June 25th, 2014 – Dubai, UAE – Family Businesses – Playing a pivotal role in the Economy
Family businesses are the backbone of many economies around the world and their sustainability is critical to global economic growth.
Many of the world’s greatest corporations were started and are still run by family dynasties. In fact, some of the largest publicly listed companies are family-owned, including one-third of Fortune 500 companies.
Statistics show that over 70% of businesses in the GCC are either family-owned or controlled, demonstrating that this business model is the essence of local societies and regional economies. As such, they play a vital role in economic development – not only through their business contributions but also by creating an investment environment that is open, safe, secure and transparent.
A number of family businesses began as entrepreneurial projects 50 to 60 years ago and have over the years diversified their interests and created a number of successful conglomerates. These businesses are considered relatively young and will undergo a generational change over the next five to ten years, having reached a stage where a more structured governance process is necessary.
Specific studies over the last couple of years have shown that family firms are more dominant in the MENA region compared to other regions. Two key factors contribute to their growth and subsequent power in the region:
- Cultural preferences (steeped in deep tribal and Arab traditions) to first pursue business within the family and only then consider outsiders; and
- Solid political connections (an important factor for pursuing business in closed economies).
Why Corporate Governance is Crucial for Family Firms
Increasing growth and globalization have brought many challenges for family businesses. Corporate governance is a critical enabling factor for the development of family-owned businesses. Practicing good governance enables these businesses to establish robust business processes and prepare for future expansion. Corporate governance lays the foundation for family firms to be more accountable and transparent in their operations, which leads to opportunities for growth, financing and improved performance.
GCC family firms are becoming more aware of the increasing importance of corporate governance, but for some firms it is still not yet a high strategic priority.
As ownership passes from one family generation to the next, the key drivers to improve governance and transparency are linked to the desire to develop and pass on a healthy and efficient organization to the next generation.
As family firms expand, the relationship between owners, managers and employees becomes more complex. A good corporate governance system puts the right policies in place to manage this complexity. Corporate governance creates a solid organizational structure that clarifies roles, reporting lines and delegation of responsibility. Corporate governance also draws the line between ownership and management, and separates policy direction from the day-to-day running of the company.
Board of Directors - There is a growing appreciation amongst family firms of the importance of a strong well-functioning Board. The board is the cornerstone of good corporate governance and will act as the intermediary between the family and the company. The value of independent directors is becoming more recognized, especially where they bring strategic, corporate governance, legal and finance skills. Family firms with independent directors cite the improvement of Board dynamics as a benefit, in that it can add increased planning, discipline, strategic focus and structure to Board meetings, with key decisions less likely to be made bypassing the Board.
It is apparent that family companies in the GCC are increasingly looking at strengthening the boards of their companies to effect discussions that revolve around the business, its growth plans, strategy and profitability, providing support and guidance to management. A number of firms have defined clear responsibilities between the family shareholders and the Board, and between the Board and the executive management, but only a small majority of firms have fully implemented this.
A strong culture of privacy prevails in many family firms, indicated by the fact that although a high percentage of family firms produce the equivalent of an annual report; these are generally for internal stakeholders only.
Relations between family shareholders and non-family investors also present challenges. Non-family external investors often have significant influence over the shaping of the governance of the family business. Their views on corporate governance are converging due to economic globalization and the emergence of global investors – who may add value or restrict available credit terms. The main challenge in the governance of family-owned businesses is the existence of the additional layer of complexity that the owning/controlling family brings to the business. Shareholders must learn to understand the various interconnections among the owning/controlling family members.
Succession Planning - Family firms are beginning to recognize that a lack of family governance structures can be the biggest cause of conflict, particularly when it comes to succession. In particular, clear criteria for selection of the family members that are to lead the business, and well-thought out structured governance and transparency for those not directly involved, are becoming more important, especially as the family firm moves into the third generation. Successful family businesses are the result of years of hard work and dedication. To pass on this success, corporate governance needs to be made part of every family firm’s culture.
