When family businesses reach a certain size and level of wealth, the challenges for the business and the family become more complex. The management of increasing family wealth is often outsourced to family offices. In an attempt to integrate both the tasks of distributing family wealth and tackling family matters, the Al Habib Holding Company has set up an own infrastructure managing these issues within the company. Saleh Mohammed Al Habib, Board Member and Audit Committee Member of the Al Habib Holding Company, Saudi Arabia, explains how his family integrated a transparent financial reporting and organisation system and now successfully runs its own family office.
Establishing the Holding Company
Founded in 1970, the Mohammed Al Habib Real Estate Company was a one-man establishment, depending solely on the efforts and development activities of its founder.
Over the years, the company development projects grew and flourished and it succeeded to penetrate some other fields, such as manufacturing, transport, etc. Due to the varied activities and the handover of management to the second generation, a need arose to integrate such investments into one entity to achieve the long-term goals of the Al Habib family.
At the beginning of 2004, the founder made the establishment of a holding company a strategic goal in coordination with the second generation. After consulting think tanks and people with experience, the founder and the second generation agreed on a distinct, and clear vision for the holding structure. The result was restructuring all the companies into a holding company with many affiliated and sister companies, which came to be known as the Al Habib Holding Company.
The main objectives of the Al Habib Holding are:
a. Organising the owners-management relationship through the family rules,
b. Developing and maintaining the family resources and wealth through establishing a very professional team skilled in asset and risk management.
c. Monitoring and auditing the affiliated and sister companies through an internal audit committee headed by a non-family independent, and qualified auditor for impartiality purposes.
d. Looking after the family interpersonal issues through the family office.
The Family Office
The family office became one of the main objectives of the Al Habib Holding Company; i.e. looking after the personal needs of the family members. A family office is commonly used to refer to investment firms specialized in managing family wealth; however, in our case, the office manages the private needs of the family members since we firmly believe that the family is the essence and as such it is the wealth to be maintained and looked after.
Partners belong to one family and are thus socially related and live a similar life. In spite of these common features, there still remains a difference in making use of the capabilities and services available in the Holding Company and the sister companies thereof such as managerial services, financial facilities, and cash drawings upon need. The ones benefitting the most of these services would naturally be the sons working in those companies who control the spending and withdrawing. Sometimes the control lies with the founder as well. When the sons and the founder are busy and/or on their frequent business trips, the other parties’ interests remain on hold. Undoubtedly, the bigger one’s wealth becomes, the more family responsibility increases, which can leave little time for other challenges in the business.
It is by no means an easy job to find accurate and traditional accounting solutions in this situation where personal and family expenditures are made and recorded in a partner’s current account. Naturally this does not lead to a proper expenses classification, which makes it quite difficult to prepare any detailed, accurate reports. This situation requires a close follow-up. In addition, recording is usually done to the founder‘s account thus leading to confusion as to which responsibilities should be ascribed to the founder and which go to the sons.
Thus, we cam up with our own family office concept, ensuring that all founders would have an equal share of services and regular financial reports, which would account for each one’s income and expenses in a detailed manner, enabling each one to better manage his financial matters and devote himself to things of greater importance.
The family office tasks include:
· following up on the transactions related to the family bank accounts and credit cards accounts,
· completing all procedures in the government departments,
· making flight bookings and reservations at hotels for family trips,
· following up and issuing statements of family credit card accounts,
· arranging family meetings,
· following up on the distribution of invitations making sure they reach the attended invitees, especially at special events and feasts, and
· following up on the academic performance allocating an excellence semester prize.
I believe when such an office succeeds in its functions, it can heavily contribute to a successful holding company. Much more time can be devoted to developing the strategies and policies of the group, thus ensuring a better and more efficient management and the best use of the resources available.
The Office Legal Status:
Registering the family office as a company entails responsibilities and expansion; hence, we decided to make the family office part of the Board of Directors administration in the holding company. We successfully obtained the general assembly approval so that the office could be formalized and have a legal identity and managerial features. The family office submits its annual report at the annual board meeting.
