Covid-19 is strengthening UAE family businesses’ corporate governance structure

Corporate governance is a life jacket for family firms, especially in times of crisis, write Basco Rodrigo and Rana Hamdan

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Family firms are the backbone of the UAE’s economy. Accounting for a significant segment of the non-oil gross domestic product and employing 70–80 per cent of the workforce in the private sector, family firms’ contribution is crucial and valuable to the local economy.

But, like most other markets, family businesses in the region are not immune to economic challenges such as Covid-19 or the falling oil prices. In fact, it is now more important than ever for these family firms to survive. One way they could navigate this crisis is to put in place a robust corporate governance structure, which is essential for business continuity and to smooth succession from one generation to the next.

According to a study released by the Sheikh Saoud bin Khalid bin Khalid Al-Qassimi Chair in Family Business at the American University of Sharjah earlier this year, one-third of family firms in the UAE have formal family councils that harmonise the relationship between the family and the firm.

However, only 17 per cent have a family protocol or constitution in place. Having a formal family council and protocol is essential to promote family and business welfare as well as to organize the relationship between family members and the business. Even during external shocks like the current global pandemic, a family council creates the formality necessary to establish well-structured decisions driven by family values and vision.

One of the most basic corporate governance mechanisms is to share the boardroom with a professional non-family board of directors. Having a well-structured board of directors not only ensures better accountability, limits the risk of managerial opportunism, and prevents family nepotism but is also useful for navigating the socioeconomic consequences of the current global pandemic.

However, less than half of surveyed family firms in the UAE have such a formal board of directors.

During the current global pandemic, such a board could adjust its role to scrutinise the risks of the crisis and monitor the associated effects and future consequences on both the family and the business. As such, being caught without a board of directors during a challenging time may adversely affect family firms’ ability to foresee risks and adjust procedures and policies to mitigate the challenges ahead.

However, merely having a board of directors in place does not guarantee success—the board’s composition and structure matter to ensure competitiveness in times of crisis. The report shows that only 22 per cent of family firms have external members on their boards. Unfortunately, not having independent members as a part of the board of directors implies that family members and extended relatives dominate board-table discussions. Time will tell if family members’ endogenous conversations are enough to overcome the new reality.

Given that many local family firms do not have robust corporate governance structures in place, several UAE family firms have implemented a cabinet crisis to handle the adverse circumstances caused by the pandemic to flush out new ideas and craft effective strategies.

In many family firms, the crisis cabinet has initiated immediate steps to put the safety of the firms’ employees first, has communicated effectively with all stakeholders, and has re-shaped the firms’ strategies to maintain business continuity. Overall, the crisis cabinet has sped up all immediate actions to respond to the new normal ahead.

Most importantly, the crisis cabinet is promoting firm resilience in this time of crisis and is formulating recovery plans by seeking new opportunities.

The biggest concern about this crisis is uncertainty. Unlike previous crises that were financial in nature, the current global pandemic has brought drastic changes in almost all aspects of human and corporate life. One positive impact of the global pandemic for UAE business families is that they have to acknowledge the need to have effective corporate governance structures in place.

In our region, where family firms play an important role, family firms with proper governance mechanism may be more resilient and better prepared to survive than those without such structures.

Basco Rodrigo is the Director of "The Sheikh Saoud bin Khalid bin Khalid Al-Qassimi Chair in Family Business" at the American University of Sharjah and Rana Hamdan is a research assistant at "The Sheikh Saoud bin Khalid bin Khalid Al-Qassimi Chair in Family Business"