This is the second in the February series of “Blogs from the Board.” Thanks to Adib Rashid for this blog on “Governance, Succession and the Middle East Family Business.”
Family businesses in the Middle East are the backbone of the region’s economy. Compared to their counter parts in the western world, they are relatively younger. Many Middle East family businesses are facing succession issues for the first time, which is a significant threat to the continuity of the business and to the region’s economy. This has placed significant pressure on them to adopt better governance practices. I have seen a growing trend in many of the businesses I work with to develop rules on how to govern the relationships between the family members in their respective roles as shareholders, board members, employees and as family members.
The families in the region had previously enjoyed limited external competition and protected markets, which helped them in building large and diversified companies operating in multiple sectors. Despite the large size of the companies, decisions were still made by the founders in a centralised manner. As families grow and new members join the business, different rules need to be applied to mitigate the risks arising from the complexity of making collective decisions and managing family dynamics.
Tradition has influenced succession decisions. It is a common practice for the eldest son to get the top job and other family members are appointed to run subsidiaries. In many cases the eldest son wasn’t necessarily the most suitable person to run the business. Some businesses that followed this traditional approach struggled to grow and manage the family’s relationships. Families now ensure that the leadership positions are earned by the most competent person who can add value to the business as well as the family.
Many family groups had no holding company structures. Instead, they were structured as a collection of companies resulting in a complex decision-making process and inefficient management as well as continuity problems. As more and more families adopt holding company structures, they try to implement better governance practices. In addition, next generation family members, who are often western educated and exposed to different ways of doing business, had high expectations and demanded better structures.
I see more family businesses starting to draft their family constitutions/charters and develop governance bodies to help in the process. Typically, they develop rules on how to make decisions at different levels in the organisation and within the family, e.g., entry and progression of family members in the family business, how to deal with conflict, what are the family’s philosophy and values, how to manage personal wealth by creating a family office, and how to structure charitable giving.
There has been a significant improvement in awareness during the past several years and better governance structures will continue to evolve in the Middle East, which will help family businesses continue to succeed for the coming generations.
About the contributor:
Adib Rashid is a member of Ernst & Young’s FFI membership and has almost 20 years of corporate and consulting experience working for Merck, Arthur Andersen, PwC and EY. He lives in Dubai and currently leads the family business advisory services in the MENA (Middle East and North Africa) region and established the EY – MENA Family Business Center of Excellence. He was recently elected to the FFI board of directors for a four-year term. Adib can be reached at email@example.com.
Yours in Practice,