Family-owned companies must go public to survive

DUBAI — Globalisation poses more challenges for family-owned companies (FOCs) than any other type of business, according to the NBD's latest quarterly economic report. It states that the management structure and ownership of FOCs tend to hamper their transformation to new ways of modern and efficient management systems. This is true of all countries, including the UAE.

By Lucia Dore (Senior Correspondent)

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Published: Fri 21 Jul 2006, 11:54 AM

Last updated: Sat 4 Apr 2015, 3:13 PM

The NBD report states that maintaining unity among family members is a major challenge, especially across generations. It points to studies that show that the arrival of the third generation of owners is usually when serious conflicts among family members arise, leading to the demise of the family business.

The implementation of new management systems is often a cause of conflict, because of the reliance during the establishment phase on family members managing them. The report reckons that such reliance makes it difficult for the next generation to modernise and innovate management practices in these establishments without facing family conflicts, disagreements and complications.

Making this transformation, however, is crucial if FOCs are to survive. Changes in the world economy, in particular the opening of domestic markets to international companies and the elimination of many trade barriers, are forcing FOCs to become more competitive.

In Dubai, there is considerable concern about the ability of FOCs to survive. According to statistics published by the Dubai Chamber of Commerce and Industry (DCCI), the FOCs represented 54.6 per cent of the total active companies in Dubai in 2004,and 54 per cent of the total workforce. Some 68 per cent of the FOCs are concentrated in trade, 10 per cent in construction, 9 per cent in transportation and storage and 7 per cent in real estate.

To operate in the increasingly competitive world economy, it is deemed critical that FOCs separate ownership from management. "This will bring in more capable management that can focus on business expansion and profitability through greater productivity and efficiency," states the report. It also emphasises that international evidence shows that the best way to achieve this is by converting into a public company: "Changing the ownership structure of the FOCs through public offering of stocks not only leads to the entry of new shareholders but also introduces further governance into the company through the general assembly." In the UAE, however, this transition faces a number of impediments, according to NBD's analysis. First is the current requirement that FOCs must offer no less that 55 per cent of its capital in an IPO, although this percentage has been modified to 30 per cent in the newly drafted companies' law that is expected to be officially announced in coming months.

But not everyone is in agreement with this proposal. The report says: "Some FOCs have already announced their dissatisfaction with the lower percentage, and they contend that setting the percentage of the IPO must be determined by the company's board of directors."

Many families are also concerned about the evaluation process of company assets, which is implemented through the Ministry of Economy and Planning. But the newly drafted Companies' Law will allow FOCs to appoint expert houses in financial evaluations and auditing to conduct assets' evaluation and determine the share value for public offering.

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