Some of the most successful companies worldwide remain family businesses - for example, Walmart, Ford, Cargill and Bombardier in North America, Peugeot, IKEA and LVMH in Europe and Tata, Samsung and Toyota in Asia. The most successful family firms are built and sustained across generations. Many of the Western family businesses have instituted corporate governance structures that continue to have the active involvement of members of the original founding family.
Family businesses account for approximately three-fourths of the private sector economy in the GCC. Most of these businesses are young - under 60 years old - and highly diversified. Gulf family firms started predominately as trading firms and have expanded to add a wide variety of businesses primarily in trading, real estate, shipping, construction and financial services.
The factors behind the success of most family businesses in the GCC are, in most cases, very different from those of Western or Asian companies. The success factors have hitherto included (i) limited external competition, (ii) wide ranging opportunities, (iii) favourable procurement laws, (iv) easy access to capital and (iv) existing business networks. Most GCC family firms have concentrated control within one or two family members and succession has been a less troublesome issue. These and other advantages have helped certain families create successful and diversified conglomerates in the region. However, these factors will not continue to protect family businesses from current and new challenges in the marketplace.
Since the worldwide financial crisis in 2007 much attention has been devoted to the importance of corporate governance both globally and in the GCC. It remains, however, a relatively new and somewhat alien concept for many owners and the management of private family companies. Family firms generally see the implementation of a corporate governance program as solely an issue for public companies. However, having a good corporate governance program in place can lead to significant benefits for the private company. GCC governments have come to realise that establishing realistic corporate governance standards can lead to increased foreign investment and sustainable growth for companies operating in the region. Oman lead the way in 2002 as the first GCC State to enact a Corporate Governance Code. The focus of the codes in the GCC, including Oman, remains public companies and especially financial institutions. There is, however, a slow but steady movement in the GCC to have such codes applicable to private companies.
Large family businesses have reached the stage where it is necessary to have a more structured governance process and one that is less dependent on a single family member. Most family businesses are currently managed by second-generation family members with approximately 20 per cent being run by a third generation. Governance must be flexible to address the diverse interests of new and additional family members. However, the benefits of establishing a bespoke corporate governance process are tangible and include:
- improved efficiency
- enhanced reputation: employees, clients, customers, suppliers and financial institutions
- less risk exposure
- compliance with anti-corruption laws and regulations
- attractiveness for future investment such as an IPO, joint venture or an exit strategy.
Any corporate governance policy for a GCC family business should, at a minimum, include:
- independent directors at Board level
- accountability of management
- transparency and access to information about management’s actions and company data
- full and open financial reporting
- protection of minority stakeholder rights
- proper budgeting system
- appointment of an independent qualified audit committee
- guidelines for succession
- adequate policies and procedures for evaluating new investments
- separation of family and business activities
- robust conflicts of interest policy
- conflict resolution mechanism for intra-family disputes and differences.
Without compulsory standards of corporate governance being applicable to private companies in the GCC, family firms should take the lead and design and put in place a corporate governance policy that adds value to the company and improves the overall operation of the business and its profitability.
