Corporate Governance in the GCC

Transcription

1 Corporate Governance in the GCC Middle East IPO Summit 2007 Dubai, UAE Dr. Nasser Saidi Executive Director, Hawkamah

2 Overview Corporate Governance in Emerging Markets Corporate Governance and Access to Capital IIF/Hawkamah Survey Regulators Stock Exchanges Listed Companies Recommended GCC CG Reform Measures June

3 Corporate Governance : Performance in Emerging Markets Better CG correlates with Firm level CG provisions & practices matters even more wherever: Cross-country differences in laws & enforcement affect better operating performance better market valuation of companies Weak protection of shareholder rights weak legal environments & weak public governance ownership structure Market valuations & dividend payouts availability & cost of external finance June

4 Drivers for Corporate Governance Reform International convergence of prudential and regulatory codes and standards: e.g. AML/CTF, Banking CPs, Drivers for modernisation and change are varied: Intellectual: new institutional economics International obligations and agreements: WTO, RTAs and FTAs Competitive pressure and emulation Role of IFIs: WB, IMF, WIPO, WTO High volatility and turbulence in equity markets Pressure from globalisation, liberalisation and inter-connectedness of markets and regional/ international investors MENA countries have been slow in adopting or complying with international codes and standards, apart from Basel CPs and AML/CTF June

5 Corporate Governance and Access to Capital Good corporate governance is essential for: safeguarding company assets maintaining and enhancing investor confidence reducing the potential of fraud Poor corporate governance companies will find it harder to access external capital will face higher financing costs will see their credit ratings downgraded will have weak investor confidence June

6 GCC Equity Market Boom & Correction I Higher equity prices have driven investment and corporate borrowing based on strong expected rates of return, buoyant domestic demand, robust cash flows Recent market correction appears to be due to unfulfilled expectations: performance and profits reported by companies were below expectations leading to fall in equity prices. Technical problems such as non-market based IPO pricing- led to market distortions Weaknesses in accounting and auditing standards imply lack of transparency and inadequate corporate disclosure: asset markets become open to manipulation and rumors and increased volatility June

7 Index value 1/1/2003 = 100 GCC capital markets performance G C C M arket Index Jan Apr Jul Oct Jan 03 Apr Jul Oct Jan 04 Apr Jul Oct Jan 05 Apr Jul Oct Jan United Arab Emirates, Shuaa, UAE Index, USD [rebase 1/1/2003 = 100.0] Saudi Arabia, Saudi SE, All Share Index (TASI), SAR [rebase 1/1/2003 = 100.0] Qatar, Doha Securities, General Index, QAR [rebase 1/1/2003 = 100.0] Oman, Muscat Securities, MSM 30 Index, OMR [rebase 1/1/2003 = 100.0] Kuwait, Kuwait SE, General Index, KWD [rebase 1/1/2003 = 100.0] Bahrain, Gulf Investment Corporation, Index, Price Return, USD [rebase 1/1/2003 = 100.0] Source: Reuters EcoWin June

8 Capital Raising activities, UAE USD mn Secondary equity issues Initial equity issues Source: Shua a Capital June

9 GCC Equity Market Boom & Correction II No evidence of banking system stress from corporate indebtedness or asset price risk: GCC corporations have low leverage Consumer and Corporate leverage remain low or moderate Exposure to commercial, housing/residential or equity markets is low Monetary authorities and bank supervisors have introduced or strengthened prudential measures to limit bank exposure and risk Capital market authorities have taken remedial/prudential steps to reduce volatility, increase liquidity or widen access Improved corporate governance standards will help improve transparency & disclosure, tighten listing requirements, lower volatility and restore investor confidence. June

10 Empirical Evidence from the UK IPO Market Corporate governance procedures is the main changes in the period before flotation*. Survey of 102 companies of which 70 on AIM 67% of firms made CG procedures changes prior to the IPO due to the decision to float, such as: Introduction of audit and remuneration committees Appointment of non-executive directors The main reason for such changes: Satisfy stock exchange listing requirements Comply to requirements of large potential institutional investors Satisfy the expectation of the financial community Other changes include: investor relation functions (62% of co.) and top management personnel (46% of co.) *source: The role of corporate governance in the IPO process: a note, B. Burton, C. Helliar, D. Power, Corporate Governance, Volume 12, Number 3, July 2004 June

11 IIF-Hawkamah GCC CG Survey Hawkamah Institute for Corporate Governance partnered with the Institute for International Finance to assess the corporate governance environment of the GCC countries, from an investors perspective. GCC Task Force met with close to 100 regulators, Central Bank officials, accountants, auditors, investment firms in all 6 GCC countries. Analysis of the corporate governance environment focused on: Minority shareholder rights Structure and responsibilities of Board of Directors Accounting and auditing Transparency of ownership and control Regulatory environment June

