Challenges: a new emphasison governanceThe cont<strong>in</strong>ued boom <strong>in</strong> <strong>the</strong> <strong>GCC</strong> is br<strong>in</strong>g<strong>in</strong>g with it a number of new challenges and responsibilities,toge<strong>the</strong>r with closer <strong>in</strong>tegration with <strong>in</strong>ternational <strong>in</strong>vestors and global stakeholders on at leastthree levels, all of which are call<strong>in</strong>g for a greater emphasis on improved corporate governance.The first of <strong>the</strong> three is that <strong>the</strong> excess liquidity that has been accumulated<strong>in</strong> <strong>the</strong> region is now be<strong>in</strong>g <strong>in</strong>vested <strong>in</strong>ternationally <strong>in</strong> avery well-diversified range of assets and <strong>in</strong>dustries. Previous oil boomstended to see much of <strong>the</strong> surplus cash from <strong>the</strong> Middle East ei<strong>the</strong>r<strong>in</strong>vested frivolously (<strong>in</strong> areas such as showy real estate), or passively(<strong>in</strong> f<strong>in</strong>ancial assets and through external <strong>in</strong>vestment managers). Much<strong>in</strong> developed economies. That wave of <strong>in</strong>vestment is br<strong>in</strong>g<strong>in</strong>g with it aseries of new challenges with many of <strong>the</strong> heavyweight corporate <strong>in</strong>vestorsfrom <strong>the</strong> <strong>GCC</strong> suddenly under unprecedented public scrut<strong>in</strong>yoverseas.That is because many of <strong>the</strong> companies now be<strong>in</strong>g acquired by <strong>GCC</strong>“ The compell<strong>in</strong>g macroeconomic outlook for <strong>the</strong> region, tw<strong>in</strong>ned withfar-reach<strong>in</strong>g regulatory reform is prompt<strong>in</strong>g a much broader community of<strong>in</strong>ternational equity <strong>in</strong>vestors ei<strong>the</strong>r to <strong>in</strong>crease <strong>the</strong>ir exposure to <strong>GCC</strong> equitymarkets, or to <strong>in</strong>vest <strong>in</strong> <strong>the</strong> region for <strong>the</strong> first time”of today’s oil wealth, by sharp contrast, is be<strong>in</strong>g channelled <strong>in</strong>to corporateassets overseas, many of which are large blue-chip companies<strong>in</strong>vestors are very large employers fulfill<strong>in</strong>g key social roles. GE Plastics,for example, which is be<strong>in</strong>g acquired by Saudi Arabia’s Sabic, employssome 11,000 people worldwide, several thousand of whom are located<strong>in</strong> <strong>the</strong> US. Those employees will need to be reassured that anyrestructur<strong>in</strong>g aris<strong>in</strong>g from <strong>the</strong> acquisition is handled <strong>in</strong> a transparentand open manner.Over and above those concerns, o<strong>the</strong>r <strong>in</strong>ward-look<strong>in</strong>g commentatorshave voiced anxiety over <strong>the</strong> perceived security risks aris<strong>in</strong>gfrom overseas <strong>in</strong>vestment <strong>in</strong> local corporate assets – especially <strong>in</strong><strong>the</strong> US. Witness <strong>the</strong> concerns raised about potential security breaches<strong>in</strong> New York and Baltimore when DP World trumped S<strong>in</strong>gapore’sPSA <strong>in</strong> <strong>the</strong> battle for P&O.O<strong>the</strong>r highly visible assets rang<strong>in</strong>g from <strong>the</strong> UK retailer, Sa<strong>in</strong>sbury,to Auckland Airport <strong>in</strong> New Zealand have also been attract<strong>in</strong>g <strong>the</strong>attention of deep-pocketed <strong>in</strong>vestors from <strong>the</strong> Middle East. These<strong>in</strong>vestors will <strong>in</strong>creas<strong>in</strong>gly need to ensure that <strong>the</strong>ir corporate governancestandards as well as <strong>the</strong>ir