Managing Partner, Hisham Farouk tackles the contentious issue of succession and governance in family-owned enterprises.

Family-owned businesses represent more than 90 per cent of the business community in the UAE, according to a recent study published in the UAE*.  This fact alone highlights the significance this sector plays on the local economy.  In order for the UAE to move further forward it is essential for these family-owned businesses to recognise how they can unlock their potential for growth.

Hisham shares the considerations which are needed in family-owned businesses when planning succession.

Sharing a business can do much to strengthen the family bond, but passing a family business from one generation to the next can be a complicated process and one which needs to be managed and planned with care.

Succession planning and the introduction of young dynamic leaders is essential to continued business growth and innovative thinking.   

“The incumbent management has a great wealth of management experience and this skill has to be inculcated on to the younger generation who are taking over, it should be done in a very open and transparent manner to ensure that there is stability in the company.  The ultimate objective is to guarantee that the business is not hurt during the corporate restructuring and transitioning period. All the stakeholders must agree that productivity and smooth functioning of the company is the ultimate goal.”

Shadowing the founders of the business is not sufficient enough for these young leaders, who are trying to move the business forward in an era of increased competition.  The introduction of an external management team and independent auditor are imperative in strategically aligning the business growth strategies to the market demand and opportunity.

Independent non-executives plays a critical role in encouraging further new thinking in the business; this also allays fears regarding conflicting goals and loss of control of the business.

“In family-owned business, the primary stakeholders are the family members. Therefore it is the onus of the family members to bring in an executive board that is qualified to provide independent suggestions for the growth of the business. The presence of independent senior members on the board, capable of challenging the decisions of the management, is widely considered as a means of protecting the interests of stakeholders too.

This external management team must have an added value, the required skill set and the necessary expertise in order to aid the growth of the business. Most importantly, there has to be chemistry between the board and the family owners. The family members must communicate openly and transparently with the board, especially on the key matters concerning the business.”

In addition to the introduction of an external management team the services of an independent Auditor should also be consider.  However, family members and the board must ensure that the accounting team comprises of the right individuals who can be relied upon to provide objective reporting.

“Whether they have an independent audit or not, the main questions to consider are; what is the added value... or what is the unique information they are getting from these auditors which would help them take the business to the next level?”

“Material changes happen in family businesses, for instance a lot of them started as core businesses or core industries and diversified to many sectors. So you may have a family business that started off in real estate and later on diversified into banking, hospitality, construction, among others.”

“This has been the natural evolution through our time. Where these businesses are at today is sustaining that structure and moving on to the next level. As an independent advisor, I would want to look at how these different arms of business are providing balance, complementing or providing synergy to each other, or what the opportunity cost is.”

“On the other hand, if I was the business owner, I would expect my independent audit advisor to provide a transparent audit report, supported by analytics which would aid the management team to make effective business decisions, this is particularly important for succession purposes”, Hisham adds.

“But I think the most important thing is when the patriarch or the head of the family business hands over the reins of the business.  He would like to hand over a business that is ready and clean, a business that is not saddled with debts or litigations or management and family conflicts, in order to make it easier for the next generation to grow the business and take it to the next level”.

Like in the other GCC countries, family-owned enterprises represent more than 90 per cent of the business community in the UAE, according to a recent study published in the UAE, which also states that nearly 70 per cent of the over 20,000 family companies in the GCC are still dominated by the old founding members, who “control these firms with traditional methods and attitudes”.

Statistics* provided in the research authored by Saleh Al Rousan, economic adviser at the Ras Al Khaimah Chamber of Commerce and Industry, show that these companies contribute nearly 75-95% of the sector’s trade activity in the region, with investments reaching $500 billion.

“Their total global wealth is estimated at over $2 trillion and they employ nearly 15 million people,” it states.  The study goes on to add that only around 30 per cent of these companies are controlled by the second or third founding generation.

“Local governments should prompt these family-owned companies to ensure transparency, and curb the domination of social habits and traditions which influence their activities and obstruct their development,” the study states.

Hisham echoes the same sentiments, warning that some family owned businesses are still dominated by the founding members, who manage these firms with traditional views.  It is important to embrace the change in technology and globalisation, which the young generation are already at abreast with – positioning them as the leaders of tomorrow.

Published in Accountant Middle East Magazine - December 2012 issue