A Comparative Analysis of Transparency and Disclosure Practices by the Largest Middle East Economies By Dr. Assem Safieddine and Leila Atwi (An edited version appeared in Harvard Business Review Arabia July 3, 201) Corporate governance and the protection of shareholders rights have a well documented role in attracting investments to an economy. The case is even more evident for emerging countries where investor rights and contract enforcements are not as secured by the legal institutions as in developed countries. Here, research shows that better governance and transparency practices at the corporate level are instrumental in reducing the risks perceived by investors and in attracting investment flows. A forthcoming research highlighting a survey of institutional investors finds that better firm level governance substitutes, at least partially, for weak legal frameworks for investor protection. Investors are willing to pay higher value premiums for improvements in governance practices by companies in less investor friendly markets. Corporate governance has indeed become a key ingredient for sustainability and an investment criterion in the stock picking process of global and sophisticated investors. Nevertheless, access to transparent and reliable information is the first and foremost interface that foreign investors tackle when evaluating potential exposure to any financial market. Investment decision making by sophisticated global investors necessitates access and analysis of financial and non financial information at the time of entering the market and on a regular basis thereafter. Furthermore, disclosure of relevant information is an indispensable governance pillar for the exercise of ongoing monitoring, control, and decision making by shareholders. Transparency is therefore a key enabler of a market s attractiveness. The Middle Eastern markets have been directing significant effort to grow and attract foreign investments. But are these markets playing the transparency card correctly? Is the public information sufficient to encourage investors market exposure? We conduct a comparative analysis of the transparency practices adopted by the listed companies and stock exchanges in the three largest economies in the region: Turkey, Saudi Arabia, and Iran. We focused on comparing the breadth and depth of the publicly disclosed financial and governance information. The three markets are at different stages of development and openness. Turkey has a well established market. It has been listed on the MSCI emerging market since the early years of the index inception. In 2016, its market capitalization was around $12 billion according to the World Federation of Exchanges. Saudi Arabia is preparing for an upgrade to emerging market status on the MSCI index in 201. In preparation, the Saudi authorities put significant effort to improve the governance regulatory frameworks, promote implementation, and raise awareness. In a recent move in April 201, the Saudi Exchange, Tadawul, announced plans to introduce further reforms to its corporate governance in line with international standards. The market has been inaccessible to international investors till 200 when foreign access became possible only through swap contracts but remained widely unpopular. Then, it became open 1
to direct but restricted investment by foreign financial institutions in the second half of 2015; which was considered a major positive development for the region's capital markets. In 2016, the Saudi market was the largest in the Middle east with a market cap of around $ billion out of $1.26 trillion MENA capitalization. The development of the Iran market, on the other hand, decelerated over the decade of sanctions. The Tehran Stock Exchange (TSE) and market supervisor (Securities and Exchange Organization SEO) have adopted regulations with the aim of upgrading control and transparency. The developments in Iran, however, did not keep pace of those adopted by the global and regional markets and the ever growing investor expectations. Following the sanctions relief early 2016, the Iranian economy achieved a promising growth. In 2016, the market had a capitalization of $ billion, realizing a 22% return; the third highest regionally and seventh internationally. Today, the market is believed to have the potential to become one of the last and largest frontier markets in the world. Nevertheless, the country continues to face difficulties in access to finance and significant economic and political challenges lie in the horizon. Despite the differences across the regional markets, the three of them have strong incentives to improve their visibility, attract foreign capital, and grow. Below are the findings of the comparative study covering the ease of data accessibility, the depth and breadth of financial disclosures and governance disclosures. Data and Information Accessibility: Typically, investors seek to gain access to information through the companies websites and/or the dedicated portals of the stock exchange. Investors ability to reach relevant data is made relatively easy and smooth in Saudi Arabia and Turkey through direct and effective disclosure channels. All the surveyed Turkish and Saudi companies show a clear commitment to investor relations with dedicated sections and contact information on their websites giving investors easy access to corporate information, strategy and activity highlights, investor relations calendar, webcasts, summaries and snapshots of historical financial performance, dividends, etc. Turkish companies have a tradition of posting complete investor kits in English with somewhat wider coverage relative to the Saudi disclosures. A record of financial and non financial information is also made available on the Turkish and Saudi exchange portals but the investors might face difficulties in locating some of the documents of the Turkish companies in English. The Iranian companies, on the other hand, provide selected information on their websites. For the few companies that have dedicated shareholders sections, the information provided is rather limited. While most of the surveyed companies provide a secured access to a shareholders portal that possibly contains relevant documents and information, it remains a challenge for a potential investors or other market participants to extract the full breadth of necessary information. At the stock exchange level, corporate data is not centralized on a single platform, not consistently available for all companies, and very often found in Persian only. 2
