Mohammed Al Jadaan, Chairman, Capital Market Authority (CMA): Interview

Interview: Mohammed Al Jadaan

What are the most important issues the Kingdom should address to attain emerging market status?

MOHAMMED AL JADAAN: By opening the market to qualified foreign investors (QFI) we are taking the first step towards enhancing governance and transparency in the Saudi Stock Exchange, with the aim of transforming it into an exchange that compares favourably with any in the world. Inclusion in the MSCI Emerging Markets index would help that process, but it is a point in the journey, rather than a destination in itself.

The CMA is working to address feedback from local and international investors, but it is important to remember that the Saudi Stock Exchange has already made strong progress in terms of enhancing governance and transparency, as well as in ensuring liquidity. The exchange is the largest and most liquid in the region, and an important global market. As of April 2015 it had a market capitalisation larger than Mexico, Malaysia and Russia, with average traded values comparable to exchanges in Brazil and India. These indicators are important criteria for inclusion in emerging market indices and for the exchange’s development.

Will the entrance of international institutional investors into the Saudi market reduce volatility?

AL JADAAN: While the overall holdings within the stock exchange are dominated by institutions ( government-related entities, Saudi institutions and non-resident foreign institutions currently account for approximately 60% of total market capitalisation), around 90% of trading is conducted by retail investors.

Given this backdrop, one of the main goals of the QFI framework is to enhance institutional investment in the market and thus reduce volatility by attracting the expertise of international institutional investors. This is also linked to a broader endeavour to encourage greater institutional investment among local investors as part of the drive to increase professionalisation and stability within the market. It is expected that this process will help to improve the quantity and quality of research on listed businesses, enabling investors to make more informed decisions and reduce volatility.

How will the CMA increase transparency and improve corporate governance for listed firms?

AL JADAAN: Improvements to transparency and corporate governance have a crucial role to play in the development of capital markets in Saudi Arabia. The CMA issued Corporate Governance Regulations in 2006 as guiding principles to companies listed on the Saudi Stock Exchange and has gradually introduced provisions related to shareholders’ rights and disclosure to ensure compliance and improve standards. Under these regulations, listed firms must produce quarterly reviewed financial statements, which contain a balance sheet, a profit and loss account, a cash flow statement and notes, as well as audited annual reports. Moreover the firm’s board of directors must issue an annual board report with a description of the company and its business, corporate objectives, dividend policies, information regarding the board composition and executives of the firm, and remunerations and indemnification. The report also includes a statement by management of current and future developments that may have significantly affect the firm’s financial position.

To assist in the development of best practice corporate governance, the CMA has helped to educate board members and raise awareness of corporate governance with workshops and campaigns. These have included a series of conferences and media events, combined with seminars targeting directors and senior managers, on issues such as good board practices, risk management and non-financial disclosure. The CMA also issued arrangements to specifically deal with distressed companies in 2013. These arrangements apply to listed firms that have accumulated losses reaching 50% or more of their total capital and include enforcing more stringent disclosure requirements on such firms to ensure that investors are better informed. These efforts have caused a notable improvement in transparency.