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Regional businesses need to function behind glass doors

Regional businesses need to function behind glass doors

Study reveals that the GCC’s listed companies still have a long way to go before they convince the public they are indeed transparent.

September 14, 2008 8:24 by

Dana el-Baltaji

It started out as a simple study. The idea was to send out 18 emails to companies around the GCC, interview their investor relations executives and assess how transparent their business and financial dealings actually were. Trends chose three listed companies from six regional stock markets, one in each of the following sectors: real estate, telecommunications and banking.

The study failed miserably.

Only one out of the 18 companies responded to the emails, and even that company didn’t get back to us with an appointment. Instead, they emailed an electronic version of their brochure. Others sent out automated responses with promises of being contacted by an executive within 48 hours. As of the time of this writing, it’s been more than a week.

Why the poor results? Some would argue that summer is slow, when “investors are on holiday and not following the market,” as Robert McKinnon, managing director of equity research at Al Mal Capital in Dubai, told The National. Others would insist that emails alone are not enough to secure interviews with companies throughout the GCC, and that journalists have to perform a series of verbal acrobatics and practice a mild form of e-harassment to get an interview. And even then, it isn’t guaranteed.

But summer vacation or not, the market’s tendency to slow down in the summer surely doesn’t mean all executives are out of the country for the entire season, especially given that the stock markets don’t take time off during this period. As for harassing companies, who has time for that?

The addresses we sent the emails to are posted on the stock markets’ websites; they are specifically for investors to gather more information about a company. Imagine, then, how that company will be perceived by a potential investor if it doesn’t communicate? Indeed, most world markets consider communication with the public and shareholders one of the most important factors of transparency. It’s part of maintaining public confidence in the markets. Publishing annual reports on the stock markets’ or companies’ websites is not enough.

A question of semantics. What, exactly, does being transparent mean? Trends defines it like this: Transparency is the availability of up-to-date information that allows shareholders, stakeholders, the media and ordinary citizens to conduct informed decisions and analysis about a company or a stock market. Companies are not required to disclose confidential information in order to be transparent; only data, news items and business transactions that affect the stock value, the market, stakeholders and potential investors must be disclosed.

Whatever the definition, there’s a given you can’t dispute: transparency is essential to any healthy market. And whether or not companies and markets strive to maintain transparency, ultimately it is an investor’s perception of a company’s or market’s level of transparency that matters. In the words of Dave Balter, founder and CEO of BzzAgent, “Transparency is the counterweight to public skepticism.” Unfortunately, that’s a connection GCC companies have yet to make.

Although the GCC’s stock markets have disclosure laws, and recently made a show of enforcing them (Oman’s Muscat Security Market recently threatened to slap criminal charges against offenders, for example), experts continue to feel that the level of transparency in the region can be improved.
According to Transparency International’s (TI) 2007 Corruption Perceptions Index, Qatar achieved the highest score in the Gulf with 6 out of 10. That’s hardly a triumph, though; the acceptable world average is 7.

And although TI’s index is directed toward governments rather than corporate sectors, in this part of the world, governments fully or partly own many of the most successful businesses. Heads of state routinely sit on the boards or own large blocs of major national companies. Criticism of one is a criticism of the other. So let’s get straight to the point; if public GCC companies are going to move beyond being mere regional institutions, they need to be more transparent.

But that’s a difficult argument to make in the Gulf. The whole point of transparency is to encourage investors and consumers to trust a company and its market with their money. But the GCC is home to some of the world’s fastest-growing markets, valued at $1.2 trillion thanks in part to all the petrodollars pouring in. And because of this hypergrowth, the region’s companies can be as opaque as Muammar Gaddafi’s sunglasses and investors will continue to pour more money than sense into them. After all, there are big profits to be made.

To be young. Considering how immature these markets are, it’s understandable they’d have serious teething problems. In the GCC, stock prices rise and fall at rates that scare even the wildest of maverick investors. This year alone, Qatar’s market surged 25 percent, Kuwait is up by 20 percent and Saudi Arabia is down by 14 percent. Both RGE Monitor and Standard & Poor’s described the regional markets as “volatile,” adding that the markets are “subject to double-digit corrections and violent booms and busts.” For markets this vibrant, a little more transparency couldn’t hurt.

Despite the roller-coaster indices, however, as far as adhering to the markets’ minimum requirements for disclosure of information go, some say a select number of companies in the GCC meet the requirements of markets in places such as Germany and France. Philipp L. Lotter, Vice President of Moody’s Middle East Limited, explains: “Emaar, DP World and Emirates Airlines file at least annual reports. Emaar even files quarterly results, and its transparency very much lives up to the kind of standards you would see in parts of central Europe… There is no disadvantage or lesser transparency in the GCC than there is in most other parts of the world.”

Indeed, some companies are taking baby steps toward transparency. According to Moody’s and Standard & Poor’s, more companies in the Middle East are opening their confidential files to ranking authorities today. Many, it seems, want to know where they stand with competitors; but this won’t necessarily lead to increased transparency for investors. So what will? Lotter has some suggestions.

“I think the real challenge is for those companies that have issued bonds or sukuks to become more transparent,” he says. “To publish quarterly results, to have financial calendars so that the public knows when company X will publish their Q3 results. There need to be more mechanisms put in place in order to make it easier to access a lot of the information, rather than there not being information there in the first place.”

The problems with the mechanisms already in place are simple – they don’t work. Trends mini-study shows that even the basest of requests aren’t met. The problems, however, are far deeper than merely ignoring requests for information.

Many of the companies listed on the markets throughout the region have invalid email addresses posted on the markets’ websites in spite of reassurances from the markets’ officials that all published information on those websites are correct and up-to-date. In Dubai alone, the Dubai Financial Market (DFM) lists at least 10 invalid emails of listed companies, including Dubai Refreshments Company and Arab Insurance Group.

Executives at the DFM assured Trends that all the information investors need to make educated decisions, is available on its website. But what about a company’s corporate culture, or how it deals with a financial or PR crisis, both internally and with the media? Surely an investor has a right to such information if he or she chooses to invest?

What rules? One suggestion made by a DFM executive was to call a company and ask for information about the business’ corporate governance. Unfortunately, calls to three companies in Dubai led us from one clueless operator to another. We were unable to get a single executive on the line, let alone the names of board members or any information on how often a company communicates with its investors.
The problem with the GCC’s level of transparency, then, isn’t that there is a lack of information, or that companies are any less inclined to adhere to market requirements than companies in the West. The main problem is that their level of communication with the public is abysmal. Invalid email addresses, ignoring requests, hiring operators who can’t – or won’t – transfer calls and who have no idea their companies even have investor relations officers, are detrimental to the regional markets’ reputations at this stage in the GCC’s growth.

Even dealing with the press is proving to be a challenge for businesses. Companies such as Dubai Islamic Bank and Deyaar have hardly addressed the highly public arrests of their senior management, and yet everyone knows there’s a problem. Why not address it?

The fact is, local companies aren’t accustomed to answering much to the public – especially during a crisis – and it’s causing a backlash of negative press. And that’s never good for investor confidence.
The solutions to this transparency issue seem simple, but they aren’t. Companies are going to have to rework their priorities and realize how important communication with the media can be.

Who knows how long it will take before companies in the region start taking this issue seriously? But when they do, they’ll undoubtedly see a marked improvement in their perceived transparency, as well as investor confidence.

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