Blindsided! Why so many GCC companies are currently at risk
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.”
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.
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.
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.
“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.