Pressure on IR in the Middle East

Increased investment is putting presure on imrpovements in Middle Eastern investor relations, with know-how imported from the US and UK

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 service sectors. And the recent launch of the new Middle East IR Society (ME-IR) marks the shift in emphasis for this massively diverse region, which stretches 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 the Bank of New York Mellon and Alex Ménage from Thomson Reuters, acknowledge 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 that there are anywhere from 20 to 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.’

Chojnacki says there are two contrasting forms of IR professional in the Middle East: ‘One typically comes with IR experience from a European blue-chip company, and 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 London-based VMA Search, knows the region well and has witnessed firsthand the building swell of Middle Eastern companies recruiting IROs from the UK and the US.

‘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 don’t seem to be aware that having investors means communicating with them properly. If you had told them about such issues in the past, they might well have told you to bugger off.’

Lost in translation
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, markets in the Gulf Cooperation Council nations could be valued by 15 percent to 20 percent higher with stronger corporate governance,’ he says.

Saidi also notes that a recent survey from 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 mental topography is illustrated by a foray onto the Dubai Share Talk forum, a website where investors in Middle Eastern firms exchange information with each other about a range of listed companies. 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; profound worries about insider trading. It constitutes quite a list.

Federico Salinas is a capital markets lawyer with law firm Dewey & LeBoeuf who has worked in the Middle East region 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, you will find corporate communications that sound like they are dictated by lawyers; at the other end, corporate communications have 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 – both fairly and transparently.

‘I think this is because 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.

Whose rules?
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 doesn’t really know what it’s picking yet, so everything is under review.’

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. ‘Just 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. ‘If investors see the general direction things are going, however, 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.’

From crude to contemporary art

Critics of the Middle East’s economy often cite its stupendous oil wealth as a double-edged sword that has held back broader economic diversification.

Governance problems in the region are certainly an issue because many companies have previously been state or family-owned. But investors have been through this experience with many economies in Brazil, Russia, India and China.

Much of the Middle East is reinventing itself: look beyond the gold-plated palaces, underwater hotels and Givenchy spas and there are reformist sheiks sinking money into huge universities, museums and galleries. Award-winning Iraqi architect Zaha Hadid is designing a performance arts center in Abu Dhabi, and British architect Sir Norman Foster is designing the national museum. In Doha, Qatar’s capital city, the new Museum of Islamic Art – a gorgeous, modern building devoid of excess – is being supported by the British Museum.

It may be true that culture and expertise are being bought now. But the next generation will create it.

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