Saudi Arabia's family-owned businesses get new corporate governance guidelines

The corporate governance regimes of Saudi Arabia’s family-owned businesses (FOBs) are a salient talking point in financial circles, for obvious reasons. Estimates as to their contribution to GDP vary, but a 2012 study by the Jeddah Chamber of Commerce & Industry claimed that the Kingdom’s FOBs in that year accounted for around SR350bn ($93.28bn), or 25% of the total. At that time, there were around 5000 FOBs in the country, 156 of which were listed on the Saudi Stock Exchange. Their importance to the economy is central, and their efficient operation is thus the concern of a range of government entities, from the Capital Market Authority (CMA), which as it opens the market to foreign investment seeks to strengthen corporate governance to establish the bourse as a desirable investment platform, to the Ministry of Commerce and Industry (MoCI), which is concerned with the more general performance of FOBs in the domestic economy.

MAKING THE TRANSITION: The preparedness of Saudi FOBs to implement enhanced corporate governance protocols varies considerably across the segment. Some of the larger firms, such as the international conglomerate Al Zamil Group, have been upgrading their internal structures since Saudi Arabia’s accession to the WTO in December 2005. As it prepared its businesses for globalisation and WTO competition, the group and the more progressive firms like it have focused on issues such as separating family affairs from business, establishing training and development programmes, and setting up family councils to smooth the transition of management to the next generation. “Organisation is key to effective corporate governance for family-owned companies,” Sulaiman Al Muhaidib, chairman of Al Muhaidib & Sons Group, told OBG. “Things like family councils can help provide structure and give the younger generation a greater sense of involvement.”

INCREASED OVERSIGHT: Corporate governance was an important element of this process, and over the last 10 years the level of its application has gradually risen. Listed family businesses are already subject to the CMA’s corporate governance regulations, while those not on the exchange must comply with the companies’ regulations issued by the MoCI. However, recent years have seen the government step up its efforts to enhance the level of corporate governance in the FOB segment, with the most significant move coming in late 2013 in the form of the MoCI’s online publication of its draft Corporate Governance Guide for Saudi Arabian Family Companies and Model Rules.

The document established protocols for FOBs across a range of areas, including: establishing holding structures to channel investments; delegating control to a team of board members and executive managers; formulating value statements as a guiding compass for future generations; involving younger generations in decision-making processes; introducing family boards to supplement boards of directors in areas such as settling differences between family members; employing family members and imposing employment conditions on them; distributing equitable dividends; and ensuring the governance of share transfers and exits.

REACHING OUT TO ALL: FOBs have much to gain from undergoing the transformation the MoCI has requested of them. As family concerns expand, the importance of robust business processes becomes greater, and by making themselves more accountable and transparent these businesses open the door to not only improved performance, but also crucial financing options, such as private equity transactions and public offerings, or a combination of the two.

Without a clearly defined corporate governance framework the increasingly complex relationships between employees, managers and owners can be problematic for FOBs. Many family companies, however, have inadequate provisions in place to address issues such as succession, and the resulting potential for instability has a negative effect on both earning and funding potential. However, as the nation’s family-owned concerns set about upgrading their processes and protocols they now have a clear framework to follow.

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The Report: Saudi Arabia 2015

Alternative Investments chapter from The Report: Saudi Arabia 2015

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