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Family businesses are the most complex form of business organisation. The linkage of often emotionally-driven family ownership with rational business needs creates a fertile ground for conflicts on multiple levels.
Particularly at times of generational shifts, uncertainties about the interest and the leadership competence of the next generation of family members make the business vulnerable.
However, family participation in a business can strengthen the business because family members are very loyal and dedicated to the family enterprise. It is no secret that the economic landscape in the GCC is controlled by families.
Families wield considerable power in the boardrooms of listed companies across the GCC. Between one-quarter and three-quarters of all publicly-traded companies have at least two members from the same family on their boards.
In Kuwait, a single family can own up to 100 per cent of a board, while in Saudi Arabia the control could extend up to 75 per cent, a study by Abu Dhabi-based investment bank The National Investor (TNI) found.
In both Abu Dhabi and Bahrain, a family could control a maximum of 66.7 per cent of the board, while in Qatar and Oman this could be 70 and 60 per cent respectively. In Dubai, this percentage was the lowest at 50 per cent, making the emirate a better performer in corporate governance.
On average, wealthy business families hold between 19 per cent and 30 per cent of all company board seats in the GCC.
The representation of women on company boards in the GCC remains low compared to international benchmarks, despite the growing number of Arab women entrepreneurs.
In about 580 companies covered, only 63 seats were held by women, representing 1.5 per cent of the total.
The study dispelled the perception of Gulf companies having a high cross-board membership. It found that 80 to 90 per cent of individual directors are on a single board across the GCC. On the size of a board, there was no uniformity in different countries.
The maximum size of boards for Abu Dhabi and Bahrain was 15 compared to 11 for both Dubai and Kuwait.
The aim of the study was to highlight the corporate governance gap in the region and to encourage more diversification in its board rooms, to globalise the outlook of the boards and to support the important wealth creation role that they play for the economies.
In this context, it is vital that family business owners recognise that private equity can offer unparalleled experience in meeting their capital restructuring, market repositioning, management optimisation and governance needs.
Private equity also enables the definitive separation of business ownership from business management, and the development of family firms into institutions, rather than 'one-man shows."
At the same time private equity investors have to differentiate their expertise and clearly demonstrate their value, whilst always remaining sensitive to the regional business culture.
Within the GCC over 90 per cent of all commercial activity is estimated to be controlled by family firms which number over 5,000, hold combined assets of more than $500 billion and employ 70 per cent of the workforce. However, worldwide, only 30 per cent of family businesses survive into the second generation, and less than six per cent beyond the third generation.
If the US pattern is repeated in the GCC, the region faces great succession challenges as many family businesses here are now entering the second generation era.
Dialogue between family businesses and private equity, however, could hold out a bright future for many.
If partnerships between private equity firms and family businesses in the GCC can successfully create an environment in which managers can act as owners and owners no longer need to act as managers, then all parties can confidently look to a truly competitive future.
Re-engineering is urged if family firms are to successfully compete in both global and domestic markets, with private equity having a key role to play.
Private equity has already been the foundation for success the world over. Family businesses in Europe, which partnered with private equity firms, increased exposure to new markets by 60 per cent, with two-thirds also out-performing their competition.
The average value of private equity-backed businesses doubles at the point of exit after an average ownership period of just three and a half years.
Family business owners should be mindful that despite the popular perception of private equity as synonymous with short-term cost-cutting, the bulk of growth in private equity-owned firms in fact derives from organic revenue growth and acquisitions.
