Are family owned firms deterring investors?

Family business: Bad for business?

In a large majority of the Gulf, especially in Saudi Arabia, a massive percentage of companies are owned by powerful families or state entities, groups whose influence is far-reaching. As such, it is feared that the family culture of many Gulf firms may be deterring international investors who fear the economic playing field in the region is "not level."

The concerns were raised by Roy Batchelor, a professor of Banking and Finance at London's Cass Business school, who in an interview with Arabian Business said, "There's a difficulty generally with the financial markets in the area that with many of the listed companies, the shares that are listed and actively traded really don't represent much of the share capital of the company, so a lot is retained by the original owners or state entities and so on.

"Of course in that case if you are an investor, it is not like investing in the US equities where you can be pretty sure that everyone has the same information about the shares. Here, large blocks of shares are owned by the family, by the original owners, so they could be doing anything, and you are not party to that."

"Equivalent to insider investors"

It is a legitimate concern, and one not entirely without precedent. Earlier this year, members of the Abdullah family, founders of Nasdaq Dubai listed jewellery company Damas, were reprimanded by financial authorities for making $165 million of "non-specified, unauthorised payments" using company money.

It has highlighted, Professor Batchelor said, the problems of allowing families or state entities to hold controlling stakes in companies as it could be one step away from insider trading.

"They are insiders, they are the equivalent to insider investors. So if I come and I buy a share, with quite a lot of the companies traded here I know there are blocks of investors who have a lot more information about the company's activities than I can ever have...

"So any company in that situation, where you've got the general public shareholders and family related shareholders, there is going to be an asymmetry of information between the two. And that is going to lead to, apart from the possibility of malfeasance, people on the outside are going to be very reluctant to invest in companies like this."

With such criticism, echoed by several European firms, it is clear that unless Gulf Markets opt to become more transparent they are going to miss out on a host of outside investment, investment that could open up new opportunities for their companies and the region.

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