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Long considered to be an afterthought or a cosmetic gesture at Gulf companies, corporate governance is now being taken more seriously in the region. Yet a lack of transparency and regulatory enforcement remain a blight, and adverse publicity surrounding recent, high-profile corporate dealings risk tarnishing entire markets in the eyes of international investors.

Governance structures across the region remain a top-down affair, which is an issue when it comes to embracing the levels of scrutiny and criticism required for good corporate governance practices. Indeed, convincing listed companies in the region to open themselves up to further examination has proved a tough sell.

This is true for government-related companies, which are among the biggest in the Gulf and are especially dominant in banking, telecommunications and resource-based industries, as well as some of their private sector counterparts.

“There is a cultural issue of people in Asian countries, including the GCC, not wanting to give bad news and this has unfortunately transferred into business culture where bad news is avoided rather than confronted,” said Sabah al-Binali, chief executive of Universal Strategy, co-founder of Saffar Capital and a long-time investor and advisor on Gulf stock markets. He was also a former chairman and investor in Zawya until 2012.

“In the GCC, we need to learn to confront issues directly if we are to achieve best proactive corporate governance.”

Saudi Arabian telecom operator Mobily is perhaps the Gulf’s most notorious example of corporate governance failures this decade. The company was a darling among investors as it posted impressive profits year after year, outperforming its rivals as its stock hit a high of 96.80 riyals ($25.81) in May 2014.

Yet those earnings proved to be false and the operator, in which the United Arab Emirates’ Etisalat is the biggest single shareholder, with a stake of just below 28 percent, admitted something was wrong in November 2014. Eventually, it revealed profits over a 27-month period were nearly $1 billion lower than previously stated, despite being audited and the company employing a risk management committee.

The cost to shareholders has been seismic – Mobily’s stock now trades at around 15.24 riyals, down 84 percent from its 2014 peak and $16.94 billion has been wiped off its market value.

“There’s a problem in the Gulf with disclosure in general. From meetings I’ve had with companies, and especially IR (investor relations) officers, it's related to a prevailing mentality of trying to disclose as little information as possible,” said Mohammad Skaiky, senior research analyst for Middle East and Africa at Glass Lewis, an influential proxy advisory firm.

“It's not really because companies are afraid of criticism. In many cases, companies are controlled by the government and so they think that whatever the government needs to know it would know through its management of the company.”

In some cases, majority shareholders do not believe minority shareholders and potential investors should have access to the same level and detail of information as they do.

“They just don't think they need to disclose everything. Many companies tell us they’re trying to keep disclosure to a minimum to avoid giving their competitors any advantage. I’ve explained this doesn't meet with the standards of a listed company,” said Skaiky.

Binali cited a lack of transparency in communicating the true financial position of listed companies as the biggest weakness in terms of Gulf corporate transparency.

“What we see in management and investor relations presentations are not consistent with what you can read in the financial statements,” said Binali, urging regulators to punish companies for any discrepancies.

“Stock exchanges need to be stricter in enforcing the corporate governance code and the commercial law,” Skaiky added.

STEADY IMPROVEMENT?

Yet corporate disclosure levels have broadly improved over the past decade and for that much credit should go to the Middle East Investor Relations Association (MEIRA). Founded in 2008, MEIRA aims to improve regional companies’ corporate governance, financial transparency and communications with investors.

“More and more listed Gulf companies have an IR department, it’s becoming a priority,” said Clemence Piot, general manager of MEIRA, which works with IR officers, senior company managers and board members to train them in best practices.

“Ten years ago, people in the region didn’t believe or see the value in being transparent. Now, they understand that if you communicate with investors, are transparent and follow international guidelines on top of local regulations it can only be beneficial because you become more attractive (to) local and international investors.”

Saudi’s market regulator has brought a lawsuit against suspects in the Mobily scandal and another state body found some people guilty of providing insider information and of insider trading. But all too often, accountability for corporate governance failures is less than in developed markets, slowing implementation, said Asad Ahmed, Dubai managing director of Alvarez & Marsal, a global professional services firm.

“Is corporate governance viewed as an essential component of running a business or a hindrance? (It’s) not dissimilar to the way the audit function was perceived a few years ago,” said Ahmed, noting that corporate governance was still largely seen in the Gulf as a box-ticking exercise.

Yet evidence shows that listed firms that exhibit a lack of transparency are considered to be a riskier investment for investors.  

“Companies are jeopardising their chances of expanding their shareholder base and attracting international investors because for the past two years we’ve seen that investors, especially large, institutional investors worldwide, are no longer interested in investing in companies that do not meet the minimum compliance requirements,” said Skaiky.

Strong IR policies are beneficial in a myriad of ways – companies are run better, can borrow more cheaply and will command a valuation premium versus less transparent rivals, although many “penny stock” Gulf listings, which typically have only a small free float and attract little share trading, seem to still see IR as intrusive and unnecessary.

“The level of IR sophistication is often linked to a company’s need for capital, particularly international capital,” said MEIRA’s Piot. “A large international investor base will push a company to improve its IR to provide more details on the latest financial results. They want to meet the CEO, the CFO, so the whole management is involved in this effort.

“Without this international investor base to push for greater transparency, a company is more likely to just comply with the minimum regulatory requirements.”

Skaiky cited Egypt as a model for Gulf countries to follow. Cairo’s stock exchange in 2016 introduced rules requiring listed companies to submit a quarterly disclosure form listing all changes to shareholder ownership and board composition, plus any other important information that would be relevant to investors.

The new rules were strictly enforced and as companies steadily became used to these regular disclosures, their broader mentality over transparency has become noticeably more open.

“GCC listed companies have survived with relatively low quality corporate governance, predominantly due to oil,” added Binali.

“As oil revenues decline, corporate governance becomes essential, and those who don't understand that and don’t implement sufficient controls will fail. Companies that continue developing their corporate governance will attract the necessary investment to flourish regionally and globally.”

(Reporting by Matt Smith; Editing by Michael Fahy)
(michael.fahy@thomsonreuters.com) 

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