Achieving Democratic Gains through Corporate Governance in Palestine

Since its establishment in 2011 as the first independent civil society organization devoted wholly to the promotion of good corporate governance in Palestine, the Palestine Governance Institute (PGI) has created and expanded the space for democratic dialogue and debate in the Palestinian Territories (West Bank and Gaza). The keys to PGI’s success have been a commitment to strong internal governance, a focus on assessing and understanding its constituencies’ challenges, and a strategy of helping private sector actors achieve reforms that have a multiplier effect on society. Private sector institutions that have strong internal governance have greater capacity, and speak with more credibility, to bring about the governance reforms they seek from their public sector counterparts. As a leading forum for democratic discourse in Palestine, PGI has provided the impetus for governance reform in both the private and public sectors and has voiced evidence-based positions on controversial governance-related issues.

The Heightened Profile of Corporate Governance in Palestine

The space for vibrant public policy-making in the Palestinian Territories is extremely limited, as public sector governance is hamstrung by a complex web of geopolitical factors. The Palestinian Legislative Council has been unable to meet since 2007, and while the President’s term expired in 2009, he is still in office due to the ongoing political stalemate between rival factions. Private sector development opportunities are limited by this environment of political stagnation, along with ongoing security challenges. Undeterred by these obstacles, PGI has waded into the governance gap with purpose and urgency. Where others see reason for despair, PGI has succeeded in advancing governance reform in the private sector and civil society as a means of addressing Palestine's economic and social challenges.

Why, one might ask, have PGI and CIPE decided to focus on corporate governance in Palestine, when there are so many other pressing challenges? The answer lies in the deep conviction that improving the corporate governance of companies and related private sector institutions lends credibility to democratic processes, with the potential to yield market-oriented reforms. Such institutional reforms offer tangible benefits, not only to the citizenry and private sector actors who are seeking democracy that delivers, but also to the public sector institutions seeking to build democratic legitimacy. Ultimately, by strengthening the foundation for good corporate governance and authentic democratic interactions, PGI will enhance the prospects for sustainable development in Palestine.

PGI’s standing as an independent voice in civil society enables it to foster democratic governance where it is otherwise scarce. Thanks in large part to PGI’s work, debating corruption is no longer taboo in Palestine. Rather than engage in finger pointing and character assassination, PGI’s strategy has been to diagnose and offer solutions to the key enablers of corruption, namely weak governance structures and irregularities in the performance of private and public sector institutions. This institutional approach has garnered PGI tremendous credibility and has created space for key stakeholders to discuss real governance challenges. Chambers of commerce and business associations routinely call on PGI to address the particular governance challenges facing their diverse members, from farmers and accountants to women entrepreneurs and insurance executives.

Firms participating in PGI’s events across Palestine have asked PGI to help them assess their own governance structures and practices and develop appropriate reforms. In one recent example, the Hebron Chamber requested that PGI partner with it to convene a conference on corporate governance specific to the concerns of the Hebronite business community. Another prominent example from the public sector, is a customized program to educate Council members about their oversight responsibilities delivered in response to a request from the majority leader of the Palestinian Legislative Council (PLC) (Palestine's de facto Parliament). Similarly, PGI has helped numerous executive branch agencies and bureaus become more effective counterparts to their private sector constituencies, mainly through the fair exercise of their legal and regulatory mandates.

Turning Internal Governance into External Effect

When PGI was established in 2011, it already had a solid foundation on which to build. For ten years prior to PGI’s establishment, its predecessor the Center for Private Sector Development (CPSD) introduced the concept of corporate governance to Palestine. With strong technical and financial support, both from CIPE and other partners, CPSD undertook a wide range of research and advocacy activities aimed at strengthening the Palestinian Authority’s nascent democratic institutions, mainly by enhancing the role and voice of the private sector in economic policy-making. After a decade of accomplishments, however, it became apparent that CPSD should be transformed into an independent and exclusively governance-focused institution.

CPSD’s reincarnation as PGI was a recognition that the most effective route to bring about reform in Palestine was promoting good governance, both in the private and public sectors. And in order to become a credible voice on matters of governance, the newly-established PGI had to be well governed itself. In the three years since its establishment, PGI has achieved considerable improvements in its own organizational governance. PGI’s independent board of directors, representing a broad cross section of the private sector, academia, and civil society, meets regularly and plays an active role in governing the organization. PGI is guided by a strategic plan that keeps the organization mission-oriented and faithful to its priorities. The substantial investments PGI has made in governing itself internally have set an example to other institutions in Palestinian society, and has positively affected the external environment for reform.

