Support from unlikely quarters

Scott McCulloch
Editor in Chief

Supporters of family business come in various guises. So who would have thought a vociferous critic in Dubai would qualify? Consider the Middle East and its long history of family business. For many in the West, the region has long been regarded as fertile ground for political unrest and instability. But as international financial centre projects take root in Bahrain and Dubai, logic would dictate that the shoots of a hitherto non-existent culture of corporate governance will emerge there and in the wider region.

Samir al Ansari of Dubai International Capital says more needs to be done. The majority of family businesses, he says with more disdain than irony, are still run as family businesses. Bereft of transparency and saddled with inadequate accounting standards, Mr Al Ansari wonders how they operate at all. Governance, he adds, is virtually non-existent. "These businesses will not survive," he flatly predicts. Mr Al Ansari's views are strong, and as chief executive of a multi-billion dollar private equity concern they are bound to carry weight.

Here is why. By some accounts, family businesses are directly or indirectly responsible for 95% of economic activity in the Middle East. The private sector, arguably the backbone of non-oil producing countries and increasingly the alternative to oil dependence in the Gulf, is crucial to unlocking the potential of the region. In the eyes of some observers Mr Al Ansari may come up short on credibility, his comments shrugged off as yet another poke at family firms. So be it. But it could be argued that his statement is a wake-up call for businesses as the region's governments continue to lift protectionist policies under pressure from the World Trade Organisation. Business leaders in the Middle East have long-held concerns over their ability to expand, attract foreign investment and enter untapped markets. That requires capital. Knocking a company into shape to protect the next generation can only be a wise course of action.

If alarm bells are indeed ringing, they should be. Fewer than one in ten family businesses in the Middle East survive to third generation. In Saudi Arabia, arguably the region's largest and most important market, the figure is fewer than 2%. Mr Al Ansari is not alone in raising the alarm. Douglas Dowie, general manager of the National Bank of Dubai, also believes family-owned businesses must modernise to survive. IPOs are one way for them to improve management quality and corporate governance while offering an efficient exit strategy for family members looking to cash in. The problem is exits are final. Naguib Sawiris, head of Egypt's listed Orascom Telecom, acknowledges that IPOs can play a useful role in capital raising but warns the downside can be significant. His company soaked up £320m through an IPO in 2000, when his founding family sold 43.1% of shares on Egypt's bourse. Mr Sawiris has since admitted publicly that it is a decision he has come to regret. "You are confronted with thousands of small shareholders asking stupid and illogical questions… if you cannot get along with your brother, how about 100,000 shareholders?"

The alternative is to make peace with your brother. Fortunately, this seems increasingly the case. If the local management consultants are to be believed, a growing number of family firms are tapping their services in a bid to sharpen operations as competition in the region intensifies. And it is. Qatar recently confirmed plans to set up an international financial centre in a move that will rival similar projects being implemented by its neighbours Dubai and Bahrain. Meanwhile, Mr Al Ansari's opinions may be disappointing for some. They may reinforce – even perpetuate – the myth that family businesses are somehow shoddier versions of publicly held concerns. But these opinions are on the record and may yet stir many families into bigger and better things.