GCC family firms look for external capital: Study

January 30, 2013 - 1:41:20 am

DOHA: GCC family firms are increasingly looking externally for growth and expansion plans. A large number of  family firms are looking for external capital in the future and a considerable number of family firms have already raised external capital at some point in their history, according to a new research programme jointly conducted by  the UN-supported agency Pearl Initiative and  PwC.

The research, interviewing over 100 family firms across the GCC that covered all major industry sectors, found the region’s family firms are becoming more aware of the increasing importance of corporate governance, but it is till not yet a high strategic priority.

The report said a strong culture of privacy prevails in many family firms. Although 76 percent  of family firms interviewed produce an annual report equivalent, these are generally for internal stakeholders only. Sixty-three percent of firms disclose financial or non-financial information to banks and business partners, and only 12 percent of family firms publicly disclose any financial information whatsoever.

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 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.

The research shows that there is a 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. 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 significant sensitivity that was discussed during the research is the issue of board performance and evaluation. Only four percent of the 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 dynamics.

The study 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.

The 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. Fifty-two of the firms interviewed have defined clear responsibilities between the family shareholders and the board, and between the board and the executive management, but only 20 percent of firms feel that they have fully implemented this so far.

Amin Nasser, Partner, Middle East Entrepreneurial & Private Clients Leader, PwC, added: “Over 80 percent 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.”

The Peninsula