Transparency vital for family businesses

Shock waves emanating from the financial troubles of two prominent Saudi family businesses, Saad Group and Ahmed Hamad Al Gosaibi Group, are resonating in boardrooms throughout the region. While the majority of family conglomerates are well managed and properly capitalised, all of them are now under pressure to become more open and transparent and to put in place corporate governance in line with best practice. Without embracing the necessary structural changes, they may find it difficult to thrive in the post-crisis marketplace.

Privately held companies are the backbone of Middle Eastern economies. They are involved in diverse economic activities and account for the bulk of private sector GDP. Yet for all their importance, they have so far been operating without providing much transparency. The average level of financial disclosure is so poor that one rating agency has admitted it was not aware of the problems at Saad Group until 24 hours before it downgraded it to junk status.

Until the troubles emerged at the Saudi groups early this summer, family businesses had been viewed as safe and reliable borrowers. Most of them are still in good shape, and few have made risky investments financed by excessive leverage, but the well-known practice of “name lending” based on reputation has now been severely undermined. Banks are becoming more cautious, asking for more transparency and more collateral, and some are withdrawing lines to certain conglomerates.