Middle-east Arab News Opinion | Asharq Al-awsat

Debate: Family-owned businesses no longer have a role to play in Gulf economies | ASHARQ AL-AWSAT English Archive 2005 -2017
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An investor looks up at screens displaying stock information at the Dubai Financial Market, June 17, 2013 (REUTERS/Jumana El Heloueh)

Despite the criticism and risks that surround them from all sides, family businesses remain very important to the economy, because they make up a large majority of all companies, and employ 75 percent of the work force.

In the European Union, family businesses make up 70 to 94 percent of all the total businesses operating in the region, and contribute 70 percent of gross domestic product (GDP). In Saudi Arabia, the percentage rises to 95 percent and contribution is 50 percent of non-oil GDP, a high rate that reflects the importance of family businesses to the Saudi economy. The same pattern can be found in other Gulf countries.

Most owners of family businesses prefer to retain the legal title of their businesses for reasons related to administration, profitability and control, where they have the ability to exert direct control over their business and use this financial and administrative power to make decisions quickly, without being hampered by the official regulations that control the operation of corporations.

Family businesses still control Gulf economies, especially the Saudi economy, but their power is always linked to the presence of their founders who control them according to their unilateral management philosophies, which rely on centralized control of the business and close attention to controlling costs.

It must be said, however, that many founders of family businesses may not be aware of any future dangers, such as the possibility of their businesses breaking up after the second or third generation, due to family problems such as the distribution of inheritances, especially in cases of polygamy where there may be large numbers of children who may disagree over the future of the business.

History contains examples of when governments have intervened to correct the position of family businesses after the death of their founder, to preserve their interests and that of the national economy. There are also examples of government intervention to impose what is known as “shareholding company” title on some family businesses for reasons related to protecting the economy and sustainability, which underlines the importance of family businesses and the level of their influence on national economies.

However, the consequences of family disagreements do not only affect the business partners, they also negatively affect the wider economy, especially in cases of family-owned financial businesses. Reports show that there are frozen accounts in local banks containing in excess of 19 billion Saudi Arabian Riyals (5 billion US dollars), due to differences related to Saudi family businesses, in addition to assets with a market value of more than 30 billion riyals (7.5 billion dollars).

What is certain is that family businesses are most profitable when the founder is still alive, although that does not rule out the existence of organizational shortcomings that can hinder them, the lack of a mechanism to solve disputes and convert and dissolve partnerships, or a culture of voting for taking effective decisions.

The focus of family businesses is on their commercial or industrial specialty, which limits them to a narrow framework which they cannot escape, and which negatively affects their future growth.

Therefore, future risks have prompted the founders of some family businesses to look for suitable ways that might allow them to convert their business into a public company, while keeping a majority of influential shares in order to maintain overall control.

Some founders of family businesses have been able to convert their firms into public companies that have achieved much more success than when they operated as family businesses. The Al-Rajehi Bank, Zamil Group and Jarir are examples of this transformation in the Saudi market, one that has helped those companies grow and increase their assets and the profits of the founders, in addition to expanding the ownership to include a larger number of their relatives, thus increasing their value to the national economy.

From this I conclude that converting family businesses to public companies is not just an option now, but a strategic necessity for ensuring sustainability and survival.

International studies show that nearly 33 percent of family businesses survive to reach the second generation, 10 percent reach the third generation, and only four percent reach the fourth generation, which strongly suggests that it is impossible that the majority of family businesses which exist today will survive after the second generation.

Also, family businesses face many other challenges, such as fierce competition from international companies and economic conglomerates, the mandatory application of corporate governance, in addition to technical developments and rapid changes which family businesses simply cannot keep up with. Therefore, the conversion to public companies helps sustainability and increases the value to the owners and the economy, as well as increases the return on investment and shareholders rights, and increases performance and production in the company itself.

There is no doubt that family-owned businesses will make very sizeable profits by going public; however, the prevalent culture in the family business sector sometimes obscures the sensible strategic vision from their owners’ eyes. This requires action and encouragement from governments and economic organizations.

Guaranteeing the survival of family businesses is in the interests of the economy. But it is important to prepare the right climate to facilitate the conversion of family businesses into public companies, or to encourage them to join existing public companies in a manner that benefits both parties. Another effective method would be to restructure such businesses and impose the application of corporate governance on them, chiefly the separation of ownership and administration, and to develop a mechanism for the dissolution of partnerships, resolving disputes, and avoiding the risk of collapse.

The counterpoint to this piece can be read here.