The Rise and Fall of Family-Owned Businesses
December 26, 2022
Being a young country, the UAE has witnessed the success of many well-respected individuals who have thrived off the fast pace development the UAE has experienced in all sectors throughout its mere 50 years of establishment. Many such individuals have started businesses that have now become conglomerates and pillars to the economy both inside and outside of the UAE. Most of these conglomerates were both established and run by either one founder or a number of siblings categorically marking them under the title of “Family-Owned Businesses” (FOB). According to volume 19 of the third issue of the Academy of Strategic Management Journal 2020, these businesses contribute to over 60% of the region’s gross domestic product and employ over 80% of the Gulf’s labor force. In the UAE and Saudi Arabia alone, around 90% of the private sector are FOB’s.
It has been well-observed in the last decade that many such conglomerates or wealth of ultra-high net worth individuals have been subject to the inheritance or shift of control to the next generation. While this may seem like a positive change to a fresh new outlook on investment and business development of an already prosperous empire, most of these wealth and businesses lack direction, especially in a managerial sense, on the general vision of the enterprise and the decision-making members of a usually large pool of inheritors.
Over the past decade, we have witnessed many decrees passed by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, the UAE Prime Minister and Ruler of Dubai, establishing various special judicial committees to overlook the generational succession of FOB’s 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 the interference of 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:
- As mentioned earlier, most of these conglomerates were run by either one founder or two to three siblings. Hence, this lead 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’s internal affairs. 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 lead 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 in paralyzing the authorities’ family members attain, converts inheritors from proactive business owners into silent bystanders receiving annual dividends.