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Corporate Governance and Risk for Sovereign Wealth Funds and the Companies In Which They Invest

Ethical and Nonfinancial Risk Issues Surround Saudi Arabia’s Public Investment Fund Post-Khashoggi

The law distinguishes the governmental and commercial activities of sovereigns. But the market does not. The distinction should inform the corporate governance and business conduct of sovereign wealth funds (SWFs) and other state-owned enterprises (SOEs), as well as the nonfinancial risk analysis of the private investors and companies in and which they invest and do business.

Following revelations about the killing of Jamal Khashoggi, questions have arisen about the risk and ethics of doing business with Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF). The PIF, in contrast to other of Saudi Arabia’s prominent state-linked enterprises, is in the spotlight because it is most closely linked with Saudi Arabia’s crown prince and “defacto ruler,” who also is believed to have “ordered” or otherwise been complicit in the death of Mr. Khashoggi.

Although it has existed for over 40 years, the PIF’s international profile has grown in lock step with the political ascent of the crown prince. A 2015 re-organization placed the PIF under the authority of Council of Economic and Development Affairs, aligned the PIF with Saudi Arabia’s Vision 2030, and brought it under the control of the crown prince, who is chairman of the PIF and Council of Economic and Development Affairs, and the driving force behind Vision 2030.

In recent years, the PIF has made high value, high profile investments, particularly in tech. Earlier this year, the crown prince famously toured the United States, promoting Vision 2030 and showcasing the PIF. “The trip, in its scale and the range of American luminaries on the itinerary, [was] an undertaking of extravagant ambition,” said “analysts.”

Following revelations about the death of Mr. Khashoggi, public enthusiasm for the crown prince, and the PIF, has waned. Some investors, companies, and other institutions are reconsidering risk-reward balance of doing business with Saudi Arabia, and more specifically state enterprises closely linked to the crown prince.

As widely covered, global financial institutions, private equity firms, and companies withdrew entirely from the Future Investment Initiative (a crown prince initiative linked to Vision 2030 and the PIF), or cancelled appearances by their high profile leaders. Feeling the heat of public opinion, large and prestigious companies did not want to be seen as supporting, or being indifferent to, allegations of government-sanctioned or directed crimes. The actions were, in many cases, more symbolic than substantive. As JPMorgan Chase CEO Jamie Dimon said shortly after his withdrawal was announced: “We couldn’t be seen to be in any way condoning that behavior,” but business relationships with Saudi Arabia will continue.

Reportedly, a few “prominent voices” in Silicon Valley have questioned the role of “Saudi money” in tech.  Some in Silicon Valley reportedly “are calling for the tech world to exercise greater caution in vetting its investors as disquiet builds about one of the industry’s biggest backers — Saudi Arabia — and its role in the killing of journalist Jamal Khashoggi.” Companies in which the PIF has invested heavily, notably Uber (in which the PIF has invested $3.5 billion and holds a board seat), face a “major dilemma” in the wake of the Khashoggi case. And other institutions, such as Harvard and MIT (part of the crown prince’s U.S. tour), are reportedly “reconsidering their ties to” Saudi Arabia.

So what does this mean for corporate governance and business conduct? The unflattering spotlight on the PIF post-Kashoggi raises, among other matters, issues of corporate governance for SWFs and SOEs and, for private enterprises, related questions of nonfinancial risk.

Corporate Governance of SWFs and SOEs: (De)Politicization of Boards and Management, Protecting State Assets and Enterprises

  • First, the current questions surrounding the PIF put into focus a fundamental matter of corporate governance: whether and to what extent political figures should be involved or associated with the management and business of SWFs and SOEs. The crown prince, for example, has a high level, broad portfolio in Saudi Arabia. He is not, for example, a minister of economy with functional responsibility for or expertise in business or economic matters (which might justify or bolster the case for, as a practical matter, his directorial authority vis-à-vis the PIF).
  • The close association between the crown prince and the PIF means that his political acts and other conduct taint the PIF’s reputation and risk profile. In good times, a political figure can add gravitas to a state-linked commercial enterprise. In bad times, the same person taints the enterprise. The question, particularly for an entity like the PIF—the size and backing of which give it firepower independent of any single government official—is whether the benefits of so closely associating with a political figure are or could be outweighed by the taint of such an association.
  • At a more fundamental level, the investment decision and business conduct of SWFs and SOEs that are managed or controlled by political figures—whether or not they are formally members of the board or management—can more easily be controlled by political objectives, and adherence to corporate and investment governance can be compromised (or appear to be compromised). This reality should lead governments and state-linked enterprises to weigh the pros and cons of more technocratic approach to SWF and SOE governance. Ultimately, state-linked enterprises that give careful consideration to these and related issues act in their own self-interest, by insulating their assets and enterprises from the uncertainty of politics (they should not view this exercise as bowing to foreign or other pressure).

Considerations for Private Investors and Companies: Nonfinancial Risk Before and After Investments With or From State-Linked Enterprises

  • Private companies that receive SWF and SOE investment, as well as the investors who arrange or co-invest with state-linked firms, should, when screening investments and assessing nonfinancial risk before and after the point of investment (and when additional investment is under consideration), assess the quality and risk inherent in the corporate structure and governance, as well as the business conduct controls of SWFs and SOEs, as they may affect them in the near- to longer term. In doing so, they should take a lesson from the PIF situation. Post-Khashoggi, the most of the high profile, driving doubts about “Saud investment” or “Saudi money” are not about Saudi Arabia or the Saudi government as a whole. Rather, they concern a single political figure.

To be sure, the involvement of government officials and other political figures in state enterprises can be problematic in cases less extreme than those involving murder. Corruption, other malfeasance, inadequate expertise, or the simple falling out of favor of a political figure can taint the reputation and standing of SWFs and SOEs (the relationship between Malaysia’s former prime minister and 1MDB is an example). The private investors and companies with and in which they invest and do business can be damaged by association. These private enterprises have a strong business interest in weighing the near- and longer-term nonfinancial risk posed political control, and they should adopt or adapt corporate governance protocols and investment screening criteria accordingly.

How MassPoint Can Help

MassPoint works with private and state-linked entities to identify and manage unique legal, governance, and risk issues that can arise for and involving sovereign enterprises. The firm brings a unique perspective and broad knowledge base to legal and risk matters. To learn more, contact Hdeel Abdelhady at and learn about MassPoint’s approach to delivering client value as strategic legal counsel.

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