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Private firms face succession, governance challenges
April 29, 2017, 3:56 pm

In the highly competitive modern-day business environment, family-run enterprises in Gulf Cooperation Council (GCC) states face several challenges, including succession issues and adhering to corporate governance standards that will continue to hobble their growth potential.

A new report by the Gulf Family Business Council (GFBC) and management consultancy firm, McKinsey & Company, shows that the largest GCC family-owned businesses collectively generate over US$100 billion in annual revenues and remain the second largest shareholder in GCC economies, next only to governments of the region. With nearly three-quarter of all private sector enterprises belonging to this category, family-controlled firms not only drive regional economies but also collectively constitute a crucial variable element in the development agenda of the region. In recent years, rapid globalization and closer GCC integration, which opened up new vistas for businesses, also brought more competition to the home turfs of many Gulf family enterprises.

The pressure to expand or be trampled over by more agile new arrivals, led many family businesses to engage in rapid, ill-planned expansion drives for which they either did not have the resources or the competencies.

The financial and human resource challenges faced by these family enterprises were further exacerbated by the lack of effective corporate governance frameworks and the absence of proper succession planning. Accordingly, many companies ended up either floundering in the new competitive environment, or becoming embroiled in acrimonious legal cases. Second or third generation family members squabbling over the sharing and managing of family assets are a common occurrence among many family-run firms in the Gulf.

Structured governance process and succession planning are crucial, especially to family businesses as many of them are expected to undergo a generational change over the next five to 10 years.

With over half of family businesses in the Gulf currently transitioning from second to third generation, this unpreparedness for succession has held back the growth potential of many companies.

A recent survey by accounting firm PricewaterhouseCoopers (PwC) found that only 14 percent of Middle East family firms have a plan for the succession process for all their senior executives, while 38 percent have none at all.

Suhail Bahwan with daughter Amal Bahwan

According to the PwC survey, while the region’s family businesses continue to be active and successful, the changing political and economic environment is also affecting both their current performance and their growth expectations. The survey found that areas such as succession, diversification, digital, cyber security, and innovation are not being tackled by family firms in the Middle East.

Respondents to the PwC survey said that the three most significant challenges faced by their family firms are government policy, legislation and regulation (42 percent); skills shortages (35 percent); and market conditions (31 percent). Nearly half (48 percent) said keeping pace with digital and new technologies is one of their key challenges, yet only 35 percent believe their business is prepared for dealing with a data breach or cyber-attack.

Also, while some family businesses have made significant progress in putting corporate governance systems in place, few have been successful in completing end-to-end effective implementation. In the survey, over 66 percent of participants reported that they have started to put the corporate governance building blocks in place, but only around 33 percent reported that the practices are fully adopted and are working effectively.

Abdulla bin Ahmad Al Ghurair with son Abdul Aziz Al Ghurair

Abdulaziz Abdullah Al Ghurair, chairman of GFBC, and the most prominent member of one of the largest merchant families in the Gulf, said: “More than half of GCC’s family businesses are in the midst of the transition from the second to third generation.

This is a critical transition as just around 15 percent of those businesses are likely to survive it. A major risk during this transition is for large family businesses to get fragmented. Preparation is needed to avoid loss of family harmony and business disruption, which in turn leads to loss of economic value.”

The PwC report pointed out that growth outlook for family businesses could also be curtailed by the organization’s own lack of strategic planning rather than economic factors or other external concerns.

Firas Haddad, PwC Middle East partner and family business advisory services leader in the Middle East, said: “Both the survey results and our own experience lead us to conclude that greater emphasis on strategic and medium-term planning would allow family businesses to achieve greater success, and fulfill their true potential.

“Overall, Middle East family businesses’ performance and outlook for growth remain strong with notable progress on professionalization, but less so on strategic planning. Having an ambition to grow, without a strategic plan of how to get there, remains just an aspiration,” Firas added.

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