Dr. Mohamed A. Ramady
Publication Date: 
Mon, 2007-11-05 03:00

“Big T” or transparency is suddenly in the air. Not a day passes by, without someone mentioning it either in writing, or saying it on the innumerable satellite chat shows in the Gulf, as if almost hypnotized by the word. It is, as though by repeating it incessantly, we are all suddenly taken to the land of financial and business transparency that will lead us to everlasting happiness. However, just as in “Alice in Wonderland”, we have to step back from the world of fantasy make-believe and take a reality check. What exactly do we mean by transparency? Can this ever be achieved in the cutthroat world of business, and what are the bare minimum benchmarks that one can live with in that elusive search for the grail of “full” transparency?

The demand for more and more transparency from businesses is a legitimate one. Investors are the ones taking the risk by placing their hard-earned money into corporations in the hope they are in safe hands. At the minimum, they expect to be told all material events concerning the company’s performance, which might lead to adverse effects. Even the most economically sophisticated of nations sometimes fall foul of lack of transparency in the business dealings of their flagship corporations. One does not have to mention Enron here, but the most recent case of the collapse of the national symbol of Switzerland — Swissair — is a case in point.

The collapse of Swissair, dubbed “The Banker in the Sky” for its clockwork timing, maintenance and past profits, shook the country’s confidence in its business leadership and damaged its reputation for businesses efficiency. While all 19 senior Swissair management were cleared of crimes linked to the collapse of the airline, investors were left bewildered on how this could have happened. The charges against the defendants included mismanagement, making false business statements and forging documents. The airline was left vulnerable after a $3 billion cash balance was turned into a $14 billion debt, namely by a strategy of buying smaller European airlines. The dependents argued that they had acted for the best interest of the airline, but the question remains — how transparent were their actions? If investors had been told, would the same strategy have been approved by management?

The issue of transparency is where to draw the line in material reporting. Should this be confined to the financial assets, liabilities and cash flows of the company — as seems to be the case in the Gulf, or should it include information of a deeper and personal nature about the management and Board? Is the health of the chairman a material issue or a private one? Are the inter-family alliances, bloodlines and affiliations of concern to outsiders, or should they not be revealed? If the answer to both is that the business definitely depends on the state of health of the chairman, as he is the driving force of the corporation, or that new contracts can only be obtained through the use of interfamily alliances, then transparency deems that these material facts are disclosed. If transactions are done on arms length and transparent bidding system, then such information need not be disclosed.

In the Gulf, businesses are still dominated by family firms. Some have listed part of their company on the local stock markets, especially in the boom days of ever rising share prices, when not too many questions will be asked, and transparency or the lack of it, was the least of concern on Gulf investors’ minds. It was not surprising then, that the overwhelming majority of initial public offerings (IPO’s) seemed stuck at the magical 30 percent level: sizeable enough to meet listing requirements, and yet below a majority sale level to ensure that the business is still run by the same management and Board pre-IPO.

Nothing changed. As long as investors seemed happy with dividend payments and ever increasing share prices, why worry about more transparency? Also, if the regulatory bodies themselves did not ask for too many details on the operations of the company, why worry about some minority shareholders with no power of punishment? It was truly amazing to note that Saudi public-listed companies were still operating, when in fact their paid-up capital had been eroded by more than 80 percent and they were technically bankrupt. Was this not enough reason for a material disclosure, either by the management, regulators or their auditors?

The disastrous fall in the regional, and the Saudi stock market in particular, has caused an outburst of anger and resentment by investors. Not knowing where or whom to blame, they have now pinned their hope on more “transparency” from the companies they invest in. At the least, what is expected now are material facts on new projects, existing project performance, signing of significant new banking facilities or capital issues, board and management changes, loan-loss reserves, market share positioning, and non-sensitive new product developments. One can live with this information, and start to take educated guesses on the future performance of one’s favorite listed company.

Let us hope the discussions and demand for more transparency remains within logical bounds, but there is a definite need for more “transparent” statements and revelations by Gulf companies currently obsessed with maintaining company secrets. If this happens, we will be better off and maybe there could be an easing of speculative trading on the local markets. We can then forget about getting details about the chairman’s favorite dinner locations or where he likes to take his holidays. This remains definitely private, unless of course, it is all paid for by the company investors....

Dr. Mohamed Ramady is a visiting associate professor, Finance and Economics at King Fahd University of Petroleum and Minerals.

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