According to a 2005 report on corporate governance in Lebanon by the Institute of International Finance (IIF), although the Lebanese government has given high priority to improving its legal and institutional framework for corporate governance, important gaps remain, and the judiciary system still lacks independence. Furthermore, minority shareholders' rights are not adequately protected and the responsibilities of the Board are not well defined. Therefore, the IIF Equity Advisory Group recommended applying the guidelines of the 2002 IIF Corporate Governance Code and preparing a corporate governance code on a mandatory or "comply-or-explain" basis. It further advised establishing an independent securities supervisory authority to ensure effective enforcement. In 2002 the Lebanese Corporate Governance Task Force was put in place by the Lebanese Transparency Association (LTA) to design and implement projects on corporate governance in Lebanon. In 2006, the LTA adopted a Lebanese Code of Corporate Governance, and implemented the European Union (EU) Association Agreement, which requires Lebanese companies to adopt corporate governance principles in line with EU legislation. On October 11, 2007, the International Finance Corporation (IFC) signed a Memorandum of Understanding with the LTA to establish an institute that will promote better corporate governance practices in Lebanon. Furthermore, the IFC cooperates with Lebanon through an advisory project on corporate governance.

General Overview

According to a 2005 report on corporate governance conducted by the Institute of International Finance (IIF), the Lebanese government has given high priority to improving its legal and institutional framework for corporate governance, notably by improving disclosure of information, adopting International Financial Reporting Standards (IFRS), and requiring disclosure of ownership stakes in companies. Despite these efforts, however, important gaps remain in the regulatory and institutional environment, and the judiciary system still lacks independence. Furthermore, minority shareholders' rights are not adequately protected, and responsibilities of the Board are not well defined. Therefore, the IIF Equity Advisory Group (EAG), which acts as the Corporate Governance Task Force for Lebanon, recommended applying certain guidelines of the IIF Corporate Governance Code and preparing a corporate governance code on a mandatory or "comply-or-explain" basis. The report added that the IIF Code was adopted in 2002, and seeks to "improve the investment climate by establishing practical guidelines for the treatment of minority shareholders, the structure and responsibilities of the board of directors, and the transparency of ownership and control of companies" (p. 1). The IIF Code differs from the broader Organization of Economic Cooperation and Development (OECD) Principles in that the former is more detailed and aimed at implementation, but does not diverge from the OECD principles in substance. The EAG further advised creating an independent securities supervisory authority to ensure effective enforcement. Following the 2005 IIF assessment, the Lebanese Transparency Association (LTA) adopted a Lebanese Code of Corporate Governance in 2006, which aims to address some of the shortcomings mentioned above. According to Kaufmann et al. in their 2007 working paper for the World Bank on governance indicators, Lebanon has improved its Regulatory Quality indicator between 2005 and 2006, but has suffered a decline in its rating on Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Rule of Law, and Control of Corruption indicators.

As noted on the International Finance Corporation (IFC) website, the LTA was founded in 1999 to promote transparency, accountability, and democracy, and to fight corruption in Lebanon. The Lebanese Corporate Governance Task Force (LCTF) was incorporated as an LTA initiative in 2002 and is responsible for the design and implementation of projects on corporate governance. According to the Center for International Private Enterprise's (CIPE) report published in 2005, the LCTF has been working on projects to implement a set of corporate governance principles and to amend the Code of Commerce, as well as to effect changes in other laws and institutions. Furthermore, it has created a network of companies that comply with corporate governance principles, and is seeking to promote the concept of "leading by example" (p. 11). In April 2006, Lebanon implemented the European Union (EU) Association Agreement, which requires Lebanese companies to adopt corporate governance principles in line with EU legislation. The IFC notes on its website that, on October 11, 2007, it signed a Memorandum of Understanding (MoU) with the LTA to establish an institute that will promote better corporate governance practices in Lebanon. The IFC also cooperates with Lebanon through its advisory project - the Lebanon Corporate Governance Project. Finally, according to the Middle East and North Africa Initiative (MENA) website, Lebanon is part of the MENA Initiative on Governance and Investment for Development, which promotes comprehensive reforms to improve corporate governance structures and operations. As stated in Saidi's 2004 report, cooperation and the harmonization of disclosure regimes, as well as accounting and auditing standards across the MENA region are crucial.

