GCC family businesses could face increased risk of fragmentation in the absence of proper governance structure, an expert has warned.
According to a PwC survey released this week, family businesses in the GCC are at risk of being assailed by problems of succession planning and conflicting interests amongst the family shareholders.
“About 50% of the GCC family firms surveyed did not have formal family protocols or formal governance structures . Good governance in family firms involves establishing proper rules between shareholders and formalising their business relationship to ensure successful and sustainable continuity. Family businesses also need to professionalise their boards and encourage discussions at board level to be about growth, profitability , strategy etc rather than family issues and conflicts,” said Amin Nasser,partner and private clients leader at PwC Middle East.
Only five to eight per cent of the family businesses survive a third generation handover, as per the survey, and in the Middle East many of the firms have reached a stage of management by second and third generation.
Nasser said that the survey revealed that many of the families in the Middle East are going through family feuds but they are still protected because of the presence of the founder. However that might not be the case when the founder steps down.
In addition, GCC families are traditionally large resulting in a huge number of shareholders and multiple players as it reaches the third generation.
“It is not the size but the dynamics of the family that matters. Businesses formally controlled by siblings with the same mother are now controlled by cousins who may have weaker ties,” he said.
However this very diversity and the size of the GCC families makes the call for proper corporate governance more essential as the current system do not have any notable mechanisms for conflict resolution. Nasser explained that the Middle Eastern families are increasingly moving away from appointing the eldest son as the successor thus creating possibilities of conflict.
“Conflicts happen when there is a feeling of unfairness or a lack of transparency in the business,” he said referring to how a proper governance strategy can save the day when it comes to choosing a daughter over a son as a successor.
Middle East family businesses, unfazed by the global conditions, have registered bullish growth with 83 per cent reporting increased sales last year while 23 per cent expect aggressive growth over the next five years, the survey finds.
The key challenges facing family businesses currently are attracting and retaining talent while accessing finance at a reasonable cost.
“Name lending is no longer favoured by the financial institutions who are, amongst other factors, also looking at how well the family businesses are structured from a continuity point of view when the founder will no longer be there,” said Nasser.
He continued to say that a lack of proper governance structure could thus hamper the growth potential of the family business if the banks refuse finance.
Another key challenge for GCC family business was to attract and retain talent in management positions. Nasser mentioned that though family businesses were not averse to appointing non-family members in key management positions, they have not always empowered them.
“Where family businesses appoint non-family CEOs to run their businesses, they are not always able to retain such executives due to the fact that such CEOs are sometime not given sufficient authority or space to run the businesses properly due to interference by family shareholders,” said Nasser, stressing on the importance of a strict governance structure.
Nasser said that this is the right time for Middle East family businesses to adopt a proper governance structure as it is shifting to the third generation.
“GCC families are often reluctant to pursue a comprehensive governance strategy in their business because they feel it might threaten their control of the firm. This view is particularly common among the first generation family members who have their own management style while second and third generation family members are usually keen to implement more formal corporate governance practices.”