Sabah Al Binali: On Adia, Arabtec and the value of corporate governance

I read in the news that the Abu Dhabi Investment Authority has sued the Brazilian energy firm Petrobras over alleged corruption issues within the company. I am extremely proud that Adia has taken such a strong shareholder advocacy and corporate governance stance. This is how investors extract value, be they sovereign wealth funds or individual investors. It starts with advocacy and corporate governance.

I would love to see Adia publish its shareholder advocacy and investor corporate governance standards and announce when it has taken action to enforce them. This would be a great example for all to follow, in particular the likes of the Abu Dhabi Investment Council, which has major stakes in important companies in our economy, including several banks, that greatly affect the investment landscape and even the economy of the UAE.

One important issue is that best global practice has three levels of corporate governance: shareholders, board members and management. Just like the more well-known issue of not mixing the board and management, if shareholders started appointing their own employees, or other related directors, to the board then they effectively remove one level of governance and oversight.

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Meanwhile I am puzzled by Arabtec’s rights offering. As of this writing, the share price is Dh0.88 and the price for the rights offering is set at Dh1 a share. This is for a company that lost Dh3.4 billion last year and is raising the money not to build new business, which might explain a premium, but to extinguish losses and pay off liabilities.

They say they are on top of their risks. I don’t think that phrase means what they think it means. Their main explanation for their losses is an impairment charge on their receivables of Dh1.9 billion. There is no explanation why this was impaired, or how they might try to recover it. How do you write off Dh1.9bn and just walk away with no explanation?

Arabtec might do well to visit Adia and learn about good corporate governance. The good news for shareholders is that since the capital increase is underwritten, then if they don’t subscribe, even though they will be diluted in ownership terms, they will actually increase the value of their shareholding. It’s sort of like the reverse of going ex-dividend.

I wonder if the Abu Dhabi Accountability Authority will be asking Aabar why it is subscribing to a capital increase in a company that is losing huge amounts relative to its equity, why it is investing money to pay off liabilities instead of for growth, and why would it pay approximately a 16 per cent premium?

Sed quis custodiet ipsos custodes?

Sabah Al Binali is an active investor and entrepreneurial leader with a track record of growing companies in the Mena region. You can read more of his thoughts at al-binali.com.

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