Outsider input has great value for family firms across GCC

As one of the largest business segments in the Middle East today, family groups are adopting stricter governance and investing in more robust advisory services to stay competitive.

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The extent to which family owned or controlled businesses around the world represent the lifeblood of commerce is not often fully appreciated. In the US, a third of Fortune 500 companies are family controlled, and family-based entities are responsible for 60 per cent of the country’s employment. In Europe, well over two-thirds of businesses are family owned, with France dominating at more than 80 per cent.

Family businesses in the Middle East enjoy a similar profile and constitute a significant class. Operating across diverse industries and with varied scales of operations, these businesses have made a significant contribution to transforming markets within the region, creating employment and fuelling the growth of the economies within which they operate.

They tend to take the long view; interested in growing the family wealth and having a different set of strategic goals compared to non-family owned private companies, their long-term economic contribution is significant.

In times of good news, it is often the case that family enterprises are not given the recognition they deserve, as big global corporations are deemed more newsworthy. However, in times of economic uncertainty, the resilience and sustainability of family businesses brings them back into the spotlight again.

For many family businesses, the ability to plan long term can give them a competitive edge, allowing them to be more innovative than the corporate sector. In addition, the agility with which a well-run family business can take decisions quickly means that many are in a better position than the corporate sector to ride out economic downturns and, having spotted value, actively acquire other companies that are not doing so well.

Their independence from the capital market, and strong focus towards cash reserves, are also qualities that continue to give traditional family businesses a genuine competitive edge in the marketplace as the global economy recovers.

While family business owners benefit from the personal challenge of building their businesses, family independence and respect within the community, they are also confronted with numerous challenges which generally aggravate over time and with business expansion.

One of the biggest challenges today is to do with corporate governance and risk management. Less than a quarter of GCC family businesses disclose their financial information and less than 10 per cent have any formal forum responsible for oversight of governance matters.

The preservation of family wealth is usually a key objective within families. Given the current average size and growth rate of GCC families, the consensus is that family businesses need to grow 15 to 20 per cent a year just to maintain the same level of wealth across generations. Risk appetite and effective management of risks thus assume a far greater importance than had previously been recognised.

Further, the distinction between family businesses and family wealth is sometimes blurred. The older generation is often guided by emotion, whereas those with a wealth preservation mindset will usually take a pragmatic and commercial view. Also, some family members may wish to extract value early or step away from the family businesses, in which case the need for properly formulated valuation and exit strategies, including IPO preparation, is paramount to ensure continuity with minimal disruption.

Most family firms in the GCC are now managed by the second generation and it is now not uncommon to see effective risk management and governance, separation of ownership from management, formal mechanisms for intra-family dispute resolution, succession planning not limited to family members, and strategic planning being taken seriously.

An increasing number of businesses in the UAE are looking to bring non-family executives and non-executive directors into their business. There are already some family businesses which enjoy the wisdom and counsel of external directors in helping develop their business, without seeing the presence of independently minded individuals as a disadvantage. The greater the number of commercial minds on both sides the greater likelihood of better decisions being taken and better business performance.

The owners understand that they can own the capital and net the dividends, as well as play a key role in deciding the strategy of their business, but allow for professionals with commercial experience to execute the day- to-day running of the business. The increased accountability, both internally to a board, involving external non-family members can be used to bring in different skills and experiences. Where there are different shareholders, the introduction of corporate governance disciplines can be a distinct advantage.

To summarise, planning, risk management and governance in family businesses are evolving towards the more formal models adopted by the corporate sector as they recognise that family issues more than business issues determine longevity and success.

Ian Gomes is the partner and head of advisory and markets for KPMG Lower Gulf

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