In the past, a company's dealings were entirely private, kept within the hand of the partners, ownership group, or family who conducted operations. This arrangement wasn't necessarily bad either, as the competitive edge was often gained through secrecy of the firm's dealings and financial standings. But since then, all of this has changed with the arrival of global competition and the need for investment of public capital.
Companies need capital investment to stay competitive in today's business environment and with that public offering are a number of duties and responsibilities to the investor. This responsibility is best summed up as the obligation for disclosure and transparency.
As an investor, when you buy shares in a company you become one of its owners, no matter how small that share may be. With this in mind, you take on both the risks and the benefits of ownership and as owner, and should expect the management of the company to direct affairs as efficiently and professionally as possible, so that your expectation for profits can be met. If this isn't the case and proper disclosure of the company's activities and profitability is not forthcoming, take your business and money, elsewhere, say investment analysts.
When a company wants investment, the onus is on them to attract and retain investors and with that it is their responsibility to build confidence through open and honest reporting. To do otherwise is tantamount to swindling investors — telling them one thing while meaning another. No matter how you put it, this dishonesty erodes the integrity of the market in general and everyone suffers.
After 21 years of operating in the traditional manner, Jordan continues to emerge from an institutional culture and adapt to the new ways of the global economy. With international standards penetrating the capital market, the investment landscape is surely and slowly changing for the better and there are greater opportunities. However, there is still some resistance.
Many company owners feel they lose control to outside forces (shareholders) by seeking financing through shares. They still think they are accountable to no one but themselves, but clearly, this is no longer the case. They operate using other people's money and so must report to their backers, no matter how small the investment.
Brokers warn that many companies “window dress” their balance statements prior to the reporting periods, and investors should take note of this. Samir Jaradat, CEO of the Securities Depository Centre (SDC), explains that proper disclosure gives an “equal chance to everybody” to profit from the market. He stresses the SDC's record keeping role helps “ensure a fair, just, transparent and liquid market.” If everyone knows what's going on, “there are more players with appropriate information who can interact and reach a fair price,” he says.
But this information must also be timely and effective, derived from proper auditing and at regular intervals. Jaradat explains that while the law has changed and continues to change to enforce disclosure, the issuers of information don't always feel forced to disclose. “They still think the company belongs to them,” says Jaradat, but adds, “when you tap public money, it's not your ballgame anymore.”
For Jaradat, it's a question of evolution, “the previous set-up was good, we all knew each other but that's changed,” he says. “Jordan is getting bigger, and with more players we don't know each other anymore. That's why we need the leap to international standards.” Jalil Tarif, CEO of the Amman Stock Exchange (ASE), also stresses the importance of disclosure practices. “It's a very important area for investors and players in the market as a whole,” he says. “Every single item, procedure or event that might affect the price of securities is important and should be disclosed.”
Looking back at his own private sector experience to understand the pitfalls, Bassam Saket, CEO of the Jordan Securities Commission (JSC) which is responsible for the policing functions within the securities industry says, “I know from inside how information can be diluted.” “Things have to be corrected but not by revolution, but evolution,” he adds, pointing out the great departure from 21 years of tradition.
In recent months, the JSC has suspended brokers for various infractions, including market influence, and continues its role of enforcement to protect market integrity and investor confidence.
Ongoing development of Jordan's capital market
Someone actively working towards Securities Law reform is Allan Roth, an international securities consultant who has spent the larger part of his career helping draft modern, updated disclosure legislation in over 20 countries. He has since come to Jordan and is helping rewrite the laws for the industry and is expected to present a capital market development package this year.
For Roth, disclosure in the capital markets is essential to dynamism in an economy, “it's a desire to encourage entrepreneurship, new businesses and the people they bring along.” Opportunity stimulates that dynamism, believes Roth, and that is created through an open, transparent environment. He recognizes that national economies are increasingly tied to a global, competitive economy, and companies wishing to effectively compete must go to strangers for capital. This means forgoing some control of the enterprise, he says.
Roth looks to the example of Thailand in the 80s. He remembers a society that operated along a traditional business model with companies reluctant to give up control of their books. The attitude was “it's our business and no one's going to tell us how to run it,” he says. “But one by one, the companies realized they had to break out of this mould to survive.” “In Thailand it just happened, one changed and the others followed,” he says.
Why this happened believes Roth is “because competition is a kind of peer pressure” and ultimately, companies were forced to follow their competitors into new practices. An example of failed disclosure legislation comes with the case of Albania and only serves to underscore the importance of a fair and accurate securities system.
In 1997, Albania underwent wrenching chaos and tumult because of a securities scandal involving large-scale investment fraud. As thousands of people lost their life savings, the government fell and the entire country was destabilized. Sadly enough, this happened because of the popularity of the securities market and the fact that the legal infrastructure and enforcement mechanisms weren't in place.
Jordan's current disclosure legislation “needs some substantial revision in terms of legal construct,” says Roth. The problem is that the earlier version failed to anticipate the development of the market including new practices.
Roth uses the example of companies wishing to pay their employees in stock options. “Stock options are becoming a medium of exchange for start-up companies,” says Roth, explaining that Jordanian law inhibited these sort of transactions at one point. “Our project deals with issues like that ... we can change the law in that respect and eliminate a problem,” he says, adding, “nobody anticipated this kind of stuff when they first drafted the laws.”
Roth stresses the need to present financial information in a standardized, reliable way, and at regular intervals. To meet this goal, the accounting and auditing professions have to also go along, he says. A strong enforcement mechanism is essential to ensure everyone plays by the rules, “fraud destroys confidence, and confidence is the market.” A well functioning capital market is to some extent, self-regulating as market forces ultimately decide success, believes Roth.
“Financial markets demand accountability on the part of management and this improves the efficiency of managers; they have to show their mettle to attract capital, and there is pressure to be honest and efficient,” he says. “The financial market itself serves as a policeman over corporate managers in a more effective way than small shareholders on their own.” — ( Jordan Times )
By Owen Clegg
© 2001 Mena Report (www.menareport.com)