Since the family office functions are confidential, the management team should be carefully selected. We decided that most importantly the management team members should respect the privacy of the family members, and be honest. The team was then formed with a director from outside the family to avoid conflict of interests. It now comprises an accountant, a treasurer, a liaison officer to complete all the family office’s and family members’ procedures in the government departments and administrations.
In order for the office to efficiently serve all family members, we decided that we would communicate with the office team per phone, fax, as well as e-mail.
Accounting and Administrative System:
The Al Habib Holding Company supervises the accounting and administrative activities of the family office and follows up on its goal setting, responsibilities, work mechanisms, and programs of all its employees in a manner fitting the tasks assigned to them. We also prepared an accounting system and opened an independent bank account for the family office to be financed by the holding company under the item “Distributions of Shareholders Profits” under “Payables”. In addition, a financial system was developed to distinctively match and reflect the nature of the family office.
An annual budget is issued for the family office, which is handled by a well-established auditing firm. Such firms audit and accredit the budget annually after being submitted for approval to the Family Office Board of Directors regarding administrative expenses (salaries of the staff and their general expenses), the party to credit for, what to be ascribed to the founder and the other family office members’ share of these expenses.
Qualitative Classification of Expenses:
Since the expenses of the founder and the other family office members are different in nature and size, two levels of expense details have been established: One for the founder (who pays a large portion of expenses and wishes to be informed about what he pays for sons independently, and therefore items of a more detailed degree have been added to the founder‘s account), and the other level type relates to the other family office members. As for the other family members, detailed reporting is suited to the size and nature of their expenses.
It has been also agreed that the founder is responsible for the minors’ expenses and a fund was established to reinvest their annual profits.
Family Office Revenues:
– Financing comes mainly from the owners’ shares of the company; profits related to the works and projects of Sheikh Mohammad and his family.
– Each family member also freely finances the family office if his expenses exceed his profits from the holding company.
It has been agreed that monthly profit distributions is made among the company shareholders and family office members so that such distributions can be deducted from each one’s share of the distributed profits provided, however, that the expenses of any of the company founders will not exceed his or her share of the distributed profits.
An independent bank account has been opened and persons authorized to sign and the amount allowed to be disbursed under an individual signature have been determined together with other details according to an accurate matrix of family power.
The Audit Committee in the Al Habib Holding Company is responsible for supervising the tasks of the family office.
The Office’s Current Role:
At the very beginning, the family office was expected to handle certain accounting matters only. However, after the office had proven a success in handling all the personal and family details, we thought of assigning the office with much more tasks. It all began with handling some expenses following up on the tasks related to the family residential accommodations including the details of handling and following up of entrepreneurs‘ contracts.
In addition, to domestic maintenance contracts, and supervising the purchases of furniture and home appliances the family office’s tasks are:
1. Following up on the founders’ administrative and personal financial expenses.
2. Completing all procedures and transactions at the government departments and make reservations and bookings at airlines and hotels for family trips.
3. Following up on the statements of family credit card accounts.
4. Organising cultural and educational programs, distributing publications for the promotion of social, family, and religious aspects, and utilize annual events for achieving such purposes.
5. Arranging for family meetings and following up on the distribution of invitations, especially at events and feasts in which the office bears the relevant expenses.
6. Following up on the academic level of the family members that are students and devote an excellence semester prize.
7. Preparing scholarships and fellowships for the family‘s distinguished students.
8. Contributing to tuition payments and fellowships abroad and setting relevant organisation rules.
9. Providing the best means for looking after minors and increasing their profits through balanced portfolios managed by specialised financial institutions in accordance with successful economic standards.
Finally, we would like to stress that the family office has proved a big success. Being in its preliminary stages, makes the family office an idea opened for tremendous development and modification in light of the obstacles, which is subject to examination and further discussion within and outside the family.