The Beirut Stock Exchange (BSE) was founded in 1983 under Legislative Decree No. 120, and currently has 16 listed companies. Lebanon is also the headquarters of the Arab Stock Exchange Union, as noted in a 2007 U.S. Department of Commerce (DoC) Country Commercial Guide. According to the 2005 IIF report, the majority of companies in Lebanon are small and medium-sized enterprises (SMEs), and the equity market is highly concentrated, and "relatively underdeveloped compared to other countries in the region" (p. 2), with total market capitalization amounting to 15% of GDP, as opposed to 40% in the region. In its 2008 Doing Business report, the World Bank perceives investor protection in Lebanon in 2007 as being slightly above the regional average but below the OECD mean. The Investor Protection Index is a subcomponent of the World Bank's 2008 Doing Business Indicators, and consists of three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index) and shareholders' ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index). The indices range between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Lebanon scores 9.0 in the Disclosure Index, against a regional average of 4.9 and an OECD average of 6.4. It scores 1.0 in the Director Liability Index, against a regional average of 3.8 and an OECD average of 5.1. It scores 5.0 in the Shareholder Suits Index, against a regional average of 6.3 and an OECD average of 6.5.

The Principles

Principle I: Ensuring the Basis for an Effective Corporate Governance Framework

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There is insufficient information publicly available directly addressing this principle. According to a 2005 IIF report, the Lebanese government has given high priority to improving its legal and institutional framework for corporate governance, notably by improving disclosure of information, adopting IFRS, and requiring disclosure of ownership stakes in companies. Despite these efforts, important gaps remain in the regulatory and institutional environment, and the judiciary system still lacks independence. Furthermore, minority shareholders' rights are not adequately protected and responsibilities of the Board are not well defined. Hence, the IIF EAG, which acts as the Corporate Governance Task Force for Lebanon, recommended applying the guidelines of the 2002 IIF Code, and preparing a corporate governance code on a mandatory or "comply-or-explain" basis. It further advised creating an independent securities supervisory authority to ensure effective enforcement. Following the 2005 IIF assessment, the LTA adopted a Lebanese Code of Corporate Governance in 2006, which should address some of the shortcomings mentioned above. According to Kaufmann et al. in their 2007 working paper for the World Bank on governance indicators, Lebanon has shown an improvement in its Regulatory Quality indicator between 2005 and 2006, but suffered a decline in the rating on Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Rule of Law, and Control of Corruption indicators.

Principle II: The Rights of Shareholders and Key Ownership Function

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There is insufficient information publicly available directly addressing this principle. As noted in Saidi's 2004 report, the LCTF aims to "maximize the rights and equitable treatment of shareholders through a legal and regulatory framework by creating enforcement mechanisms to rectify violations" (p. 96) as part of its Action Plan. According to a 2005 IIF report, minority shareholders' rights are not adequately protected and responsibilities of the Board are not well defined. However, according to a 2005 CIPE report, the Legal and Regulatory Subcommittee of the LCTF has been working on amendments to the Code of Commerce in order to strengthen minority and foreign shareholder rights and comply with the International Accounting Standards (IAS) and the International Standards on Auditing (ISA).

Principle III: The Equitable Treatment of Shareholders

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There is insufficient information publicly available directly addressing this principle. As Saidi reported in 2004, the LCTF aims to "maximize the rights and equitable treatment of shareholders through a legal and regulatory framework by creating enforcement mechanisms to rectify violations" (p. 96) as part of its Action Plan. According to the 2005 IIF report, minority shareholders rights are not adequately addressed in the securities regulation. Hence, the EAG recommended raising the voting threshold and providing minority shareholders with "the right to sell stock at appraised value in the event of a merger or takeover" (p. 8).

Principle IV: The Role of Stakeholders in Corporate Governance

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There is insufficient information publicly available directly addressing this principle. According to Saidi in his 2004 report, the LCTF aims to "engage various stakeholders, such as company employees, trade unions, creditors, suppliers, consumers, and the public-at-large, when instituting corporate governance" (p. 96) as part of its Action Plan.

Principle V: Disclosure and Transparency

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There is insufficient information publicly available directly addressing this principle. As stated by Saidi in 2004, the LCTF aims to "produce guidelines for disclosure and transparency" (p. 96) as part of its Action Plan. The LCTF further recommends disclosing financial and non-financial information, promoting transparency in compliance with the IAS, setting up a legal and regulatory framework to monitor the collaboration of listed companies, and enforcing auditing standards based on the ISA. As noted in a 2005 CIPE report, the Legal and Regulatory Subcommittee of the LCTF has been working on amendments to the Code of Commerce in order to strengthen minority and foreign shareholder rights and comply with the IAS and the ISA. According to the 2005 IIF report, Lebanon has made progress in improving disclosure of information, adopting IFRS, and requiring disclosure of ownership stakes in companies.

Principle VI: The Responsibilities of the Board

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There is insufficient publicly available information directly addressing this principle. According to Saidi's 2004 report, the LCTF aims to "highlight the responsibilities of the board of directors" (p. 96) as part of its Action Plan. The LCTF further recommends maintaining a transparent corporate structure, board independence, and independent non-executive board members. In its 2005 report, the IIF also recommended ensuring that independent directors chair the audit and nomination committees and that training is provided to independent directors.