Corporate Governance: It’s a Family Affair
[This is an extract from an article in the National newspaper on 5 August 2013]
Family firms are the engine of our global economy. Many of the largest multinational corporations began as family firms, and around 90% of the world’s businesses can be defined as such. In the Gulf region, 80% of GDP outside the oil sector is generated by family businesses, highlighting their utmost importance to the health of the region.
Most Gulf family firms have developed some form of governance procedures, but very few have a formalised structure robust enough to weather change including generational transitions. Every family business is unique, so it is important that governance frameworks are flexible. However, there are some intrinsically similar challenges that every business faces, and a strong governance framework is key to ensuring its long-term survival and success. Almost three quarters of the region’s family businesses are owned and managed by the second generation, and over $1 trillion in assets will be handed over to the next generation in the next five to ten years. Therefore, taking into consideration the global average statistic that only 15% of family businesses continue to create value beyond the 3rd generation, it is no wonder these firms are taking urgent action.
In order to understand how they operate, it is important understand the culturally-relevant sphere within which family businesses operate. Firstly, families in the Arab world are large. By the third generation the number of family members may reach three digits. This situation creates a steep hierarchy with even relatively minor decisions being made at the top. This flat pyramid of power, with a few elders at the top and many youngsters below seeking guidance and instruction, can lead to tensions that could threaten the stability of the business. In addition, traditionally, firms in the region were male-orientated, however nowadays more daughters and grand-daughters are keen to get involved in the family business. This is a very positive trend that will undoubtedly lead to immense benefits and value creation within businesses and families alike.
Despite the potential for conflict, however, the Arab business is not just run by the family; it is run for the family. Great care is taken in transmitting good moral values not only to the next generation but also to their stakeholders. Given that it is currently the Holy Month of Ramadan, perhaps this is a good time to reflect on this point. Ramadan promotes good character, particularly truthfulness and trust-worthiness, which are also the pillars of good corporate governance practice. By acting with integrity in all areas of their operations, businesses will not only help themselves, but also encourage others adopt better business practices across the region.
Whilst Ramadan is an important time for our region, it is the basic principles that the month represents that are at the core of successful corporate governance, and the values that shape the culture of our family-owned business. The success of our nation’s companies, and providing on-going security for our families, lies beyond simply making profits. It lies much more in retaining a strong family business culture, their imbedded values systems, and providing a service to the community in which it is integrated.