This is particularly important in owner-managed companies where the owner-manager needs to define his or her future involvement in the day-to-day running of the business, whether to pass on the business to a family member or business partner, or to seek an exit from the business through a trade sale or public listing.
A succession plan allows the company to develop and facilitate leadership changes in a progressive, planned and non-disruptive manner, assuring shareholders, employees, customers and other stakeholders of the longevity of the company, while preserving its reputation and brand value. Succession planning helps to maintain an appropriate balance of skills and experience within the company.
Recruitment and Promotion - Recruitment and human capital management are major factors in a family firm’s long-term success. A governance system that provides clear guidelines for employing family or non-family members and impartial performance-based promotion is essential for the sustainability of the business.
Typically, first-generation family businesses are managed by the founders and other family members, and this may continue to the second generation. These businesses often face the challenge of attracting good specialists to assume management positions, and face even greater difficulties in retaining such qualified professionals. The relationship between family/ managers and non-family professionals must be carefully crafted to maintain a well-functioning management team and lead the company to success.
Preserving Family Harmony - Family members may have interpersonal conflicts on the running of the company. A solid governance system helps resolve such conflicts, allowing family members to focus on other key issues.
Ensuring Fairness - Open decision-making and procedures that ensure fairness in evaluating and rewarding both family and non-family employees are essential tools in avoiding tensions and raising the reputation of your company. More and more family-owned businesses in the region are embracing corporate governance to secure their long-term future. Over the past few years, many firms have taken the initiative to formalize policy frameworks and structures for effective governance.
Family ownership may be seen as an opportunity or a threat, depending on a variety of factors. The family ownership and commitment to the business may be understood as adding value, provided that the company and the controlling family can respond to the concerns of the investor community. Investors – both shareholders and creditors – may look with distrust on family-controlled companies, because of the risk that the controlling family may abuse the rights of other shareholders. Investors are likely to scrutinize such companies with care before taking the plunge and investing. There is a long and storied history of family-owned companies with highly-concentrated ownership, poor transparency and absence of accountability and fairness principles leading to the abuse of minority shareholder rights. From an investor perspective, the key is to establish the right corporate governance conditions so that the positive aspects of family ownership are coupled with assurances that investor interests will be recognized and addressed.
As the Middle East enters a new phase of growth and integrates more closely with the global economy, family businesses that ignore corporate governance now are likely to lose their competitive edge in the future. GCC family firms are some of the largest and most successful globally, but corporate governance must be implemented to a higher standard, and international best practices must be applied to domestic and regional organizations in order to compete with the surge of multinationals entering the market. The benefits of this include better access to finance on more favourable terms, and the ability to attract foreign investment and stronger talent.
Pedersen & Partners has an impressive track record of understanding and working with family-owned businesses in the region and beyond, by providing high quality informed advice on management recruitment issues, consistently supplying them with the best available leaders and executives. It is our belief that in order to achieve outstanding results in the rapidly changing environment across the Middle East, family-owned companies need to focus on one key success factor – the right management.
Andrea Williams is a Client Partner based in Dubai. Ms. Williams brings over 15 years of extensive Executive Search experience with a proven track record of projects across Russia, CIS, the Middle East and Africa with a special focus on the Financial Services, Consumer Products and Retail sectors. Prior to joining the firm, Ms. Williams worked as a Director of a boutique emerging markets Executive Search firm based in Dubai and previously as a Senior Executive Search Consultant for CIS and MENA at an international Executive Search firm based in Moscow. Before entering into the Executive Search and recruitment industry, she worked for three years at investment bank JP Morgan based out of London.
Ms. Williams holds a BA Hons American Studies from the University of Wales, Aberystwyth and while at JP Morgan, achieved her CIMA qualification.
Pedersen & Partners is a leading international Executive Search firm. We operate 52 wholly owned offices in 50 countries across Europe, the Middle East, Africa, Asia & the Americas. Our values Trust, Relationship and Professionalism apply to our interaction with clients as well as executives. More information about Pedersen & Partners is available at www.pedersenandpartners.com
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