2016-06-28

AT Kearney’s report, titled Family Business in the GCC: Putting Your House in Order study mentioned that with market realities changing from a climate of plenty to one of cash rationing, especially relevant now in the current climate of fallen energy prices, family businesses would need  “strong leadership to centralise management, address governance and succession issues.” (Image FotoArabia)

Pearl Initiative is an organisation that works across the Gulf region to influence corporate accountability and transparency. Recent data from the organisation has shown that around 75 percent of the Gulf Cooperation Council (GCC) private sector comprises family-owned businesses, 25 of the largest family businesses collectively generate around USD100 billion (QAR364 billion) in annual revenues. If we contrast these figures against PwC’s 2014 Family Business Survey, we find however that less than six percent of family businesses survive beyond the third generation and even fewer, less than three percent, survive beyond the fourth generation.

The survey showed that only 14 percent of Middle Eastern family firms have a robust succession plan that has been discussed and documented. Further, 84 percent of families are not happy with their succession planning processes, with 52 percent of family firms citing succession planning as a concern over the next five years, compared to 36 percent globally.

What then are the challenges facing family-run businesses in the GCC? And what does it take to survive? The AT Kearney study revealed that with market realities changing from a climate of plenty to one of cash rationing, family businesses would need “strong leadership to centralise management, address governance and succession issues…The road to future growth and profitability means embracing new realities”.

Commenting on the key common priorities of family businesses, AT Kearney’s principal, Cyril Gourp mentions that each family business has different priorities depending on their maturity, size, current organisation. “But,” he adds,  “I see some key recurring topics: investing in new sectors and new geographies to capture opportunities; strengthening competitive advantage and market positioning to reach international market standards; building competitive barriers against new market entrants; and rationalising investment and asset portfolios by divesting from or turning around value-destroying assets”.

Shared challenges

Providing perspective on the three main issues that family businesses face in a global climate of more transparent, professionally-run corporations, Sheikh Mohammed bin Faisal Al Thani, vice chairman of Al Faisal Holding and Aamal Company mentions that the challenges facing professional and well-established family businesses that are expanding on a global scale are similar to those of other companies, regardless of their formation.

Sheikh Mohammed stresses, “There are three key elements that should be adopted by family businesses for enduring success: first, a well-managed family business that implements and adheres to corporate governance best practice; second, defined roles and responsibilities for the partners or family members alongside a well qualified executive management team; third, having a succession plan in place.”

Talking about the challenges that family businesses face in the current paradigm of professional management, Gourp addresses the factor of family business sustainability, breaking it down into a business and portfolio management component and a family business and governance component.

“On the portfolio management side, most GCC family businesses have a highly diversified and fragmented business portfolio with entities and assets in five to seven sectors for most of them,” Gourp tells The Edge, adding that this contrasts with family businesses in more mature European or North American markets where portfolios focus on clear business platforms.

“On the family component,” says Gourp, “the lack of clear governance structure drives a series of key problems jeopardising family business wealth and sustainability: the lack of segregation between business and family assets, the absence of efficient succession planning with abrupt or unprepared successions.”

Corporate governance

Imelda Dunlop, executive director of Pearl Initiative stresses that family businesses in the region are facing the challenge of operating in a low-oil price economic climate while managing internal leadership transitions within generations.

According to Dunlop, family-run businesses must make a great deal of effort to develop robust corporate governance systems that mirror the family’s culture and ensure the continuous implementation of its vision and ethics. “Setting out clear succession criteria and considered governance and transparency procedures is critical to securing an organisation’s success while avoiding controversy, particularly moving into the third generation in the coming years.” In her opinion, complacency in governance policies is becoming a real threat to the future success of family businesses. As the next generation comes through to take over the family firm, it is up to them to pass on the mantle of comprehensive corporate governance to ensure the business they pass on to their children is as robust as it can be.

Dunlop also stresses that the company board is the link between family shareholders and management. “Ensuring that the board has the right mix of experience and capabilities is critical. Developing clear criteria and a robust process for the selection of Board members whether from within the family, or for independent directors is important, because an effective Board that can lead the company well. Bringing in external members can revitalise the board and provide the company with a competitive edge.”

PwC’s 2014 Family Business Survey showed that only 14 percent of Middle Eastern family firms have a robust succession plan.

AbdulSalam Abu-Issa, deputy chief operating officer, Salam International, echoed the same sentiment, “When we went public, we ensured that the family name was kept intact across generations while making sure that the board is composed of sufficient number of professionals and independent members too.” He explains that their job is to keep the family on track since they come with varied corporate experiences.  They are at liberty to disagree with our decisions and raise a flag when they see that the family is being too emotional about something. They keep us on track, keep us disciplined and this has improved the overall governance structure.”

Sadiq Hamour, director of Business Development at QFC Authority (QFCA) says, ”Securing the future and breaking the emotional ties with the past is also an absolute must. Albeit difficult to achieve, it requires willingness to make bold moves and take over new risks. This may take some families outside their comfort zone, but the sector as a whole was built on entrepreneurial energy and determination, and the families would not have survived such a tough business environment had they not had the qualities they will need to succeed now,” adding that ownership and succession in publicly-traded companies are strictly business emotion-free decisions. “But in family businesses, ownership and succession can be very complex. Family businesses are potentially more vulnerable at times of succession.”

Succession planning

Outlining several models of succession planning that can either operate in silos or coexist, Abu-Issa of Salam International Investment Ltd, mentions that it is wiser for the founder to gradually co-opt the younger generation into the business by allowing them to take charge of the non-essential, non-strategic aspects of the business “as that will leave the founder to still be in charge of the strategic aspects”.

