Family businesses, the economic backbone of countries represented in the Cooperation Council for the Arab States of the Gulf (GCC), have to change their corporate governance in order to face their current challenge of succession for the next generation.
Family businesses account for about 80% of non-oil GDP within the Middle East region, according to the Deloitte Consultancy. Ninety-five per cent of all companies in the GCC are family owned. They are the backbone of the GCC economy.
Currently, over half of these businesses are transitioning from their second to their third generation, and many are unprepared for the succession.
Family businesses are unprepared for transition
According to a study from McKinsey & Company, only 15% of these businesses in transition are likely to survive. In addition, the study shows that only 17% of GCC family businesses have an efficient assessment method in place to identify positions and responsibility for the next generation.
Two main challenges emerge from this situation: succession of management and succession of ownership. One key risk during the transition is for large family owned businesses to split, due to the difficulties of the succession. The lack of organisation and legal structures also highly hamper family business growth in the GCC.
In an attempt to address this challenge, the KPMG Middle East and South Asia Family Business Conference took place earlier this month in Bahrain, under the name “Next Generation”.
Lack of corporate governance facing the globalisation threat
The lack of an effective corporate governance structure in the GCC family businesses represents an obstacle to a smooth transition. Their corporate governance is characterised by a centralised decision-making and is below international standards.
Today, these family businesses are competing with global players; yet they maintain a conservative management style built on patriarchal traditions rather than on innovation and flexibility. Considering today’s globalisation context, experts have said that GCC traditional management approaches must be shed.
In a context where these businesses are now competing against global companies where human resource management is based on skills and not blood ties, family businesses need to hire new managers from outside the family to be competitive. Preparing for the transition to new leadership is an opportunity for family businesses to establish relationships with non-family business managers and professionalise their company and their network.
Initial Public Offerings
A solution to this succession of ownership challenge is going public. An Initial Public Offering (IPO) refers to the first time a company issues shares to the public.
An IPO is a way to raise immediate cash flow, which can be used for growing the business. Furthermore, an IPO enables companies to prune the family tree. Through IPO, those family members who do not have the skills to be in the business can be bought out. This simplifies the ownership structure and helps make decision-making quicker and more effective.
Finally, an IPO allows for more discipline and transparency, as it mandates a listed entity to file quarterly and annual financial reports.
Opportunities and challenges for social stability and progress
Family businesses are not just the backbone of the GCCs’ economy; they represent an important factor of social stability, as well. Being the largest employer in the GCCs, their dismantlement would lead to a high rise of unemployment. They are also vital for government agencies, as they depend on fees and tax income.
The challenge of succession for GCC family-owned businesses is also an opportunity for the new leadership to include women. As GCC governments take actions to engage women in the economy, family businesses could take advantage of this impetus to significantly increase their talent base. By including talented women with the family company, families are able to reinforce family perspectives as well as business perspectives.
In order to survive and continue to hold up their respective economies, GCC family businesses must act quickly to address their internal challenges and respond to external factors such as an increasing globalised and competitive environment.
