Blindsided! Why so many GCC companies are currently at risk

November 28, 2017 10:52 am


Corporate governance continues to be a critical weakness of companies in the Gulf, and lagging governance standards can deter international investors from looking for opportunities in the Gulf region.

This is the observation by S&P Global Ratings, which notes, “Potential investors face closely controlled company ownership, a general lack of transparency, and the vagaries of individual states’ jurisdictions with respect to creditor protection.”

“This leaves them open to the risk of weak management and, in extreme cases, fraud. Meanwhile, excess liquidity led some GCC GREs in the past to invest opportunistically in promising projects and investments at home and abroad, sometimes without adequately recognizing the risks involved, in our view.”

Read: Get ready for 294% rise in inflation in 2018, GCC

While sophistication is increasing and liquidity is currently constrained, the potential for underpricing of risk, resulting in market volatility and systemic risks, remains, the ratings agency notes.

Ownership structures weigh on governance

“Companies that we rate in the Gulf region tend to be owned by governments or powerful local families, both of which can be detrimental to corporate governance,” S&P notes.

“In the case of energy and infrastructure companies, for example, the government will in our experience often determine financial viability through tariffs, feedstock supply agreements, and funding arrangements,” it adds.

Read: Here’s why GCC IPOs in 2018 will raise at least $100bn more than 2017

Moreover, the chair of these companies is likely to be a member of a key government policymaking body, while boards of directors are largely dominated by government officials.

“We think this may render a company susceptible to decisions being made in the interests of government policy and not of minority shareholders or creditors, notwithstanding benefits linked to government ownership, such as access to funding at favorable terms and the potential for government support in case of need,” it notes.

Lack of independence for boards of directors

The boards of directors of GCC companies reflect their ownership structures, with a majority comprising family members or government representatives.

The boards of holding companies in the region typically play less of an oversight and strategic role than those in Western Europe and other developed markets.

Read: No gas stations in sight? No problem. Rent this car

As a result, the board’s role is sometimes more representative than strategic, S&P notes.

Weak transparency and disclosure

Disclosure is limited across GCC companies. Because the majority of the largest companies in the region are private, publicly available information is often limited, S&P adds.

Read: Shunned by banks, and abandoned by staff, are SMEs folding?

“We think it is positive that companies generally prepare financial statements in accordance with international financial reporting standards. However, fully audited annual accounts and quarterly financial statements are not always publicly available, and only a select few companies organize quarterly investor calls, or otherwise provide detail and explanation to their financial performance,” the report notes.

Tags:

Hadi Khatib
By Hadi Khatib
Hadi Khatib is a business editor with more than 15 years' experience delivering news and copy of relevance to a wide range of audiences. If newsworthy and actionable, you will find this editor interested in hearing about your sector developments and writing about it.



AMEinfo EXPERTS