JEDDAH, 16 May 2005 — The number of family establishments in Saudi Arabia is in decline. Some family establishments were formed over 50 years ago but many came into existence during the economic boom after the discovery of petrol. “Family Establishments” refer to the establishments that were founded and owned by an individual or a number of members from the same family. These founders could not anticipate the danger their companies would face from the second and third generation’s disagreements in the company. Therefore, they opted to convert their companies to a shareholding establishment.
In Saudi Arabia, 98 percent of the companies are classified as family establishments. According to Dr. Abdul Rahman Albarrak, a finance and management specialist, one third of these family companies that were passed on to the second generation continue to exist. And only 15 percent of family companies continued to the third generation.
For his research on the subject, Albarrak sent a questionnaire to 500 of the top companies in Saudi Arabia. He interviewed five managers and owners of companies who decided to change to a shareholding establishment. Finally, he did an exclusive research on a Saudi establishment that transformed into a shareholding establishment.
The main financial reason for opting to convert is to use the money raised from selling the company’s stocks to expand its activity. However, the companies faced problems due to the few number of banks that existed in Saudi Arabia, the high expenses of loans and the requirements banks demand to lend money. Furthermore, many businessmen refused to work with profits generated from interests. On the other hand, many companies found it difficult trying to finance their projects. Therefore, these companies searched for an external way to finance its projects and that is by changing into a shareholding establishment. They were also pushed by the big possibility of Saudi Arabia joining the World Trade Organization soon, which will create new potentials and challenges for them. The research also showed some marketing reasons for companies to become a share-holding establishment. One of these reasons is to strengthen the company’s marketing position. With increased competition in the Saudi market it has become more difficult for companies to market their products especially after the government had opened the door for foreign products. The low cost of electricity and land in comparison to other cities had attracted many local and foreign businesses. Also, the low cost of labor and the tax-free policy on products of Saudi companies made it easier for other new companies to appear and compete with the older establishments. Albarrak pointed out some administrative reasons that might force a company to end its activity. He concludes that most of these family companies didn’t provide an organized system of rules and regulations that could be transferred to its inheritors. Also, they lacked a data-base system that could follow up with any educational, sociological and economical updates occurring in the future. Moreover, the research confirmed that most of these family companies couldn’t manage to sustain reasonable annual profits. Owners of the companies also feared the loss of control and ownership of the company due to selling a large number of its shares. However, article number 52 states that any company willing to transform to a shareholding one can sell only 40 percent of its share.
There are positive effects to a family company changing to a shareholding one. The companies that are ruled by a specialized professional management department developed a better way to raise their company’s portfolio. The employees became owners of the company which increased their motivation and loyalty to work. The large sum of shares the company owns enabled it to accomplish enormous projects like energy and communication which are impossible to be achieved by individuals.
Albarrak suggested incentives from governmental departments for companies converting into shareholding ones by explaining the process to go through and pros and cons, enabling foreign companies to sell their shares in Saudi markets and participate in Saudi shares, and allowing specialized consultative offices to operate. He also recommended the companies separate the administration from the ownership, hiring qualified people to run the establishment and writing down all the information needed for others to learn from.
