Macaskill on markets: Saudi Arabia – The tricky business of ethics


Jon Macaskill
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Saudi Arabia’s central bank governor recently gave international banks a clear signal that they will not be punished by a loss of fees for avoiding an investment conference in Riyadh due to public outrage over the murder of journalist Jamal Khashoggi.


This must have been galling for Ken Moelis, who was the only high-profile leader of a Wall Street firm to attend the Saudi Future Investment Initiative conference in October.

JPMorgan chief executive Jamie Dimon, BlackRock head Larry Fink and Blackstone chairman Stephen Schwarzman all cancelled, in an apparent attempt to signal disapproval to the Saudis, without actually cutting off their own future earnings from the kingdom.

Moelis, by contrast, showed up and engaged in awkward evasion of media questions.

It is all too easy to condemn Moelis as a hypocrite who publicly espouses vaguely defined “values” while remaining focused entirely on his own bottom line.

So here goes. Moelis runs the investment bank he founded – Moelis & Co – by fostering a cult of his own personality, complete with a website that highlights the ‘Moelis Standard’, a list of seven principles.

Number four is the principle that: “We stay ahead of the changing environment to provide the most relevant advice and innovative solutions.”

Number six is: “We will not compromise our vision and values.”

Hollow nature

A casual observer of the Moelis Standard might wonder how the chief executive is staying ahead of the changing environment by endorsing the Saudis in a period of widespread condemnation of their actions, or what exactly it would take to compromise his vision and values.

The decision by Moelis to recommit to a relationship that may lead to future fees (he won a slot in the recently delayed Saudi Aramco IPO that led to him being jokingly dubbed Ken of Arabia) certainly underscores the hollow nature of the platitudes expressed in his eponymous standard.

But Dimon, Fink and Schwarzman shouldn’t expect plaudits for their own choreographed attempt to take an ethical stance that doesn’t involve a financial sacrifice. It could be argued that they are more hypocritical than Moelis, who at least stood publicly by his own lack of convictions.

JPMorgan – along with other banks such as Morgan Stanley, Goldman Sachs and HSBC – will almost certainly feature as a manager on fresh Saudi deals before long. And Fink, chief executive of the world’s biggest asset manager, said that BlackRock would not withdraw from Saudi investments over the Khashoggi murder.

Fink’s remark came just as he made a push to promote BlackRock’s plan to expand its activity in environmental, social and governance (ESG)-focused funds, which underscored the contradictions of selling ethical products. 

It could be dubbed the ‘Murder on the Orient Express’ approach to dealing with ethically dubious clients, after the Agatha Christie mystery in which (84-year-old spoiler alert) it turned out that all the suspects did it together 

BlackRock had its lowest net inflows in the last two years during the third quarter and its share price has fallen over 30% from the peak of this year. This prompted Fink to present a bullish case for his expectations for future growth in exchange-traded funds (ETFs), in part by extolling likely demand for ESG products.

“We have a lot of the ESG ETFs coming onto the platform, so I think there is a big opportunity there,” Fink told analysts on BlackRock’s quarterly earnings call. 

BlackRock predicts a rise in ESG ETFs from a current level around $25 billion to roughly $400 billion in a decade and presumably hopes to maintain its leading share of this market.

The firm – like other asset managers and many banks – is devoting a great deal of energy to pitching ESG and other ethically responsible products, in part to appeal to young customers. This could be undercut by an association with morally dubious regimes.

Recipients of large Saudi funding such as Blackstone and SoftBank face similar pressures, although from different angles.

Blackstone secured a commitment of up to $20 billion from the Saudi sovereign wealth fund for an infrastructure investment vehicle that was billed as the biggest of its type. There was already concern that the Saudis might have a disproportionate influence on the investment decisions of the infrastructure fund, given that they are providing half of what was presented as a $40 billion targeted total when it was announced in 2017. 

The controversy over the Khashoggi murder may now draw fresh questions from co-investors such as various US state teachers’ pension funds. Institutional investors of this type are notoriously slow to react to issues facing the financial services industry – including the high fees charged by private equity firms such as Blackstone.

No matter how ponderously they proceed, they take their responsibilities seriously, however. Concern about the ethical aspects of projects is likely to increase in the future, even if outrage over Khashoggi’s death starts to fade.

SoftBank faces a similar problem due to the scale of its reliance on Saudi money for its Vision Fund, which at roughly $93 billion is the largest technology investment vehicle yet created.

Almost half of this total was committed by the Saudi sovereign wealth fund, and SoftBank founder and chief executive Masayoshi Son has become closely associated with crown prince Mohammed bin Salman, the day-to-day ruler of Saudi Arabia.

Son’s initial prevarication then eventual decision to skip the recent investment conference in Riyadh was widely covered. There will be extra scrutiny of his ties to Saudi Arabia both from investors and from potential recipients of SoftBank funding in the technology sector, where business founders tend to be young and attuned to criticism on social media.

'Murder on the Orient Express'

SoftBank may attempt to deploy its trademark financial engineering to ensure that any future technology funds are not as openly reliant on Saudi money.

This approach could also be adopted by banks and asset management firms seeking to profit from regimes such as Saudi Arabia and China that are unpopular with other segments of their customers. 

It could be dubbed the ‘Murder on the Orient Express’ approach to dealing with ethically dubious clients, after the Agatha Christie mystery in which (84-year-old spoiler alert) it turned out that all the suspects did it together.

If ethically challenged investments can be parcelled into digestible amounts and large syndicates of banks share the work of financial transactions, then the likes of Ken Moelis may be able to avoid the unwanted attention that comes with public association with unpopular clients.

Clearly, no one would want Moelis to endure an unpleasant ordeal like his Riyadh conference attendance again.

Financial services firm heads may find this approach hard to pull off when they are simultaneously trying to present themselves as stewards of a newly ethical approach to business.

But the rewards will no doubt remain attractive enough for them to make the effort.