Family and corporate governance: A key and developing issue for the future

01 Feb 06:51 AM

Sector : Banking & Finance Country : Qatar

By Jonathan Reardon

In a region where, historically, there has been minimal separation between owners and managers, there has been little need to adopt formal policies

Many family businesses are highly concerned about their privacy but will, over time, need to consider how to take the business forward


Family businesses play an enormous role in Qatar's economy and represent a major part  of the private sector. As many of the family businesses are going through or facing  generational changes, and some are looking to diversify further their businesses and  obtain access to international investment, there is a growing recognition of the need to  develop both appropriate family and corporate governance structures and policies. As  some of these family businesses openly start to demonstrate their commitment to good  governance, other family businesses and indeed small and medium sized enterprises (SMEs) should follow suit.

Although a relatively new concept to Qatar and the other countries forming the Gulf Cooperation  Council (GCC), the role of Corporate Governance in risk management and sustainable growth  is being acknowledged, at least in principle, as these GCC governments seek to regain investor confidence, build sustainable economies, and compete and develop globally.

To varying degrees each GCC government has legislated in respect of Corporate Governance. The focus of such legislation tends to be public companies, and increasingly financial  institutions, as GCC governments seek to grow their capital markets and boost confidence in the financial sector. In Qatar, for example, a Corporate Governance Code applying to public and  listed companies was introduced in 2009, by the Qatar Financial Markets Authority. This Code contains detailed guidelines on corporate governance in line with international practices. More  recently in September 2013, the Qatar Financial Center announced regulations governing single family offices in Qatar.

The family businesses which represent the most significant part of Qatar's and other GCC  countries privately owned economy have also started to recognize that good governance  practice is something that they must implement, although it may be some time before such family businesses really adopt this as an essential part of their businesses rather than  something to which lip service is paid.

Access to finance

While good governance can enhance the operations of a business in various ways, it is the link between good governance practices and access to funding, international investment and partnerships that seems to be the key driver in encouraging family businesses and SMEs to adopt sound practice. Banks and international investors want and need, as part of their own governance and compliance procedures, to know that borrowers and potential partners are being properly managed, have appropriate mechanisms in place for assessing risk, have the  appropriately qualified and experienced management, and that proper books of account and reports are being kept and prepared in accordance with international standards. For those operating in more mature economies, these basic good governance principles are expected, but in a region where, historically, there has been minimal separation between the owners and management of businesses, and where there has been little need to adopt formal policies, these basics do not necessarily come naturally.

Family businesses

Each GCC country has large family businesses that, over several generations, have developed into highly diversified conglomerates and in some cases multinational enterprises with interests around the world. These family businesses started out as small trading companies and grew into large diversified groups with interests in many sectors including construction and infrastructure, real estate, retail, trading, distribution, logistics and manufacturing. An important element in this growth is due to the strong relationships developed with international investors and partners.

However, many family businesses are highly concerned about their privacy and in some cases dominated by a family patriarch, and as a result still have very few formal procedures in place, but will, over time need to consider how to take the business forward, particularly in the context of succession. Others have properly made the transition from local trading enterprise into diversified global conglomerate, with sophisticated governance frameworks that include the appointment of both executive and non-executive directors from outside the family circle, audit committees and anti-corruption policies and procedures. This is particularly the case where the Family business is publicly listed.

As these hugely successful family businesses openly demonstrate their commitment to good governance, it is likely that other family owned and other companies will follow suit.

Continuing development of corporate and family governance

Access to finance is not the only reason that family businesses in Qatar and other GCC countries are starting to recognize that they need to adopt good governance. As Qatar, like the other GCC Countries, starts to move their economies away from reliance on hydrocarbons, wider global engagement will be important for sustainable growth. Investors from more mature economies will be more likely to invest in and do business with companies where there are good levels of transparency and access to financial and other information.

The Research Report, "Family Matters-Governance Practices in GCC Family Firms," by PwC and The Pearl Initiative released in January 2013, found that many family businesses in the Gulf are going through or facing a generational change over the next 10 years. As many of these family businesses don't have documented succession processes or mechanisms for dealing with associated conflicts which may arise there is great scope for disputes.

Such disputes might arise for a number of reasons including lack of a proper mechanism for choosing the next business leader(s), lack of transparency in decision making with family members not understanding the reasoning or strategy behind business decisions, and potential conflicts of interests between owners and managers.

The Report indicates that GCC family businesses generally have fewer formal governance and conflict management procedures than global family firms with a majority having no family governance structure in place and only about 20 percent putting in place such a structure. On a less formalized basis the Report's research found that about half of the family firms surveyed had defined the responsibilities of family shareholders, board and management but actual implementation was lagging far behind.

Particular areas of governance for family firms to consider are:

  • The establishment and proper use of family councils – at present these are less prevalent and much less used than is the case in Western countries. Such councils can provide a good basis for a structure that allows some separation of the interests of owners from the managers of a business, which in GCC countries can be particularly intermeshed. They also provide an excellent forum for discussion of the family business and its development and also difficult issues such as strategy and succession.
  • Greater transparency and preparation of accounts and annual reports which can be provided to and relied upon by potential investors, lenders and business partners, rather than just, as is now largely the case, used for internal family and management purposes.
  • Clear decision making procedures allowing wider family and key management input and responsibility.
  • Policies and procedures covering areas such as payment of dividends, remuneration and recognition and promotion of appropriately qualified and talented family members and external executives.
  • Adoption of appropriate exit and succession procedures to reduce risk of potential conflict and disputes.

The effect of generational change in the family businesses allied to their desire and need to continue to diversify, as well as expand globally with increased access to foreign investors and partners, is leading to family firms in Qatar and the other GCC countries beginning to appreciate the need for family and Corporate Governance structures and practices but it will take some time for this to develop and be more widely recognized and implemented.


Jonathan Reardon
Jonathan Reardon is a senior consultant in the Pinsent Masons Corporate Team based in Doha. Pinsent Masons is a leading international law firm with offices in Doha and Dubai, which has been advising Qatari clients and their businesses for over a decade. 



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