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13 Comparison of CG frameworks in the GCC Countries with IIF Guidelines (on scale of 1-5 with 5 being fully compliant) June

14 Takeaway of IIF-Hawkamah Survey Excess Liquidity in the GCC Region Too much money chasing too few stocks High valuations due to lack of sophisticated investors and poor equity culture with limited disclosure & transparency This creates high volatility in stock markets Easy access to capital provides little incentive for change at company level Efforts being made by authorities to improve overall corporate governance frameworks but some initiatives lack strategic focus and political will Banking sector in general has better corporate governance due to Basel II compliance June

15 Regulators GCC regulators seem to be professional but there are weaknesses that impact quality of regulatory environment Political pressures Lack of independence Availability of skilled and professional staff Weak underlying corporate laws Existing regulatory structure in most GCC countries Regulator reports to Ministry of Commerce or Finance In some countries stock exchange also performs regulatory functions Preferred regulatory structure Regulator independent from government ministry and stock exchange June

16 Stock Exchanges in the GCC Are at various stages of evolution although in general stock exchange play the role of both market maker and regulator, which creates conflicts Vary in size (market capitalization) and product offering Need to share a common technology platform, which could lead to integration of equity markets Integration of GCC equity markets will make the region more competitive and help increase equity flows June

17 Individual and Group rankings of GCC Equity Markets Only Saudi Arabia s equity market is in the top ten emerging market stock exchanges However, if combined, GCC equity markets would rank fifth after Hong Kong, Russia, Korea and India Integration is a key to stabilizing and growing the regions equity markets DIFC strategy to link region s financial markets June

18 Planned GCC Corporate Governance Reforms Bahrain: Ministry of Commerce in Bahrain has drafted a new commercial companies law and a new code of corporate governance that will be enforced in the near-term. BCB revising CG guidelines and enforcement Kuwait: Capital Market Law is currently being amended to incorporate corporate governance related requirements for companies Oman: CMA is going to reassess current corporate governance requirements in Fall 2006/early 2007Authorities are considering privatization of Muscat Securities Market Qatar: DSM expected to introduce a code of corporate governance by end of 2006/early Authorities are strengthening regulator s surveillance and enforcement of stock exchange and companies; created QFMA independent regulator in 2005 Saudi Arabia: CMA issued a draft code of corporate governance in Fall 2006 UAE Securities and Commodities Authority, the regulator for UAE, drafted code for corporate governance for listed companies. ADSM recently introduced corporate governance guidelines for listed companies. DFM has drafted corporate governance guidelines for listed companies June

19 Improving performance: Recommended GCC CG Reform Measures Develop a strong regulatory structure by clearly separating and defining the roles of the regulator and the stock exchange Increase effectiveness of regulators by making them fully independent of government Issue meaningful corporate governance codes and require mandatory compliance Build institutional capacity and strengthen surveillance and enforcement mechanisms to ensure compliance Strengthen the underlying corporate governance infrastructure by updating laws and creating specialized courts to deal with financial cases Adopt IFRS for all listed companies Promote training programs for directors of listed companies Promote investor education and enhance public awareness of good corporate governance principles and practices Introduce corporate governance best practices for state-owned and family-owned companies Grant foreign investors full access to equity markets and promote shareholder activism by foreign and domestic institutional investors and the media Create a regional level corporate governance task force to promote convergence and harmonization of laws and codes among GCC countries June

20 Majlis, Hawkamah Institute of Directors Mission is to develop and train effective, knowledgeable and competent directors for MENA region Open to private and public sector companies, entrepreneurs of start-up companies, and people responsible for the strategic direction of a business organization Services offered include: Training and certification program Executive coaching Workshops, seminars and conferences Financial planning and consultancy services Affinity programs Access to members only lounges and facilities

21 Complementary Work Needed to Advance CG Engage wide participation from NGO s, Chambers of Commerce & Industry, media, business associations, government, academia Develop necessary institutions and build human capacity in major areas (accountants, regulators, bankers, company directors) Design an effective regulatory system, but also create the conditions that make such a system credible. Corporate governance is about establishing a climate of integrity, trust and confidence. Corporate governance is critically about enforcement and will require judicial reform June

22 Corporate Governance in the GCC Middle East IPO Summit 2007 Dr. Nasser Saidi Executive Director, Hawkamah Hawkamah The Institute for Corporate Governance DIFC, The Gate Level 14 T: F: E: June