This, in Abu-Issa’s view, can help the business with a multiplicity of views, preventing the owner from operating purely a “like a one-man show which in effect is the biggest impediment to efficiently-run a business they once founded.”

Citing how succession has been planned in the case of their own company, Abu-Issa tells The Edge, “We are different on two counts. One, we decided to go public early on in our business. Second, our present chief executive officer and the chief operating officer are second-generation businessmen, and had taken over from the founder at a relatively young age – they had to, since our grandfather passed away early. What they are doing with us right now is to hand over the less critical decisions that pertain to day-to-day running of the business, keeping the strategic decisions to themselves.”

Sheikh Mohammed of Al Faisal Holding and Aamal Company says, “As the second generation, we are already involved in business strategy and management, with clear roles and responsibilities.  We share the vision of my father Sheikh Faisal Bin Qassim and, in this way, we are able to make an increasing contribution to the continuing expansion and development of the business in line with this shared vision.”

“On the portfolio management side, most GCC family businesses have a highly diversified and fragmented business portfolio. – Cyril Gourp, principal, AT Kearney.

Giving his opinion on the way succession planning is handled in the region, Firas Haddad, partner Risk Assurance Services, PwC Middle East is unequivocal when he says, “The issue of succession is not being dealt with as priority among family-run businesses,” and goes on to add that numerous surveys have shown that the two greatest threats to the continuity of a family business are ‘conflict’ and ‘succession’.

Abu-Issa of Salam International and Haddad agree that succession has two dimensions: ‘succession in ownership’ and ‘succession in management’. Abu-Issa mentions, “If there is ownership but no authority, it builds up frustration in the younger generation.”

In Haddad’s opinion, addressing these issues is often viewed as an extremely sensitive subject. He explains, “The next generation family members are hesitant to bring this up with the founding generation out of a sense of respect.  In turn, the founding generation is fearful of a perceived loss of control. To ensure continuity and for the sake of future generations, neither of these factors should be viewed as deterrents in addressing what is the single greatest threat to the continuity of family businesses, that is, the lack of a formal structured and documented process for ensuring the succession.”

Ahmad Nasser Sraiya Al Kaabi, chief operating officer of Al Sraiya Holding Group, says, “Al Sraiya Holding Group created a new leadership transformation model by preparing the new generations (the new family members) to comply with the future business needs according to the company’s vision.” Hamour of QFCA is of the view that succession planning greatly varies depending on family members. Having family members as decision and strategy makers is not without its advantages, with short lines of communication and low costs, if they can agree on a vision and strategy setup. Many companies around the world are run this way, Hamour says, adding, “It is evident that an increasing number of family firms ensure – or even insist – that younger family members go through a proper development programme before entering the firm. In many cases, this includes a ‘training’ period of work outside the business. This “professionalisation” of the next generation is helping close the credibility gap that will breed managers with an invaluable insight into the crucial difference between owning and managing a business.”

Listed entities

Many family-run businesses which are listed on stock exchanges also have better corporate governance and disclosure standards. Does that help in running the organisation? Or is that done to meet the statutory requirements?

Sheikh Mohammed feels that following the requirements and guidelines of the Qatar Stock Exchange certainly adds value to their organisation as it enhances transparency and communication with all stakeholders, which, in turn, contributes to increased trust and engagement from shareholders, business partners and employees.  He continues, “Reporting in this way therefore demonstrates the professionalism of our organisation and enables us to convey, on a structured and regular basis, the strength of our financial and operational performance as well as the strategic rationale for the transactions, investments and other corporate initiatives that we undertake as we continue to deliver our long-term vision for the company.”

Dunlop of Pearl Initiative is of the opinion that the key drivers to improving governance and transparency in family firms are generally not linked to disclosure requirements or an inevitable initial public offering. Dunlop explains that research has shown that the key driver for a family firm owner to improve governance is the desire to pass on a healthy, efficient and well-run organisation that can be successful and sustain through the next generation and beyond.

In this context, Steven Drake, head of Capital Markets and Accounting Advisory Services, PwC Middle East tells The Edge, “Effective corporate governance enables boards to better lead and provide oversight to their organisations.”

The future

Dunlop explains that family and private companies in the region face many challenges, including that of an estimated USD1 trillion (QAR346 trillion) of assets set to be transferred to the third generation in the next 10 years, adding that she is optimistic about the future of family businesses over the next decade, “largely due to the fact that these businesses are recognising and prioritising the need for transparency, corporate governance and succession planning to enhance their credibility and standing among competitors in the dynamic and growing market.”

“A significant number of families will go through a generational change in the next 10 years in Qatar. However, regrettably not all will survive. I believe some will adapt and flourish, while others may be sold to larger international groups and some will simply no longer exist,” says Hamour of QFCA. He adds that globalisation and the digital advancement greatly accelerated the rate at which things change. Business cycles are getting shorter and faster. “The old saying ‘it takes three generations to build a business’ is already outdated and replaced by something along the lines of ‘one generation can build three businesses’,” says Haddad.

Al Kaabi of Al Sraiya Holding is of the view that family businesses for the coming 10 years will be looking more into corporate management due to their business expansion locally and internationally. He explains, “This way we can face all the family business challenges by creating a more corporate environment, set a formal base for creating a corporate business based on accurate polices that can be applied to all levels and benefit the business itself.”

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