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Friday, January 18, 2019

We Must Learn From Our Mistakes

by Khalaf Ahmad Al Habtoor

© Al Habtoor Group

Khalaf Al Habtoor, Chairman of the Dubai based Al Habtoor Group of companies and one of the United Arab Emirates most eminent business leaders, recently gave an interview to Al Bayan, one of the region's most respected Arabic newspapers, in which he commented on the nature of public share holding, the emerging Emirates stock market, and the performance of the companies who raise capital through major stock issues.

In his interview Al Habtoor stated emphatically that the Public Share Holding companies established from the early 1990's had failed to achieve any significant results. So far, they had failed to invest the capital that was gathered from their share issues to investors which meant that the performance of these companies failed to meet their investors' expectations.

Al Habtoor went on to say that Boards of Directors and the Ministry of Economy and Commerce where to blame for the current state of affairs, particularly in the recently formed companies that have raised capital by public issue of stock. To set things straight, he added, requires a close look at the underlying problems that triggered the crisis and to hold perpetrators accountable.

Part of the problem could be attributed to the feasibility studies of these company projects. "They are not sacred" he said, "as if these studies had been prepared by reputable international companies, instead of local 'experts' who do not have the experience to undertake them." Al Habtoor added, "we do not need new issues which are not based on serious feasibility studies which contain strong realistic forecasts and have analysed the markets fully, and we must ask those companies that are asking for an increase in their capitalisation: "What have you done with the initial capital?"

He went on to comment on the individuals who are a member of more than one board of directors. He believes they must have 'super-powers' or 'supernatural abilities' to be able to serve on more than one Board because a normal person could only give his total attention to the growth of one company, and in some cases there could be conflicts of interest that may affect their judgement.

He felt that seeing so many of the same names sitting on the boards of so many companies was a way of promoting the company prior to floatation rather than them working in the best interests of that company. "These people are good and respected but they cannot do everything," he added. He went on to say that the General Assembly was the only authority that has the capacity to question members of Boards of Directors and control their actions. However, UAE shareholders needed to be educated and this is the responsibility of the Board of Directors.

Al Habtoor pointed out that while current local share prices were low, they still did not reflect the actual value of the companies listed. He felt the real value of quoted companies stock was much lower than their current share price. He put this down to the poor performance of these companies who he felt had not achieved significant results. It was hardly surprising that the shares price of these companies has had dropped, while the share prices of quoted bank stocks had not because they are well established and turn a profit.

Is there a need, at this stage, for more companies to come to the market and offer public subscription?
First of all, let me state that I am against forming any new company that is not based on a serious feasibility study based on real facts analysing the viability of any new venture. I have little faith in allowing companies who have not carried out in-depth analysis on their possible viability to offer itself for subscription.

Secondly, companies must remain closed for a period of three to five years to enable them to show a track record of successful project completion or other successful trading or development activity and can demonstrate its profitability. Only then can they be converted into public stock holding companies. To open companies to subscription as soon as they are incorporated is objectionable because they can cause a great deal of damage to the economy if they fail.

Some people argue that exemptions must be given to large companies carrying out giant strategic projects in the sense that they must be allowed to make a public offering from their inception to fund the project. how do you respond to this?
In my view, companies must not be open for subscription before they have been operating a few years to ensure that they are profitable, can transact sufficient amount of business and are capable of achieving significant tangible results. They must show that they have money in the bank, not just fictitious results on paper. In my view, exemptions must not be allowed even to companies in which the Government holds 50% of the shares. These companies like all others, must operate in the market for a specified period of time and show results. I say this because I am proud of my country and seek to support its economy. It is my sincere wish to see the flag of the UAE flying high everywhere on Earth.

