Middle East importing IR and compliance knowledge from UK and US
Despite vast oil reserves, the Middle East is steadily running out of the black gold that has supported it so well for so long. Instead, much of the region is steadily reinventing itself as a financial and leisure destination. Huge amounts of money are pouring into the property, entertainment and financial services sectors. And the recent launch of the new Middle East IR Society (ME-IR) marks this shift in emphasis for this massively diverse region, stretching from the Moroccan Sahara to the soaring steel and glass superstructures and designer boutiques of downtown Dubai, a dramatic, hazy skyline continually choking on its own construction dust.
Two founders of ME-IR, Michael Chojnacki from thee Bank of New York Mllon and Alex Ménage from Thomson Reuters, both acknowledge that international investors have a huge need for professional IR practice in this fast-changing region where, until recently, many western investors were either ignored or prohibited from investing.
‘I would estimate there are around 20-30 fully-fledged IR departments out of 1,000 or so companies,’ says Ménage. ‘So a sense of IR practice is developing rapidly because institutional investors are looking for opportunities and these people are used to best practice.’
Importing experience
Chojnacki says there are two contrasting forms of IR professional in the Middle East: ‘One typically comes with IR experience from a UK or European blue-chip company, who is developing the practice from very early stages, with limited knowledge of local customs and traditions. The other is often a high-placed executive who is very familiar with the company and the region but has a limited operational knowledge of IR. ME-IR hopes to address both those individuals.’
With rising numbers of Middle Eastern companies embarking on roadshows to London and Tokyo in search of investors and liquidity, that support is certainly needed. Oskar Yasar, managing director of VMA Search, knows the region well and has witnessed at first hand the building swell of Middle Eastern companies recruiting US and UK investor relations professionals.
‘Whether it’s in Qatar, Bahrain, Saudi Arabia or Dubai, they know they’ve got to raise standards,’ Yasar says. ‘Companies know they have to have decent balance sheets, reports and accounts; it’s really about basics. Some companies still aren’t aware that having investors means communicating with them properly. If you told them about such issues in the past, they might have told you to bugger off.’
Such lack of communication finesse is why some Middle Eastern companies struggle on several fronts. Nasser Saidi, executive director of the Dubai-based Hawkamah Institute for Corporate Governance, an independent think tank, reckons many Gulf companies are undervalued to the tune of hundreds of billions of dollars. ‘Based on the empirical evidence, the Gulf Cooperation Council markets could be valued by some 15 percent to 20 percent higher with stronger corporate governance,’ he says, adding that a recent survey with World Bank Group member IFC saw many companies reiterating the importance of corporate governance but failing to understand what it really meant.
This varying IR topography is illustrated by a foray onto Dubai Share Talk, a website where investors discuss a range of listed firms from the Middle East. When forum users were asked about the quality of local transparency and disclosure, the criticisms were rapid and pointed: poor directors’ reports that don’t explain changes in financial statements; slow responses to news linked to sudden share price movements; and profound worries about insider trading.
Federico Salinas is a capital markets lawyer with Dewey & LeBoeuf who has worked in the Middle East since 1999. He says that despite some progress during the last nine years, there remains a fundamental IR disconnect at many Middle Eastern companies. ‘Putting aside the top international companies operating in the region, you often find that some management teams haven’t made the connection between the compliance and communications elements of IR,’ he explains.
‘At one end of the spectrum,’ Salinas continues, ‘you find corporate communications that sound like they are dictated by lawyers; at the other end, corporate communications become pure marketing channels that don’t take into account reporting obligations, let alone a general obligation to treat equity holders, no matter how small, fairly and transparently. Management members at some companies don’t quite believe that even public shareholders are real owners of the company.’
This is not helped by the general lack of shareholder activism, Salinas adds. ‘But this may change as more companies tap sophisticated institutional investors which tend to be more demanding than retail investors,’ he says.
Writing a new rulebook
Questions remain about which regulatory model – a British principles-based approach or a more US-style rules-based tack – will be adopted in the region. Given the close historical connections between the Middle East and the UK, some feel a UK approach is the natural route. One source says a US model would be resisted because of America’s close links with Israel and Israel’s relationship with the Palestinians, though not all commentators agree.
Vanessa Rossi, a senior research fellow at Chatham House in the UK, thinks the Middle East is happy to wait and see for the moment. ‘It’s a fluid situation,’ she suggests. ‘While the US and the UK are going through the current credit crisis, the Middle East will be looking at what emerges from the turmoil.
It’s also difficult to talk about a region that contains so many stark differences and imbalances. For example, Saudi Arabia doesn’t allow any foreign ownership (though this is expected to change over time). And retail investors predominate over institutional investors through much of the region, although – as Salinas indicates – this is also likely to change.
Rossi says that, above all else, the Middle East needs time – and plenty of it. ‘Look at Hong Kong and Singapore: 20 years ago they were seen as not quite on the right side of things in terms of reputation,’ she points out. ‘But if investors see the general direction things are going, the rest of the regulatory system will fall into place. It’s about signaling the intention you’re moving forward. And the Middle East is moving forward.’
This article also appears in the November issue of our sister publication, IR magazine.
