The UAE has witnessed the success of many individuals who have thrived off the fast pace development the country has experienced in all sectors through its – mere - 50 years of establishment. Many such individuals started businesses that are conglomerates and pillars of the economy.
Most of these were both established and run by either one founder or a number of siblings, categorically marking them under the title of ‘Family-Owned Businesses’. According to Volume 19 of the third issue of the Academy of Strategic Management Journal 2020, these businesses contribute to over 60 per cent of the region's GDP and employ over 80 per cent of the labor force. In the UAE and Saudi Arabia, around 90 per cent of the private sector are FOBs.
It has been observed in the last decade that many such conglomerates or wealth of UHNWIs have been subject to inheritance - or shift of control - to the next generation. While this may seem like a change to a fresh new outlook on investment and business development of an already prosperous empire, most of this wealth and businesses lack direction, on the general vision for the enterprise. And because the decision-making members are from a usually large pool of inheritors.
Correct future course
We have witnessed many decrees passed by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, the UAE Vice-President and Prime Minister and Ruler of Dubai, establishing various judicial committees to overlook the generational succession of FOBs in a more exclusive and private manner. This is due to the sensitive nature of such disputes and the overall economic interest of keeping such empires intact and in the best hands possible while cherishing the family nature of such enterprises.
Many may wonder why such massive and reputable enterprises need an outside committee to dictate integral business affairs and managerial structures, when such family-owned wealth and businesses should naturally be driven and controlled by the second-generation inheritors.
While handling many cases dating back to late 2015, when disputes and concerns of this nature began to surface, we have observed that the main three reasons these businesses and inheritances needed the interference of special judicial committees are as follows:
- Most of these conglomerates were run by either one founder or two to three siblings. Hence, this led these businesses to be conducted in a very casual sense with no proper documentation illustrating how these businesses were being run, how decision were being made, and what was the overall direction of the business.
To be more specific, annual general meetings, if ever conducted, were not always documented. The same goes for board meetings. Business decisions were regularly made verbally with the lack of an appropriate forum, managerial operations lacked proper execution, and the business was run solely on trust.
This is not uncommon practice for FOB's in the region, as one would not expect to need formalized meetings and paperwork to converse with their own sibling.
- Another reason would be the lack of proper governance and disclosure within the business. The foundation these businesses were leaning on lacked rigid guidelines. For example, memorandum of associations of these conglomerates were outdated.
The hierarchy of separate committees within the business as well as policies including specific language on the conduct of business were also absent. There were many missing pieces to the puzzle.
- Lastly, the abundance of the one-man show regimen. Meaning that most, if not all, of the operations were led and executed by the founder without involving family members in the decision-making process. Nor even employing family members in any aspect of the business.
The absence of adequate training, prior preparation, and proper exposure renders the second-generation oblivious to the business direction, operations, and overall objectives for the continuance and further development of the business.
For this reason, in some cases, it has been witnessed that non-family members from higher management intrude in some disputes in an attempt to strip second-generation inheritors from their inheriting rights of controlling the business. This attempt converts inheritors from proactive business owners into silent bystanders receiving annual dividends.
These massive empires are at risk of deteriorating not only affecting the business itself but the economy as a whole. Government intervention can offer temporary relief to the rising trepidations these conglomerates are facing.
However, these conglomerates need permanent solutions to accommodate the generational shift in their structures. One solution could be through public listing. Ali Alghanim & Sons Automotive Company started this initiative in being the first Gulf FOB to list their shares in the Kuwait Stock Exchange.
Due the shared interest in the success of the business by the family members and external investors, public listing can provide more transparency, ensure proper governance, and offer a wider range of diverse markets for the expansion and development of FOB's. This, of course, is not a one-shoe-fits-all scheme, as it may not be a viable solution for all conglomerates.
The Dubai International Financial Centre, by recently launching a Global Family Business and Private Wealth Centre, and a number of elite law firms have been working on a new mechanism to provide dispute resolution assistance, advisory services, as well as proper education and training for such businesses and individuals to help recreate well-organized and more efficient establishments.
The purpose of this is to support and develop these businesses and inheritances to thrive and flourish, rather than diminish in the hands of the next generation.