Governance Forum: Seeking to keep abreast of scientific developments to enhance performance efficiency in Saudi family businesses

During the opening session of the Corporate Governance Forum in Family Businesses:

Al-Mana: We seek to keep pace with scientific developments to enhance the efficiency of performance in Saudi family businesses.

Al-Khalidi: Governance is the safe way to sustain businesses across generations

Jane Wales: Implementing first-generation governance for any family company ensures continuity in future generations

The Forum on Corporate Governance in Family Companies organized by Asharqia Chamber in cooperation with the Institute of Directors in the GCC countries on Wednesday, April 10th, under the patronage of HE Dr. Majid Al Qasabi, Minister of Commerce and Investment that entitles “The latest trends and best practices in family business governance.”

The Forum stressed the importance of spreading the culture of governance and institutionalizing family businesses among family business owners and indicating the need for legal procedures and family charters to ensure that these companies continue to serve the national economy.

The Forum witnessed seven sessions of dialogue and presentation of a number of working papers, which will be presented by a group of specialists from inside and outside the Kingdom that dealt with many aspects related to family companies and their role and future in the local economic scene.

Government programs and plans

At the opening session, on behalf of His Excellency Minister of Commerce and Investment Dr. Majid Al-Qasabi, the undersecretary of Interior Trade, Abdul Salam Bin Abdullah Al-mana, reviewed the programs and plans implemented by the Ministry to enhance the efficiency of small and medium enterprises.

He said that in view of the great economic importance of the family business sector and its impact on supporting the national economy and achieving its future goals through its programs and strategic plans, the Ministry is keen to keep abreast of the scientific developments in this regard and to harness its positive data to enhance the efficiency of family enterprises.

The Ministry has done everything possible to strengthen the sector’s progress.

He reviewed the experiences of all kinds and saw many specialized studies to take advantage of them in reaching a model that meets the needs of the family business community in the Kingdom and opens new horizons for the application of governance mechanisms, as these mechanisms have positive implications for the sustainability of family business across generations.

Among the efforts made by the Ministry to support and organize family businesses,

he said that the Ministry issued last year the guiding charter of family businesses, which is a document that helps regulate the work of family members in the executive of their companies, sets a clear perception of the policy of distribution of profits and draw up specific mechanisms for the disposal of the shareholder in shares and the departure of shareholders in order to enhance the values of the family business and achieve the objectives of companies and business development in accordance with the institutional framework that supports its expansion and increases the chances of success ..

In this regard, he added that the Ministry has blessed the establishment of the Family Facilities Center and considered it as an important step that supports the Ministry’s pathways in enhancing the march of the family enterprise sector through the various activities that will be carried out by the center in the near future.

He added, “We continue to provide support for the coming generations to complete in our family businesses what the first generation has built.”

He described the Forum as a meeting this elite of experts and specialists in the fields of governance and institutionalization, which is an opportunity to recognize developments and keep abreast of the developments on the best practices of corporate governance.

He said, ” I am very confident that we are all looking forward to the path of renaissance and sustainable development in accordance with the standards of good governance, a path we have begun since the inception of Vision 2030.”

In conclusion, he thanked Asharqia Chamber for its contribution to the national economy and its keenness to spread the culture of institutionalization and governance among various companies (family and non-family).

He sent a special thanks to the Chamber’s leadership for its cooperative spirit by saying, “I am confident that this spirit is what we need today to reach our goals and our future aspirations.”

Global standards

For her part, the Executive Chairman of the Institute of the Director of the Gulf Cooperation Council, Jane Wells, reviewed the services provided by the Institute, a non-profit institute, which works with many large companies such as Saudi Aramco, Saudi Basic Industries Corporation (SABIC), and others that played a major role in establishing the Institute in 2007.

She stressed her keenness to raise awareness of the corporate governance of all kinds and presented various ways and means to apply governance within them.

