Dr. Ali Al-Ghamdi
OKAZ newspaper recently published a report, which indicates about a government directive to the family businesses asking them to transform into joint stock companies. The directive, issued by the Ministry of Economy and Planning and the Capital Market Authority (CMA), says that it was evident from field visits to the family businesses that transformation into joint stock companies would bring about numerous advantages and benefits for them.
The report also sheds light on the viewpoints of Wassam Al-Fareehi, an official at the department for financing at CMA, with regard to this issue. He says that there are big potential risks for family firms, especially after the founder’s generation period passes onto the second generation. The possibility for a breakup of family businesses is around 30 percent during the period of the first generation, and this registers a gradual surge during the periods of the second and third generations. These firms are so vulnerable that they can vanish from the scene with the fourth generation in place after incurring huge economic losses.
Al-Fareehi drew attention to the successful experiments of family businesses that have come forward to float their shares into circulation. There have been several exemplary examples of such firms, which turned into joint stock companies and thus maintained their stability and safeguarded themselves from disintegration. He cited several ways for such a transformation through public sale of shares. Some owners of family businesses float 30 percent of their shares into circulation. The second way is increasing the capital with the objective of financing some expansion projects. Al-Fareehi also noted that CMA does not directly intervene in the initial public offering of any firms. On the other hand, it frames several regulations aimed at protecting the wealth of the shareholders, and the most important among these regulations is that the shareholders are prevented from handing their shares over to anyone else for at least six months after floatation in the market had taken place.
The newspaper report also carried the opinions of Naif Al-Adl, director of capital markets at Tadawul Company. He said that the joint scheme to persuade family firms to transform into joint stock companies involves provision of some incentives, such as working to enhance awareness among owners of family businesses about the significance of transforming into joint stock companies. The transformation entails some steps such as converting from limited liability companies to closed joint stock companies and following some other procedures before transforming fully into joint stock companies.
The aforesaid observations by two government officials about the government incentives for the family businesses in the event of their transformation into joint stock companies seem to be nice, and it gives the impression that such transformation would be beneficial not only to the owners of family businesses but also to the public who buy their shares once they are floated. Those who buy the shares believe that they will get profits due to the very good performance that these businesses would have attained with enhancing their image following their transformation into joint stock ones.
But in fact, these businesses generally do not float more than 30 percent of their shares into public circulation. They charge premium prices for shares after creating brand value for their products, which most often will be much higher than the book value of shares. People would come forward to buy the shares after being lured by the declaration of the firm about its best performance and the propaganda by the owners of these businesses that may send the stock prices higher.
But after completion of the IPO procedures and allocation of shares for each investor, it would become clear that the owners of family firms had secured huge amount of money in terms of premium prices of shares through some unscrupulous ways. It would also be evident that the owner of the family businesses would continue to hold total control over the newly formed joint stock company because of his stake, amounting to 70 percent of the total shares in the company. The owner might have given some of these shares to his family members. Anyhow, he will enjoy the position of the chairman of the board of directors of the company. He decides who will be the members of the board from among his sons, daughters, friends and relatives who will neither disobey and defy his orders nor disagree with him in any matters. The board chairman and his family members would enjoy most of the benefits, including dividends. The newly joined shareholders will not have any influence in running the company.
They carry out daily transactions, including signing of agreements and the likes, without consulting the new shareholders in violation of the governance system. The duty of these shareholders would then be restricted to the routine procedure of electing board members in line with the company law and the law of the CMA. The company officials can engage in any malpractice and even commit violations if they are successful in winning the consent of the general assembly for the same. In most cases, general assembly is nominal and ineffective in discharging its responsibilities. This brings home the idea that transformation of family businesses into joint stock companies are not bringing about the desired results. In the current scenario, it would be neither beneficial to the national economy nor helpful to the public.
Hence, there should be a revamping of the company laws in a way guaranteeing the due rights of all shareholders and there won’t be any room for the owner of the family firm to monopolize it. Otherwise, there won’t be any merit or benefit in the transformation of these firms into joint stock ones.
— Dr. Ali Al-Ghamdi is a former Saudi diplomat who specializes in Southeast Asian affairs. He can be reached at algham@hotmail.com
