Region’s governance rules need a rethink
Abraaj’s spectacular collapse offered deep insights into a cosy insider culture, something that should move Mena businesses to adopt best practices employed in developed markets
The collapse of private equity titan Abraaj has focused renewed scrutiny on corporate governance standards in the Middle East and North Africa (Mena) region. The episode also highlighted the importance of a strong governance culture in attracting — and retaining — international investors.
At the beginning of last year a number of prominent investors, among them the World Bank and the Bill and Melinda Gates Foundation, hired a team of forensic accountants to investigate a $1 billion (Dh3.67 billion) health fund run by Abraaj.
When control of Abraaj was handed over to a court appointed liquidator in June, it was revealed that the firm’s revenues hadn’t covered basic operating costs for several years.
To make up the shortfall Abraaj borrowed heavily — including from its own funds — and outstanding debts to creditors reached over $1 billion.
In its report, Abraaj’s liquidator, PwC, noted the lack of complete financial records. In an arrangement that should have had conflict of interest alarm bells ringing loudly, the managing partner in charge of risk management at Abraaj was married to the founder’s sister.
Abraaj’s collapse has also brought scrutiny on the firm’s auditor, which is conducting an independent review over its own potential conflict of interest.
Abraaj appointed KPMG to review investors’ mismanagement concerns when they first arose and the auditor exonerated the firm of any wrongdoing.
Critical weakness
However, it has since transpired that Abraaj’s chief financial officer at the time of the investigation had previously worked for the auditor.
In a report, S&P Global warned that “corporate governance continues to be a critical weakness” for Gulf companies and that strengthening management and governance practices could improve access to capital markets and cut the cost of raising debt.
Now, in a region where the private sector is dominated by a patrician cadre, longstanding concerns over standards of corporate governance have re-emerged. And the international capital markets are watching — and waiting — to see the response. productivity growth in the developing world. It is essential for attracting capital as it enables international investors to determine the quality of corporate management and board oversight. Without it, rent-seeking behaviour can take hold resulting in the diversion of resources from economically productive activities into economically unproductive channels.
Importance of rules-based system
As the Mena region pivots away from its reliance on petrochemicals to a more diversified and open economy, its success in transforming its corporate governance culture from a relationship-based system to a rules-based one will be critically important for its long-term development.
Ongoing professional education will have a vital role to play in helping to effect that change. As new mores become entrenched, it will feed through to improved corporate governance standards. Institutional investors also have a role to play, with many already pushing for a more aligned approach to cross border corporate governance and regulators are responding.
The Saudi Vision 2030 programme, which has made its Financial Sector Development Programme one of the main drives, is one example of this. Where regulators have yet to catch up with expectations, investors are engaging directly with corporations to advocate for reforms.
As the Abraaj example shows, investors are increasingly willing to stage interventions when they feel that their best interests are not being served.
However, it may be that the best hope for corporate governance is a generational change. As the next tranche of finance professionals makes its way through the ranks, new attitudes and expectations will slowly erode the old ways of doing business.
■ William Tohmé is regional head of the Middle East and North Africa at the CFA Institute.