Knowing and Understanding the Private Sector’s Challenges

PGI’s strategy acknowldeged that in order to create a culture of corporate governance in Palestine, it first had to understand the challenges and priorities of the business community. In its first three years, PGI conducted comprehensive surveys of hundreds of listed and family-owned enterprises across the Palestinian Territories. PGI staff met with the owners and managers of firms (small, medium, and large) in individual meetings and workshops in cities and towns throughout Palestine. Through these activities, PGI identified the obstacles and opportunities that firms face in adopting better corporate governance practices. During this early period, PGI did not just assume that firms were fundamentally interested in corporate governance, and indeed the research revealed that many businesses simply saw no need to change.

Advancing Governance through Guidelines

Corporate governance can seem a nebulous concept to business owners. The need for governance structures, particularly among small family-owned firms (the predominant ownership model in Palestine), was not initially perceived as a priority. To generate new ways of thinking about corporate governance, and in order to make governance principles more accessible to members of the Palestinian business community at all levels, PGI played a leading role in developing two sets of guidelines – one for listed firms and another for family-owned enterprises. Input from businesses generated through the surveys, existing legal and regulatory frameworks, and international best practice were taken into account in the drafting of the guidelines.

Furthermore, the guidelines were written with their audience very much in mind. In order to advance reform, PGI recognized that these publications needed to speak to the business community, and give the owners of firms both a rationale for change and a set of concrete, practical steps to implement sound corporate governance practices. For example: weighing the relative merits of different forms of companies; balancing the familial nature of firms with a commitment to professionalism and sustainability; improving firms’ performance through effective oversight by general assemblies and boards of directors; achieving transparency through disclosure and reporting; and enhancing employee performance through evaluation.

The guidelines have made an impact in numerous ways, as evidenced by considerably greater interest in internal audit, a pronounced improvement in the quality of annual reports produced by firms, and tangible reforms in relation to the stature and performance of boards of directors (as opposed to an excessively dominant role for just one or a few individuals). The number of firms now listed on the Palestine Stock Exchange (PEX) has risen 22% since CIPE’s program with PGI began in 2011 – an important indicator of PGI’s (and before it CPSD’s) effectiveness in developing the Corporate Governance Code, which applies specifically to publicly traded shareholding companies. Similarly, the Capital Market Authority (CMA), which is a long-time partner with PGI in its comprehensive governance campaign, has recently released a Code of Conduct for its own board members and employees. This is as an important prerequisite to the CMA’s role as a model of governance for the firms and institutions it oversees.

Educating the Next Generation

Another significant component of PGI’s strategy for reform has been to address the educational prerequisite for creating a culture of corporate governance in Palestine. This is particularly vital since there is no formal course of instruction in corporate governance at the university level in any local higher-education institutions. PGI is working hard to bridge that gap. To ensure that the next generation of leaders enter their professions with a strong grounding in corporate governance, PGI designed and presented a seminar series for students in the business and law faculties at universities across the Palestinian Territories.

This educational campaign has gained significant momentum in a short period of time. After an initial foray in which PGI convened one or two seminars a year, increased demand for the seminars resulted in PGI presenting five seminars in the subsequent year; PGI is projected to present 15 seminars in 2014. Each seminar is typically attended by 60–100 students and faculty. At least two universities have expressed interest in offering a semester-long course on corporate governance in cooperation with PGI. As with the rest of PGI’s work, the impact of this initiative is only beginning to be felt, as the young emerging leaders educated through this program take up their roles in the private sector and professional life.

Best Practices for Achieving Reform

Helping private sector stakeholders understand the critical role of corporate governance in improving the performance and profitability of firms has been a key element in the success of PGI’s reform efforts. Business leaders in Palestine increasingly understand that modernizing corporate governance produces tangible benefits for their firms both in terms of improved business operations and increased credibility as contributors to public policy reforms. A private sector that has its own house in order is more capable, and better positioned, to engage in democratic processes targeted at advocating for their interests and holding policymakers and regulators more accountable.

Furthermore, PGI promotes open dialogue and gives voice to all sides of an issue before staking its own position, and as a result is acquiring an increasingly credible image as a non-partisan and highly professional advocacy institution. In Palestine, where governance and reform issues can attract heightened interest and emotions, PGI’s credibility as a convening authority for democratic debate is vitally important.

The activities described in this case study were funded by the National Endowment for Democracy.
Hisham Awartani, PhD, is Executive Director, PGI
Stephen Rosenlund is Program Officer, Middle East and North Africa, CIPE

Publication Type: 

CIPE

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