Over the last five years we’ve witnessed a dramatic proliferation of INITIAL PUBLIC OFFERINGS sweep across the Arab world. According to Ernst and Young, in 2007 52 Middle East companies raised $12.8 billion through IPOs. These figures reflect a profound transformation in the economic landscape of the region, and this transformation has had a powerful impact on the financial media in the Middle East. But before we get too feverish from all the heat generated by this profusion of public offerings, we have to take a stone-cold, sober look at the reasons for these changes and seriously consider why a strong, independent financial media is absolutely essential to the development of the region’s financial markets and the economic welfare of the Middle East.
Thirty years ago the region was dominated by state-run, command-and-control economies and state-controlled media. There was virtually no stock market. The private sector was overwhelmingly composed of family-owned businesses. Transparency and accountability were alien concepts in both private and public sectors. Intra-trade was a rhetorical ideal rather than a reality. Oil revenues flooding in to the Gulf economies in the 1970s and early ‘80s fuelled a helter-skelter ‘black-gold-rush’ and infrastructure boom that left the region reeling and dislocated, with a welter of unresolved social and structural problems. Financial media was all but non-existent.
The grim fact is that over the last quarter century, in spite of all the oil wealth that has flowed through Arab economies, the region’s economic performance has been what the OECD describes as ‘weak and disappointing’. Real per capita GDP has stagnated. The population explosion across the region has created dangerously high unemployment, which has contributed to political instability in many parts of the Arab world that has, in turn, kept the Arab world on the margins of the global economy. This dispiriting situation is directly attributable to the resistance many Arab governments historically demonstrated toward the implementation of genuine, lasting social, economic, political and structural reforms.
The current harsh realities in the region have finally forced many Arab countries to begin making these long-overdue changes. An important part of this reform process has been for Arab governments to establish stock markets to complement the developmental role of banks. The objective is, of course, to provide listed companies with long-term finance, to promote the role of the private sector in stimulating growth and to improve the allocation of scarce economic resources. The primary function of banks and markets is to move funds from those who save to those who produce and it is widely accepted that the emergence of a dynamic private business sector is a critical ingredient in the process of economic growth and development.
But this can only take place if both the public and private sectors behave according to sound principles of corporate governance, without which, all the benefits of a free market can evaporate like a mirage. Corporate governance lies at the very heart of a market economy. And financial media have a crucial role to play in the process of public disclosure and critical commentary that ensures that good corporate governance is in place. William Browder, CEO of Hermitage Capital Management, the largest public equity fund in Russia, said, “The single most important corrective mechanism we have against mis-governance is the press.”
There is no question that a strong, independent financial media is indispensable to ensure transparency, accountability and compliance and to protect investors and the general public against abuse, malfeasance and incompetence.
- In 1999 the OECD formulated a series of six principles of corporate governance which have since become universal benchmarks for both developed and developing economies. These are:
1. The promotion of transparent and efficient markets
2. The protection and facilitation of shareholders’ rights
3. The equitable treatment of all shareholders
4. The recognition of the rights of stakeholders established by law or through mutual agreements
5. The assurance that timely and accurate information regarding the financial position, performance, ownership and governance of the corporation is published.
6. The assurance that management is effectively monitored by the board and that the board is accountable to the company and the shareholders.
An independent financial media plays a central role in ensuring that all these principles are observed by corporations through the process of monitoring and reporting on corporate performance, policies and activities in the context of the markets and the overall economic welfare of the region. One of the lessons learned from the Asian Financial Crisis of the 1990s is that weak or ineffective corporate governance procedures can create monumental, event catastrophic, latent liabilities for individual companies and for society at large. In the Arab world, without transparency and accountability and good corporate governance in place, we are just as liable to create our own Arab Financial Crisis or suffer from our own home-grown versions of Barings, Enron, WorldCom or Parmalat. We cannot afford to be complacent.
A survey published in Malaysia in 2002, revealed that the frequency and nature of media coverage and commentary about a company ranked as one of the most important factors for institutional investors and equity analysts in assessing corporate governance and the decision to invest in an IPO or an existing publicly listed company. The results of this study, which were surprising to academics, clearly demonstrate the increasingly vital role the media is playing in the development of emerging markets. It is absolutely crucial that business news organizations in the MENA region see their role as educating a public that has largely been left out of the process of economic and political reform and to give investors, business leaders and decision-makers a more transparent view of the regional business landscape that will better help them shape corporate and public policies. In this connection it is the job of the financial media to report to the public and investment communities on the full-range of issues that directly impact economic growth and the markets, including trends toward or away from democratic change, openness to trade, government restrictions, private and public debt, labour conditions and reforms, market regulations, political and social stability, religious and cultural values, corruption, education and financial literacy and government policies.
The two parallel market developments taking place in the Arab world – that is, the process of privatisation, in which government-owned enterprises become publicly listed companies, and the concomitant transformation of family-owned companies into publicly listed companies – must be closely monitored and reported by the financial media.
The aim should not be to rain on anyone’s parade but to ensure that the reforms and changes taking place in the regional markets are in the long-term interests of the investment community and the public at large. Transparent controls, responsible corporate boards and shareholders rights must be in place for sustainable growth, development and diversification. Information and education are imperative for developing economies and emerging markets and the financial media forms the most effective channel of communications we have.
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