 Why is transparency important to emerging markets?

Transparency is important in emerging markets since investors cannot always rely on legal
institutions and the rule of law in these countries to secure their rights and contract enforcement.
Transparency is crucial in such a turbulent setting to reduce the risks perceived by investors and
attract their investments. Actually when states do not build legitimate and accountable
institutions, and when the justice system is flawed, individuals and organizations will tend to shy
away from investing in companies operating and listed in these states, as they will undoubtedly
perceive investments in these organizations as riskier when compared to similar ones operating
in developed countries where legal institutions are present and the rule of law is respected.
Transparency and corporate governance give investors some sense of protection that is essential
for them to consider placing their funds in emerging markets.

 What are the most important items to disclose? How the lack of disclosure of each would
affect investors and companies?

The most important items to disclose are the following:

- Financial information including annual reports (current and previous years’ reports),
annual financial statements, interim financial statements, and stock related info.
- Governance related information including shareholder structure, organizational chart,
board of directors’ composition, info on board committees, general assembly info, major
events announcements, articles of association, code of ethics, top management info, and
sustainability reports.
The lack of disclosure of financial information will make it difficult if not impossible for
investors to perform proper assessment of corporate strategies, plans and financial performance
over time. If financial information is not disclosed, investors won’t be able to analyze the
corporation’s financial statements and compare them with previous performances. On the other
hand the decision to disclose financial information and how to disclose it is a strategic choice for
companies. If a company wants to be traded in a major stock exchange and/or attract investors it
needs to disclose financial information with no omissions or false statements, and make sure that
independent auditors evaluate the disclosed information. Conversely if a company is not trying to
attract new investors it might choose to disclose only an annual report and avoid costs related to
full financial disclosure and independent auditor reports, or if a corporation is engaged in
fraudulent business it will try to conceal information as much as possible.
The disclosure of governance related information is essential for investors to know the
company’s internal control structure and how much their rights are protected by the target
company. It should be also noted that shareholders structure disclosure is of particular
importance in some countries like Iran as it makes it impossible for investors to guarantee that
the company they are investing in won’t be subject to sanctions. On the other hand the decision
to disclose governance related information is of strategic importance for companies willing to
attract new investors or planning to be traded in major stock exchanges. Contrariwise if a
company is not trying to attract new investors or is engaged in fraudulent business it will try to
conceal information as much as possible.

 What is the information to look for when assessing a company’s governance?

The information to look for when assessing a company’s governance is the following:

Historical records of board reports, governance compliance reports, info on board committees,
sustainability reports, organizational structure, top management info, code of ethics, info on
aggregate compensation, director’s interests, related party transactions, general assembly info,
shareholder structure, the company’s articles of incorporation, and board of directors
composition,

 What are the implications of deficient areas of disclosures in each market?

Turkey

Not disclosing the organizational chart can discourage investors who could question the
company’s resources utilization.

KSA

Organizational structure, top management information, code of ethics and sustainability reports
are not reported by many companies, this can lead potential investors to question the efficiency
of the organization’s structure, the company’s management integrity, as well as the possibility of
an agency problem arising, moreover ethical and green investors would most probably shy away
from investing in companies that do not reveal their code of ethics and sustainability reports. To
sum it up, it seems to me that failing to report the organizational structure, top management
information, code of ethics and sustainability reports represents a major impediment for these
companies in respect to attracting investors.

Not disclosing the shareholder structure in many Saudi companies discourages investors who are
unable to conduct a thorough analysis when making investment decisions.

Iran

The absence of a single portal where information is centralized, is a significant barrier that keeps
investors especially foreigners from investing in the Iranian market. The more difficult and
complicated the access to information is, the less likely investors would be exposed to the
opportunities available.

Most of the data being available only in Persian is a major obstacle for attracting foreign
investments.
Financial statements are either not available or presented just in Persian and only for the current
period. This a major deficiency in the Iranian market that can only lead to a total disinterest from
investors in general and foreign ones in particular. I can’t imagine that an individual or an
organization would invest in an entity that does not divulge its financial statements. On what
basis would potential investor assess the company and value its stock? In summary the
unavailability of financial statements on companies’ websites is the most critical hurdle facing
them when it comes to attracting investors.

The fact that indirect ownership is undisclosed, makes it challenging for investors to identify the
ultimate shareholders and may expose them to sanction‐related risks. This means that investors
will require a higher return on investment to compensate them for the increased risk they are
incurring.