The institute is located in the GCC, as it conducts many seminars and workshops and seeks to connect with local expertise to help companies apply governance.

She added, “Family businesses are a big sector that is facing a host of problems and challenges and all we hope and seek is to apply the governance of the first generation to any family company, which ensures continuity in future generations.”

She pointed out that the global economy of the Kingdom requires the elements of the owners of companies to apply all the principles of governance according to international standards.

Spreading the culture of governance

For his part, the Chairman of the Board of Asharqia Chamber Abdulhakim bin Hamad Al-Ammar Al-Khalidi, said that the ideal solution for the sustainability of family business and its smooth transition across generations lies in the introduction of governance measures, which balances management and ownership and takes companies, regardless of their size and number of owners, to progress and success.

Al-Khalidi added that it is in the face of successive changes in the national economy, which is created by the Vision of the Kingdom 2030, where increased reliance on the private sector as a cornerstone of growth and development and because family businesses are a major component of the private sector.

Today’s Forum aims to identify family business owners with the latest trends and best practices in family business governance and all that will preserve the continuity of their business of all kinds.

It is a message that is constantly confirmed by Asharqia Chamber, “Governance is the surest way to sustain businesses across generations.”

Al-Khalidi reviewed the positive aspects of the culture of governance and its actions on family businesses and the national economy by saying, “Asharqia Chamber has taken the dissemination of the culture of governance among family businesses a target. This Forum and other programs, initiatives and awareness lectures are all aimed at achieving the goal of family business owners to adopt governance measures because of the great benefits of the family company and the national economy both in terms of increasing their contribution to non-oil GDP and in terms of absorbing thousands of national labor forces.”

At the end of his speech, Al-Khalidi praised the wise government, represented by the Ministry of Commerce and Investment, for its great efforts to stimulate and encourage the business sector to institutionalize business.

At the end of the opening session, all sponsors, supporters and speakers were honored.

538 thousand family enterprises, which constitute 63% of the total establishments operating in the Kingdom.

Al-ajlan: The contribution of family enterprises to the Kingdom’s GDP is 810 billion riyals.

Bin Dawood: The passion of children in the fields of the company is the most prominent reasons for the continuity of family businesses.

Al-Majdoui: 10 family companies may only stay three for the third generation

The first session emphasized the importance of the governance of family affairs and that the challenges begin with the third generation in particular, as the family was unable to distribute the shares in a deliberate manner between ownership and management.

Reduce powers

During this session, which was titled “Corporate Governance in Family Companies: The Latest Trends and Best Practices,” the international Advisor on Governance and Board Development, Professor Bob Garrett, said that informal family governance allows for the governance of the most formal and legislative companies around the world, which is creating many challenges for family businesses that are not expected by all members of the family including some resentment within the family, especially with regard to the reduction of powers, but the pressures are likely to increase within the family and here must be agreed on the two things until the work continues.

Garrett said that more than 90% of companies worldwide are family businesses and have a growth rate of 10% per year with the exception of small businesses.

He pointed out that 84% of family businesses have a sense of goals and values agreed upon as a company, and 63% of them are looking to take significant steps in developing the mechanism of action towards digital transformation, and 55% have a fully documented strategic plan.

On the specifications of the founding generation and successive generations, Garrett stressed that the founding generation often has the energy and the strong concentration as dominated by tyranny.

The second generation is careful to grow and increase the volume of business and development with a little resentment and frustration.

The third generation is overcome by loss of focus and failure if the family cannot distribute the shares in a deliberate manner between ownership and management to ensure the long-term health of the business.

Enhancing competitiveness

At the second session that entitled “Services of the National Center for Family Businesses”, Talal Al-Ajlan, CEO of the National Center for Family Business, said that the Center is currently in the establishment phase, after the Minister of Commerce and Investment inaugurated at the headquarters of the Chamber of Commerce and Industry in Jeddah in November 2018, which aims to highlight and develop the role of family enterprises in economic and social development and enhance their competitiveness and increase their contribution to GDP in order to achieve the Vision of the Kingdom of 2030.

