Dubai: Family businesses in the GCC have made significant progress in putting corporate governance structures in place but are lagging when it comes to strict implementation — something that could eventually challenge their very existence, a study by the Gulf Family Business Council (GFBC) and McKinsey & Company has revealed.

The study, which surveyed the largest GCC family-owned businesses which collectively generate $100 billion (Dh367.3 billion) in annual revenues, showed that only 33 per cent of GCC-based family businesses have fully implemented governance systems, leaving significant potential for improvement in institutionalising governance.

“We understand that the majority of family business owners in the GCC are relatively young, between 40-60 years old, facing the critical juncture of transition of leadership from first- to second- or second- to third generations. One major risk during this transition is for large family businesses to get fragmented,” said Abdulaziz Al Ghurair, chairman of GFBC.

The study assessed current GCC family business practices and benchmarked them against five dimensions that are critical for the longevity of any family business — family, ownership, business, philanthropy and wealth management.

“Preparation is needed to avoid loss of family harmony and business disruption, which in turn leads to loss of economic value. With around 75 per cent per cent of [the] GCC private sector economy being family-owned, it is pertinent that we support the families to be equipped for the transition,” Al Ghurair said.

The study showed that only a few family businesses in the region have been successful in completing end-to-end implementation. Of the businesses researched, over 66 per cent of participants reported that they have started to put the building blocks in place. However, only around 33 per cent reported that the practices are fully adopted and are working effectively.

On the family side, the study revealed that 44 per cent of family businesses have an employment policy in place for the next generations. However, only 17 per cent of businesses have an effective assessment method in place to identify roles and responsibility for the next generation. A development plan for the next generation and a clear business integration policy would ease the transition of leadership and set a reference to manage conflict.

The study recommends that the ‘rules of the game’ should be clearly stated to the next generation as early as possible to allow for effective succession planning and transition of leadership.

The study also revealed that, while a few family businesses in the GCC have initiated philanthropic efforts, very few have a structured plan on this front.

“While all families are involved in some form of charitable giving, very few have developed organised philanthropic efforts: Only 36 per cent of the sample group had defined a clear strategy for their giving; 20 per cent had established a robust governance structure to oversee their giving; and, 16 per cent were clear about how they would evaluate the impact of their efforts,” said Ahmad Yousuf, partner at McKinsey & Company.

On preparing the next generation of leaders, the GFBC is collaborating with leading education institutions to bring family business-specific courses to the region. Later this month, the GFBC is running a next generation workshop developed by a leading family business professor from INSEAD Wendel International Centre of Family Enterprise.

“The findings of this study validate the direction of some of the council’s existing initiatives designed to facilitate successful transition for GCC families while addressing both the external and internal factors impacting family businesses,” Al Ghurair said.

The GFBC released a legal white paper on succession planning, discussing challenges in April this year. The GFBC chairman disclosed a legal initiative launched with policy makers to develop legal structures that consider family business challenges in the region.