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| 3 minutes read

Navigating Family Business Transformation and Succession Planning in the Kingdom

Facing the transition challenge is fraught with difficulties.

Family businesses have stood as cornerstones of Saudi Arabia’s economy, contributing substantially to its growth and stability. Nonetheless, despite the array of advantages inherent in running a family business, the emergence of disputes within these enterprises can present challenges to both the business itself and the dynamics of family relationships.

In my professional capacity, I have witnessed firsthand the protracted and complex nature of family business disputes. Notably, these conflicts drain valuable company resources, negatively impact the group’s reputation, and in the direst circumstances, have the potential to drive a wedge through the very core of the business, leading to its eventual collapse. Compounding this, studies underscore a disturbing trend: the survival rate of family businesses takes a precipitous dive due to the mishandling of transitions from one generation to the next.

In the context of Saudi Arabia, where the fabric of society is deeply interwoven with family values, addressing, and resolving these conflicts necessitates a delicate equilibrium between preserving harmony among family members and ensuring the sustainability and success of the businesses they operate. Nevertheless, it is possible to effectively navigate times of change and transition by seeking professional support to deal with family members, executives, and other stakeholders.

Based on engagements with a number of these family businesses across Saudi and The Cooperation Council for the Arab States of the Gulf (GCC) region, some key recommendations for navigating disputes within family businesses are:

  • Carefully and objectively understanding the dynamics of family business disputes: In most cases, the genesis of family business disputes can be traced to numerous factors encompassing clashing objectives, intergenerational disparities, disagreements concerning strategic trajectories, and the pivotal matter of succession planning. It is not uncommon for these conflicts to stem from personal issues that do not relate to the business, yet their potential to escalate rapidly endangers the business’s prosperity. Acknowledging the distinctive nature of family businesses is paramount in mitigating or effectively addressing these disputes as they arise.

     
  • Fostering harmony through effective communication: In Saudi, the bedrock of resolving family business conflicts lies in unconstrained communication among family members—both those who are actively engaged in managerial roles and those who assume silent shareholder positions. Encouraging this free-flowing dialogue stands as a linchpin, sustaining trust and alignment toward shared objectives.

     
  • Crafting clear governance structures: The establishment and formalization of lucid governance structures is imperative for the long-term sustainability of Saudi family businesses. Articulated policies, codes of conduct, and decision-making protocols are pivotal in the prevention of conflicts and ensuring seamless business operations. Particularly during periods of generational shifts, instituting a rigorous framework for succession planning proves pivotal for effective management.

     
  • Transparency in information dissemination: Affording shareholders unconstrained access to financial information assumes a critical role in fostering trust—a bedrock for conflict avoidance. This is enforced by Article 171 of Saudi Arabia’s new Companies Law, which embodies this transparency by granting non-managing shareholders (or their designated representatives, such as consulting firms or forensic accounting practitioners) the full right to scrutinize company operations and inspect accounting records and documents at the company’s headquarters twice annually. This provision empowers shareholders to assess issues and allegations carefully prior to initiating any unwarranted claims that could trigger unnecessary disruptions.

     
  • Early engagement of expert support: In cases of complex shareholder disputes, the engagement of independent experts takes on a pivotal role in providing impartial evaluations of contentious matters. Expertise ranging from forensic accountants and valuation specialists to legal advisors can be pivotal in scrutinizing financial records, reviewing valuations and business plans, or evaluating claims, thereby presenting unbiased insights that facilitate the resolution process. Their professional judgement often exerts substantial influence and aids in achieving equitable settlements.

     
  • Harmonizing family and business interests: The delicate nature of resolving family business disputes in Saudi Arabia requires a careful balance between the necessity to harmonize the aspirations of individual family members with the ongoing commercial viability of the business.

Undeniably, the flipside to the significant value that family businesses bring to the Saudi economy is that if left unmanaged family business disputes can have a massively detrimental impact on the economy and jeopardise thousands of employees’ livelihoods. Family businesses bring a huge amount of rich heritage and tradition of management to the Kingdom. But with many going through periods of transformation – operationally or in terms of management and leadership – these changes can cast a significant shadow over the future of family-owned enterprises in Saudi and the region.

Nonetheless, family businesses should be confident that there are ways to navigate all these issues effectively. With a strategic approach underscored by effective communication, these conflicts can be navigated to successful resolutions. By cultivating open dialogues, implementing well-defined governance frameworks, affording transparent access to information, and enlisting external expertise, families can successfully navigate times of turbulence and change, whilst preserving both family relationships and the enduring accomplishment of their entrepreneurial endeavours.

This article was first published for CEO Middle East.

Tags

emea, uk, financial services, operations, governance, article, international arbitration, saudi arabia

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