With the opening up of the Saudi Stock Exchange (Tadawul) last month, H+K Financial’s Bobby Morse writes in Banker Middle East about the new communication priorities this brings for companies in the Kingdom.
Worth more than all regional Gulf markets combined, Saudi Arabia’s Tadawul is arguably the jewel in the GCC’s capital markets’ crown. It is home to some of the region’s most prized investment targets, including blue-chips in key sectors such as petrochemicals and banking.
Up until now these investment opportunities have been largely out of the reach of the vast majority of non-Saudi investors, except through complicated swap arrangements. However, from June 15 this is set to change as the exchange opens to foreign investors.
With the world’s most powerful fund managers now eyeing the Kingdom’s brand new and extremely attractive opportunities, we can expect to see Saudi Arabia’s companies concentrate on their internal structure and external profiling.
Despite the global dominance of its hydrocarbon resources, the foundations of Saudi Arabia’s economy are built on family businesses which generate around 80 percent of non-oil GDP. While family members may currently retain complete control of the direction and the focus of their businesses, the lure of international investors may prove hard to resist.
The move to a market listing brings its own challenges not least of which will be the need to prove the family business is built for longevity, and that family interests are separated from business interests. There will be an acute focus on corporate governance, transparency, succession planning and accountability.
An intention of the Capital Markets Authority (CMA) in opening the stock market is to support institutional investors and increase institutional investing which remains dwarfed by the dominant retail investor market. In order to attract such institutional investors, standards of international best practice, corporate governance and compliance will be key prerequisites for making an investment decision.
Adopting suitable corporate governance processes, and hiring an independent executive board focused on the long-term success of a company on merit rather than on the family name, cannot happen overnight.
The right talent and the right processes need to be installed as early as possible to give companies the structure they need to move forward free from family pressures or disagreements, yet allowing founding family members to remain firmly involved, formalising their day-to-day decision making powers.
The role of Investor Relations (IR) professionals will also grow in importance as companies realise they are now competing for the attention of investors on a global stage. They will want to ensure that they have carefully crafted messaging and narrative which are accurately conveyed to investors in context, and they will want to ensure that the process is in place to make the investment community aware of all the latest information relating to the company.
A switched-on company board will recognise that a good IR function is about far more than sticking to the rules and regulations of the specific market and managing a tick-box exercise. They will recognise the imperative of holding a dialogue with investors, and that they are alert to all market intelligence.
The changes in market regulation and opening the Tadawul to Qualified Foreign Investors will crystalize some important changes in the priorities of companies – both those listed on the exchange and those family owned businesses that may now be open to the opportunity of listing to attract international capital. Interesting times lie ahead.
Bobby Morse, joint Managing Director of H+K Financial, advises clients on best practice capital markets communications.