media relations are of a standardthat is commensurate with practices <strong>in</strong> <strong>the</strong> countries where <strong>the</strong>y are<strong>in</strong>vest<strong>in</strong>g.A second area <strong>in</strong> which today’s oil-fuelled boom is underp<strong>in</strong>n<strong>in</strong>gcloser ties between <strong>the</strong> <strong>GCC</strong> and <strong>the</strong> global community is <strong>the</strong> capitalmarket. The strong performance of <strong>GCC</strong> equity markets has not goneunnoticed by <strong>in</strong>ternational <strong>in</strong>vestors <strong>in</strong> recent years. Many, of course,will have been unnerved by <strong>the</strong> sharp corrections <strong>in</strong> <strong>the</strong> markets atChallenges: a new emphasis on <strong>Governance</strong>
Def<strong>in</strong><strong>in</strong>g corporate governanceIn his presentation to <strong>the</strong> Islamic F<strong>in</strong>ancial Services Board’s 2005summit, Malcolm Knight, general manager of <strong>the</strong> Bank for InternationalSettlements declared that good governance <strong>in</strong> both publicand private organizations <strong>in</strong>volves three th<strong>in</strong>gs:• an understand<strong>in</strong>g of <strong>the</strong> objectives of an organization, and alignmentbetween <strong>the</strong> <strong>in</strong>terests of managers and stakeholders;• transparency, and access for stakeholders to <strong>in</strong>formation aboutmanagers’ actions and company data; and• accountability, whereby managers are held to account if <strong>the</strong>y fail toachieve <strong>the</strong> organization’s objectives.When one moves on to governance as it relates specifically to corporates,a number of o<strong>the</strong>r considerations get added to <strong>the</strong> mix ofaccountability, transparency, openness and <strong>in</strong>tegrity:• def<strong>in</strong><strong>in</strong>g shareholder rights and manag<strong>in</strong>g <strong>the</strong> mechanismsthrough which <strong>the</strong>se rights are exercised, particularly to protectm<strong>in</strong>ority shareholder rights and <strong>in</strong>terests;• ensur<strong>in</strong>g checks and balances to manage issues of <strong>in</strong>dependenceand <strong>in</strong>terference that stem from separat<strong>in</strong>g management andownership <strong>in</strong> firms, and <strong>the</strong> differentiation between executive andnon-executive board members;• <strong>the</strong> appo<strong>in</strong>tment of strong, <strong>in</strong>dependent and highly qualified auditcommittees;• codes of conduct for boards of directors as well as managementand employees;<strong>the</strong> start of 2006, which led to <strong>the</strong> TASI <strong>in</strong>dex <strong>in</strong> Saudi Arabia shedd<strong>in</strong>gmore than 50% of its value dur<strong>in</strong>g <strong>the</strong> year.Never<strong>the</strong>less, <strong>the</strong> compell<strong>in</strong>g macroeconomic outlook for <strong>the</strong>region, tw<strong>in</strong>ned with far-reach<strong>in</strong>g regulatory reform is prompt<strong>in</strong>ga much broader community of <strong>in</strong>ternational equity <strong>in</strong>vestors ei<strong>the</strong>rto <strong>in</strong>crease <strong>the</strong>ir exposure to <strong>GCC</strong> equity markets, or to <strong>in</strong>vest <strong>in</strong> <strong>the</strong>region for <strong>the</strong> first time. Ano<strong>the</strong>r attraction of many Middle Easternstock markets is <strong>the</strong>ir relatively low correlation with o<strong>the</strong>r emerg<strong>in</strong>gor better-developed and mature equity markets. “In 2006 when <strong>the</strong>markets of <strong>the</strong> <strong>GCC</strong> crashed by about 50% over <strong>the</strong> same period <strong>the</strong>Global Emerg<strong>in</strong>g Market <strong>in</strong>dex rose by about 29%,” says