The Survival of Family Businesses

Virgin founder Sir Richard Branson may or may not pass on the reins of his $4.2 billion business empire to his children.

Even if Branson’s dynastic succession does materialize into a successful transition, generational transition and succession is usually seen as the exception rather than the norm in the business world. In the Middle East, however, multi-million dollar empires like that of the Bransons are usually built on bloodlines and trust.

A staggering 80% of businesses in the region are family-owned or family-run, highlighting the key role they play in contributing to the Arab economic landscape and accelerating regional growth and development.

“Family businesses in the region are one of the most important pillars of economic activities in the Middle East as they play a key role in accelerating economic growth and contribute actively to the process of economic development in such countries,” said Sheikh Nahyan Bin Mubarak al Nahyan, Minister of Culture, Youth and Community Development.

However, despite their strong emphasis on the family-work relationship balance, legacy-building and carrying on the family name, the obvious challenges of working with family members in a professional setting, including operational challenges and managerial transition of businesses to a third generation, could be the core factors behind successful acceleration or a slump in the region’s economic growth.

Working in Close Quarters

With hospitality and family values embedded deep into the Arab culture, the family-owned businesses in the Middle East have reported bullish sales growth patterns to outshine family conglomerations around the world by more than 15 percent. The core assets, however, do not lie in accumulated wealth or acquisitions, but in the legacy represented by the family name, or in some cases, the brand name.

Traditionally, the entrepreneurial head of the family is the war horse and face of the empire. Even when the next generation takes office and graduates into the system, the reigns of key decision making is still retained by the elders. Retiring business owners in the West, however, completely detach themselves from the business and take no part in the running of the organization. According to Hofstede’s theory of cultural dimension, the power distance in the UAE is almost 4 times as much in the US.

Groomed for Success

Although nearly 41% of all Middle Eastern family businesses intend to pass on ownership to the next generation, the possibilities of family feuds and mismanagement of companies’ gives third-generation handovers a one-tenth chance of survival. The inclusion of extended family into the workplace further multiplies the possibility of messy handovers, which can be disruptive or even traumatic, thus making the significance of succession planning more important than ever.

Fatima Obaid al Jaber, Chairperson of the Abu Dhabi Business Women Council, firmly believes that “family businesses play and important role, and it is unlikely that this is going to change anytime soon.”

The mammoth task of identifying and grooming of the right successor, family or non-family, then becomes the most crucial decision looming over the next decade. Being the powerhouse businesses that they are, it comes as no surprise that effective succession planning will script the destiny of economic growth in the Middle East.

With more than one trillion dollars to be handed over to the next generation in the span of 5-10 years, emotions are bound to be running high with the future of large, joint families at stake. To fully understand and mitigate the risks associated with the transition, families often turn to professional institutions and, in some cases, business schools to facilitate the change.

With the three pillars of succession planning: family, ownership and business, coming into play, regional business schools’ detailed research, information and case studies on all three aspects of succession allow for viable solutions to ensure both, the ‘family’ and the ‘business’ survive the transition. With the daunting probability of a third-generation failure, the recruitment of non-family, key management personnel also provides for an unbiased, capable approach, but only if power is relinquished to the ‘outsider’ in favor of ownership-management separation. The inclusion of such corporate governance is now more crucial than ever.

“In the GCC, family businesses are relatively young with most of them less than 60 years old in the market,” said Mohammad Al Fahim, chairman of Al Fahim Group. “In order to survive, grow, and take our places among the many family-run firms in the region and to blossom, we need government support and backing similar to that which was during the leadership of the late Shaikh Zayed Bin Sultan Al Nahyan when he supported local companies by ensuring them government work and purchasing their products and services.”

Handing over the Reins

In addition to government support, another vital cog in the wheel would be the regularity with which retired owners continue to enforce decisions on the business, in spite of a handover. Even with outside work experience and impressive credentials, the new generation would have little say in the business. While this safeguards the organization against a probable collapse, the adversarial impact would be the inability of the heirs to fully comprehend the functionality of the business and shoulder its responsibility in the long run.

Handling the responsibility of running the family business also gives the next generation the much needed experience to launch their own separate, entrepreneurial ventures, boosting their local economy.

“It is estimated that businesses are 10 to 40 per cent more successful if entrepreneurs owning such businesses had previous exposure to family business,” said Fatima Obaid Al Jaber. “Such entrepreneurs gain valuable experience and insights through informal learning made available to them in a family business environment.”

According to Shaikh Nahyan, “the most successful family businesses in the country are one which strikes a perfect balance between responsible business ownership, professional management, and pleasant family dynamics.”

Having achieved that so far, it is now the responsibility of the mature veterans to pass on the torch to their young prodigies who may not catapult the empire to new heights because of their inexperience. Handing over the reins may not be the easiest decision or transitional period for a family business in the Middle East. But given the key role they play in accelerating economic growth and contributing to the overall economic development in the region, it is a delicate but crucial process that needs to be done efficiently and thoroughly. If done well, the chosen successor may just be able to succeed.

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