), in partnership with Dubai Islamic Bank (DIB), Saudi Economic and Development Company (SEDCO),and Iran Foreign Investment Corporation (IFIC).

The board is composed of eight institutional members, where three seats are assigned to each of these co-sponsors of the fund and the remaining two are allocated to two investors based on their investment size. Board meetings are held every two months in order to process investment requests and update directors on any issues of importance It follows that in such a board there is no place for amateurs. Injazat's strategic statement says each director must be qualified and able to "set the course" for the future direction of the fund. Essential qualifications ar e listed as:

1. Envisage the different stakeholders' interest;

2. Understand the goal and mission of the company;

3. Develop a strategic plan in accordance with the identified priorities;

4. Hire, train and evaluate a chief executive officer;

5. Develop and adopt the policies that direct and control operations; and

6. Monitor the performance of the company.

However, there is no nomination committee nor is there any review system for director's performance. This is not unusual in small companies where directors are nominated by powerful shareholders. However, several companies have experienced the benefits of this type of committee in setting objectives and concordant incentive plans.

The issue may be less important since directors only receive reimbursements for expenses paid. The executive committee acts as a remuneration committee for the CEO's pay, with the CEO himself dealing with other staff pay and conditions.

Injazat calls this a "hire and delegate" approach, and sees it as a plus for good corporate governance rather than a minus. It says: "In order to overcome several obstacles to good governance, Injazat's board of directors hires and delegates the power of managing the fund to qualified and independent, adequately-empowered managers who have expertise in financial, strategic and managerial matters. The board tries not to intervene in management when the company faces specific problems"

Such philosophy may run counter to the philosophy in many Western countries but in a region with many top-down corporate entities and where there can be a high degree of board involvement in day-to-day business the Injazat statement has meaning.

This is especially true when Injazat's own philosophy is instilled in companies in which they invest. Here their corporate governance concepts have more than a 'trickle down' effect.

For example while trying to ensure good reporting, Injazat has been helping its portfolio companies by providing a system of "checks and balances" in reporting systems, measuring practices and processes for board meetings and interaction protocols between the directors and management.

CEO Rifai says this enables Injazat to help companies to reduce risk, and thereby improve performance. "The company actively adds value to its partner companies through assistance in creating strategic opportunities, incorporating corporate governance into their business management and generally optimizing their returns"

"The Middle East is in need of development that will help the different countries in the region to upgrade their infrastructure and integrate with the rest of the world. Injazat will provide the all-important financial backing to accelerate this developmental process. We work with a sense of social responsibility with partners who share the same ideals,' adds Rifai.

In Injazat staff meetings are held at the beginning of every workweek where updates on all company issues are discussed whether related directly to work on hand or in support services.

Of course communication is much easier in a small company. But, perversely, it is often the small and medium sized companies that experience the most difficulties in working out how to have effective corporate governance. In many SMEs the managers are so busy rushing around that they hardly have time to speak with each other.