Why corporate governance is key in GCC family businesses

The improvement of corporate governance is vital for the future of family businesses

It is no secret that family businesses are an integral part of the GCC’s economy. In fact, research from the Gulf Family Business Council and McKinsey reveals that a substantial 60 to 70 per cent of businesses in the region are owned by families, generating around $100bn in annual revenue.

While these numbers are certainly impressive, there are widely acknowledged challenges that these companies face. When it comes to corporate governance family businesses are often out-dated in terms of their practices, or lack formal policies in this area altogether.

According to research, only one in three GCC-based family businesses have fully implemented governance systems that are working.

This void creates challenges from a strategic growth perspective, but can also lead to reputational damage for the companies. If external stakeholders do not see a stable succession plan in place, they may be reluctant to extend their working relationships into the next quarter. Even within the company, not having the right structures in place that explain the relationships between owners, managers and employees can lead to internal frustrations and a loss of talent.

With this in mind, there are a few guiding principles that all family businesses can adopt in building more robust corporate governance practices.

Do not leave it to the last minute

The majority of family businesses in the Gulf are still in their first or second generational cycle. Many unfortunately do not invest in creating a succession plan until it is too late. A survey by Deloitte showed that nearly half of family businesses only review these plans when a change in management requires it, while 41 per cent do not have leadership contingency plans.

The problem with leaving succession plans to the last minute is that it presents massive legal challenges that complicate the transition process and may lead to conflict within the family.

To address this issue, business owners have to establish the appropriate wills and trusts that clearly outline how the leadership of the business will be passed to future generations. At the same time, they must also ensure that management of the company is being passed into capable hands. This underscores the value of owners setting up mentorship and development programmes for junior family members who may one day lead the firm.

Drive clarity in decision-making

It is understandable for the founder of a business to control all aspects of the management early on. However, as the company grows and more outside expertise is brought into the fold, it is vital that there is a clear line between ownership and management. While the owners can set the vision of the group, managers are usually responsible for the day-to-day running of the business and bring in specific expertise in areas such as finance and legal.

For larger organisations, a formal board of directors that has a stable mix of both family and non-family members is critical. Part of driving clarity is also establishing a clear decision-making framework that outlines the roles of each board member, manager and owner.

Set communication as a business pillar

The importance of maintaining consistent dialogue with direct stakeholders and employees – during both good and difficult times – cannot be underrated.

Even from an external perspective, we see more banks beginning to move away from ‘name-based’ lending and looking more closely at available information on business performance. That public information will also make it easier to grow the firm’s trading relationships with larger companies, which expect this degree of transparency with their partners. An annual roadmap coupled with quarterly and half-yearly performance meetings with both internal and external stakeholders is a must in today’s business landscape.

Family businesses must still remain flexible enough to adapt to change. Evolution of the business strategy, for example, will almost always be required along the path to success.

That adaptability can still happen within these corporate governance structures. In fact, investing in corporate governance and building it as a critical pillar of the company will not only help in passing one’s business on to future generations; it will help the business to thrive for generations to come.

Mohammad Baker is deputy chairman of Gulf Marketing Group