Taking Qatar’s family businesses into the next era
For decades family run businesses in Qatar have played a vital role in the nation’s economy, and certainly a major part of the private sector. The future success of family businesses is however not guaranteed, and today they face challenges on numerous fronts, writes Shehan Mashood.
A report released in January this year, Family Matters – Governance practices in GCC family firms by PwC and The Pearl Initiative, shows that most Gulf family businesses are going through a generational change. As a new generation takes over from the founders, unresolved family issues, and unclear succession plans leading to family feuds could easily end in the fracturing of large family businesses or worse, reveals Amin Nasser, a partner at PricewaterhouseCoopers in Dubai, who advises family businesses in the Middle East on issues such as succession planning and governance. The other issue that family businesses will have to contend with if they are to grow and survive is implementing a long-term strategy that balances both the needs of a modern, accountable business and the family.
A significant number of families are going through a generational change in the next five to 10 years in the region. Whenever this kind of succession occurs, Nasser goes onto explain, there is a huge risk that a family might get fragmented since there are no proper structures in place. “We have seen a number of family feuds,” he says, “although respect for the elder generation has to some extent protected them. These families, when moving to the next generation, need to formalise the relationship between family members and create rules which are fair. They need to create a sustainable and well-structured business if they are to succeed where other families have failed.” According to Nasser, global statistics show that no more than 10 percent of family businesses survive beyond the third generation.
All this is not to say that family businesses are unaware of the importance of these issues. The Family Matters report states that the majority of GCC family firms interviewed considered corporate governance a key issue for the future, however, it is a low priority in comparison to wider operational and commercial concerns and overall profitability.
The driving factors behind family business success has been their conservative approach to doing business and focusing on long-term objectives. They are not under the same pressure from shareholders as listed companies, explains Nasser. But going forward their success will depend on how they tackle key issues such as succession, remuneration, how future strategy is decided and which members of the family play an active part in the business.
Governance within the family component of the business can often be more complex than the governance of the business itself, says David Dhanoo, the chief legal officer at Qatar Financial Centre (QFC), which in September announced new regulations governing single-family offices for Qatar. These offices are usually set up to manage the investments and other financial needs from within their premises of a single wealthy family. A multitude of reasons contribute to the complexity of family governance, Dhanno continues, not the least being the pivotal role played by family dynamics, which are often present across generations.
Having family members control decisions and strategy is not without its advantages points out Dhanoo, with short lines of communication, and low costs, - if families can agree on a vision and strategy - this setup can be very successful. Many companies around the world are run this way.
Nevertheless, the disadvantages are many, explains Dhanoo. The lack of skills and management knowhow, confusion of interests between owners and managers (which can lead to some family members preferring short term gains to long term investment), opaque decision making (which can deter lenders and other investors) and even family feuds could damage or destroy the business.
Family feuds can stem from numerous issues. “Conflicts in family businesses arise when family members perceive that their needs are not met,” says Nasser. “Conflicts also surface when situations are unclear or not properly understood.” Indeed, he adds, when shareholders that are actively involved in the running of the daily business make decisions, this causes friction between the family (passive shareholders) who are unaware of how or why decisions are made.
Choosing the future leaders of a family business is a large cause of conflict within families. “One of the prime weaknesses of family as opposed to public ownership of companies,” says Dhanoo, “is the heirs to family companies may take the business for granted, and choose to enjoy their leisure instead of running the business. History is littered with instances of family companies decaying for this reason after a few generations.” Family firms in the Qatar have prospered due to the high economic growth enjoyed by the country, but have also grown harder to manage, not to mention more valuable, so ensuring that the heirs are capable and committed to the business is even more important, points out Dhanoo.
“The family can no longer directly control every aspect of the operations.”– David Dhanoo, group chief legal officer at QFC
Aamal Company, for example is a highly diversified Qatari conglomerate, and one of the many succesful family run businesses going through a generational change. They are a publicly listed family firm that has managed to enact and codify good governance practices in their business. Sheikh Mohamed bin Faisal Al Thani, the vice chairman of the company, working alongside his father, has been tapped as next in line to take over as the chairman. He explains that his father, Sheikh Faisal bin Qassim Al Thani is surrounded by highly competent executive management with extensive knowledge of the business’s operational and financial aspects to inform decision making. He also pointed out the central role his father still plays in business decisions telling The Edge, “he has a vision for the future of the company and it is very clear to us, so our roles are to continue the family business for the next generation.”
