Family businesses in the Middle East are now competing in a more turbulent environment dominated by pluralistic social values, intensified competition, a global economy and rapidly changing politics and regulation, said a report.

The article entitled ‘Family Businesses: Addressing the challenges faced in today’s environment’, in the Deloitte ME Point of View issue, points to the growing challenges faced by today’s family businesses, and how they can be overcome.

“The complex relationships that exist between family members and the delicate balancing act required to combine family and work relationships have become great challenges,” said Ali Kazimi, managing director, International Tax Services at Deloitte Middle East, a leading professional services firms, providing audit, tax, consulting, and financial advisory services.

“There is no one rule that governs all. Every family business is unique, and its identity continues to be shaped over the many family generations,” he added.

Deloitte professionals addressed these challenges in a recent event hosted by the British Business Group in Dubai, where the issues of protecting and investing family business wealth were tackled.  Deloitte has also recently set up a dedicated Deloitte Middle East Private Client and Family Office Offering, to provide innovative and wide ranging global tax and wealth planning solutions to family businesses, entrepreneurs and private businesses in the region.

In the Deloitte ME Point of View article ‘Family Businesses: Addressing the challenges faced in today’s environment’, several areas were pointed out as facing family businesses today. They include:

Sourcing skills

One of the main issues for family entities is the lack of separation between ownership and management.

“In today’s competitive marketplace, the old approach does not necessarily work as well as it used to in the past,” said Paula Morris, Private Client and Family Office Services leader, Deloitte Middle East“On the one hand, organizations are increasingly facing increasing challenges requiring a new set of skills to run a successful business model, which are not completely available within the family,” he added.

Morris points to the difficulties that family businesses face trying to attract and retain non-family talent to manage their ventures.

Governance framework

Another major issue is the lack of a proper governance framework, which can negatively impact the ability to control the management of the organization, increases the likelihood of irregularities and can result in inconsistencies in the way business is conducted. Adequate policies, systems and procedures, independent directors at the Board level and a robust financial reporting framework are just some of the elements that family businesses need to have to succeed.

Organisational structure

Considerable weaknesses related to loose structures where the entity (or the group of entities) lacks logical organization in terms of type of business or industry group have been identified. In some cases, certain activities and investments are held and controlled by the owner(s) themselves, in other cases the entities are mixed up in non-compatible lines of business (technology and real estate for example), which inevitably leads to significant challenges in strategy, management, control, monitoring and accountability.

Inherent limitations

The very unique characteristics of a family business can pose several challenges. The extent of these vary significantly among organizations and depend on various factors relating to the family, internal relationships, the family member(s) controlling the business (first, second or third generation) among other issues. At the top of the list of inherent limitations and issues, lies the potential of conflict among family members, which - needless to say - can threaten the very survival of the organisation.

The article ‘Family Businesses: Addressing the challenges faced in today’s environment’, further outlines the various actions that family businesses can take to address the fundamental changes in the economic landscape, and the challenges being faced by these entities today.

Some steps include:

•    Governance and structure - A proper governance framework should be set to define the guidelines and mechanism of maintaining oversight and accountability across the organization. Both the legal and organizational structure should be considered.

•    Separation of ownership from management - Proper segregation of ownership and management is key, to meet the increasing requirements of new skill sets and to address the threats posed by intermixing family and business matters.

•    Talent - As companies move towards segregating ownership and management and since it would be difficult for many organizations to fill all key positions with family members having adequate functional or industry expertise, employing non-family members in certain key positions becomes essential.

•    Strategy and family affairs - The organization should define a very clear strategy with key directions. It is essential to have an agreed-upon transparent mechanism to manage matters related to family members, their accountability, conflicts and disagreements among them, especially when transitioning from one generation to another.

•    Financial aspects - Essential to the success of family organizations is to clearly define fiscal and financial policies, including dividends and re-investment policies, sale of shares in the business among family members or to third parties and many other financial-related matters.

The global economic and political climate makes it more important than ever for family businesses in the Middle East to implement effective planning and governance frameworks. Challenges, both internal and external are becoming ever more prevalent for family businesses. These challenges must be managed and planned for to ensure the prosperity of family-owned entities. – TradeArabia News Service