The Quest for Corporate Governance in GCC Family Firms

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The Board. Photo-Shawn Kelly
Latest research shows that there is growing appreciation amongst family firms in the GCC of the importance of a strong well-functioning Board that acts as the right interlocutor between the family and the company. Photo-Shawn Kelly

Many of the world’s greatest corporations have been started and continue to be run by family dynasties.

GCC family firms are becoming more aware of the increasing importance of corporate governance but it is still not yet a high strategic priority, according to a new research report ‘Family Matters, Governance Practices in GCC Family Firms‘, conducted by the Pearl Initiative, the GCC-based organization into corporate governance and PwC the leading professional services organisation.

The research programme involved interviewing over 100 family firms across the GCC and covering all major industry sectors. The research drew intelligence from family firms operating in single and multiple markets, as well as taking a cross-section of companies under first, second, third and more generations of family management.

A key focus of the report is to recognise the importance of corporate governance in family firms and to understand the issues surrounding implementation. As ownership passes from one family generation to the next, the report highlights that the key drivers to improve governance and transparency are linked to the desire to develop and pass on a healthy and efficient organisation to the next generation.

The research shows that there is growing appreciation amongst family firms of the importance of a strong well-functioning Board that acts as the right interlocutor between the family and the company. 55% of the family firms interviewed have Board members from outside the family, and 42% of firms have at least one non-family non-executive director on the Board. The value of independent directors is becoming more recognised, especially where they bring strategic, corporate governance, legal and finance skills. Family firms with independent directors cite improved Board dynamics as a benefit, in that it can add increased planning, discipline, strategic focus and structure to Board meetings, with key decisions less likely to be made by-passing the Board.

A strong culture of privacy prevails in many family firms as indicated by the fact that, although 76% of family firms interviewed produce an annual report equivalent, these are generally for internal stakeholders only. 63% of firms disclose financial or non-financial information to banks and business partners, and only 12% of family firms publicly disclose any financial information whatsoever.

In a sign that family firms are increasingly looking externally for growth and expansion plans, 55% of family firms said that they would be seeking external capital in the future, with 24% having raised external capital at some point in their history.

A significant sensitivity among family firms that was discussed in detail during the research is the issue of Board performance and evaluation. Only 4% of family firms interviewed evaluate Board performance, with findings showing this is, in part, due to difficulties in practical implementation and the perceived potentially negative impact it could have on the familial dynamic.

The research concludes that GCC family firms are some of the largest and most successful in the world today, however there is a pressing need to implement higher standards of corporate governance. The benefits of this include better access to finance on more favourable terms and the ability to attract foreign investment and stronger talent.

On issues of family governance, family firms are recognising that a lack of family governance structures can be the biggest cause of conflict, particularly around succession. Clear criteria for selection of family members leading the business, and well-thought out structured governance and transparency for those not directly involved, are becoming more important, particularly moving into the third generation. 52% of the firms interviewing have defined clear responsibilities between the family shareholders and the Board, and between the Board and the executive management, but only 20% of firms feel that they have fully implemented this so far.

Commenting on the launch of “Family Matters, Governance Practices in GCC Family Firms“, Imelda Dunlop, Executive Director, Pearl Initiative, said, “This is our second major piece of research to be published since we launched the Pearl Initiative at the end of 2010. When we started, there was a lack of credible, insightful Middle East-focused research on corporate accountability, transparency and associated good business practices. With this report, we believe that family firms will gain greater understanding as they seek to apply international best practices to their domestic and regional organizations.”

Amin Nasser, Partner, Middle East Entrepreneurial & Private Clients Leader, PwC, added, “We are delighted to work with The Pearl Initiative on this study about family businesses in the GCC. Over 80% of businesses in the GCC are either family owned or controlled, indicating that this business model is the basic fabric of local societies and regional economies. These family businesses began as entrepreneurial projects 50 to 60 years ago and have over the years diversified their interests and created a number of successful conglomerates. These families are therefore considered relatively young and will go through a generational change in the next 5 to 10 years. The businesses have reached a stage where it is necessary to have a more structured governance process – one which is less dependent on a charismatic leader.”

“Although owners of family businesses in the GCC generally view corporate governance as good business practice and recognize its value, most of them have not fully adopted modern global corporate cultures. Nonetheless, it is apparent that family companies in the GCC are increasingly looking at strengthening the boards of their companies in order to result in discussions that revolve around the business, its growth plans, strategy and profitability rather than family issues or conflicts,” he added.

