by Alissa Kole
Historically, when governments have acquired ownership in private companies, it has been either to nationalise them or to infuse them with capital to prevent bankruptcy. More often than not, governments have stepped in to rescue banks whose going concern is considered a matter of financial stability. Occasionally, and notably during the COVID crisis, they have intervened to rescue companies in automotive, healthcare and other sectors deemed critical for national sovereignty.
Compared to Europe or America, where banks and airlines have been the usual suspects for state aid, bailouts of failing firms have been rare, though not without precedent, in the Gulf. Consequently, they have been orchestrated on an ad-hoc basis, rather than through a structured mechanism as with bank bailouts in the US during the last financial crisis. While GCC banks did not require support at the time, occasional bailouts such as for example of Dubai Bank in 2011, have since taken place.
Against the background of a widely different political economy of both private and public sectors, governments in the GCC have had fewer reasons to rescue private firms. For one, government bailouts were simply not called for in the past two decades in the region which has remained unscathed by the global financial crisis, while companies that continue to receive government support such as Kuwait Air are state-owned and hence subject to a state guarantee.
Secondly, large family firms in the region have over the years grown diversified and hence insulated from the fluctuations or developments in any one particular sector. Third, the region has not seen strategic foreign investment that called for state intervention, as was recently carried out by the UK government in Chinese-owned British Steel to safeguard employment and production capacity.
On rare occasions when Gulf governments have invested in private businesses this has been, on the contrary, due to opportunities identified by sovereign wealth funds (SWFs) to develop particular companies and/or sectors. In these cases, SWFs leveraged their wider ecosystem to provide growth opportunities to firms in a manner fundamentally similar to a private equity fund.
When state-owned companies (SOEs) have been transferred to SWFs, this has not been done in their capacity as a rescuer of last resort. In some cases, shares of the ‘crown jewels’ have been transferred to SWFs to support the latter’s credit rating as they tap debt markets. An evident example of this was the transfer of the 8% Saudi Aramco share to the Public Investment Fund (PIF) last year.
On the other hand, shares of financially distressed private companies have been transferred to other entities such as Istidama Holding Company set up under the Saudi Ministry of Finance. It was the vehicle used by the government to initially take managerial control and subsequently partial ownership of the Bin Laden Group, the Kingdom’s oldest construction company in 2018.
Unlike their global peers, more often than not, Gulf governments have intervened in companies for reasons other than financial distress. Even in cases where going concern has been at stake, the cornerstone of the debate has revolved around corporate governance. The result of these interventions has indeed been a significant change in board composition, with greater government and limited family representation.
This was the case in the Bin Laden Group restructuring, which eventually saw two family members remain on the nine-member board. A similar restructuring – for widely different reasons – is also currently underway in the Emirati Majed Al Futtaim (MAF) group, this time at the request of company heirs, following an earlier intervention just three years ago. With $16 billion USD assets worldwide and revenues of $9 billion USD last year, MAF does not require any financial stabilisation.
Despite the fact that the company has for long been considered a poster child for good governance, with a board of directors where in 2023 only one of a ten-member board was a family member, the principal concern is once again board composition. To address this issue – as in previous family business restructurings where governments have deemed a particular company ‘too big to – a judicial committee was established last week to support the company heirs.
These cases highlight that board governance in large family-owned conglomerates in the region remains the ultimate challenge to ensure their long-term sustainability. As the Bin Laden Group case highlighted, agreeing on its board required a delicate balancing of state and private shareholder interests to be reflected in governing documents such as by laws, board charters and other elements of its corporate governance framework.
The degree of ‘governance flexibility’ in these founding governance documents varies. On the one extreme, one prominent Gulf family has recently prohibited its members from dealing with the holding company as suppliers. This goes beyond what is required in listed markets, even in Oman which is the strictest in the region in defining and addressing related party transactions.
On the other hand, most family companies do not have such strict provisions in their family charters and, for variety of reasons, have eluded government efforts to bring them to public markets. At the same time, local company laws have for now minimally addressed the governance of family firms, through requirements such as the formation of an Audit Committee in private companies in Saudi Arabia for example.
While recent Company Law amendments point in the right direction, they do not address the fundamental risk of family conglomerates being ‘too big to fail’. As family groups remain private, they warrant additional systematic oversight. This is already the case in Europe where, by virtue of companies the European Union Disclosure Directive, companies with over 500 employees are required to disclose additional sustainability-related information publicly.
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