MANAGEMENT studies indicate the average lifespan of family-owned businesses is around 40 years and one out of three family businesses survive into a second generation and three out of 10 into a third. However, family-owned businesses stand firm as the backbone of many economies around the world.
Among European Union countries, 70-95 percent of all registered companies are family businesses, contributing 70 percent to gross domestic product (GDP). In the United States, 20 million companies are family businesses, representing 49 percent of GDP, employing 59 percent of the total work force and creating 78 percent of new jobs. As for the Arab countries, around 95 percent of companies are family-owned. In Saudi Arabia, nearly 95 percent of firms are family businesses.
Although family companies play a pivotal role in the economy, they face risks and next generations’ integration, which threaten their sustainability. To ward off these threats and ensure continued growth, family businesses need to embrace right corporate governance practices.
“Many family companies empower themselves, overcome uncertainties and ensure sustainability by implementing good corporate governance programs, in line with a clear vision governing relations between owners, shareholders and employees,” remarked Anees Ahmed Moumina, CEO of SEDCO Holding Group.
“Corporate governance framework determines rights, responsibilities, authority and accountability of the board members, executive management, shareholders and stakeholders,” he noted.
Moumina said it is crucial for owners of family businesses to believe in the importance of implementing sound corporate governance standards to mitigate the threats and ensure sustainability.
These standards, he explained, constitute the three main components of a good corporate governance structure, which facilitate the operation of a family company: defining clear goals and responsibilities for all members of the three circles; encouraging family members, company employees and owners to act responsibly; and regulating the way families and owners get involved in business discussions.
The majority of family companies in the region face succession challenges. Currently 80 percent of family businesses are run by second generation and 20 percent by third generation.
In Gulf Cooperation Council (GCC) countries, members of every generation are double the number of original family members, a factor that results in increased responsibilities.
Despite such challenges, adopting good governance highlights the importance of a strong management team to oversee day-to-day business operation, leading a company to advanced levels of sustainable growth.
According to Moumina, disclosure and transparency are two of the most important principles of corporate governance, enabling shareholders to access information they need in a transparent and credible manner. He said companies listed on the stock exchange are required to set, in writing, disclosure policies, and procedures, as well as supervisory systems. In addition to producing financial statements, firms are also required to issue reports by boards of directors, reviewing fiscal year operations and business impact factors.
The annual report should include cases of compliance and noncompliance with corporate governance codes. This helps investors to evaluate company assets, competitors, and financial position.
Implementing corporate governance principles, however, can be onerous for family companies. To undertake this task, family businesses need to empower boards of directors and develop relations with more responsive shareholders, according to consultants, managers and shareholders.
For the CEO of SEDCO Holding Group, the challenge is to balance the parameters of management, ownership and family relations. Strategic planning, which governs the way these parameters intersect, ensures smooth transitions and enhances sustainability.
He said the application of good corporate governance practices maximizes investment return and values, preserves shareholder rights, and limits conflict of interest. Compliance with corporate governance principles helps engage shareholders in the decision-making process and keeps them updated on their investments. It seeks to build strong relations between management and stakeholders, such as employees, suppliers, and creditors. Corporate governance also boosts stakeholders’ trust in companies, which improves performance and helps firms achieve their goals.
In this regard, Moumina said that this is the right time to consider strengthening corporate structure in order to identify core competencies necessary to empower companies in the next phase of growth. Competition is becoming increasingly fierce in light of business changes and developments as well as efforts of regional and international companies to build stronger relations.
In this context, local companies are superior, and international firms prefer to cooperate with them due to their experience in the GCC markets. Due to the growing numbers of family businesses, local and international companies have wider options. Successful partnerships are built on best practices because good corporate governance establishes trust, and ensures employees, business partners, and all the stakeholders are well aligned and share the same values in achieving the targeted goals. — SG
