At the beginning of 2018, The Abraaj Group, a Dubai based private investment fund, was on track to become the largest private investment fund in an emerging market. By June of the same year, the firm filed for provisional liquidation. The combination of using investor funds for personal expenses, borrowing money against its own secured funds, and defaulting on massive amounts of debt caused the Abraaj group empire to crumble practically overnight. Through my team’s root cause analysis of the dramatic rise and fall of the Abraaj group, we were able to sort out the story of the scandal, understand the ethical implications of the environment that allowed for such a scandal to take place and give recommendations of how the firm can move forward in the future.
The Abraaj Group was founded in 2002 by Arif Naqvi with funds raised from various personal investments over the years. The mission of the firm was “to deliver superior risk-adjusted returns to investors while playing an effective role as agents of economic and social change in the market and communities in which [the Abraaj Group] invests.” Their goals of investing in emerging markets and helping third world countries attracted high profile investors such as the Bill and Melinda Gates Foundation. One investor described the business model of the Abraaj Group as “inspirational capitalism at its most enlightened”. Before long, the group had raised over $1 billion for their health care fund alone while managing another $14 billion of assets from various investors. The firm was on track to earn another $6 billion and become the world's largest private investment firm in an emerging market. Before the firm could reach this goal, their foundation began to crumble as whistleblowers started pointing out flaws and the Abraaj Group’s financial records showed signs of meddling.
After completing a thorough timeline of the events that lead to this dramatic fall, my group and I established the three main points that encapsulate the story of the case. First, Arif Naqvi moved investor money intended for hospitals and other companies into personal accounts to cover expenses, salaries, and loans. Next, the group began borrowing against its assets to give the appearance of stable finances while creating a “highly unstable business model” in the process. Lastly, the group defaulted on over a billion dollars in debt, initially covering it up through money transfers and internal borrowing. These actions were made by or at the instruction of the founder, despite the fact that he has come out saying that all actions he took were legal and called for. From here, my group decided that the overarching theme was that Naqvi, though a talented investor, found himself over his head after rapid expansion and little oversight of company development. The actions he took exhibited good intentions however ultimately lead to the collapse of his soon to be empire.
From an ethical standpoint, I believe Naqvi would describe the case with the rights approach. This approach emphasizes human dignity and the belief that people are not a means to an end and should not be treated in such a way. The social impact aspect of the companies mission statement and subsequent derived values of integrity and empathy support this. Investments in developing countries and markets, as well as the creation of their troubled health care fund, show that the initial intentions of the fund were virtuous and worked toward the well being of others, a factor that attracted many investors. Despite this, from an outside perspective, when I first read this story, I thought it was a stereotypical case of the power approach. I believed Naqvi’s actions were selfish, incorporating frivolous spending and insatiable greed. After my team’s analysis and discussion, I can say I no longer find the power approach applies. Despite this, I am interested in how the rest of the investigation plays out through the judicial process and through media exposure as new information is still being released.
While the power approach may not directly apply to this case, the actions of Naqvi clearly show the disconnect between the internal and external business culture within the firm. The formal business culture, as partially described by the mission statement, suggests that the actions of the company revolve around on the well-being of everyone involved, from the employees to the investors. The investigation brings to light the different informal business culture. In May 2017, after being asked to send payments to one of Naqvi’s sons and a former assistant, an Abraaj finance executive emailed his concerns about a “cash crunch” to Mr. Naqvi. He wrote: “The tension and stress is unbearable for me and it is affecting my health and my efficiency, and performance at work. You (Naqvi) are fully aware of the situation. I humbly and respectfully request you to please help me in this situation.” Such a statement points out the toxic work culture that some employees were in the midst of. While the company may have been advertised as a “do-good” firm, the firm’s financial issues lead to employees being overworked and stressed.
My group and I derived three recommendations from this factual and ethical analysis. The first and most influential change would be the restructuring of the firm and the development of a new business model. As of now the firm is almost solely run by Naqvi. We would suggest creating a more team-based decision-making process, so the allocations of funds are impartially distributed and recorded most professionally. To help the firm raise cash and pay back their massive amounts of debt, we suggest they sell one of their significant subsidiaries, K-Electric, a Pakistan based electricity company. While this sale may appear complicated due to the lack of transparency in the Pakistan business environment, it will ultimately allow the Abraaj Group to start fresh and rebuild their customer's trust. If all else fails, our final suggestion would be to accept takeover by another firm. Several international firms have already announced their interest in acquiring and overtaking the management of the group. Partnering with another firm would boost the company’s reputation as they aligned themselves with a more reliable brand name. It would also give the firm access to more cash needed to bring the company to a more stable operating condition.
As stated before, this is an ongoing investigation, and new details will continue to emerge in the coming months along. I am interested to see what the verdict will be and if Naqvi will be painted by the media as a hero who overestimated his ability or a corrupt businessman who used his power to reap wealth from developing economies. In many ways, how the media portrays him will affect how the public’s verdict on the case. Unlike cases we previously studied this year, such as Enron and Volkswagen, I found the Abraaj case to be significantly more ethically ambiguous to the point where it required extensive understanding of the scandal as well as the people involved. The Abraaj case was not a clear set example of any ethical approach in my opinion. The further development of this case will no doubt cause my perception of the scandal to shift slightly, requiring possibly another analysis of case details. Regardless, I feel as though this case is an excellent example to show business ethics is much more complicated than a black and white issue, necessitating in-depth analysis and diverse perspectives on the issues to reach a common ground.