The Egyptian corporate legal framework has its origins in French civil law. Law No.159 of 1981 provides the basic company law. Anglo-American common law concepts are more prominent in the Capital Market and Central Depository Laws. In 2004, the World Bank published a Report on the Observance of Standards and Codes (ROSC) on Corporate Governance in Egypt. The main conclusion of the report was that while there have been a number of major reforms undertaken in the recent past, mostly incorporated in the July 2002 reform of listing rules, the implementation and enforcement of the rules remain weak. In this regard, the report recommends that there is need to build institutional capacity in order to ensure effective regulation of the market and strong enforcement of rules; and to implement legal reform in order to bring the policy reform into greater conformity with the Organization for Economic Co-operation and Development (OECD) Principles. The Egyptian Code of Corporate Governance was published in October 2005 by the Egyptian Institute of Directors and should be considered an addition to the corporate-related provisions stated under various laws. It is currently under review.

General Overview

In 2004, the World Bank published a Report on the Observance of Standards and Codes (ROSC) on Corporate Governance in Egypt. The main conclusion of the report was that while there have been a number of major reforms undertaken in the recent past, mostly incorporated in new stock exchange listing rules, the implementation and enforcement of the rules remain weak. Hence, the World Bank identifies enforcement as the key challenge and recommends building stronger institutional capacity in order to ensure effective regulation of the market with a particular focus on disclosure. Still, despite legislative upgrades there is still a need for legal reform, especially in the company, auditing, and accounting laws, in order to bring the policy reform into greater conformity with the Organization for Economic Cooperation and Development (OECD) Principles. The World Bank (2004) notes that, in this area, "carefully targeted assistance could be of help" (p. 15). In the 2006 Article IV consultations with the International Monetary Fund (IMF), staff asserted that "capital market regulation is well advanced in adopting best practices, and the stock market is enforcing higher standards of corporate governance" (p. 18).

The 2004 World Bank assessment also argued that "awareness of corporate governance has increased significantly due to a number of banking scandals and the role of the press in uncovering scandals. The corporate governance framework for the banks has been significantly upgraded, especially at the four large State-owned banks ... and improved corporate governance is an explicit policy goal of the CMA" (p. 2).

The Investor Protection Index is a subcomponent of the World Bank's 2007 Doing Business Indicators. The Investor Protection Index 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 indexes vary 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. Egypt scores 5 in the disclosure index against a regional average of 5.8 and an OECD average of 6.3. It scores 3 in the Director Liability Index against a regional average of 4.6 and an OECD average of 5.0 and 5 in the Shareholder Suits Index against a regional average of 3.5 and an OECD average of 6.6.

Regarding the legislative framework for corporate governance in Egypt, the 2004 World Bank assessment notes that the Egyptian corporate legal framework has its origins in French civil law. More specifically, Law No.159 of 1981 provide the basic company law. However, Anglo-American common law concepts are more prominent in the Capital Market and Central Depository Laws. Capital Market Law No. 95 of 1992 regulates the capital market, and provides the framework and supervision of the stock exchange and market intermediaries. The Capital Market Authority (CMA) can draft new secondary regulations, which are then issued as decrees of the Minister of Foreign Trade. Central Depository Law No. 93 of 2000 regulates shareholder record keeping, clearing, and settlement. In 2003, the National Democratic Party endorsed reforms to the company and accounting/auditing laws.

The Egyptian Code of Corporate Governance was published in October 2005, and, according to its foreword, should be considered an addition to the corporate-related provisions stated under above mentioned laws. The Code's rules are neither mandatory nor legally binding. Rather, they promote and regulate responsible and transparent behavior in managing corporations according to international best practices and means that strike equilibrium between various party interests. The Egyptian Institute of Directors (EIoD), which was established in 2004 by the Ministry of Investment in collaboration with the World Bank, International Finance Corporation (IFC), and the Center for International Private Enterprise (CIPE), announced that it started the national campaign for the update of the code. Contributions and recommendations by stakeholders were due in April 2007.

The main regulator is the CMA, which is reporting to the Minister of Foreign Trade and Industry (MFTI). As of 2004, at the time of the World Bank assessment, it employed 250 people, whose salaries were in line with comparable private sector positions. The assessment further noted that the "CMA has wide administrative sanction powers, including warnings, de-listings, suspending and revoking licenses, imposing monetary penalties, canceling transactions (even after settlement if there has been an illegal act), conducting inspections, and suspending shareholder decisions" (p. 2).

The Cairo and Alexandria Stock Exchange (CASE) is a quasi-governmental body under the supervision of the CMA, which can veto CASE board decisions. CASE is responsible for monitoring compliance with listing rules and may impose penalties on companies that do not meet disclosure requirements, including monetary payments, trading suspension, and delisting. The Ministry for Clearing, Settlement & Central Depository (MCSD) is the central clearing, registry and depository organization. In July 2002 CASE issued new listing rules. These were intended to increase disclosure and corporate governance requirements for listed firms. The 2004 World Bank assessment noted that "as a result, a net of 99 companies had been de-listed for failing to observe the new listing rules by end-September 2003" (p. 1), and 300 mostly small and closely held companies were likely to b de-listed over the months following the assessment.

"The Egyptian market is characterized by a large number of listed companies" (Annex C, p. 1), notes the 2004 World Bank assessment. This is partly due to tax advantages traditionally associated with listing. Listed companies are eligible for a tax exemption equivalent to the three-month deposit rate paid by the Central Bank on paid -up capital. 1148 companies were listed at the end of 2002, up from 656 companies in 1992. However, the number of listed companies fell to 1079 by the end of September 2003, as the CASE began to strictly enforce listing requirements. As mentioned above, up to 300 companies are expected to de-list by the end of 2003, leaving approximately 800 listed companies.