Surplus

In the light of what you have just said, how do you evaluate the existing Public Stock holding Companies? Have they achieved good results favourable for the economy?
Companies which were established in the past five years should be evaluated on their results. Have they achieved profits and were these profits distributed to the shareholders? If they made profits and paid dividends, then they were successful. If they did not, then they failed. I am not aware of any public share holding company that has been established in the last eight years that has paid its shareholder dividends. This indicates that something wrong has happened and is still happening. We must pinpoint the reasons for this state of affairs before we think of a remedy. When I speak about profits, I do not mean profits on paper, or budgets that do not reflect reality. Rather, I speak of financial surplus. what is the actual amount of surplus in these companies? how much money do they have in the bank? What I am actually saying is that we need strong sound companies. I am by no means against setting up new companies. I am against going through the same bad experience of the past. The UAE needs new public stock holding companies based of ground of financial strength and viability. We need big companies to safeguard our future. We need mergers and giant conglomerates not only in the UAE but in the Arab world at large.

Where is the Initial Capital?

Some Companies rush to increase their capital. How do you view this? Do you think they have logical reasons to support their decision to increase their capital by offering another share issue?
One must understand that a country like ours cannot take a great deal of risk on share speculation. We survive because we enjoy a good commercial reputation. We must not allow any one to destroy our reputation that has been laboriously built up over the years. Much serious wrong-doing can stem from capital increase. I am speaking in general terms here. It is wrong to take peoples money and not invest it or put it to productive and profitable use. A failure to do so demonstrates that something is seriously wrong. One may ask: where does the blame lie? Is it with the Board of Directors. Is it with the development programme? Or, does it lie somewhere else?

You are asking about whether capital should be increased. But the big question you must ask is, what happened to the initial capital? Were did it go?

Whose Responsibility Is It?

Who in your view should be held responsible?
I believe that the Ministry of Economy and Commerce is responsible for such wrong-doing, it has failed to adequately monitor these people. It must do so in earnest. It must question the negligent companies and hold them liable for their negligence, for not managing and investing their shareholders' money properly. Don't forget, this money comes from our business institutions, large and small, from our citizens, young and old, many of whom have borrowed from the banks to make the investment. This is our money, collectively speaking, and therefore it is up to the regulatory authority, be it the Ministry of the Economy or any other body, to ensure that it enforces regulation and monitors all transactions on behalf of us, the citizens of the UAE. If they fail in this duty then they must be held responsible. What did this body do for many of the victims of the stock market crisis. Those who benefited from this crisis were few.

Victims, individuals or business institutions, were in the majority. we must seek transparency not just at the company level but at ministerial level as well. The latter must provide people with accurate information about these companies and take action against companies that transgress or ignore the regulations and law.

Super Power

Is it normal for a person to be a board member of more that one public stock company despite the fact that the interests of these companies are similar? why are the same names repeated on so many boards of directors?
This is abnormal, for, if a board member is a normal person he cannot work and think for more than one company. Some men however, think they are super-human. We, as Arabs tend to give ourselves more weight, than we really possess. It is common knowledge throughout the world that if you stretch yourself too thinly and branch out into many directions at once you will not doubt fail. this is why other countries are ahead of us by hundreds of years.

In my view, to have the board directors of existing companies on the boards of new ones, this is to keep repeating the same mistake. So far, there have not been enough successful public share holding companies to justify allowing their directors to sit on the boards of new public stock holding companies. To allow this is to repeated the mistake and multiply it a hundred times. I believe the reason behind this phenomenon is to 'promote' a new company. In other words, they feel that the people will not accept the new company without these names. This is wrong because accepting or rejecting the company must be based on the sound standing of the company and not on the names and past reputations of individuals or groups of people. Individuals come and go. Our purpose here is not to criticise anyone or cast doubt on his reputation. They are all good people who descended from good families with excellent reputation. But this is not a valid approach to managing public stock companies.

