Governance

Protecting Family Businesses From Themselves

Today marks the United Nations’ International Day of Families. According to the UN, the day “provides an opportunity to promote awareness of issues relating to families and to increase knowledge of the social, economic and demographic processes affecting families”.[1]

The integral role of the family is well established in the UAE. It influences many aspects of our society in ways we may not always notice. Not all countries allow for designated family areas in restaurants and other public spaces, and few have specifically designed their streets and urban areas to enable extended families to live close together. In the UAE, we have both.

Families have also had a formative influence on the shape of the UAE economy. Many of our best-known family businesses were formed before the establishment of the UAE in 1971 and their growth has been tied to that of our nation. Family companies are now playing an increasingly important role in the diversification of the Gulf economies. According to PwC, family-owned firms already generate more than 80 percent of non-oil GDP of the GCC.[2]

However, while the influence of the family on our culture and society has been instrumentally positive, the influence of culture on family firms can have mixed effects.

Family culture can obviously bring many advantages to a business. The value systems and self-preservation tendencies of families in general means that taking a long-term view is strongly encouraged. This extends to family businesses which often have a longer-term growth perspective than other companies whose fortunes can seem to rise and fall with each set of quarterly results. In the Gulf Region, our culture also positively influences how family businesses understand their role in society. Philanthropy and social justice are integral aspects of Islamic culture that generate a deep commitment to education, job creation and social responsibility within many family companies across our region.

At the same time, however, a recent report by PwC has highlighted two aspects of our culture that may not always be compatible with what is usually considered best practice in corporate governance. The first is the very steep hierarchy within many family firms, as a result of the expected absolute deference to our elders, and which is considered to be a very important value in our society. In extreme cases, younger voices might be marginalised in decision-making, and important youth perspectives overlooked. The second, is the natural tendency for families to keep their affairs absolutely private, which in the case of a family company can extend to business disagreements that might sometimes benefit from independent advice or even mediation.

It is clear that the influence of our culture on family businesses can have both benefits and drawbacks. You cannot have one without the other. The key is to ensure that if cultural norms ever begin to interfere with sensible business processes, family companies can find an appropriate balance between the culture that defines them and the corporate best practices that can in many cases protect them from themselves.

In 2012, the Pearl Initiative partnered with PwC to publish a study into corporate governance practices within family firms in the GCC. According to the report, while family businesses around the world are increasingly adopting new governance measures to manage issues of conflict, succession and decision-making, the Gulf Region is “lagging behind” in this area. Specifically, the study found Gulf family firms were significantly less likely than their global peers to have agreed entry and exit provisions, performance appraisal mechanisms, or processes for the use of third party mediators in internal disputes.

The establishment of clear governance procedures is particularly important for family firms. As the report notes, individual members of families will often have differing levels involvement in the management of the firm, but all may have strong views on company strategy. Communication is the key to overcoming these issues, however family settings are not always conducive to free and frank discussions. As such, the study recommends the provision of regular information to all shareholders and the introduction of clear governance mechanisms to keep family issues and business issues separate.

Ultimately, the report concludes that “more robust corporate governance will lead to higher standards of management, better understanding of risks, more effective control mechanisms, and more informed decision-making” by family firms. For any business today, particularly one seeking to access global markets or attract international investment, these traits could be the difference between failure and survival.

As UN Secretary-General, Ban Ki-moon, said on last year’s International Day of Families, “Families hold societies together, and intergenerational relationships extend this legacy over time.”[3] Our region’s family businesses have helped hold our economies together, and the adoption of sound corporate governance practices will extend their legacy in the future.

as featured in The National on 15th May 2014

Sources:

[1] http://www.un.org/en/events/familyday/

[2] “…in the Gulf region some 80% of GDP outside the oil sector is generated by family businesses.” http://www.pearlinitiative.org/tl_files/pearl/img/JAN-MAR2013/PIPWC%20report%20-%20English%20FINAL.pdf

[3] http://www.un.org/en/events/familyday/

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