Royal family ownership in corporations, particularly in Gulf Cooperation Council (GCC) countries, presents an intriguing intersection of tradition and business influence. Many companies in regions like Saudi Arabia, Kuwait, and the UAE have substantial ownership stakes held by royal family members. Research shows that royal family ownership impacts corporate governance and performance metrics in several ways, although the outcomes vary.
Positive Impact On the Corporate Performance
Research shows that royal family ownership is often correlated with better financial outcomes. For instance, companies with royal family ownership stakes in Saudi Arabia and the UAE have, on average, higher returns on equity (ROE) than their counterparts. According to the study conducted by the Research Gate firms, which have many independent royal family members on board, they performed better than any other firm. This better performance can be largely attributed to enhanced market access and preferential treatment in government contracts and regulations.
Moreover, firms with royal family ties benefit from increased FDI. Royal family members associated with a company provide stability and credibility, leading to better access to capital and higher stock valuations. As per Science Direct, foreign ownership in GCC countries accounts for $60 Billion (6% of the total market capitalisation).
Access to Strategic Resources and Political Connections
Royal family ownership also offers companies a competitive advantage by connecting them with strategic resources and political networks. Moreover, these firms benefit from insider knowledge of policy changes, which can give them a head start in adapting to new regulations and market conditions. This level of influence is particularly advantageous in the GCC region, where government regulations are a central factor in business operations.
Challenges in Governance and Transparency
Despite these benefits, royal family ownership has its downsides. According to S&P Global Ratings, the corporate governance systems of the GCC countries are still weaker than global corporate governance practices. Moreover, the GCC needs to not only adopt CG codes but also implement CG principles and ensure that minimal subjectivity is involved in implementing the codes in the GCC countries. In many cases, royal family-owned firms were shown to have larger boards, which sometimes hindered decision-making and inconsistencies in corporate policies.
Corporate Governance Mechanisms
Interestingly, corporate governance mechanisms play a role in balancing the pros and cons of royal family ownership. According to the studies of Haniffa and Hudaib (2006), Zahra et al. (2000), Habtoor and Ahmad (2017), Lipton and Lorsch (1992) and Jensen (1993), firms with royal ownership that incorporate effective governance structures, such as smaller boards and high-quality auditing, show enhanced performance. These mechanisms mitigate some risks by ensuring oversight and strategic decision-making, thus aligning more closely with international governance standards.
One particularly effective governance practice in royal family-owned corporations is the involvement of international auditors, often called the “big four” auditing firms. These auditors help bolster credibility, especially in global markets, while also checking potential conflicts of interest or mismanagement within royal family-controlled corporations.
Economic and Market Implications
Royal family ownership in GCC firms has broader economic implications. As GCC countries increasingly seek to diversify their economies beyond oil, attracting foreign investment has become a priority. Royal family ownership can be perceived as an assurance of continuity and stability, attracting foreign direct investment (FDI) and facilitating global partnerships, particularly in Saudi Arabia’s Vision 2030 economic diversification agenda.
Conversely, reliance on royal family ownership may hinder market competition. Companies with such ownership structures may enjoy preferential treatment regarding government contracts, which could stifle the growth of smaller, independently owned businesses. Moreover, excessive reliance on royal family connections can deter companies from independently adopting innovative practices or entering international markets.
Balancing Power and Governance
Royal family ownership in corporations within the GCC region significantly shapes corporate performance, governance standards, and economic stability. While royal family ownership offers advantages regarding resource access, market confidence, and government support, it also introduces transparency and concentrated control challenges. Effective corporate governance practices, such as employing international auditors and maintaining independent board members, are essential for balancing these pros and cons.
As GCC economies continue to expand and integrate globally, the dual forces of traditional royal family influence and modern corporate governance will need to coexist. This balance will ultimately determine whether royal family ownership continues to benefit corporate performance in the region.
