By Santhosh V Perumal/Business Reporter

Family businesses, which contribute 80% of the non-oil gross domestic product of the Gulf region, are increasingly looking externally for growth and expansion even as they face succession, conflict resolution and business continuity challenges, according to Pearl Initiative.

However, they ought to strengthen their corporate and family governance framework to attract foreign investors and secure finance at favourable terms as well as establish family/shareholders’ council, said a Pearl Initiative and PricewaterhouseCoopers report, which interviewed more than 100 family firms across the Gulf Co-operation Council (GCC) region.

The report  observed that there had been “growing interest in the possibility of creating offshore Shariah-compliant trusts” across the region since the current trend of creating a holding company did not offer the same advantages of a trust.

Finding that 60% of the interviewed firms had entered the third generation and that 53% did not have any family governance structure at all, the report cautioned that family businesses would tend to lose the international competitiveness if they didn’t improve the structures, including family governance.

“As the global economy slowly comes out of recession, it will become more and more important for (family) firms in the region to implement higher standards of corporate governance. This will allow them to access finance at more favourable terms, attract foreign investors and customers,” Imelda Dunlop, executive director of Pearl Initiative, said.

The Pearl Initiative is a private sector-led not-for-profit organisation set up to improve transparency, accountability and business practices in the Arab world.

Finding a clear opportunity for improvement (in corporate governance), the report said if this was not addressed, family firms in the Gulf region would begin to lose their international competitiveness.

Although many GCC firms were fully aware of this governance, they had not accorded sufficient high priority, it said, adding those which had addressed governance issues were focusing more on conventional corporate governance measures rather than family governance because the former could assist with business issues such as obtaining external finance.

“We believe that family governance should be at least as important to a family firm as corporate governance, and if neglected, can create the risk of significant conflict, particularly on succession,” the report said, adding managing succession and conflict were the two top priorities for the GCC family firms.

The GCC family firms could benefit from establishing more formal corporate governance structures such as separating management from ownership, ensuring better delegation and providing for a well-structured board that includes non-family members with crucial business skills, which will keep the focus on growth, strategy and global challenges and ensure business continuity.

Stressing on the need for family/shareholders’ council, Pearl Initiative said: “Such a council can be effective in the GCC, where families tend to be larger than that in Europe and North America.”

The council could provide a forum for all members of the family to discuss the business and come to an agreed vision for its future, regardless of whether they played an active role in day-to-day management, it said, adding the council also made the succession process easier to manage and provided a good oversight mechanism when non-family executives were being brought to manage the firm.

The survey found that only a very few GCC family firms had mechanisms in place to evaluate the board performance.