GCC Family Business Groups – The Real Powerhouses

Roughly 5,000 medium to large family firms exist in the Middle East, with net assets totaling US $600 billion, according to Al Masah Capital’s MENA Family Businesses Report. These companies constitute 75% of the private sector economy and employ 70% of the labor force in the GCC region. These family businesses go back generations and are closely intertwined with the development of the region, way before oil was discovered; when the region was a sleepy, trading backwater, it was these families that were putting in place roots that form the bedrock of the current economic environment.

Specific studies have shown a higher dominance of family firms in the MENA region vis-à-vis other regions. Two key factors contributed to their growth and subsequent power in the region:

-A cultural preference (steeped in deep tribal and Arab tradition) to first pursue business within the family and then consider outsiders; and
-Solid political connections (an important factor for pursuing business in closed economies).

48% of the families account for a little more than 60% of the wealth. Saudi Arabia leads the way followed by the UAE, Kuwait and Egypt. In the list of top 65 families based on wealth the average family net worth in Saudi Arabia stood at US $6 billion. The MENA average stood at US $4.5 billion.

Some of the Biggest Family Firms in the Middle East

Saudi Arabia

Al Rajhi
The Al Rajhi family is considered, by most in Saudi Arabia, as the country’s wealthiest non-royals, and among the world’s leading philanthropists. Al Rajhi is the owner of Al Rajhi Bank, one of the Middle East’s largest banks and also is the world’s largest Islamic bank.A major investor in Saudi Arabia’s business world, it is one of the largest joint stock companies in the Kingdom, with a paid up capital of SR 6.75 billion. The Al Rajhis are renowned in the Gulf Area for varied business interests, with banking possibly being one of the most prominent

Saudi Bin Ladin Group
The Saudi Binladin Group (SBG) is a multinational construction conglomerate and is headquartered in Jeddah, Saudi Arabia with offices in London, Dubai, and Geneva.The group is considered the largest construction firm in the world and
recently signed a US$1.23 billion contract to construct the tallest building in the world, Kingdom Tower in Jeddah.

Olayan family
The Group was founded by Suliman Saleh Olayan. The Group’s substantial international holdings include public and private equities, real estate and fixed income securities concentrated in – though not limited to – the U.S. and Europe.
The Olayan Group is a major international investor and leading diversified business in the Middle East.

United Arab Emirates

Al Futtaim family
The group founded in the 1930s had its business interests split between Abdulla Al Futtaim with the automotive, electronics, engineering and technologies, retail, financial services, general services, real estate and joint ventures
divisions under him and his cousin Majid controlling a property development business (now known as Majid Al Futtaim Group)which develops shopping malls throughout the MENA region

Juma Al Majid
The Juma Al Majid group of companies had a modest start in the year 1950. Juma Al Majid partnership ventures’ operate in the fields of shipping, construction, food-Imports, general trading, travel and other industries. The group is also active in financial investments and portfolio management across the region and globally.

Al Tayer
Al Tayer Group is a privately-held, diversified company with operations in 12 countries in the Middle East and beyond.The group operates leading, quality-focused businesses in automobile sales and service, luxury and lifestyle retail, perfumes and cosmetics distribution, engineering as well as interiors contracting. In addition, Al Tayer Group has investments in commercial real estate, contracting, supply chain management, precision tools manufacturing and travel agency services

 Al Ghurair
The Al Ghurair Group is a prominent fixture within the UAE business community and has been in business for over 40 years with expertise in retail, industry and manufacturing. The Group operates eight strategic business units that are
part of three main lines of businesses namely real estate and shopping malls, manufacturing (Packaging Solutions and Metals) and investments. The group is also is one of three biggest exporting and importing companies in the UAE

Al Habtoor
The Al Habtoor Group is one of the UAE’s most respected and successful businesses, operating in the UAE and international markets has grown with the UAE. While best known for construction, it is globally recognised through its involvement in the hotel, automotive, real estate, education, insurance and publishing sectors.

Al Rostamani
Al Rostamani one of the largest and oldest business conglomerates in the United Arab Emirates has diverse commercial interests in the automotive, contracting, trading and service sectors.

Qatar

Almuftah Group
Al Muftah Group is one of the first enterprises in Qatar working with a network of foreign partners, government institutions, and local businesses to execute major building, civil, and industrial engineering and construction projects. Al Muftah Group also owns businesses in a number of other sectors, including automotive and transport, industrial machineries and equipment, home and office electronics, residential and contract furnishings, cable and satellite TV broadcasting, education, restaurants and catering, graphic design and publicity, travel and recreation, real estate, wellness and fitness, and personal products and accessories.