David K<strong>in</strong>g.As Deputy CEO of HSBC Global Bank<strong>in</strong>g <strong>in</strong> <strong>the</strong> Middle East as well asformer CEO of <strong>the</strong> Dubai F<strong>in</strong>ancial Services Authority (DFSA), K<strong>in</strong>ghas unrivalled experience of <strong>the</strong> recent evolution of Dubai’s capitalmarket. “The divergence <strong>in</strong> performance between <strong>the</strong> Middle East ando<strong>the</strong>r emerg<strong>in</strong>g markets makes <strong>the</strong> region very attractive as a sourceof diversification,” he expla<strong>in</strong>s.Accord<strong>in</strong>g to a recent survey conducted by HSBC, one factor discourag<strong>in</strong>g<strong>in</strong>ternational <strong>in</strong>vestors from <strong>in</strong>creas<strong>in</strong>g <strong>the</strong>ir exposure toMiddle Eastern equities, however, is <strong>the</strong> perception that corporategovernance standards across <strong>the</strong> region rema<strong>in</strong> <strong>in</strong>adequate. Themost recent HSBC <strong>GCC</strong> Investor Survey, conducted <strong>in</strong> April 2007,polled <strong>in</strong>stitutional <strong>in</strong>vestors <strong>in</strong> Dubai, Abu Dhabi, Kuwait, SaudiArabia, Qatar, Bahra<strong>in</strong>, Oman and Egypt, who were broadly positiveabout <strong>the</strong> outlook for <strong>the</strong> region’s bourses. “<strong>GCC</strong> markets are generallyexpected to outperform both developed and emerg<strong>in</strong>g marketsover <strong>the</strong> next 12 months, although bullishness compared wi<strong>the</strong>merg<strong>in</strong>g equities <strong>in</strong> particular is less marked than <strong>in</strong> our Decembersurvey,” says <strong>the</strong> HSBC analysis. With<strong>in</strong> <strong>the</strong> <strong>GCC</strong>, respondents weremost upbeat about <strong>the</strong> prospects for Kuwait (nom<strong>in</strong>ated by 28% of<strong>in</strong>vestors as one of <strong>the</strong>ir preferred markets), followed by Dubai (19%)and Saudi Arabia (17%).• protect<strong>in</strong>g <strong>the</strong> rights of external suppliers of equity f<strong>in</strong>ance;• rules on representation and gifts, and procurement codes;• compliance policies to make sure pr<strong>in</strong>ciples of corporate governanceare not just recognized but enforced.The downside identified by <strong>the</strong> HSBC survey, however, was <strong>the</strong> dimview that <strong>in</strong>stitutional <strong>in</strong>vestors still have of corporate governancepractices <strong>in</strong> <strong>the</strong> region. To <strong>the</strong> question “how much of a barrier is corporategovernance to stock market performance?” a dispirit<strong>in</strong>gly high64% said this was a “significant barrier”, with only 25% say<strong>in</strong>g this wasnot a barrier, and <strong>the</strong> rema<strong>in</strong>der confess<strong>in</strong>g to be<strong>in</strong>g unsure.In terms of assess<strong>in</strong>g corporate governance standards <strong>in</strong> <strong>the</strong> <strong>in</strong>dividualmarkets of <strong>the</strong> region, <strong>in</strong>vestors were even more hesitant.While 24% <strong>in</strong>dicated that Kuwait had <strong>the</strong> highest standards, with21% nom<strong>in</strong>at<strong>in</strong>g Oman and 14% nam<strong>in</strong>g Dubai, 34% said <strong>the</strong>y wereunsure and none picked Saudi Arabia, Abu Dhabi or Qatar as lead<strong>in</strong>g<strong>the</strong> way <strong>in</strong> terms of corporate governance. They were slightly moredecisive about nam<strong>in</strong>g <strong>the</strong> worst <strong>GCC</strong> country, with 25% identify<strong>in</strong>gSaudi Arabia and 22% nom<strong>in</strong>at<strong>in</strong>g Dubai as <strong>the</strong> economies that leftmost to be desired <strong>in</strong> <strong>the</strong>ir corporate governance standards.