Mobily fiasco highlights need for good governance in the Middle East

As Etisalat and Saudi Arabia’s stock exchange begin to welcome foreign investors for the first time, the travails of Etihad Etisalat come as a stark reminder of the importance of modern corporate governance standards for listed companies in the kingdom and beyond.

Etisalat’s Saudi subsidiary, known as Mobily, was one of the country’s strongest telecoms stocks, with a market capitalisation of 71.4 billion riyals (Dh69.9bn) at the end of June last year.

One year on and that figure has plummeted by nearly two-thirds after Mobily admitted in November that it would have to restate 18 months’ worth of earnings because of alleged accounting irregularities, sending shares into freefall.

The company’s chief executive departed in disgrace, and the Capital Market Authority deployed a team to comb through its financial practices.

“The situation at Mobily has been a wake-up call for listed companies in the region and in Saudi Arabia in particular,” said Toby Wilkinson, an investor relations professional and a board member of the Middle East Investor Relations Society.

Mr Wilkinson added: “You only had to look at the website to see the paucity of useful information on it. Disclosure, transparency and corporate governance need to be in the DNA of companies in the GCC if they are to compete for the attention of emerging market investors internationally.”

He said that Etisalat’s decision to appoint its group chief financial officer Serkan Okandan as Mobily’s deputy chief executive to help sort out its woes would provide reassurance for its investors.

The impact on Etisalat's shares in the UAE to yesterday's revelations has so far been limited. The company's shares, which rose 21 per cent last week in response to the lifting of foreign ownership restrictions, fell just 0.7 per cent yesterday.

As for the wider Saudi equity scene, the CMA’s active role in monitoring the situation is actually likely to improve the confidence of both local and foreign investors, according to Sameer Nawaz, the co-head of investment banking at Saudi Fransi Capital in Riyadh.

“In capital markets anywhere in the world you’re going to come across such challenges and issues with major companies, as we saw with Tyco in the United States [in 2002] and more recently with the HP-Autonomy scandal [in 2012],” he said.

“Such controversies are largely unavoidable but the important thing is that you have a system in place to deal with such issues, which gives investors a level of comfort.”

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