When the Dubai Financial Services Authority, the regulator of the Dubai International Financial Center (DIFC), called up the UAE’s business journalists for a press conference in March, expectations of a major announcement were high. After all, the regulator had promised, in private, that 2007 would be the year of getting tough. Add to that the fact this conference was being held just weeks after the business press had enjoyed a field day over allegations of share manipulation against a local investment bank, Shuaa Capital, made in this magazine and rumblings about insider dealing at Dubai’s biggest companies, the feeling was that the watchdog was finally baring its fangs. Instead, we were told of a six-week investigation that had exposed a complicated Internet fraud, in which Australian and Southeast Asian investors were bilked of their money by a bogus website claiming be a financial market within the DIFC. This scam-busting is becoming habitual: in late April another press release announced that another, similar, scam had been closed down by the team. While this was all very commendable, the assembled journalists couldn’t help but be disappointed. In a region where business dealings are at best murky and at worst completely opaque, and where insider dealing, share manipulation, off-balance sheet business deals and shaky corporate governance are rife, wasn’t this a case of fiddling while Rome burns? Privately, regulators will admit this. One senior enforcer in the UAE burst out laughing at the mention of corporate governance and Dubai in the same breath. Such an attitude among the watchdog goes some way to explaining why markets are struggling to recover after their spectacular falls last year. As Hisham Al Razzuqi, the chief executive officer of Gulf Investment Corporation, told TRENDS, “It’s a matter of confidence now. We are at a stage where people have to realize the situation, assess where they are at the moment. People are also waiting for the company results to come in. They are trying to find out whether the results are coming from their operational business or from the markets and whether is there a gap between the two. What we need is more transparency, more analysis and more research.” Transparency, hand in hand with corporate governance, are the new mantras of Gulf business. According to Transparency International, a global NGO that promotes openness in political and business life, transparency “can be defined as a principle that allows those affected by administrative decisions, business transactions or charitable work to know not only the basic facts and figures but also the mechanisms and processes. It is the duty of civil servants, managers and trustees to act visibly, predictably and understandably.” Working out where the Middle East, and in particular the Gulf, stands in terms of opacity or transparency depends on what you’re measuring. Transparency International itself focuses strongly on kickbacks, corruption and connections, and it sees a strong correlation between corruption and poverty. Its benchmark Corruption Perceptions Index ranks countries on a scale of zero to ten, with ten being squeaky clean and zero hopelessly corrupt. Out of the six GCC states, the UAE does quite well, coming in at number 31 with a score of 6.2. The lowest scoring GCC country, Saudi Arabia, languishes in 77th place, with a score of just 3.2.

Bleak picture. However, a more recent report, of relevance to your average investor, paints a far bleaker picture. The Investor Protection Indices of the World Bank’s Doing Business Survey, ranked the Middle East and North Africa as the worst place for safeguarding shareholders, with a score of 4.6. The indices look at factors including corporate disclosure regulators, shareholders’ ability to file legal action and directors’ liability. Out of the GCC states, the UAE came bottom, with a score of just 4.3, while Kuwait led the pack with 6.3 – putting it in the same class as the OECD (Organization for Economic Cooperation and Development) countries, the top region with a score of 6. Oman and Saudi Arabia scored 5.3 and 4.7, respectively. Even this survey fails to tell a complete story. Kuwait may well be out on top, but, even if corporate wrongdoings are brought to the attention of the regulators, the watchdogs do little more than nip. When Abusalman Al Awadi, the chairman of the troubled Al-Ahlia Investment Company, was removed as chairman for the misappropriation of some $14 million from the company’s coffers, his punishment amounted to little more than a slap on the wrist and, in true nepotistic style, he retains control of his empire through family members serving as proxies on the boards. Addressing the UAE’s low ranking on the World Bank’s table at the Middle East IPO summit held in Dubai last month, Habib Al Mulla, the chairman of the Dubai Financial Services Authority (DFSA), sounded a warning. “Shareholder confidence is an essential component of a sound capital market, and with that comes a need to ensure that investors are protected,” he said. “Too many markets are paying lip service to the cause of investor protection and the gap is growing when compared to the best practice found in the major financial centers. We have a long way to go.” As the UAE, in particular, seeks to transcend its local exchange image and become a genuine financial hub, transparency and corporate governance are starting to be taken seriously. Nassir Al Shaali, the chief executive officer of the DIFC, told TRENDS that it is this quest to attract more sophisticated international players that’s behind the drive for a more transparent business community. To that end, he’s working on educational initiatives through Hawkamah, an international association aimed at lifting standards of corporate governance in the region. “The ideas that we are promoting and pushing are educational activities and awareness activities of financial markets and the financial services industry in general,” he said. “But we are also challenging regional governments as well as large corporates from the point of view of corporate governance standards through our initiative of Hawkamah. We’re actually scoring companies in the region against each other, really putting it up there and getting these guys to compete with each other to improve their corporate governance standards. That goes a long way toward making the area more sophisticated to make the investor as well as the consumer more aware and demanding in terms of standards.”

