New research from Pearl Initiative and PwC highlights transition in corporate and family governance

The research programme involved interviewing over 100 family firms across the GCC and covering all major industry sectors. The research drew intelligence from family firms operating in single and multiple markets, as well as taking a cross-section of companies under first, second, third and more generations of family management.

A key focus of the report is to recognise the importance of corporate governance in family firms and to understand the issues surrounding implementation. As ownership passes from one family generation to the next, the report highlights that the key drivers to improve governance and transparency are linked to the desire to develop and pass on a healthy and efficient organisation to the next generation.

The research shows that there is growing appreciation amongst family firms of the importance of a strong well-functioning Board that acts as the right interlocutor between the family and the company. 55% of the family firms interviewed have Board members from outside the family, and 42% of firms have at least one non-family non-executive director on the Board. The value of independent directors is becoming more recognised, especially where they bring strategic, corporate governance, legal and finance skills. Family firms with independent directors cite improved Board dynamics as a benefit, in that it can add increased planning, discipline, strategic focus and structure to Board meetings, with key decisions less likely to be made by-passing the Board.

A strong culture of privacy prevails in many family firms as indicated by the fact that, although 76% of family firms interviewed produce an annual report equivalent, these are generally for internal stakeholders only. 63% of firms disclose financial or non-financial information to banks and business partners, and only 12% of family firms publicly disclose any financial information whatsoever.

In a sign that family firms are increasingly looking externally for growth and expansion plans, 55% of family firms said that they would be seeking external capital in the future, with 24% having raised external capital at some point in their history.

A significant sensitivity among family firms that was discussed in detail during the research is the issue of Board performance and evaluation. Only 4% of family firms interviewed evaluate Board performance, with findings showing this is, in part, due to difficulties in practical implementation and the perceived potentially negative impact it could have on the familial dynamic.

The research concludes that GCC family firms are some of the largest and most successful in the world today, however there is a pressing need to implement higher standards of corporate governance. The benefits of this include better access to finance on more favourable terms and the ability to attract foreign investment and stronger talent.

On issues of family governance, family firms are recognising that a lack of family governance structures can be the biggest cause of conflict, particularly around succession. Clear criteria for selection of family members leading the business, and well-thought out structured governance and transparency for those not directly involved, are becoming more important, particularly moving into the third generation. 52% of the firms interviewing have defined clear responsibilities between the family shareholders and the Board, and between the Board and the executive management, but only 20% of firms feel that they have fully implemented this so far.

Commenting on the launch of "Family Matters, Governance Practices in GCC Family Firms", Imelda Dunlop, Executive Director, Pearl Initiative, said, "This is our second major piece of research to be published since we launched the Pearl Initiative at the end of 2010. When we started, there was a lack of credible, insightful Middle East-focused research on corporate accountability, transparency and associated good business practices. With this report, we believe that family firms will gain greater understanding as they seek to apply international best practices to their domestic and regional organizations."

"We are truly grateful to all the family firms who allowed us to interview them, and appreciate their honesty and candour about a sector that is traditionally viewed as closed to those outside the family circle. We hope that this report can help to provide a strong knowledge base for those operating inside and outside of the family firm sector, to understand in more detail the pressures and opportunities they face," she added.

Amin Nasser, Partner, Middle East Entrepreneurial & Private Clients Leader, PwC, added, "We are delighted to work with The Pearl Initiative on this study about family businesses in the GCC. Over 80% of businesses in the GCC are either family owned or controlled, indicating that this business model is the basic fabric of local societies and regional economies. These family businesses began as entrepreneurial projects 50 to 60 years ago and have over the years diversified their interests and created a number of successful conglomerates. These families are therefore considered relatively young and will go through a generational change in the next 5 to 10 years. The businesses have reached a stage where it is necessary to have a more structured governance process - one which is less dependent on a charismatic leader."

"Although owners of family businesses in the GCC generally view corporate governance as good business practice and recognize its value, most of them have not fully adopted modern global corporate cultures. Nonetheless, it is apparent that family companies in the GCC are increasingly looking at strengthening the boards of their companies in order to result in discussions that revolve around the business, its growth plans, strategy and profitability rather than family issues or conflicts," he added.