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Institutionalization: why family businesses need to act

June, 09,2019

By Matthew Donovan

Institutionalization: why family businesses need to act

 

The United Arab Emirates (UAE) remains a regional leader in diversifying away from an oil and gas dependent economy, whilst continuing to pave the way in respect of introducing new and innovative economic stimulus aimed at attracting investors. That said, at the core of the economy are family businesses, who widely are yet to adopt an institutionalized corporate culture which is evident across most advanced and emerging economies, this therefore continues to contribute to not operating or growing to their full potential or accessing investments from overseas.

 

Whilst many facets of corporate law have been derived from advanced economies, the same does not replicate in respect of the corporate culture, despite the framework existing across the UAE which permits the evolution of such. A majority of change has been driven by the necessity to facilitate foreign investment, and whilst there are many examples of tremendously successful family businesses in the UAE, we have little evidence of systemic evolution and seismic success stories, which could be addressed through small but meaningful changes to the way in which they operate.

 

Change is inevitable in order to meet the challenges of a continually globalised market, along with avoiding the ongoing trend of increasingly sophisticated international businesses being precluded from working with family businesses across the region due to limited effort in diversifying its infrastructure and governance policies to align with the requirements of domestic regulators of advanced economies.

 

Whilst the patriarchs and matriarchs of family businesses have typically been successful running businesses from the top, the next generation have experienced institutional education from leading establishments throughout the world which draw on the experience of centuries of corporate evolution and extol the virtues of a more sophisticated approach to operations. The challenge of acceptance within owner-businesses today exists as an interpretation of change being both complicated and expensive. Previously, change was not a necessity for organizations who had been established for decades as they experienced limited competitive pressure and access to capital from banks at basic repayment terms, along with access to foreign investors who at the need to exploit opportunities in the UAE accepted unfavourable terms as the opportunity outweighed risk.

 

However, today’s environment requires a change in strategy and approach, with international investors and companies demanding transparency in corporate structuring, expect good corporate governance, the separation of powers and accountability between management, directors and shareholders and to enter into complex commercial agreements as standard, whilst expecting their business partner’s operations to be fully auditable. 

Matthew Donovan, Partner of Galadari says: “any business would enjoy greater success and profitability by incurring sustainable debt to grow the business, by leveraging assets, restructuring and disposing of non-core assets, by making strategic acquisitions, adopting strong corporate governance policies and procedures which attract potential investors and partners, as well as availing themselves to the advice of trusted advisors. Is any of this easy? Certainly not and it isn’t without the need for investment, but the benefits are considerable”.

 

Whilst several businesses profess to have taken steps in the evolution of their operations the reality is that much more effort is required. During our due diligence of family businesses, we have found significant matters relating to operations and management, which is synonymous with the wider opinion of authors in management consulting firms.