Good governance is survival for family firms in the GCC

Effective corporate governance will help reduce family ownership challenges and facilitate the long-term success of the business.

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The family business is one of the oldest and most common economic organisational models – from the shop around the corner, to the multinational corporation. The significant role they play in the global economy is undeniable, with companies such as BMW, Wal-Mart, Toyota and many more all having started as family businesses, and at some point adapting their structures, processes and policies to continue to grow with resilience.

This approach especially rings true for those companies operating in a challenging economic climate, as is the case in the Middle East. With the declining oil price, the region is facing an economic downturn. Governments are reducing spending and delaying projects, while private companies are downsizing workforces. With family businesses representing more than 70 per cent of the private sector in the GCC, these companies must take the necessary steps to ensure sustainability and bolster against external pressures.

Effective corporate governance will help reduce family ownership challenges and facilitate the long-term success of the business. Initially, this may seem like a very formal process for a family enterprise but not doing so could lead to a “too many cooks in the kitchen” scenario, with no one taking control of decision-making.

A corporate governance framework regulates how decisions are made, who is accountable to whom and who is responsible for what. Additionally, if the family aspires for the business to continue growing, then so will the number of its non-family employees, and there must be a system in place to manage their development, and ensure transparency and fair treatment.

Succession planning must also be carefully considered. Only 30 per cent of all family businesses successfully transition to the second generation, with even fewer making it to the third and fourth generation. If this is not done properly and the principal owner passes away, the law of the deceased person’s habitual residence or domicile is likely to determine succession. In the GCC the exact distribution of an estate will depend on the application of Sharia law. Ultimately, this could lead to legal and financial disputes among family members and the disruption of business operations. More family members than initially desired could also subsequently become involved, which is a risk in itself and could lead to the unplanned disposal of assets, which may affect the bottom line.

Finally, one of the greatest advantages of a family business is its ownership structure; they benefit from a shorter chain of command and a sense of dedication and solidarity that can only come from family ties. However, this can sometimes be an obstacle, too. An enduring family business knows exactly when to restructure and what would guide that structure. To determine how to do this effectively, family businesses should consider the preservation of the family business culture, brand and profitability, but also the optimum tax model, control of the business, regulatory issues, an exit route for family shareholders and training for family executives.

Leaders should also consider bringing in external professional managers; according to the Family Business Survey in 2012, about 28 per cent of family businesses in the region were planning to pass ownership to the next generation, but still bring in professional management.

With family businesses now a US$100 billion market in the GCC, they carry an enormous economic responsibility. By looking at corporate and legal frameworks, planning for the inevitable and making sure the right structure is in place, these businesses will not only survive in the current economic climate but thrive in the long-run, contributing to the region’s economic prosperity.

Rupert Copeman-Hill is a partner and head of business services at Charles Russell Speechlys. The article was co-written with Piers Master, also a partner, private wealth at the company.

business@thenational.ae

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