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Balancing between regulatory & developmental roles of CMA: KES Kuwait Economic Society calls to enhance transparency

KUWAIT CITY, March 30: Kuwait Economic Society (KES) released a commentary on the discussion of Capital Markets Authority’s (CMA) decision to apply corporate governance controls to CMA regulated companies, calling for the necessity of exploiting this discussion to enrich CMA’s role and add a further strategic dimension to its role through balancing between its regulatory mandate and the functions related to its role in the development and deepening the capital market through the adoption of innovative investment and financing instruments.

At the outset, it must be emphasized that KES has always been and is still in the forefront calling for the adoption of various practices that are capable of enhancing transparency in all sectors, and the deployment of state of the art management concepts. We therefore renew our emphasis on the importance of implementing governance rules as they represent the first steps to be taken to develop the economic environment and enhance corporate transparency. We find that CMA’s Resolution No. (25) of 2013 on the implementation of corporate governance rules, is truly an example to be followed, and we are calling for its adoption and implementation in the other sectors of the State of Kuwait, not only to CMA regulated joint stock companies.

Regulatory vs Market Development Roles

As much as these concepts and articles, including governance, gain particular importance and contribute to the consolidation of CMA’s regulatory role, we at the same time, call on CMA to add a further strategic dimension to its role by balancing between the fulfillment of its regulatory role and the necessary endeavor to take critical steps towards the development and deepening of the local capital market by introducing investment instruments and products similar to those used in international markets, and cater to the requirements of investors and companies in the local market. Thus it can also benefit from the accumulated expertise amassed by these companies.
 
In the same context, the implementation of these rules must be flexible enough to enable financial institutions to create investment and financing products and solutions, instead of subjecting them to a form of strict regulation causing them to refrain from performing their natural role and functions in this field. Therefore, we propose to adopt the concept of regulation of companies with flexible rules, not by adopting strict rules which adversely affect the spirit of innovation.
The development of capital market performance as part of CMA’s mandate, giving its activity a further strategic dimension, must take into account that it is necessary to reformulate indicators to measure performance related to the implementation of CMA’s strategic vision for the quantitative and qualitative development of capital markets in the State of Kuwait, whether a stock market or a market for other instruments, such as bonds, sukuk and investment funds.
 
It is unanimously accepted that the adoption of the governance rules is an inevitable course of action to develop the performance of joint stock companies and underscore the importance of their role from a technical and financial perspective, not the least of which is, for example, reducing the cost of capital in the long term and consolidating investor confidence. However, this must be accompanied by a roadmap guided by some of the experiences of the world markets, including regional markets such as Saudi Arabia, and thus adopting the concept of gradual implementation.
 
Procedural Steps
On the other hand, we call for the reassessment of certain procedural steps based on the experience gained during the implementation of these procedures, to allow for overcoming some of the obstacles which were encountered during implementation. This prompts us to pause at the following points:
 
* Firstly, and in an aspect related to governance rules, we find that the important and essential role of the boards of directors of companies may lose some of its luster, and decline in importance particularly due to a certain exaggeration of the technical role of the independent directors. Although we totally believe in the importance and necessity of such members of the board, however, assigning to them expanded roles transcends the purpose of their appointment, and at the same time yields adverse effects. 
 
* Of the other procedures steps we are calling for, timelines or time periods allowed for disclosing material information should be more flexible, particularly because some joint stock companies are actively involved with institutions in the public sector. Those institutions are known to be bureaucratic and slow to act in some instances. This is a reality which may entail the imposition of fines on companies as penalty for delayed disclosure, while they in fact are not responsible for such delay.
 
* We also find that the CMA is required to prepare ongoing follow up reviews to assess the effects of regulatory requirements on the efficiency of companies, and the impact of the implementation of those requirements on the performance of companies. The follow up studies should allow for reassessment of those requirements and to what extent they should be maintained or amended in the future, to promote the spirit of renovation and creativity.
 
* On the other hand, we call for reconsideration of the high compliance costs. This call is based on the fact that family companies, as is known, whether in Kuwait or the GCC as a whole, form the largest segment of various categories of companies. We believe that the reconsideration of this item will encourage those companies to move towards listing their shares in the stock market. This would contribute to the enhancement of transparency and provides more added value, whether for the company itself, or to the stock market and investors.
 
* As for cases which may require companies to outsource, and given the high costs of audit and compliance incurred by companies, we propose the adoption of a mechanism taking the form of a dedicated fund providing for cost sharing between regulators and companies, similar to the fund used by the Securities and Exchange Commission (SEC) in the United States.
 
* Past experience has confirmed the importance of achieving integration between policies issued by regulatory authorities. Although several committees were created in certain areas for this purpose, however, we propose to create a mechanism for coordinating the formulation of policies between various agencies concerned, including the CMA, Ministry of Commerce and Industry and Kuwait Stock Exchange, to avoid duplication or conflict of resolution, which may adversely affect companies themselves.
 
Communication with other stakeholders
Finally, it must be emphasized that, given the exact and profound nature of CMA’s functions, and the extent to which its decisions affect a wide variety of economic sectors, we call for the deepening of the culture of communication with specialized and relevant agencies. We therefore propose as follows:
 
* It is necessary to adopt an institutional program launched by the CMA in collaboration with economy-oriented professional associations to develop human competencies in all regulatory authorities concerned with corporate interests under the umbrella of the CMA. 
 
* In compliance with best international practices, to develop clear and transparent mechanism for consulting with entities concerned, technical experts and professional associations and federations when drafting laws and regulations.
 
* To ensure the flow of information between companies and regulators, we propose that the governance rules incorporate a well-defined mechanism for communication with regulatory authorities.

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