How Succession Planning And Corporate Governance Will Ensure The Longevity Of UAE Family Businesses
The health and wellbeing of family businesses is vital for a healthy economy, making succession planning of interest to society, and not just the family.
Family-owned businesses make up 90% of the Middle East's private sector, and they are considered to be the backbone of the economy. However, with over 95% of family businesses struggling to remain profitable going into the third generation, understanding the reasons for failure is a key priority for families, businesses, and the economy as a whole. Intergenerational conflicts and poor succession planning are one of the most common reasons causing family businesses to fold, in which the reins are usually handed to a successor, without proper transition planning or alignment on the previous and forward-looking visions.
Comprising over 90% of the private sector in the Gulf region, family businesses are a catalyst of innovation, offering widescale employment, and contributing significantly to the regional economy. A recent Harvard Business Review article found that family businesses outperform listed companies during challenging and longer-term cycles. During the COVID-19 pandemic, the agility of family businesses became very apparent, not just within the UAE, but on a global scale. In a study of 3,000 businesses in 2021, KPMG found that family businesses worldwide laid off fewer people during the pandemic at 8.6%, while non-family businesses laid off around 10.2%. To achieve this, almost 60% of family-owned companies had reduced their expenses, and under a third had avoided losing employees by renegotiating vendor contracts.
Clearly, the health and wellbeing of family businesses is vital for a healthy economy, making succession planning of interest to society, and not just the family. So, what can be done on a regional level to tackle this issue? National governments have taken action in family business governance, seen recently in the UAE with the Dubai Crown Prince, H.H. Sheikh Hamdan bin Mohammed bin Rashid Al Maktoum, announcing his commitment to prioritizing the sustainability of family businesses to develop new global economic opportunities. In addition, the UAE issued a family business ownership governance law at the beginning of 2022 to boost family businesses' contribution to economic growth and enable a smoother, more effective succession process. The new law aligns with international practices, formalizes business models for family businesses, and prevents selling shares outside of the family unless family partners approve.
A 2021 PwC Middle East Family Business Survey highlighting the importance of implementing corporate governance practices found a significant rise in the number of family conflicts in recent years, stoked by intergenerational clashes as second-generation family members are already majority shareholders in over half of family businesses in the region. Indeed, whilst families in the UAE are keen to keep their business affairs private, many realize the benefits of professionalizing the business and family, with 19% setting up a family office. As per the convenings we at The Pearl Initiative have had with regional and global family business leaders and experts, implementing corporate governance in family businesses faces different challenges than in other businesses, in that it is essential to have the right leaders and vision to be in place to take the company to the next level, driving innovation and enhancing competitiveness. In the absence of a capable and willing leader within the family, boards, and governments may need to step in to look outward towards non-family members to futureproof the business.
Many founders agree that they will pass a stronger, more agile business to the next generation if their corporate governance framework is improved. However, 53% have no family governance structures in place. It is widely accepted that strong corporate values increase profitability and attract and retain employees who share the business's values and vision. However, day-to-day business and commercial challenges can often mean the intention of corporate governance is pushed down the list of priorities. In our mission to improve corporate accountability and transparency in the Gulf region, The Pearl Initiative supports family businesses to integrate a structure and culture of corporate governance to ensure long-term profitability and longevity. Through our Governance in Family Firms program, we work with family business leaders, the next-gen, and their advisors to raise awareness, create an open platform through regular convenings, and provide resources, trainings and executive education to promote family business growth and sustainability.
We also recently conducted a survey at The Pearl Initiative that found that diversity in the boardroom is gaining considerable traction– 55% of GCC family firms have non-family board members, and just under half have non-executive directors from outside the family. Family members must develop the commitment and willingness to drive the organization to the next level, which includes looking at both intergenerational leadership, and, potentially, non-family business members. What does this mean for the next generation? Around 65% of family businesses in the Middle East have next-generation family members working within the company. Still, only a third have a robust succession plan in place, according to a report by PwC. Typically, a business is passed to the eldest member of the next generation, regardless of ability or merit. Though as our research has shown, this traditional system is changing in the region, leading to many businesses now considering implementing criteria for joining junior family members, including educational attainment, technical professional and executive experience outside the family business.
Investing in the next generation is key to developing digital futureproofed businesses, since the average GCC business needs to grow by 18% annually to maintain the same level of wealth. Leveraging our youthful population with their natural ability for technology and innovation will ensure family businesses are equipped for economic success and global competitiveness.