Navigating the Storm: learning from past corporate failures in the GCC

As featured in Gulf News

Against the economic backdrop of a looming recession, soaring inflation and the war in Ukraine, the internal pressures on management teams to hit financial targets grows.

Recent corporate failures in the GCC

Cast your eyes back to 2020’s list of the UAE’s high-profile corporate failures: NMC Health, Al Masah Capital, Arabtec, Al Jaber, and of course Abraaj. Dig a little further back and the collapse of the Saad Group empire shows these aren’t just one-off events.

There is no better way to highlight to company executives that a weak culture of corporate governance within the GCC can lead to possible financial distress.

Global Economic and Geopolitical Outlook

It is clear from the current risk landscape, that now more than ever, companies are prone to financial distress, heightening the risk of regulatory or legal breaches and the reputational risks associated with undue attention from regulators who continue demand tighter regulation from companies. Rising interest rates, supply chain costs, and global geopolitical situations are going to put tremendous stress on companies across the region, especially those operating with low margins.

Trends in Regulatory and Government Regimes

This tightening of regulations is evident in the UAE. New corporate governance rules were implemented for public companies in 2021 to bring the region in line with international best practice including promoting accountability, fairness, gender diversity and transparency. Company executives have been warned.

It is not just the region’s businesses that must be well governed. The Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, recommended in their 2020 Mutual Evaluation that the region make “fundamental and major improvements” to ensure its systems are more effective in the global battle against money laundering.

In the Dubai Financial Services Authority’s (DFSA) business plan for 2023-24 they noted their intent to allow regional growth and encourage the development of its innovation hub, whilst reaffirming a commitment to balance these ambitions with a drive to promote a strong corporate culture and embrace properly managed businesses.

Managing Special Situations and Corporate failures

Whilst past crises and scandals have inevitably served as valuable lessons to corporates, they must be on the front-foot to prevent such situations from re-occurring:

1. Watch out for the early warning signs and ensure systems and assessments are in place. Implement a compliance risk management program to identify and remediate areas of risk within the business, with a first step often involving an Enterprise Wide Risk Assessment to understand the spectrum of risks.
2. Empower your employees to ‘speak up’ and ensure channels are made available for them to report any concerns and feel safe doing so.

Having a clear and actionable plan in place for when special situations arise allows companies to carry on with business as usual whilst protecting their reputation and stakeholder trust:

1. Be transparent in the approach to remediating any issues, with remediation programs visible to the board and executive management. Instead of viewing remediation as a necessary evil, view it as an opportunity to thoroughly investigate and address any misconduct before it’s deeply embedded in the culture of an organisation.
2. Talk to experts before it’s too late. Lawyers, restructuring experts and forensic accountants are often engaged to investigate issues, however consideration should be given to engaging such experts as early as possible in a process.
3. Communicate with stakeholders at the relevant time and have a strong PR team to manage the messaging as authenticity helps rebuild the trust.
4. Early engagement with regulators and other stakeholders. If any issues are identified by the business then a proactive approach to disclosing problematic activity is often well regarded by regulators.

Although the economic outlook may be challenging, companies operating in the GCC should not shift their focus away from corporate governance upgrades. This is especially true in recessionary times, where companies may be under financial pressure to cut costs. It can be risky to cut controls during such a time as a sub-standard control environment provides a greater risk of financial misstatements, and recent corporate failures have shown where that can lead. Now is the time, to be fit for the future.