Monday, November 5, 2007

Are You Sure You Want To Take Your Company Public ?

JEDDAH, 3 January 2005 ? We rarely ask ourselves today whether public corporations are a good thing for our society to have? Given that Arab and most societies prospered without corporations for hundreds of years. It is a proven fact that executive management of publicly held corporations cannot be expected to watch the company with the same anxious vigilance with which the partners in a private company frequently watch over their own. Negligence, selfishness, corruption and fraud therefore, must always prevail, more or less, in the management of such a company. In most cases, publicly held companies seldom are able to compete with privately held companies, unless they had a monopoly and political influence. Instead of maximizing profits by making better, cheaper goods, it did so in less challenging ways, by restricting competition ? sometimes with the help of the government. Instead of maximizing profits for shareholders, corporate management often maximized profits for themselves, lowering dividends but raising salaries, not to mention open expense accounts, and other benefits.In Saudi publicly held corporations the board of directors does not "manage" the corporation's business in the ordinary meaning of that term. Rather, that function is vested in the executive managers. This reality is reflected in the erosion of the standard of performance for directors in many Arab and Saudi corporations.It is an unfortunate fact that in all Saudi companies executive managers are by de-facto the equity owners and the basic capitalization is debt. As for the shareholders, they are passive owners over the assets of their corporation, worse yet they have surrendered control and responsibility to the executive management, thus, they have surrendered the right that their corporation should be operated in their sole interest.Wide dispersal of stock and its easy transferability made it impossible for shareholders to play the supervisory role originally intended. Shareholders' ability to perform their function of monitoring has been substantially eroded, initially, by their ever increasing numbers. Management has every incentive to increase the number of holders. To do so increases available capital and helps transferability by keeping the prices of individual shares comparatively low. Increasing the number of shares has another significant advantage for corporate management: It reduces the incentive and ability of each shareholder to gather information and monitor effectively. When the number of shareholders is in the hundreds of thousands and each holds stock in a number of companies, no single shareholder can monitor effectively.The current Saudi corporate form of organization is unworkable, is it possible to create a structure that will operate efficiently and fairly, despite the fact that there is a separation between ownership and control? The issue is how to keep executive managers accountable to their fiduciary duties of care and loyalty while allowing them great discretionary power over the conduct of the business.The answer to this problem was supposed to be the board of directors, elected by shareholders and acting as fiduciaries on their behalf. The board is responsible for setting overall goals and making sure they are met, for hiring the CEO and monitoring his performance, and for watching corporate management on behalf of the shareholders, to make sure that the corporation is run in their interest. That's the theory ? and the myth. The reality is that directors are "merely marionettes" driven by the CEO. Whenever an institution malfunctions as consistently as boards of directors have in nearly every major Saudi corporation it is futile to blame men. It is the institution that malfunctions.Public companies have become speculative devices for Saudi stockholders for obtaining individual profit without individual responsibility. Have we not seen the high returns generated by Saudi shares in the last twelve months? Does our society have the audacity to tell those winning speculators that instead of trading stocks, they must invest in real assets in order to further the development of our social, economic and industrial base. Does the wealth of our country increase from trading in Tadawul shares? The answer is no, trading in the stock market has always been a zero-sum game, winners and losers.Saudis converted the underlying long-term risk of investment in stocks of a very large amount of capital into a short-term risk of small amounts of capital. Because marketable corporate shares were readily salable at prices quoted by the minute (thanks to Tadawul), their owners were not tied to their company for the life of its assets, but could pocket their gains or cut their losses whenever they judged it advisable. Tadawul shares converted the shareholder's long-term risk to short-term risk. The increased number of shares and ease of transferability acted as a vicious circle, because the inability of the shareholders to influence corporate activity made "sell" the only option.Common stock turned out to be one of the most successful products marketed in this country, after cellular phones. Is it because it is the only investment with a limit on liability, zero accountability, and no limit on returns (greed), a reflection of the "Arab Character"?For centuries, Arabs including Saudis have become to be known as the trade merchants of the Middle East, but now, instead of capitalizing on what our ancestors have built, we have become the speculators of the new century.

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