It also aims to support family businesses in the Kingdom and help them apply the best standards of governance to achieve sustainability and support them in the face of various challenges.

This will be through the services and programs that the Center that is currently developing and will be presented in the future to various segments of family businesses and in various areas of our precious kingdom.

Al-Ajlan pointed out that the family enterprises constitute the majority of the establishments operating in the Kingdom with about 538 thousand family establishments, which constitutes 63% of the total establishments operating in the Kingdom by the end of 2017.

He pointed out that the contribution of family enterprises to the Kingdom’s GDP is SR 810 billion, and its contribution to the GDP of the private sector is about 66%.

On the contribution of family enterprises in the labor force within the Kingdom, he said that the employment of family enterprises with about 7.2 million employees constitutes 52% of the total labor force in the Kingdom – including national employment – by the end of 2017.

Family enterprises employ about 7.2 million employees, representing 76% of the total workforce in the private sector by the end of 2017.

He pointed to the Eastern Region that comes as the third largest area for the integration of family businesses in the Kingdom after Riyadh and Mecca by 18%.

Al-Ajlan stressed the importance of the guiding charter for family businesses, as it aims to strengthen the cohesion of family members to achieve the development and success and works to establish a balance between the interests of family members and the interests of the company and to educate family members of their rights and obligations and maximize the value of the company and the development of its business, as well as making the company a base for the permanent contribution of the family in the service of the national economy and society and encourage the independence of the institutions of the company and its executive team on the family, as well as transparency and clarity in family relationships.

Parallel companies

The 3rd session was entitled (legal and family aspects, family charter and succession plans) and was moderated by Dr. Ibrahim Al-Mutraf, President of Bir Al-Khair Center for Economic Consultancy.

The speakers of this session are Ahmed Bin Dawood, the CEO of Danube and Bin Dawood CEO, Dr. Zaid Mahaeni, the Head of Legal Affairs and Board Secretary at SEDCO Holding, Abdullah Al Majdoui, the Chairman of Al-Majdoui Group, and Detlef Daues, the CEO of V-Line Europe.

Detlef Daues stressed the importance of the presence of advisers from outside the family, and not be limited to the management of the family company in the individual member of the family as it puts the company at risk.

He pointed out that his parents participated in their company since its inception and had significant contributions to the company, especially in the addition of new products or expansion of production and is now in the process of training children to carry out administrative functions in the company.

He stressed his keenness to work and attention to the reason for its continuity and success.

For his part, Ahmed bin Dawood said that there are about 30% of family businesses that did not succeed in reaching the third generation.

He pointed out that their company has now reached the third generation and has about 65 branches.

He stressed that the first ruler in the continuity of family businesses is the passion of family members in the fields of the company.

He advised family business owners to instill passion in the family members.

He added, “There is an agreement within the family that those who want family members not to work within the framework of the company and independence away from them should not establish parallel companies operating in the same family business, so there is no conflict between family members that may affect the ties within the family.”

Seamless succession

Dr. Zaid Mahayne said that it is important to involve family members within the company.

He pointed out the process of succession of generations in SEDCO Holding, as it is a smooth succession in successive stages as well as providing successive generations with various training programs.

He pointed out that the company has two boards for the family and one for the shareholders.

The Family Council is training the family members on the governance and procedures of their application and importance in the survival of the company and continuity.

The Board of Shareholders has the ability to make recommendations.

He stressed the existence of separation between the two councils and also there are external experts supporting the company advice and guidance.

Mahayni pointed out that there is great concern within the family to inform the whole family of what is going on or will happen in the future.

A press release was issued containing all updates within the company or family, which is making the family members a permanent event.

