Transparency in times of economic slowdown

Are corporate governance and transparency off the table during the regional economic downturn?

We have seen companies cower and shy away from disclosing the full picture in the face of adversity. Others have thrown their toys out of the cot, sacking rating agencies for downgrading them, delaying corporate results or blatantly trying to divert attention from critical issues.

While transparency is not the sole reason for the regional economies to lose their momentum, it did make a bad situation worse. Last year, the S&P 500, at the centre of the global financial storm, fell by a traumatic 47 per cent. But the MSCI-GCC, far removed from the immediate credit debacle, fell 63.4 per cent, with some regional markets faring even worse.

The question then is: how much is the regional stock market downturn a result of the economic environment, and how much is it due to a lack of transparency?

"Corporate governance has historically been low in the region as compared to the other emerging markets and the developed markets," says Amrith Mukkamala, senior investment analyst at Kuwait Financial Centre.

Buzzwords during the boom times, corporate governance and transparency seem to have taken a back seat as the credit storm rages. "In general there is always a risk of being transparent in the good times and being less so in bad times," argues Farouk Soussa, an analyst at Standard & Poors. "This was the case not just with emerging markets but also in developed markets during the downward cycles of the '70s and '80s. The lessons learnt were that transparency is a double-edged sword: if you become less transparent during bad times, that raises suspicions and the markets will punish you for it."

But we often talk of reform as if it is some sacred book that should be picked up, dusted and paid homage to once every few years. This is not helped by the fact that there is currently a great battle raging between those who are looking to implement much-needed reforms in the region against those who believe Western-style corporate governance models are not what they are cut out to be. After all, some of the world's best-regulated markets could not save entities such as Lehman Brothers, or check the rise of Bernie Madoff and Enron - so why copy those broken models, they argue?

"Structural reform has become a cliche but in economic parlance it amounts to no less than the redistribution of the factors of production [land, labour, capital] in the most efficient manner possible," Tarek Fadlallah, executive director at Nomura, put it succinctly in a recent report, adding that the only road to recovery is continued reform and greater transparency.And there are many quick detours that can help make the route shorter. A crisper, clearer picture of market conditions and earnings visibility could have been a far more efficient exercise by listed companies. A classic case is the slew of rumours surrounding some of the troubled Dubai-based companies. After months of speculation, it took a clear message from the highest authority of the land to lay these rumours to rest.

Could some of these companies have helped their stakeholders with quicker facts on the ground and nipping rumours in the bud? How much shareholder value was lost during this period of uncertainty?

Regional companies can no longer hide behind the facade of immaturity and nascent market conditions. This is especially true when these regional companies are looking to acquire stakes in some of the biggest companies in the world. Indeed, transparency needs to start straight from the top, especially as many sovereign wealth funds (SWFs) have stakes in the majority of the largest public-listed companies in the region.

But the Linaburg-Maduell Transparency Index, developed at the Sovereign Wealth Fund Institute by Carl Linaburg and Michael Maduell, notes that in the last quarter of 2008, Saudi Arabian Monetary Agency (SAMA) and Abu Dhabi Investment Authority (ADIA) were two of the least transparent among government funds that had more than $100 billion (Dh367 billion) in assets under management. Among the smaller SWFs (under $100 billion assets under management), Algeria fared the poorest among all SWFs, with Iran and Oman not far from the bottom. In comparison, Singapore's Temasek shared the top slot with other OECD SWFs as the most transparent government fund in the world.

Regional SWFs can start by ensuring that the companies they have a stake in demonstrate greater transparency standards. Other companies will follow suit quickly, without the regional corporate governance drive turning into a multi-year, meaningless agenda.

To be fair there have been pockets of improvements. Saudi Arabia's CMA has initiated a number of reforms focused around company disclosures, Dubai's crackdown on corruption has been largely well-received and Abu Dhabi recently set up an Accountability Authority that aims to ensure financial transparency to improve its performance across its public-sector operations. It is hoped the model can be replicated elsewhere to ensure even greater levels of transparency for public-listed companies. And that will be not a moment too soon.

The writer is the managing editor of Zawya.com. The views expressed here are his own.