Insights from H.E. Dr. Omar Bin Sulaiman, Governor of Dubai International Financial Centre
Family-controlled businesses, the second largest shareholder after the government, form the umbrella for the national economy of the GCC countries and represent a significant variable in the development equation of the region. H.E. Dr. Omar Bin Sulaiman, Governor of Dubai International Financial Centre, UAE, emphasises the importance of supporting family business continuity through succession planning and the timely involvement of family offices.
Up until now, family businesses thrived more on personal relationships than on specialised knowledge; they mostly prevail in key sectors such as retail, wholesale, real estate, construction, and others. Many of these multi-generational family businesses that withstand the test of time have been shown to out-perform comparable businesses through synchronized ownership and long-term orientation. However, given that business transactions in the Gulf states are based more on culture and trust, the survival of these businesses is challenged by the multifaceted interaction of family, business, and ownership.
Among a host of factors, the clout of today’s GCC family businesses’ position is threatened, mainly, by governance, financial and succession concerns. These concerns are turning into challenges due primarily to the force of globalisation, the rising number of family members in each generation, the growing size of the company, the traditional modus operandi of management control, and the difficulties associated with succession planning.
Many family-owned businesses in the Arabian Gulf, though, are starting to recognise these problems and are undertaking a number of measures to partially address them; however, what needs to be stressed here is that no factor in isolation can guarantee the success or failure of a family business, and that a holistic approach is needed to manage the change, both, in perception and action.
A prerequisite for continuity of the family business from generation to generation, is identifying and appointing the right heir(s) to run the business; so far in the Gulf, most of the firms adopt an informal, long-established line of succession by opting for the eldest son, who, in his role as the new patriarch of the family, not only manages the business but endeavours to uphold the unity of the family. Handing the business down according to this preordained pattern, often overlooking the strengths and affinities of other siblings, has led to many conflicts among family members and, in some instances, led to the business being divided among them.
Ensuring orderly succession is deemed a critical success factor of survival in all kinds of firms. This is far more pronounced in family businesses, where ensuring proficient family leadership across the generations is considered the most critical variable for business continuity. Succession planning and governance have long been identified as the most frequently cited and addressed subjects in the area of family business. These two aspects cannot be considered separately; in fact, they are intertwined as governance can be an effective catalyst for succession, especially with the greater family complexity witnessed today. With the increase in family complexity, rooted mainly in the rise of number of family members, their interrelationships and the number of generations at any point in time, there is a fundamental need for family businesses to reassess their succession management and planning techniques; a more systematic approach to this critical aspect is required. Consequently, the development of sound and transparent succession guidelines and standards that put the continuity of the business at the top of the agenda and promotes the unity of the family becomes a priority. This transformation is bound to take place gradually in the Arabian Gulf given that, culturally, family business founders do not tend to be highly participatory in their approaches to decision making, which makes it difficult to establish a direct and smooth succession in many cases. However, a leading study by DIFC has found that the patriarchs of UAE family businesses are very receptive to external advisory bodies, such as those embodied by Single or Multi-Family Offices (SFO and MFO).
Given the inner and outer challenges facing family businesses, thoughtful, systematic and structured succession planning is deemed necessary to provide more secure foundations for family firms in the region, and pave the way for family harmony and business performance. However, succession planning processes and systems within family businesses evolve over time, as the firm itself evolves from a controlling owner via a sibling partnership to a cousin consortium, increasing the complexity of the firm and, consequently, the intricacy of succession.
The fact that the GCC region is inundated with family businesses of all sizes is comforting in that many of those can act quickly and help their economies recover faster than others from economic or financial crises. In addition, the new development in the region of the Single Family Office (SFO) and, to a very limited extent, the Multi-Family Office (MFO), and the role they will play in shaping the management, control, and governance of the family business is becoming more and more visible on the radar screen for these businesses in the region. The Dubai International Financial Centre (DIFC), amongst others, recognised the need to create a specialised cluster environment wherein family businesses are able to access a critical mass of highly skilled specialists to satisfy their unique and specific needs. DIFC’s solution was to legally define a family office and to establish a legal and regulatory framework to provide comprehensive solutions for families and family businesses operating in the region – the first jurisdiction anywhere in the world to establish such an environment.
Family businesses are undoubtedly a dominant market force in the MENA, and are imperative to the region’s long-term economic development. Family offices can help families to overcome the challenges they face, manage their wealth, and, most importantly, identify the next generation of leaders in order to plan the effective succession and continued prosperity of their business. While this development is still in its beginnings, all signs indicate that the pendulum is swinging in that direction, and it can be assumed that those firms that exhibit a flexibility and willingness to adapt in this domain will reap the greatest benefits.
Tharawat Magazine, Issue 4, 2009