Al Bateel Group
Al Bateel Group, another leading company having business in key sectors including  oil & gas  services, telecommunication, IT, catering services, security services, construction, concrete, supply & services, marine construction, industrial maintenance services including shut down, projects and logistics.

Alfardan Group
Known to be one of the Arabian Gulf’s leading merchant families, Alfardan Group Holding has operations in the automotive, jewellery, exchange, investments, properties development, marine services and hospitality sectors.

Almana Group
Another one of Qatar’s leading business enterprises, the Almana Group, has a spectrum of business activities ranging from automotive, contracting, computer services, real estate, travel, offshore services and much more.

Jaidah Goup
The Group has an array of divisions in automotive sector, heavy equipment, technology, energy, industrial supply and furniture sectors

Kuwait

Al Kharafi
With an annual turnover exceeding US$5 billion the M.A. Kharafi Group operates in more than 25 countries with activities covered in construction, manufacturing and commerce.

Alghanim
Alghanim Industries, one of the largest, privately-owned companies in the Gulf region is a multi-billion dollar conglomerate with more than 30 businesses and operations in 40 countries. Manufacturing of industrial products, specializing in insulation products and steel solutions, engineering – villa solutions (home automation, air-conditioning and elevators), engineering – projects (building management and electro-mechanical solutions), automotive sales and services, retailing in consumer electronics, retailing in home furnishings, fast moving consumable goods – wholesale and distribution, shipping and transportation services, consumer credit, insurance , office automation, advertising and media, talent development and travel.

Alshaya
The Alshaya Group, a family-owned business which was founded in Kuwait in 1890 has its interests across a uniquely wide range of seven retail sectors – fashion & footwear, food, health & beauty, optics, pharmacy, home furnishings and office supplies.

Bahrain

The Fakhro Group
The Fakhro Group has played a leading role in the development of the Bahraini economy and society. Focusing mainly on trading in automotive and industrial products,the Abdulla Yousif Fakhro group has grown to become one of the leading business groups in Bahrain with operations also in electronics, telecommunications, insurance, contracting, shipping and logistics.

Kanoo Group
Yusuf Bin Ahmed Kanoo is one of the largest independent, family owned, group of companies in the Gulf region operating extensively in all the regions and also operates out of UAE & Oman as the Kanoo Group. Kanoo is a diversified business conglomerate with business activities across the world’s most dynamic industries from shipping, travel, holidays, machinery, oil & gas, power & industrial projects to exhibition services, courier services, logistics, specialty chemicals and business centers and other retail and commercial activities.

Oman

The Zawawi Family – OMZEST Group

The Zawawis, a merchant family with origins in Saudi Arabia operating under the OMZEST Group is the umbrella for 75 wholly owned and associated companies with an estimated 4,000 employees. The group’s activities include agriculture, banking, contracting, manufacturing, and travel and tourism, among others. OMZEST’s key business, however, is manufacturing, from which it derives approximately 43 percent of its revenue.

The Bahwan Family – Suhail and Saud Bahwan Group

The Bahwans got their start as the exclusive agents for Toyota in Oman. Until 2002, brothers Suhail and Saud Bahwan jointly operated the Bahwan group, most likely the second largest conglomerate in Oman in terms of profits. Despite the splitting of the group, the two new companies -Saud Bahwan Group and Suhail Bahwan Group remain leaders in the economy.

Suhail Bahwan’s Group comprises of more than 40 companies with a combined currently annualized turnover of more than US$ 3 billion (2008) and employs over 15,000 personnel.

The Zubair Family – Zubair Corporation

The Zubair Group today has over 60 wholly owned companies, subsidiaries and associates in Oman, the Middle East, India, the Far East, Europe and the USA, covering a wide range of portfolio comprises investments, automotive, energy, real estate and construction, electric, tourism, furnishing, home and business solutions, information and communication technologies, cultural heritage and publishing.

GLOBAL CORPORATE  FAMILY BUSINESS HOUSES : Infographic

Many of the global corporations of today started out as family businesses. In fact, some of the largest publicly listed companies are family-owned. One-third of Fortune 500 companies are family-owned. Here’s an interesting infographic from KPMG with some interesting facts on World’s top family businesses.

Global Family-Business-Overview-infographic
Global Family Business Overview Infographic. Image courtesy-KPMG
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