Imelda Dunlop, executive director at The Pearl Initiative, a non-profit organisation set up to increase transparency and accountability in the Arab world says that, “when you have a patriarch that is a very strong character who has set up the firm with a strong culture from day one, it is enough that he is there distilling that culture through the organisation. But as they move into the second and third generation, it is more complex since there are more family members involved.” Strategic and professional communications across the shareholders and across the family are important for family businesses, if they want to avoid conflict down the line.
There is a recognition that firms need to codify the rules, they need to write them down since it is not easy to have them verbally understood or communicated purely from a complexity point of view, adds Dunlop, adding there is a need for a constitution that sets out the rules clearly for everybody.
Families moving into the next generation need to formalise the relationship between family members and create rules which are fair, “They need to create a sustainable and well-structured business if they are to succeed where other families have failed,” explains Nasser.
If the business needs a board to run the operational side of things, then the family needs a board to run the family, furthers Nasser. The Family Matters report shows that of the companies interviewed, over half of the firms did not have formal rules for family governance in place at all. And around 20 percent are in the process of establishing these structures.
Families can create councils or a shareholders assembly that is detached from the board of directors for the family business. This can provide a forum for family owners to debate issues. “In this way,” he says, “the chances of family conflicts are reduced and it is more likely that the next generation will embrace and grow the business.” The report shows that 50 percent of family firms have clearly defined responsibilities of family shareholders, the board and management. However, 48 percent of them have only partially implemented these practices. The key to averting these crises on the family front is to formalise these issues and agree on a path of action. And have them written into a constitution, so that when a situation arises in the future, there is no disagreement as to what needs to be done.
There is also an urgent need for codifying rules for matters such as which family members work within the firm, or which of them hold the most senior positions. “You need to be thinking through how you best select and develop those with the most talent within the family,” says Dunlop, “and be thinking through who in the family should be sitting on the board as well as who from outside the family should be sitting on the board.”
According to Dunlop, there is a high degree of awareness within family firms about the importance of corporate governance and the need for dynamic boards. They want board conversations to be about the business, global challenges, and growth strategy, as opposed to talking about family issues, says Nasser.
53% - The percentage of family firms surveyed, that do not have a family constitution or a family governance structure.
The corporate governance structure required by a family business depends on numerous factors, furthers Dhanoo, including the nature of the business, its size and complexity. The number of family generations involved, and whether the business has non-family executives or independent non-executive directors also factor into what kind of structure will work best for a family business.
The modern trend for family run businesses has been to try and reduce the inherent risks in family ownership by introducing more professional management, says Dhanoo. And at the extreme, family companies become publicly listed and are run by full time professional managers. As family firms grow in both size and complexity there is a need for professional managers. The way family firms have adapted to this is by hiring managers who work alongside and answer to the family owners of the business, he says. This allows them to implement modern corporate governance practices while retaining their family identity.
When there are proper corporate governance structures in place, notes Nasser, effective delegation and separation of management from ownership, a well-structured board of directors that includes non-family members can offer professional and objective perspectives, leading family businesses to realise growth and increase shareholder value.
Family firms in Qatar are increasing their understanding of what good corporate governance involves, explains Dhanoo. “In many cases, their businesses are expanding fast, and the family can no longer directly control every aspect of the operations. Families can also see what their competitors – family and publicly owned companies – are doing.”
Publicly listed family businesses are slightly ahead of the curve. As a listed company they have to meet governance requirements laid down by law and the stock exchange they are listed on, says Dhanoo. Additionally they need to meet the criteria of investors of openness, the provision of information, professional management and directors that are qualified to hold places on the board. Capital markets are international, points out Dhanoo, foreign investors or fund managers expect and demand high standards of corporate governance.
“We have seen a number of family feuds, although respect for the elder generation has to some extent protected these families.”– Amin Nasser, partner at PwC in Dubai
Listed family businesses in Qatar are increasingly aware of what is demanded of them, and are evolving accordingly, as will family firms that look to list in the future. According to the report, two thirds of family firms have not raised external capital yet, but 55 percent of them intend to do so in the future.
The degree of concern with which family firms view adopting good corporate governance naturally differs, but the report indicates that awareness has grown and will continue to do so in the future.
Unity of vision
It may be difficult for family members from different generations to agree on a unified vision. Especially since the older generation are usually more conservative while the younger generation are willing to take more risks, points out Nasser. But, “it is important,” he says, “that each family has a vision for the future and is fully committed to the success of the business.”
“You feel a palpable sense of this being about survival,” says Dunlop. “They know that it is their responsibility to ensure the success of the business now, and over the long term. And this means having to adapt their governance practices in such a way that it can grow across generations.”