The 2008-09 financial crisis helped to expose many shortcomings in corporate governance practices, especially in the alternative funds industry. When markets eventually recovered, investors demanded reform, making it clear that corporates would need to assume additional fiduciary responsibilities.
Almost 12 years later, COVID-19 is now causing a different set of challenges to corporate governance.
Whereas the financial crash brought about a regulatory overhaul, taking agency away from market participants, the pandemic is having the opposite effect, forcing them to take on more responsibility. In the context of unprecedented uncertainty, many companies in recent months have been working hard to enhance their visibility, transparency, and communication.
After the financial crisis, it was regulators who became more proactive. New regulation raised standards in areas such as risk management and oversight.
As COVID-19 continues to cause significant disruption across financial markets, firms have had to take the initiative, unprompted by regulators. Asset management firms and their service providers have been executing their business continuity planning (BCP) programme and remote working operations. Boards have also improved standards to ensure they protect investor interests.
In addition, boards will need to improve their oversight of managers’ contingency efforts to assess their effectiveness. They should also be aware of investor inquiries and support them by probing managers about their operational resiliency, including, for example, about back-up plans should primary suppliers encounter difficulties.
Feeding investor fears
Transparency is even more important in times of uncertainty, especially in regions where investors might have had concerns prior to the pandemic, such as Dubai. The emirate has been experiencing a declining property market since 2014, meaning that the current uncertainty is compounding existing investor anxiety.
Firms must therefore prioritize transparent corporate communication, acknowledging uncertainty and unpredictability before investors feel the need to ask for updates.
This path was recently taken by the GCC’s largest real estate investment trust, Dubai’s Emirates REIT. On May 10, it chose to publish a statement on its website, addressing recent and potential investor concerns.
Laying it out
The statement contextualized the drop in the company’s share price with reference to the “cyclical downswing” of the UAE real estate sector, but also highlighted issues it could easily have kept to itself. This included discussion of “an aggressive campaign of negative stories and false rumours conducted both online and offline”, which it perceived to be pushing its share price down to an artificially low level.
The trend seems to be widespread. Shortly afterwards, there was media attention on the events.
It is believed the campaigns are deliberately taking advantage of the region’s vulnerability in order to damage REIT’s value and buy at a reduced price. The campaigns must seem additionally malicious for Emirates REIT, which has already reduced rent for its commercial tenants struggling with the fallout from COVID-19.
Not being opaque
Often companies choose not to disclose information of this kind for fear of appearing vulnerable. Emirates REIT’s unusual (and certainly risky) decision to acknowledge the problem, and to confirm it is taking steps to combat the smears, must have had a positive effect on investor confidence. Investors are likely to prefer learning of such developments directly from a company, rather than reading about in the news without prior knowledge of the issues.
The REIT has continued to be consistent in this respect, issuing another statement to press just last week in response to rumoured concerns about its management fees. Explaining how its fees are structured, it stated that “Emirates REIT is not just a buy-and-sell property fund. It is a multi-faceted REIT that buys prime properties with the purpose of repositioning them, develops new office and retail concepts as well as new build-to-suit properties”.
In addition to increased transparency, fund managers are making efforts to appear additionally available. In response to social distancing measures, boards have adapted by leveraging virtual communications technology and appear to be meeting more regularly as a result.
It has been positive to see many companies taking the required steps to improve their corporate governance strategies. It is likely that many will feel pressure by investors to maintain this direction, even after once the pandemic is over. Every cloud has a silver lining, and in this respect, alternative funds are no different.
- Thomas Herd is with Forbes’ Digital Marketing.