The IMF noted in the 2006 Article IV consultations with Egypt that Egypt's stock market was one of the top performers in 2005. The market expressed its confidence in economic policies, in addition to the oil boom's positive effect on both national and regional liquidity. Even though 2006 brought a market correction, with May's figures registering a 33% drop from January's high, the overall economy showed little effect. According to the IMF's 2006 report, this was due "in part because market capitalization is still relatively low, and trading is concentrated in a few big stocks. The value of the biggest five (ten) companies account for 62 percent (80) percent of the market" (p. 17). The IMF report went on to attribute the 2006 market correction primarily to the action of retail investors who were new entrants to the market, starting in 2005.

The Country Commercial Guide for Egypt, issued by the U.S. Department of Commerce (U.S. DoC) notes that "European and U.S. mutual funds now include Egyptian stocks, and 52 local issues are included in the International Finance Corporation's general index. Shares in nine Egyptian companies are traded on the London Stock Exchange in the form of Global Depositary receipts" (p. 79).

The Principles

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

II

The regulatory and legislative framework in Egypt are described in detail in the 2004 World Bank ROSC assessment. The assessment does not address Egypt's compliance with this principle, as Principle I was only incorporated into the OECD principles with the 2004 revisions.

The Egyptian Code of Corporate Governance was published in October 2005. The Egyptian Institute of Directors (EIoD), which was established in 2004 by the Ministry of Investment in collaboration with the World Bank, International Finance Corporation (IFC), and the Center for International Private Enterprise (CIPE), announced that it started the national campaign for the update of the code. Contributions and recommendations by stakeholders were due in April 2007.

Principle II: The Rights of Shareholders and Key Ownership Function

EN

In its 2004 ROSC assessment, the World Bank rated the sub-principle of Principle II concerning basic shareholder rights as "observed," the four sub-principles concerning rights to participate in fundamental decisions; the shareholder Annual General Meeting rights; the disclosure of disproportionate control and that markets for corporate control should be allowed to function freely as "largely observed" and the sub-principle regarding the general awareness of costs and benefits of shareholder voting as "materially not observed" (Annex A, p. 1). The World Bank ROSC's main comments were concerning compliance gaps between the letter of the law and actual practice, the absence of an explicit policy statement by the CMA regarding its tender policy, and the rather passive role of Egyptian institutional investors in corporate governance.

Principle III: The Equitable Treatment of Shareholders

EN

The sub-principles of Principle III concerning the equal treatment of all shareholders and that board and management need to disclose their interest are rated as "largely observed" by the 2004 World Bank ROSC assessment. The sub-principle dealing with the prohibition of insider trading was rated as "partially observed" (Annex A, p. 1). Consequently, one of the ROSC recommendations was to strengthen insider trading and self-dealing provisions. The ROSC further urged "the enforcement of disclosure rules on related-party transactions to become a CMA and CASE priority" (Annex B, p. 1).

Principle IV: The Role of Stakeholders in Corporate Governance

CP

The 2004 World Bank assessment rates three sub-principles regarding that stakeholder rights should be respected; the effective redress if these rights are violated, and the existence of performance enhancement mechanisms for stakeholders as "Observed". The accessibility of relevant information for stakeholders was rated as "Largely Observed". (Annex A, p. 1) Stakeholders have a number of legal protections. Bankruptcy rules are subject to the Commercial Code. Stakeholders have access to the legal process to obtain redress for the violation of rights. The 2004 World Bank ROSC notes that "creditor rights are considered to be relatively weak in international comparisons". (p. 9) Stakeholders, such as employees, associations of bondholders, and others, have the right to all information by law.

Principle V: Disclosure and Transparency

EN

In its 2004 ROSC assessment, the World Bank rated the two sub-principles of Principle V concerned with standards of accounting and auditing and fair and timely dissemination of information as "Largely Observed" and the two sub-principles regarding disclosure standards and the annual independent audit as "Partially Observed" (Annex A, p. 1). The report recommended that the CMA should continue to build its capability to review the actual content of disclosure, that late disclosure should not be tolerated by either the CMA or CASE, and that the creation of an accounting oversight board should be a top priority. An electronic filing and data retrieval system to facilitate dissemination was also encouraged.

Principle VI: The Responsibilities of the Board

EN

In the 2004 assessment, the World Bank rated one sub-principle of Principle VI, the access of directors to information, as "Observed". Two sub-principles, that board members act with due diligence and care and that they ensure the compliance with the law were deemed "Largely Observed." The sub-principle regarding the fair treatment of shareholders by member of the board and the one demanding that the board has to fulfill certain key functions were judged to be "Partially Observed". Lastly, the sub-principle regarding the independence of the board was rated as "Materially Not Observed" (Annex A, p. 1). Egyptian companies have single-tier boards comprised of an odd number of members, with a minimum of three. Two "experts" may be appointed to the board. They are full members of the board, and they vote. The 2004 World Bank ROSC noted that "directors must be shareholders or represent companies who are shareholders. An employee cannot be appointed before having served at least two years with the company. The annual general meeting (AGM) elects directors for renewable terms of three years, sets their remuneration, and can remove them if necessary" (pp. 12-13). The World Bank recommends that the concept of the independent director should be included in an eventual revision of listing rules.