Educating businessmen. Hawkamah, a subsidiary of the DIFC, is probably the region’s strongest tool in promoting sound corporate governance and raising financial institutions and businesses to the next level. In partnership with the OECD, Young Arab Leaders and the International Finance Institute, among others, it organizes seminars and conferences aimed at educating businessmen about the need for sound governance, as well as formulating policy for governments and drafting codes of conduct for businesses. According to its mission statement: “Good corporate governance stimulates performance, generating higher returns and profitability of companies, leads to higher total factor productivity growth, a major source of economic growth. “Similarly, limiting the abuse of corporate insiders enhances leadership, demonstrates transparency and social accountability and creates an efficient mechanism for transferring wealth between generations. By monitoring managers of companies in both the financial and ‘real’ sectors and making them accountable for their actions, good corporate governance implies protection of investors’ interests; in turn, this encourages both domestic and foreign direct as well as portfolio investment.” But not all businessmen think corporate standards in the region are as bad as all that. Abdulaziz Al Ghurair, the boss of Mashreqbank, told TRENDS earlier this year, “In my opinion there is good corporate governance, but we will always need to raise the bar because more and more companies are in stock markets now. It does require transparency in what happens inside the organization and more of that will see more corporate governance coming in. But, again, there is no end to it and we have not had any major lapses in corporate governance.” That’s because nobody’s really looking that hard. Allegations of insider dealing have dogged local exchanges since well before the market crash, but it’s only the Saudi market authorities that have really got tough. Elsewhere, it’s business as usual. Take Emaar, the world’s second biggest property company and the UAE’s bellwether stock. It was caught up in what appeared to be a textbook insider dealing scandal last year, although the regulatory authorities declined to pursue the case. In February 2006, shares in the company plunged 4.5 percent the day before the Emaar board met to discuss distribution of Emaar profits. Given that there was widespread expectation that the board would announce a bonus share issue, the fall was surprising. So, when the bonus shares failed to materialize, investors suspected that shareholders with inside knowledge had dumped their holdings knowing full well that no bonuses would be forthcoming.

Other hurdles. Besides allegations of insider dealing, local markets face other hurdles to overcome if they want to clean up their image. State-owned companies and family firms alike are notoriously secretive; cartels and monopolies, often state sanctioned, are common; companies are loath to release names of shareholders, and even percentages of ownership. Complicated company structures, involving dozens of subsidiaries and affiliates, make balance sheets almost meaningless as holding groups shuttle cash and assets from one to another to obscure the real state of affairs, while nepotism and cronyism in the boardroom are the norm, not the exception. But perhaps the biggest obstacle in getting boards to accept that corporate governance makes financial sense is a distinct lack of evidence that this is, indeed, the case. Emaar, again, makes a good case in point. Listed on the Dubai Financial Market, it is one of the more transparent companies in the region, its high profile meaning it has been subjected to reams of research by investment banks here and abroad. Its quarterly figures are pored over by the international press to a greater extent than any other GCC firm including, last month, a highly critical analysis in The New York Times. As a result, it’s been punished on the market, with its shares stubbornly refusing to shift from low double figures. Private companies can be forgiven for wanting to avoid the kind of headaches Emaar has to endure at the hands of shareholders as a result of its open disclosure. Another factor hampering better transparency in the region is the issue of jurisdiction over cross-border business. Even within one country this can be confusing: DIFC companies are monitored by the DFSA, while DFM companies are kept in check by the Emirates Securities and Commodities Authority (ESCA). Though these two bodies do work closely together – the Internet scam busts were joint efforts – things get muddled when deals spill over to other jurisdictions. In the case of the Shuaa share manipulation allegations, the original deal was done on the Kuwait Stock Exchange. When the KSE declined to act over the initial accusation of wrongdoing, ESCA dropped its own investigation into the case. Questioned about jurisdiction problems, Al Shaali, of the DIFC, said, “It’s an issue that regulators are aware of, and are working hard to address. “Some work that has already started in this field is better cooperation between regulatory authorities in the GCC. Currently they simply do not cooperate enough. They don’t have a working relationship and understanding of how to quickly regulate businesses cross-border activities. “That has to improve and until that improves you won’t see efficiency gaining in the market, you won’t see as much as confidence among investors as well as you should expect.” The UAE is already starting to make strides towards a more open and transparent system. The UAE Federal Strategy, announced last month, sets out key performance indicators for all ministries. Mohammed Al Gergawi, the UAE minister of state for cabinet affairs, said, “Transparency and accuracy will be required to ensure better government performance to achieve the strategic goals and objectives.” Certainly, the very public manner in which ministers were upbraided recently for their failings suggests that the government isn’t just paying lip service, and that the UAE’s “balance sheet” may well be a less opaque system than those employed in the private sector.

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