The Chairman of Al-Majdoui Group, Abdullah Al-Majdoui, stressed that the continuation of family businesses after the third generation that has become very difficult, as out of every 10 family companies may remain only one generation after the third, and that of every 10 family companies may remain only three for the third generation.

He pointed to the importance of the growth rate of the family company as it is greater than the growth of the family itself.

He stressed the importance of the future vision of the company, which is clearer to the rest of the family.

Al-Majdoui noted the role of the mother in the cohesion of the family, which is reflected positively on the cohesion of the company, as her role is very important in achieving cohesion between the children.

To maintain the dividends and the level of family wealth: family businesses need to grow from 12% to 18% per year

At the fourth session that is entitled, “the Ministry’s Guide for Family Businesses,” Mr. Hussain Al-Shamasi, a partner in Allen and Overy- Khoshaim and Associates, stressed that shareholders in family businesses have acquired many rights such as pre-emptive rights in respect of new equity issues, as well as the right to fair treatment and distribution of profits and to obtain part of the assets of the company at liquidation and the freedom of disposition of shares.

They also have access to corporate letters and correspondence, supervision of board performance and accountability of members, as well as the nomination and election of members of the Governing Council and the objection to General Assembly resolutions.

On the composition of the Board of Directors, the evidence required that the Council have at least three members and at most 11 members, a third of the board members must be independent directors

He pointed out that no one can be the director of more than 10 joint stock companies closed at the same time.

The Chairman is also unable to hold an executive position in the company or to become a member of the audit committee or to chair any of the company’s other committees.

He stressed that the most important reasons for the emergence of family disputes are the direct or indirect interest in the work and transactions that carried out on behalf of the company or conflicts of interest between members of the Board of Directors.

He pointed out that the reports on family businesses recommend that the Board of Directors meet at least once every three months and in total four meetings in one fiscal year with a quorum of half of the members.

The minutes should include all discussions and decisions, statements and observations that made by members and any dissenting views.

At the 5th session that is etitled, “Results of PwC Survey on Family Businesses in the Middle East and the World,” Mr. Nasser Amin, Partner at PricewaterhouseCoopers, revealed that 75% of PwC’s 293 family businesses surveyed confirmed that having a clear set of values has created a competitive edge.

84% of them expect their revenues to grow over the next two years, and 80% were concerned about keeping up with the requirements of the stage and developing the tools of companies through digital transformation, innovation and technology.

50% of companies in the Middle East work in multiple sectors and multiple countries and 75% of family businesses in the Middle East have members of the next generation family working in the company and 78% of companies plan to pass management to the next generation.

Nasser said family businesses are the foundation of the Middle East economies.

He pointed out that family businesses are basically pilot projects and are an important source of economic activity.

He explained that most family businesses are now in their second generation and will be subject to a large number of them to shift in the coming years.

Many companies realized the importance of the existence of governance procedures and not rely on individuals.

He stressed that a number of families in the Middle East are experiencing family differences, although respect for the older generation has to some extent to protect these families.

The percentage of family businesses is only a small proportion of the third generation, therefore, consequently, continuity is a major concern for them.

He pointed out that family businesses need to grow from 12% to 18% per year in order to maintain the dividends and the level of family wealth.

At the 6th session, which addressed the most important factors for the continuity of family businesses, McKinsey’s partner, Mr. Hafez Laza, said that family businesses are a major anchor for economies worldwide.

It is an important and influential engine of economic development in the world, which requires demand to maintain performance and continuity.

He said that 70% to 90% of global GDP produced by family companies, as more than 40% of family businesses traded in Europe are controlled by families.

It controls about 40% of India’s financial market, as well as family businesses with high levels of control in the economies of Korea, Brazil and Mexico.

He pointed out that the economic importance of family companies requires the need to continue, and even this must be linked to the decisions of companies with the goals declared, and the values set.

He called for the establishment of responsible ownership in family businesses, away from loyalty that may be blind at times.

Source: Asharqia Chamber