Private business can face sustainability risks

By: Vinod Nair

MUSCAT: A number of world’s well-known corporate names have been a family-owned business to start with, but their success story can be attributed to the fact that they have been able to adjust to the challenges and demands of time. According to a report, 80 per cent of the world’s businesses are family owned.

The family-owned businesses in Oman have been urged to adopt a model of having ‘joint shareholders’ as it will help them sustain their existence over a long period of time, spanning generations.

“It has been generally observed that most of these companies seize to exist after third or fourth generations for issues related to inheritance,” said Yahya bin Saeed al Jabri, Chairman of Capital Market Authority (CMA) as well as Special Economic Zone for Duqm, at the Capital Markets Forum, yesterday.

He said that these companies face liquidity issues that can delay their expansion plans. Going public will help them raise funds for their future plans and more importantly the businesses will get assistance from the market authority.

It was also said that private firms have a special flavour because their successes have been linked to the hard work of the people who have founded it. “They should be encouraged to grow under the new ownership structure,” he said.

Abdullah bin Salem al Salmi, CMA Executive President, said that family-owned firms generally face problems regarding succession, which may even threaten their existence. Such companies cannot be just allowed to vanish because a number of workers serving them will be rendered jobless. By coming to the stock market, there will be some accountability and an improvement in the level of governance that will be useful for long-term sustainability. Dr Fawzi Behzad, founder and chairman, Middle East Securities Training Centre (MESTC), said going to stock market will help family businesses to have better distribution of their wealth, improve the quality of governance and raise funds without relying much on the banks.

He also said that the countries in the region have this tendency to take steps towards privatisation when they are going through a financial crisis, only to delay the process when the overall situation gets better. “Now that oil prices have recovered in the last month or so, again we are not talking much about economic diversification.”

Privatisation will help bring more foreign direct investment to the country and open the door to raise funds for new projects. The governments should offer benefits like tax rebates to companies coming to the stock market.

It is also said that as relatives in a family owned business grow older, they may be unwilling to reinvest profit back into the business. It is common that as relatives in a family owned business grow older, they develop an attitude of status quo.

A report by Booz and Company said that family businesses in the GCC region face the dual challenges of operating in a difficult global economic environment and managing the transition of the business to a third generation of family control.

Concrete steps families can take to achieve lasting success for their firms begin with a reevaluation of their existing portfolio of businesses. This process may involve the divestment of original businesses that no longer fit into a long-term growth strategy, even though families may retain an emotional attachment to those businesses.

The same discipline required to prune business portfolios needs to be applied to the evaluation of new investments, and may call for individual family member investments to be separated from the firm’s activities. Creating a formal governance structure to oversee both family and business activities is another crucial step families must take to ensure long-term success. Families also need to recruit outside talent and accommodate their development, relinquishing control when necessary.


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