x Abu Dhabi, UAESunday 23 July 2017

Corporate governance in the Gulf can be a family affair

Over the past few years many companies across the region have not only come to accept, but embrace, the need to adopt integrity-related policies and best corporate governance practices.

Almost three quarters of the region's family businesses are owned and managed by the second generation. Ali Haider / EPA
Almost three quarters of the region's family businesses are owned and managed by the second generation. Ali Haider / EPA

Family firms are the engine of our global economy. Many of the largest multinational corporations began as family firms, and about 90 per cent of the world's businesses can be defined as such.

In the Arabian Gulf region, 80 per cent 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, and 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.

Over the past few years many companies across the region have not only come to accept, but embrace the need to adopt integrity-related policies and best corporate governance practices. The companies leading this charge in the Gulf region are in the process of designing and implementing rigorous codes of conduct and compliance processes that can subsequently be embedded throughout the culture of their organisations.

As individual companies begin to implement robust models of transparency and accountability, the next stage in the adoption process is to share best practices with each other. Sharing best practices encourages others to adopt these higher standards, which makes good business sense for all stakeholders in our regional markets. This is particularly important as it means that we can adopt locally relevant best practices that have a real and practical application within the region. Every company investing in setting rules, implementing systems and carrying out training to instil values has an interest in other organisations in its value chain doing the same.

As we increasingly ask questions of our third-party agents, suppliers and business partners on their governance, risk and compliance practices, it is in all our interests to spread the word and raise the level of the playing field in our own industries and sectors.

There is a growing understanding of how corporate governance can help a business attract external capital, customers and business partners. However, the main pressures to adopt these frameworks come from the danger that without urgent action to institutionalise and professionalise their structures, these family firms face the risk of destruction of value and even collapse.

Almost three quarters of the region's family businesses are owned and managed by the second generation, and more than US$1 trillion in assets will be handed over to the next generation in the next five to 10 years. Therefore taking into consideration the global average statistic that only 15 per cent of family businesses continue to create value beyond the third generation, it is no wonder these firms are taking urgent action.

In order to understand how they operate, it is important to understand the culturally relevant sphere within which family businesses operate. First, families in the Arab world are large. By the third generation the number of family members may reach three digits, meaning any income from the business is distributed increasingly thinly and pressure grows to support more family members.

This situation also 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, one element that is increasingly important to consider is the inclusion of women in senior management and on the boards of these family firms. Traditionally, firms in the region were male-orientated, however nowadays more daughters and granddaughters 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. The success of the firm is not viewed purely in terms of assets. Instead, 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 Ramadan, perhaps this is a good time to reflect on this point. Ramadan promotes good character, particularly truthfulness and trustworthiness, 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 to adopt better business practices across the region.

Just as the spirit of Ramadan encourages us to do away with bad habits, if companies throughout the UAE as well as the wider region rejected unethical temptations then those who insist on continuing with corruptive conduct would become increasingly isolated.

While 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 businesses.

The success of our nation's companies and providing ongoing security for our families lies beyond simply making profits. It lies much more in retaining a strong family business culture, their embedded values systems, and providing a service to the community in which it is integrated.

 

Badr Jafar is the founder of The Pearl Initiative and the managing director of the UAE's Crescent Group