Dubai: In June this year a five-year journey for the UAE and Qatar culminated with their upgrading to Emerging Markets status from Frontier Markets classification by MSCI. In the run up to the announcement, both the bourses in Dubai and Abu Dhabi as well as the Doha Securities Market rallied significantly on the back of robust economic fundamentals underlying both the UAE and Qatari markets, as well as investors pricing in their expectations for increased funds flows to these markets.

Depending on who you speak to, analysts forecast for the amount of foreign capital expected to be drawn into the two newest members of the Emerging Markets family, range from several hundred million to a couple of billion dollars over the medium to long term. What is not in doubt is that this promotion will have a positive impact in terms of the breadth and liquidity of these markets. Sentiment towards the region as a whole should also improve as foreign investors now look more closely at our home markets.

Having said that, this initial step up to emerging market status should act as a catalyst for continual improvement in terms of market transparency and corporate governance.

Kudos to the regulatory authorities in the UAE and Qatar who made concerted efforts to have their respective countries finally accepted into the MSCI Emerging Markets Index. The UAE was turned down five times since 2008 as it solicited inclusion into the index.

Listed companies in both countries have foreign ownership restrictions, but this is seen as gradually being relaxed. Countries such as Korea and Taiwan that previously had similar foreign ownership restrictions also took a gradual path towards easing the limits over a number of years. Ownership restrictions should also relax as index component companies hit ceiling limits and face the prospect of having a reduced weighting by the index compiler if no changes occur.

The combined weightings of both countries in the MSCI Emerging Index is less than 1 per cent, much smaller than the weightings the two countries had in the MSCI Frontier Markets Index, which both dominated with an allocation of over 35 per cent in total market value. Notwithstanding, the size of the emerging markets pie is significantly larger, with an estimated $1.4 trillion invested in funds that follow the MSCI Emerging Markets Index, while the invested funds that track the MSCI Frontier Markets Index is less than $3 billion.

MSCI reviews have stressed the importance of safeguarding of investors’ assets. Key financial events the past decade have highlighted the role corporate governance practices play in maintaining viable entities and safeguarding investors’ interests.

The CFA Institute is a vocal proponent globally of the importance of corporate governance and in raising awareness of governance standards within the investment community. Its publication, The Corporate Governance of Listed Companies: A manual for investors is a valuable reference tool for both companies and investors alike. The manual suggests good corporate governance practices should seek to ensure that:

• Board members act in the best interests of shareowners (this can also be expanded to include a larger stakeholder group, such as society at large).

• The company acts in a lawful and ethical manner in its dealings with all stakeholders.

• All shareowners have a right to participate in the governance of the company and receive fair treatment from the board and management. Rights of all shareowners and other stakeholders are clearly delineated and communicated.

• The board and its committees are structured to act independently from management and others that have influence over management and other non-shareowner groups

• Appropriate controls and procedures are in place covering management’s activities in the day-to-day operations of the company.

• The company’s governance activities, as well as its operating and financing activities, are consistently reported to shareowners in a fair, accurate, timely, reliable, relevant, complete and verifiable manner.

The effectiveness of the above would depend largely on robustness of the corporate governance structure and the strength of the shareowners’ voice in corporate governance matters through shareowner voting rights.

Many countries, regulatory authorities, industry groups and others have created or added to existing corporate governance codes. This only forms part of the solution. Investors also need to be educated on their role in advocating for high corporate governance standards in their respective markets

While relative valuations, company profitability, macroeconomic environment and inclusion into the Emerging Markets index are all important in garnering the attention of investors, corporate governance is a key element in the investment decision process for many large investors as well. Companies that subscribe to high corporate governance standards are invariably rewarded with a valuation premium and attract a wider base of investors, suppliers, customers and employees.

— The writer is a member of CFA Society Emirates