Fitch Ratings has cautioned that the ratings of Gulf Cooperation Council (GCC) privately-owned corporates are being constrained by relatively weaker corporate governance than their developed market peers.
The ratings agency said in a statement that this is mainly due to the absence of an effective independent board, weak transparency and limited disclosure practices.
“We believe corporate governance practices are steadily improving in GCC, largely for publicly-listed companies, with both the UAE and Qatar recently having undertaken regulatory reforms to move into emerging market status. Nevertheless, for privately-owned corporates, a move in company culture toward more independency, transparency and disclosure could still take some time, specifically for privately-owned corporates that have yet to adopt these practises on an optional selective basis,” Fitch said in the statement.
It added that few regional corporates have independent boards, and of those that do, their effectiveness remains questionable, with few independent directors and “key man” risk from the influence of the dominant CEO or shareholder.
“Moreover, privately-owned corporates group structure shows a varying degree of complexity and significant related-party transactions,” Fitch said.
Individual private ownership of a rated entity often results in fewer equity and debt funding options than for listed entities, Fitch added.
The ratings agency said it considers key man risk to be high among GCC corporates, and it is not unusual for one person to hold more than one key position in the company.
“Risks also stem from the influence of family shareholders on corporate strategy and operations; related-party transactions; management succession; and dividend policies that may favour family interests over the interests of other stakeholders,” the statement added.
However, Fitch said it recognises that family ownership can also bring benefits, such as commitment to long-term strategic goals and tapping family wealth to aid business growth. With their own standing and influence, influential owners have created competitive benefits for their companies.
Fitch claimed that lagging governance standards can discourage international investors from looking for opportunities in GCC as they face closely controlled company ownership and general lack of transparency.
GCC companies can improve their access to capital markets and cut the cost of raising debt by strengthening their management and governance practices, Fitch said, giving the example of UAE-based Majid Al Futtaim Holding which has an experienced board, exercising effective check and balances, with high quality and timely financial reporting.
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