The governance journey amongst Middle Eastern family offices

By Paul Hunter, Director, Family Office Services, Crestbridge

As families in the Middle East look to navigate the fallout of the pandemic this year, it's clear that, for a number of reasons, governance is going to play a key part in structuring, investment, succession planning and operational decisions.

On an industry-wide level, a look at ongoing trends in the global family office space highlights quite clearly that the modern family office structure is getting more complex, more global, more sophisticated and more digital.

With respect to the Middle East in particular, meanwhile, families - whose businesses make up a sizeable proportion of the economy - are seeking increasingly to diversify their investment strategy and broaden their exposure to new markets. As families in the region become more institutional in their approach, adopt more digital platforms, increase their exposure to alternative investment markets and broaden their geographical interests, it is vital not to lose sight of a fundamental objective - to ensure family wealth is safe, ready to be passed down through the family for generations to come.

Indeed, if the disruption caused by COVID-19 has taught us anything, it's that resilience, stability and having robust control measures in place is absolutely critical. Good governance is absolutely the cornerstone of that.

Governance Journey

Of course, adopting the highest levels of good governance is not a trend associated purely with the coronavirus. Whilst current circumstances and market disruption have served to highlight the importance of governance, this is a journey that families in the Middle East have been on for some time.

After a decade of profound change in international regulation and transparency initiatives, for example, families have been busy ensuring compliance with information sharing requirements such as the Common Reporting Standard, as well as substance requirements, data protection criteria and the forthcoming Mandatory Disclosure Rules.

All of these add a layer of complexity, cost and reporting, but there is widespread appreciation that adhering to and embedding these standards into the operating models and culture are necessary in the modern environment family offices operate in.

Now, though, governance is taking on a more nuanced, multifaceted meaning. No longer is it just a regulatory, technical concept aligned with ensuring compliance with broadening international requirements.

It is also about putting in place control measures to ensure a complex family operation doesn't make itself vulnerable to internal disputes and that succession plans are clear and robust - this is aligned with how a family sees the concept of legacy.

It is potentially alarming that, according to one study (Williams Group), 70% of wealthy families lose their wealth by the second generation, and 90% by the third. The fact that 28% of 'next gens' took control of their family wealth within the last ten years, with 37% expected to take control within the next ten years (Campden Global Family Office report), means that families are facing the stark reality of the importance of putting in place robust oversight, governance and succession planning strategies.

Governance is also about instilling a more purpose-driven culture within the family that creates a joined-up, shared vision that family members can believe in. This can be manifested through a family office's investment strategy, approach to ESG investment and philanthropic activities. On average, 34% of a SFOs have an interest in sustainable investing (Global Family Office Report, 2019).

Given that the size of the HNWI population in the Middle East increased by 9.3% in 2019, while wealth witnessed an increase of 10.2% to reach US$2.9 trillion (Capgemini World Wealth Report 2020) reflects just how much is at stake.

Measures

So what measures should family offices in the Middle East focus on, in order to make sure they are putting in place governance measures that are fit for the future?

The key message to family offices must be to have conversations about what good governance means to them sooner rather than later. What does it mean in terms of succession planning? How does their governance framework influence their investment strategy and their attitude towards ESG?

And operationally how do their governance aspirations translate in terms of how they manage their outsourced specialist service providers, their ability to comply with global regulations and, specifically in the Middle East, their ability to integrate Islamic Finance structures into a globally-dynamic operation?

Importantly, a family governance structure cannot be an off the shelf template - families are bespoke and unique, and different frameworks will work for different families - but what is common is that a governance framework must be shared across family members, not imposed by the first generation if it is to work effectively. That might involve putting in place a family charter or agreeing what level of control a family wants to maintain across its structures through, for instance, private trust companies.

Increasingly in the Middle East, where the diverse ambitions of family offices are particularly marked, there is a need to embrace the expertise of external third parties. Doing so can offer real benefits in terms of receiving independent, neutral advice around oversight, controls and supervision, and can also open the door to opportunities for change and innovation that can support a family's long-term governance ambitions.

In our experience, there can be a reluctance from patriarchs in the Middle East to relinquish control, and there may not be a huge appetite amongst the next gen to think about the long-term future - worryingly, financial education amongst family offices tends to begin at around 27 years old (Jersey Finance, 'Flourishing Futures'), but the benefits of having those shared conversations early are significant.

These are challenging times for a family office. They are trying to do more, and they are doing it in a far more demanding environment than they have ever experienced before, faced not only with the prospect of a significant period of multi-generational wealth transfer and regulatory change but also with the prospect of navigating a hugely challenging unprecedented market downturn. Whilst this is a global challenge for family offices, it is particularly so for those in the Middle East where the ambition to diversify is so great.

Starting conversations around what governance means to them early, drawing on the advice of independent neutral experts, and being alive to the need for change will not only ensure the wealth families in the Middle East can survive multiple generations, but can ensure that the impact of their legacy will be felt far beyond that too.