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Smoothing out transition at GCC family businesses.

Summary: Creating 'family offices' is now integral to the process of change

By Ashley King-Christopher, Special to Gulf News

Various studies have revealed that family businesses represent an estimated 70-80 per cent of the private sector in the GCC, making them a core component of the economy.

Many have been hugely successful, attracting local and international recognition; it is therefore vital that we continue to support these businesses and ensure their continuity. Changes to family ownership structures and corporate governance have been high on the agenda of many family offices for a while, not only to make themselves more attractive to foreign investment, but to adhere to globally recognised standards.

With the OECD increasingly tightening transparency initiatives and globalisation increasing competitive pressures, the adoption of best practice codes of corporate governance and transparency is more important than ever for GCC family businesses.

In recent years, we have seen a growing trend of family businesses using cities such as London to run the management of their assets due the increased confidentiality and transparency in the UK. However, what remains of paramount of importance is the need to have a family office representative in the GCC who holds the relationship.

This year, Invesco undertook an Asset Management Survey, interviewing 67 sovereign wealth funds, state pension funds, local insurance companies, family offices, banks and IFAs. Not surprisingly, the most important service provided by family offices came out as management of the family relationship, which rated 8.1 out of 10 in terms of importance.

However, family offices were confident in their performance on the relationship factor, ratings themselves at 8.2 out of 10, leaving only a small 0.1 capability cap.

Interestingly, one of the biggest capability gaps was seen in succession planning, which scored 6.7 for importance and 6.0 for performance. Considering GCC families differ hugely from their international counterparts, especially with regards to their generational wealth, it's unsurprising that they require managers who can understand the regional complexities but at the same time can develop new inheritance structures within local legal frameworks.

Family businesses are increasingly realising the importance of succession planning with many seeking overseas expertise to help them do so. However, there are still many families who are unaware of the importance of relevant legislation and regulation when planning for the protection of their family's wealth.

So why does it need to be on their agenda? Why is succession and planning for the future so important?

According to PwC, the two most common causes for business breakdown are succession and conflict, with the latter often arising as a direct consequence of the former. Therefore, improving family cohesion and generational transition is critical.

Having a family office in place can be a crucial tool for enabling debate within the family about strategic asset allocation and key investment decisions.

What can a family business do to ensure stability? Is there a one-size-fits-all approach?

Given all families are different and have their own likes and dislikes, there is no one-size-fits-all approach. However, the family owners should consider: (1) adopting best practices in terms of corporate governance standards; and (2) A family charter which will clearly set-out the rules of the family members, including their interaction with the business executives.

For example, by confirming who the family business board should report to in the event of the death of the patriarch.

With changing business dynamics, it is now more critical than ever for GCC family business conglomerates to have a clear vision and strategy. To withstand generational transitions and economic conditions, GCC family businesses need to ensure they have the appropriate corporate governance in place, an embedded professional structure and, lastly, a strategic portfolio direction and management to mitigate and spread the company's risk.

Another key role for the family office is to help educate the next generation, for example, by supporting and providing a structured framework for their social entrepreneurship and Impact projects.

In order to ensure a smooth transition to the next generation, families need to prepare for the future. With the mindset in relation to corporate governance changing, as evidenced by the increasing popularity of family charters and family council governance mechanisms, succession planning at the family business level will be a key consideration.

The writer is with Charles Russell Speechlys.

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Publication:Gulf News (United Arab Emirates)
Date:Dec 8, 2015
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