Time to play by the rules

The term corporate governance still, unfortunately, seems to send chills down the spines of many board directors, CEOs and CFOs of public companies in the Middle East.

Their prevailing attitude seems to be: "We know what's best for our company, trust us; we do not need all this regulation, reporting or over-analysis." Although this aversion to corporate governance exists only among a minority, it does rouse suspicions that activities are being hidden from shareholder and wider public scrutiny.

Corporate governance - whether it is related to how companies are directed and controlled or the way that businesses conduct themselves - is here to stay. And it needs to be if Middle East companies are to continue to increase their international equity portfolios. Investors will pay for companies that can demonstrate good corporate governance, which in turn improves profitability and shareholder returns.

Few expect corporate governance in the Middle East to replicate and move at the same speed as it does in the US, UK or Australia. There needs to be tolerance for local customs, history and regulatory structure, because the change is coming.

From an investment management perspective, it's interesting to see some of the hiccups that have occurred, while anticipating the road-bumps ahead. One of the most challenging issues is the transparency of company activities and disclosure of information to the market. The growth of institutional investors with interests in Middle East companies, and the increasing amount of company research prepared by global and regional investment banks, has thrust this issue into the spotlight.

Both buy and sell-side firms are visiting companies, questioning senior management and requesting detailed information. The buy-side internalises this information, using it to assess whether or not to include stocks in a portfolio. The sell-side externalises it by analysing whether a stock is a sell or buy. The former tends to conduct its activities behind the scenes while the latter's business is carried out publicly. This process has certainly caused some tempers to flair recently in the Middle East.

In mature financial markets, companies devote considerable resources to ensuring analysts have good information and data that is interpreted correctly. Disagreements occur and companies defend themselves if they believe published research is incorrect, although they aren't as critical of fund managers who downsize their position in a portfolio. Within mature markets, it is difficult to recall an event where a company refused to provide more information, barred a broker from further contact or questioned their professionalism.

But such instances have occurred in the Middle East. Clearly this will have to change. If a company seeks capital from the public market - which will become more common as further government-controlled entities go private - it should be prepared to receive feedback on the worthiness of this investment.

A company's best defence against what it believes to be sloppy research or an unfair review is not to censor information but to prove the negative analyst wrong. After all, brokers are also running a business and cannot afford to be associated with distributing consistently poor work.

Grant Bailey is chief executive of ING Investment Management Middle East.

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