Number of Disclosing Companies out of the Largest Listed Companies Ease of Information Accessibility on Corporate Websites 5 Investor Relations Section on Website Turkey Saudi Arabia Iran Shareholder / Investor Relations Contact 0 0 Secured Access to Shareholder Portal Turkey Saudi Arabia Iran Disclosures on Stock Exchange Portals Information Accessibility & Consistency Information and documents are easily accessible on KAP, the designated Public Disclosure Platform for Turkish listed Data is consistently available across Investor relations contacts are available. Information and documents are easily accessible on the Tadawul website for Saudi Data is consistently available across companies, with only few exceptions. Investor relations contacts are available. Documents and information are not centralized on a single portal. Different sets of data are accessed on various exchange portals: TSE, TSETMC, Codal, & FIPIran. The data is not consistently available for all Language Barriers (on corporate websites and exchange portals) Almost all the documents and information can be found in English on the corporate websites. An English version of the public disclosure platform is available but most of the information and documents are accessible in Turkish only. Most of the documents and information can be found in English. The Listing Rules require companies to provide all announcements, notifications and publications in Arabic and English. Most of the available documents and data are in Persian only. Disclosure of Financial Information: Access to a breadth of financial information is vital to any investment analysis. The lack of sufficient disclosures is very likely to break an investment decision. Detailed annual and interim financial reports that go back to at least 6 years are made available by all the surveyed Turkish companies and most of the Saudi ones. Investors can perform sound assessment of corporate strategies, plans, and financial performance over time and undertake well founded investment 3
decision making. Furthermore, the disclosure of such information as debt data, credit rating reports, and historical record of earnings and investor presentations is remarkable for some of the surveyed In comparison to the peer markets, the Saudi Tadawul portal adopts a truly user friendly platform. The financial data and documents are consistently available on a historical basis across the listed The practice of disclosing financial information on the corporate websites is however almost inexistent among Iranian Very few companies make their annual reports or interim financial statements available on the website. When available, the financial statements are most often presented in Persian only and with no historical record. A significantly wider and more consistent array of financial statements is accessible in Persian on the different exchange portals. Nevertheless, the historical financial statements published on the English portals are presented in common templates only showing the broad financial statement items with no sufficient discussions. A remarkable practice by the Iranian companies is the publication of the financial statements of their group Furthermore, forecast Earnings per Share data for the next quarter(s) is reported by some of the Number of Disclosing Companies out of the Largest Listed Companies Financial Discloures on Corporate Websites 2 Annual Reports Turkey Saudi Arabia Iran 5 Annual Financial Statements Interim Financial Statements Stock Related Info
Disclosures on Stock Exchange Portals Turkey Saudi Arabia Iran* Financial Statements Historical financial statements are available but mostly not accessible. Expected financials notice dates for the upcoming year in Turkish. Full & detailed quarterly & annual financial reports for years Standard form financial statements: o years on an annual basis o 1 year on a quarterly basis Quarterly and annual reports provided by the company are available on the announcements portals/ sections for years at least but only in Persian. Standard form Balance Sheet & Income Statement & Financial Ratios: o 5 years on an annual basis, at least o 3 years on a quarterly basis, at least o Available for all companies List of Subsidiaries, Associates and Investment Companies Available for some companies Available for some companies Financial statements for group companies are available in Persian. Forecast Earnings per Share Summary tables with forecast for the next one or two quarters. *Reporting observations for the most comprehensive and consistent data sets that can be accessed on any of the portals: TSE, TSETMC, Codal, or FIPIran Disclosure of Governance Related Information: The disclosure of information relating to the governance practices are essential for investors to assess how control is being exercised and the extent to which their rights are protected by the target company. Companies in Turkey and Saudi Arabia have a historical record of board reports, governance compliance reports, and governance sections providing detailed information on the board committees, governance activities over the year, among other matters. The extent of disclosures by the Turkish companies is impressive. In addition to the standard governance information, many the surveyed companies provide a historical record of governance rating reports and sustainability reports. All the surveyed Saudi companies exhibit acceptable disclosures. Nevertheless, many have room to upgrade their transparency practices by reporting such information as the organizational structures, top management information, code of ethics, and sustainability reports. A notable practice among some Saudi companies relate to the disclosure of information on aggregate compensations, directors interests, and related party transactions. Furthermore, the standard reporting on the Tadawul portal fills significant gaps. Companies are required to fill a form of board related information and disclose their historical board reports on the portal. Most Iranian companies abide by the disclosure requirements by announcing information relating to general assemblies and other governance events. They also show better practices of disclosing ownership and organizational structures information relative to the peer emerging markets. Nevertheless, a complete lack 5
