For Family Businesses In The Middle East, Formalized Governance Can Help Create Lasting Legacies

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In the Middle East, an estimated US$1 trillion (AED3.67 trillion) in assets will be transferred to the next generation during the next decade, while only 20% of family businesses are managed by the third generation in the region.

In the UAE, protecting this delicate thread of intergenerational wealth transfer and legacy are several conducive regulatory changes. With the new federal family business ownership governance law, selling shares or dividends of family-owned businesses to individuals or companies outside the family requires prior approval from family partners before a shareholder sells an equity stake to a non-family member. Supporting the role of family businesses in the economy, Dubai is also home to the first Global Family Business and Private Wealth Centre worldwide.

Economic indicators aside, the strength of any family and the family enterprise lie in its values. They define a family’s identity; past, present, and future; everything it stands for. At UBS, we define the family enterprise as the collective of all the activities of a family, such as their operating businesses, financial investments, real assets, collectibles, and philanthropic engagements. Family enterprises are evolving as families evolve- especially when wealth passes between generations; for example, when members become adults, and, in turn, owners and or employees of the family business.

Family wealth transfers are complex matters that require strategic planning around all elements of the family enterprise, and this is where a family office can come into play to support the family, besides looking after the financial investments.

When families grow and new members join, communication and decisions also become increasingly complex. These steps must be guided by strong governance- processes and principles that make sure the family operates in the best possible way. A “family constitution” (or “family charter”) should be developed that describes the family’s values, principles of engagement in the business and wider enterprise, family decision-making and communication processes, as well as family kinship activities.

Such governance lets everyone know where they fit in the family enterprise, and what that means for them- for example, how they can interact and influence the rest of the family, or what role they can play in respect to the ownership or the management of the family’s operating businesses. It also helps families balance everyone’s interests and ambitions (such as young family members who see themselves as future leaders), and avoid discontent.

As part of the overall family governance, a family office can support the family in developing a professional investment policy statement in line with its values and goals. Such an investment policy sets out clearly defined goals, rules, and processes for investing, and it is usually the basis for decision-making on asset allocation or key investment decisions by the family’s investment committee.

For the region’s families, in the event that they do not want to make a full commitment in the form of a single-family office (bricks-and-mortar setup), and instead want to test their appetite for such professionalization of the management of their wealth, an outsourced family office model (like a virtual family office) could be fit to test the waters.

A virtual family office can bring made-to-measure professional family office services -rendered through outsourcing partners such as a financial services firm, tax accountant, or law firm- that help protect and grow your wealth, without the headaches and costs of running your own. Such a team can help with structural support and asset allocation, establish and regularly review the family’s investment strategy, policy, and governance, and support the family in other needs such as philanthropic projects.

Governance will continue to take center stage in this relationship, as, from our experience, new generations don’t just view the family office as an entity that safeguards the family’s assets, but often also as partners to transform the family’s legacy towards a more positive impact in the world. Reflecting on the past few years characterized by the COVID-19 pandemic, one thing is clear: families with a clear long-term strategy in place fared better than those without, and the need for a formalized family governance is more evident than ever.

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