Proper governance structure for family businesses

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A PwC survey says that GCC family businesses need to focus on developing a proper governance structure in order to ensure business health and continuity.
A PwC survey says that GCC family businesses need to focus on developing a proper governance structure in order to ensure business health and continuity.Photo-LeMeridien

A survey says that GCC family businesses need to focus on developing a proper governance structure in order to ensure business continuity and sustainable growth.

In the absence of a governance structure, these businesses face a heightened risk of fragmentation due to conflicting interests among family shareholders. The PwC survey highlights the need to implement succession planning to avoid the problems of business continuity. It estimates that currently only five to eight percent of family businesses survive a third generation handover. Several firms in the Middle East are currently being managed by second and third generation family members.

“About 50% of the GCC family firms surveyed did not have formal family protocols or formal governance structures . Good governance in family firms involves establishing proper rules between shareholders and formalizing their business relationship to ensure successful and sustainable continuity. Family businesses also need to professionalize their boards and encourage discussions at board level to be about growth, profitability, strategy etc rather than family issues and conflicts.” — Amin Nasser, partner and private clients leader at PwC Middle East

The presence of the founder plays an important role in keeping the business well-protected from family feuds and other conflict-of-interests among family shareholders. As Gulf families are generally large, the business may have several shareholders and decision-makers as it approaches the third generation. These family dynamics can have a huge and negative impact on business operations, while affecting their profitability.

With most family businesses lacking adequate corporate governance and internal conflict resolution mechanisms, they are at an increased risk of fragmentation, after the founder steps down.

The family-owned GCC businesses may also face conflict as they are now moving away from the common practice of appointing the eldest son as a successor. Any feelings of unfairness or lack of transparency in handling business matters may fuel conflict. A well-framed governance strategy can also help the businesses in appointing a successor, overcome the challenge of attracting talent in the labor market, and even provide access to more capital from financing institutions.

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