of the other governance related disclosures on corporate websites is noted. Except for information on the composition of the board of directors, Iranian companies do not publicly disclose, nor are they required to disclose, any details of their governance structures or practices. The Iranian exchange portals require companies to disclose basic governance information. They do adopt a better standard of listing direct shareholder ownership relative to their peers (reporting holdings greater than 1% relative to 5% by Turkey and Saudi Arabia). Nevertheless, the non disclosure of a company s indirect ownership makes it challenging for investors to identify the ultimate shareholders and may expose them to sanction related risks. Global research reveals that sophisticated investors are becoming increasingly aware of the value enhancing implications of corporate governance and are adopting it as a key criterion in their investment decision making. The insufficient governance disclosures by Iranian companies are likely to hinder investors' ability to perform thorough governance analysis and answer such questions as what internal control mechanisms the company adopts, what are the bodies of influence and how is power and decision making exercised, what rights do minority shareholders have and how do they exercise them. This is likely to raise serious concerns among investors about possibly hidden governance risks and consequently hold back the positive sentiment towards the market. Governance Discloures on Corporate Websites Number of Disclosing Companies out of the Largest Listed Companies 5 Shareholder Structure 3 Organizational Chart Board of Directors Composition 2 Info on Board Committees Turkey Saudi Arabia Iran 0 Other Governance Information General Assembly Information 6 Major Events/ Announcements 2 Articles of Association Code of Ethics 6 Top Management Information 3 0 Sustainability Reports 6
Disclosures on Stock Exchange Portals Turkey Saudi Arabia Iran* Ownership Structure The list of shareholders holding more than 5% and their ownership percentage List of indirect shareholders and their ownership percentage available for some of the The list of shareholders holding more than 5% and their ownership percentage All companies provide highlights on foreign holdings. List of shareholders with holdings greater than 1% Board Composition The list of directors Details such as directors classification, % shares held by directors, outside positions, committees membership The list of directors Classification of directors and date of term start & end Director qualifications are available for very few companies A list of companies where directors hold other board memberships are provided by some, but not all, Names, positions, and classification (executive vs. nonexecutive only) of board members Not enough information on directors qualifications Information on audit committees, including classification, background, expertise, and other positions of members Board Reports Corporate Governance compliance reports are disclosed for some For each company, a year record of board reports is available. The content of the reports varies across companies but generally includes company profile, activities, strategy & plans, affiliated companies, notes on financial statements, board & committees information, compensations of top executives, related party transactions, deviations from governance regulations, etc. Board reports on corporate activities for the previous four years, at least, are released in Persian. Announcements A historical record of announcements for material events, board changes, general assemblies, etc., along with supporting documents/ information A historical record of announcements for material events, board changes, general assemblies, etc., along with supporting documents/ information Announcements relating to general assemblies: invitation & resolutions, capital increase, board changes and other events Remunerations Compensation figures are available on aggregate basis (for executive and nonexecutive basis and the total for the top 5 executive positions) for some *Reporting observations for the most comprehensive and consistent data sets that can be accessed on any of the exchange portals: TSE, TSETMC, Codal, or FIPIran Keeping Transparency in Perspective In brief, both the Turkish and Saudi markets adopt acceptable transparency practices. In general, the information provided allows investors to perform sound analysis in the process of investment decision making. The two markets have contrasting strengths. While the Saudi exchange portal provides easy and well organized access to consistent information, the relative advantage of the Turkish market lies at the level of the
As such, Saudi companies have more room to upgrade their disclosure practices; more particularly on the governance related information. The Turkish exchange portal, on the other hand, can make investors access to data more friendly and comprehensive. Furthermore, both markets have room to seek further advancement to global standards in the breadth of the information provided. For instance, one area of recent global interest is the disclosure of detailed remuneration information. Companies in developed markets are open more than ever to report the philosophy and objectives of their compensation programs, the decision process, along with detailed remuneration figures for directors and the top executives. The disclosure of details on related party transactions and director interests are also among the hot disclosure items. Not to undermine the growing global attention to sustainability, ethics, environmental, and social matters. For the Iranian listed companies, accessibility to information is still limited relative to the peer emerging markets. The recent efforts to upgrade the information accessible through the exchange portals are evident. The ranking of listed companies by the timelessness and reliability of their disclosures on the Codal portal is a noteworthy initiative that is likely to incentivize greater transparency in the market. Nevertheless, investors still need access to wider and more detailed information. More importantly, lack of awareness to transparency and governance seems to be prevailing among companies as suggested by the weak form of public disclosures on websites and annual reports. Iran s financial market moved to the spotlight of emerging markets and is catching the interest of investors globally. However, investment opportunities cannot be duly assessed without access to relevant financial and non financial information. Such information is also essential for market and equity coverage by international research companies and investment banks, for ongoing assessment of financial performance, and for investors evaluation of the dynamics of control and power at the companies; and consequently, for the visibility and attractiveness of the market to global investors.