Over the past decade, regulation of listed companies
in the region has grown remarkably - albeit from a
relatively low starting point - with the introduction of new
corporate and securities laws (e.g. Kuwait), tightening of
insider trading rules (e.g. Lebanon), the emergence of
“comply-or-explain” corporate governance codes (e.g.
Saudi Arabia) and the revision of listing requirements
(e.g. Dubai). Unlike their private and to some extent
state-owned peers, listed firms are held to a higher and
clear regulatory standard which makes an assessment of
their ability to contribute to future development of MENA
economies more objective.
Recent developments in most MENA stock markets,
with the exception of Saudi Arabia, Iraq and Tunisia,
are not particularly encouraging. Most MENA markets
have experienced difficulties in keeping the IPO
pipeline active and stock market valuations up and
are hence considering more structural changes such
as privatisation, demutualisation or restructuring of
regulatory responsibilities between the exchange and
the securities regulator. Borsa Istanbul has recently
been corporatised, the Casablanca Stock Exchange is
in the process of demutualising and Tadawul - while
remaining largely closed to foreign investors - has allowed
foreign companies to cross-list on it. The impact of these
changes might not be immediately felt but they are by no
means minor.
In addition to these structural changes, multiple
fundamental trends would support the view that recent
lackluster performance of most Arab exchanges might
be a hiccup rather than a long term trend. McKinsey
estimates that MENA households hold $2.7 trillion USD
of assets, of which only 14% are invested in fixed income
and 18% in equities, demonstrating large potential for
further development of capital markets, especially as
pension, mutual fund and insurance sectors grow. This is
happening against a backdrop of a growing proportion of
global assets flowing to emerging markets, of which MENA
listed companies could capture a greater proportion,
especially in light of some the recent upgrade of Qatar and
UAE by the MSCI.
And yet, all these seemingly positive trends do not for the
moment add up to create vibrant MENA capital markets.
Ownership structures and corporate governance have
much to do with that. Taking away the controlled stakes,
the free float of MENA listed companies tends to be low
and dominated by retail investors. In Saudi Arabia, the
largest MENA market, retail investors account for an
estimated 85% of the market turnover. This market
structure obviously raises the question of incentives
for companies to adopt good governance practices. In
other words, what kind of corporate governance and in
whose interest?
28
Hawkamah issue02 56pages.indd 28
The question of incentives for corporations to adopt
better governance practices requires us to revisit a good
old economic concept: the equilibrium. Equilibrium,
market economic theory tells us, can only be achieved
when supply and demand meet. When we look at the
demand side of the corporate governance equation, we
see the regulators, generally standing alone. The tougher
regulatory stance by regulators is being taken in the name
of public interest and shareholder protection, especially
of minority shareholders who face a greater risk of abuse.
But where exactly are the shareholders and what do
they want?
Much debate has surrounded this question all over the
world and it continues to be incredulously repeated as
the grave governance failures brought to the fore by the
global financial crisis are uncovered and analysed. As a
result, the presumed role of institutional shareholders as
those expected to possess the resources to engage with
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