Bringing corporate governance into the family

Family-run businesses are a cornerstone of the Saudi Arabian economy, operating across a diverse range of sectors from banking to finance and from automotive to construction to petrochemicals.
Many are hugely successful and have attracted international recognition, as well as at a regional and local level.
Indeed, family-run businesses in Saudi Arabia and the GCC are estimated to make up 80 percent of nonoil GDP.
So the question to be asked is how to make them even more successful and attractive to audiences outside of the Kingdom, especially if they are to attract external investment? While the government is on the right track to modernizing the rules and regulations, more remains to be done.
In parallel, family-run business have an important role to play; one such way would be to look at corporate governance procedures, and demonstrate that they are an integral part of the smooth running of the business.
“Family Matters: Governance Practices in GCC Family Firms,” a recent study of more than 100 family firms from the GCC, nearly half of which are based in Saudi Arabia, undertaken by the not-for-profit organization, the Pearl Initiative, and the global advisory firm, PwC, highlights the growing strategic importance of governance to family firms and particularly the challenges around implementation.
Encouragingly, significant numbers of family firms in the Kingdom recognize the importance of having robust family and corporate governance processes, particularly when it comes to succession planning as they transition from one generation to the next, and the need for a strong and well-functioning board that can act as the right interlocutor between “the family” and “the firm.”
We have seen in many global organizations how the role of the independent director can provide important checks and balances to the boardroom and it is encouraging to see in this region that over half the firms interviewed have nonfamily board members, whether they operate in an executive or nonexecutive capacity.
Appointing a nonfamily CEO in a family business is one of the successful practices followed by some modern family businesses.
This secures independence from the decision-making process, while allowing qualified family members to contribute to the decision making process from a strategic level.
Having read the study, I note with interest the family firms that cite improved board dynamics as a key benefit of including non-family members — areas such as strategic focus, planning, discipline and structure are afforded a higher priority, a noted result being that major decisions are less likely to be made on an ad hoc basis or bypassing the board.
It is not just the dynamics of a company that have to demonstrate a sound grasp of good governance practices however.
A challenge for family firms operating in the Kingdom will be to adjust to the need for greater transparency with regards to disclosure and reporting — both financial and non-financial.
If a family firm is looking to raise capital from external sources, then this is the most straightforward way to demonstrate a strong track record.
More and more family firms are adhering to international best practices and becoming more open about their company’s financial performance.
Apart from raising capital, family businesses benefit from increased transparency if and when they are looking to attract joint venture partners or take a portion of the business public.
Lastly, the family business model itself is more sustainable long term when there is transparent, open and clear communication amongst the various family shareholders and clear measurement and benchmarking of performance is encouraged.
As we become more connected to other countries through international trade and at a macroeconomic level, it is important that our private sector keeps pace with the competition, not only domestic, but foreign as well.
As a large portion of our private sector is still controlled by family businesses, it is my belief that family businesses therefore will only continue to be competitive if they strive to achieve international best practices pertaining to family and corporate governance and seek to instill within their organizations an ever deeper culture of corporate transparency and business accountability.

— Khalid Al-Rajhi is Group CEO of Abdulrahman Saleh Al-Rajhi & Partners