Saturday, Mar 31, 2007
Dubai: Lack of transparency and disclosure of information among listed companies is a primary cause of instability on regional equity markets, according to an expert on corporate governance.
Last year's sharp market corrections and the subsequent period of volatility is linked to lack of lack of investor confidence in companies' performances - a factor which could be curbed by greater disclosure of information, said Dr Nasser Saidi, executive director of Dubai-based Hawkamah, The Institute for Corporate Governance.
"As a result of the correction in 2006, investors have become much more wary of the market. They can't understand how a company's prospects change to allow such volatility in the space of just six months," he said.
"Good corporate governance will increase both transparency and disclosure, which is important in maintaining investor confidence in your company."
Studies indicate that regional capital markets have grown to more than $1 trillion from $100 billion in five years, with a surge in IPOs and listings. However only Saudi Arabia's equity market ranks in the top ten of global emerging market stock exchanges.
According to Saidi, international financial reporting standards must be adopted "across the board" to aid capital market growth.
Citing an example of the current lack of harmonised reporting standards, he said two UAE real estate companies listed on the same exchange can use different methods to value their land ownership -- one including unrealised gains on its property and one not doing so.
"You have to have the same foundation for accounting and auditing, but you also need to improve transparency and disclosure, such as the accuracy of accounts, if they are reported on time, whether people are informed and who checks them," he said.
"If you do that, both investors and the market become much better informed and will not be subject to rumours and knee jerk reactions."
Framework
The GCC is currently in the process of adopting a regulatory framework, which, analysts say, must be mandatory and enforceable. The Emirates Securities and Commodities Authority is drafting a code of corporate governance for listed companies.
Meanwhile the Abu Dhabi Securities Market and Dubai Financial Market have drafted corporate governance guidelines for listed companies.
"Good corporate governance principles exist, but they are only guidelines and recommendations. In the next few years they will become enforceable so companies should prepare themselves," said Saidi.
In recent interviews with Gulf News, prominent figures in global corporate governance warned the UAE against adopting a tough regulatory framework, similar to the US Sarbanes-Oxley (SOX) Act. They said the cost of compliance, which can hit several million dollars per year, is encouraging companies to de-list from the New York Stock Exchange.
"I don't want to go in the direction of Sarbanes Oxley, but having fundamental rules and guidelines, which are adapted to suit local circumstances, would do a lot to restore investor confidence in the market," said Saidi.
Other factors which Saidi claims could improve standards in the financial sector include specialised courts to deal with financially-related cases, IPOs to be priced by financial specialists rather than ministries, and investment brokers to be better qualified and more responsible for the outcome of their advice.
Gulf News 2007. All rights reserved.
