GCC family businesses need succession plans

14 October 2015

Two-thirds of family-run firms in the region have no effective governance systems

  • Only two-thirds of family businesses in the GCC have started implementing systems of governance
  • Study says only 22 per cent have effective training programmes for the next generation
  • Only 10 to 20 per cent of family businesses survive to third generation

Only two-thirds of family businesses in the GCC have begun putting systems of governance in place, while only a third have systems that work effectively, according to a study by the Gulf Family Business Council (GFBC).

Systems of governance such as articles of association would make management more professional and clarify issues of succession and dispute resolution.

The study surveyed 25 of the largest family businesses across the GCC, mainly in Saudi Arabia and the UAE, with a combined revenue of more than $100bn. It found that only 44 per cent of the leading local conglomerates had a family employment policy in place, 32 per cent had clarity on family members’ roles and responsibilities, and only 22 per cent had effective training programmes for the next generation.

This is a major concern as family businesses make up 75 per cent of the private sector in the GCC, while globally only 10 to 20 per cent of family businesses survive to the third generation.

“One of the biggest challenges is implementation,” says Ahmed Youssef, a partner at New York-based McKinsey & Company, which carried out the study. “Awareness is now high but implementation is not as effective because people are afraid to make the big decisions.”

GFBC is advising family business owners to start succession planning as early as possible. The GCC is lagging behind other regions in this area.

“When the founder is 75 or 85, and his children have differences over the business, he doesn’t want to confront them,” says Abdul Aziz Abdulla al-Ghurair, chairman of the GFBC and Dubai’s Al-Ghurair Investments. “He leaves it to destiny and this is bad for the economy.”

Al-Ghurair advocates setting up governance and succession plans when the founder is in his 50s or 60s, and involving the upcoming generation, including women, in managing the business early, so they gain experience before taking over ownership.

Some companies also separate ownership and management by bringing in professional boards. In the past 10 years, this process has accelerated dramatically. This allows inheritance and family wealth preservation to be managed between members who are or are not interested in the business.

“When the transition results in a split, this can destroy the business,” says Al-Ghurair. “We work in a very open economy, where any company can come and set up, and multinationals do come. We need local companies to counterbalance this. If there are only small and medium companies competing with these giants, in 10 or 20 years their role will be minimised.”

The GFBC recommends that families take the initiative to anticipate problems and plan ahead internally, but it is still advocating for legal changes.

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