Investigation Needed

The same happens with regard to the founders of companies in the lists of most public stock companies we see the same names. This problem takes on a more serious dimension when the founders sell there founding shares prior to the expiry period permissible by our Companies Law. what do you think?
In principle there is nothing wrong in repeating the founder's name in more than one company, because the founder is basically an investor. but for the founder to sell his shares prior to the expiry of the period permissible by the law, smacks of dubious practice and which should be investigated by the General Assembly. In my view, any seemingly sincere founder who is part of the initial formation of a company, who then sells his founding shares because his sole interest is to make quick money demonstrates a lack of confidence in his company. such people should be the investigated by the General Assembly which has the responsibility to question any founders or members of a board who sell their founding shares prior to the passage of a few years and before the company shows a profit and good trading results. A founder can sell his shares if he so wishes after the appropriate amount of time has elapsed according to the law but he should immediately resign from the board of directors. It is the responsibility of the board of directors to ensure best practice from all board members to protect the investment of the shareholders. The board of directors also has a responsibility to educate and inform its shareholders, it must provide them with accurate information and give them the opportunity to ask question regarding the performance of the company and not try and shut them up. This situation is changing and shareholders are beginning to learn more about public stock companies, their operation and their rights as shareholders. what remain is for them to exercise those rights.

You spoke of the need of feasibility studies before companies can issue shares, what would you say about the many companies that have failed although feasibility studies were carried out by them before startup?
First of all, feasibility studies are not set in stone, they are merely estimates and assessments that sometime correspond to reality and sometimes do not. There are a number of things to consider, one is whether the company is an international one with a good reputation and expertise. Another is the companies business plan and its implementation. Does the Board of directors and the management team lead from the front? Are they at work early in the morning like a military commander who sets an example by being the first to arrive and the last to go home?

Now if you are talking about those feasibility studies that only paint a rosy picture and are flattering in the extreme about their prospects, which have only superficially analysed the market and therefore worthless. No international company of any standing would issue such a study, they go about things far more carefully, because they value their reputations and are keen about profiting from their investments. They are successful because they have their own experts from all over the world who are capable of producing factual objective studies. These companies are very careful about even the smallest detail when producing such studies. They even name and supply the backgrounds of the personnel who will be implementing the plan. For this reason, I say do not blame feasibility studies for the failure of projects as the study may be excellent but those that implement it, the directors and managers are below standard. If feasibility studies have been carried out by reputable international firms, we should not have had the sorry state of affairs here in our country where many companies resorted to conducting studies that lacked the necessary depth and detail.

No Results Achieved

How in general do you assess the current financial standing of public stock companies or the stock market which of course is the other side of the coin? What remedies do you suggest?
To date, the public stock companies that have been founded throughout the 1990's have failed to achieve significant tangible results that their share holders rightfully expected.

As for the Stock Market, although many people think the current value of shares quoted on it is down, I believe that share prices currently are still too high. they must move lower as they still over-value the companies that are quoted on the stock market. They are not based on any good solid results. This is borne out by the way that shares overall have fallen while the share value of banks, who are profitable businesses and issue results, is high, remains stable and does not see a weakening in its share prices over time.

Individuals Only

Most shareholders hurt by the sharp fall in share prices continue to be affected the continued decline in prices. How do you view this?
The damage that shareholders sustained was not caused by the drop in market prices. Rather, they were victims of the unjustifiable insanity that swept through the markets last summer. Everybody became a victim of this insanity, but there were notable individual exceptions particularly among those authorised to trade stock and those setting up new ventures in that period.

These people are responsible for this mess and their conduct must be investigated and be held accountable. It is only then that we can look to remedies for ailments.

I have repeatedly suggested the solution to this problem. Briefly speaking, the solution lies in opening the stock market to foreigners. The state can do this within the confines of the existing laws; namely, within the 49% or 40% ownership law.

This is bound to improve the economy. Failure to introduce more investors will cause the condition of joint stock companies to worsen even further. We should also open the market to enable overseas companies to be quoted on it as currently we do not have enough companies quoted to maintain a strong viable exchange. Foreign investors will go into the market as both buyers and seller. This means they will pump added liquidity into the economy.

Does the solution lie in the establishment of an official stock market?
An official stock market will not prevent losses because it only operates as a regulatory body.

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