Generation game

Family-run firms account for 75% of Gulf businesses. Is the next generation ready to take over?
Generation game
By Andrew White
Thu 15 May 2008 04:00 AM

Family-run firms account for 75% of businesses across the Gulf and their patriarchs are getting old. But is the next generation ready to take over the reins of power? Andrew White reports on the Gulf region's family emergency.

The Zamil Group has defined industrial investment in Saudi Arabia for over three decades, as the 12 sons of its founder have built upon his legacy, establishing a business empire that encompasses everything from glassmaking to shipbuilding.

Next year that era of family-dominated investment will come to an end, as the group prepares to sell shares to the public across some of its operating units.

It is a trend that is set to be played out across the Gulf as some of the biggest family trading groups - representing over 75% of all businesses in the region- look to the future and the accession of a new generation of leaders to take the reins.

"When we talk about a family business, it is not any more like before - small shops and trading houses," muses Dr Abdulrahman Al Zamil, chairman of Zamil Group Holding Co, today a far cry from the company first founded by his father back in the 1930s.

"The family business in the Gulf is becoming a conglomerate, a national institution that affects the national economy," he continues.

"Some of them have reached international level, and these family businesses cannot afford to continue to operate under the old regime."

At stake is the foundation of the region's economy as studies have shown that seven out of 10 family businesses fail to make the transition to the second generation, and only one in 10 makes it to the third generation.

Currently, only 5% of family businesses survive the third generation, due in large part to a lack of strong succession strategies.

The notion of 'regime change' will certainly shape the future of Zamil Group as it starts selling shares in some of its units to the public from 2009.

While Zamil Group retains stakes in more than 60 companies in 55 countries, the Saudi public will soon snap up significant stakes in one of the kingdom's most prominent family firms.

"It is one of the biggest issues the region faces today," insists Mohammed Al Fahim, honorary chairman of Abu Dhabi-based Al Fahim Group, one of the UAE's largest family business groups."Family businesses are very powerful, they hold a lot of interzests, and as they come to the end of the first generation they must safeguard their business for the second and third generations," he continues.

It's more urgent today than it was 10 or 20 years ago - the cycle of life means that if they don't do something about it now, nothing will be done, jeopardising the interests of the consumer and the family businesses themselves.

While the issue is an emotive one, it is also vital to the future of the Middle East business community.

If the succession issue is not handled with the utmost care and consideration, then Gulf family business leaders risk undoing decades of achievement.

"The first generation can be one or two people, then they have children, who in turn have children - and then it goes all over the place," warns Omar Bitar, managing partner, Business Advisory Services, at consultants Ernst & Young.

"Unless the business goes through comprehensive succession planning, it will be unable to deal with the issue of who should be running the company from one generation to another in a professional manner," he continues.

"Problems start coming up, and you end up breaking the business."

In order to survive the transition, Gulf companies are increasingly turning to private equity (PE) firms to guarantee their long-term futures.

There are two common scenarios: the first that the inheritors are disinterested and looking to cash out; the second that one or more inheritors remain dedicated to the business, while his or her siblings are eager to sell.

"You can't have four successive generations owning the business, because then you get something like 400 people trying to run things," Ammar Al-Khudairy, CEO of PE firm Amwal AlKhaleej, tells Arabian Business.

"When you have real businesspeople and then a host of trust fund-type inheritors, there is invariably a dichotomy in the interests - one guy wants to keep all the profit in the company and plough it back into the business, while his sibling wants 100% distribution of profits so he can buy that boat," he continues.

"It causes a lot of family friction and disintegration of business."

Among senior-generation family business leaders the concern is twofold: that their children will not be prepared for the leadership responsibilities that a successful family enterprise demands, or that family conflicts will arise that threaten harmony and ownership continuity.

"A lot of our deals come when you have a couple of brothers, and one just wants a few million dollars to go and live in Nice or Cannes," says Al-Khudairy.The other brother is usually the brother who stays behind and works harder than his dad; is hungrier than his dad.

"Once you've consolidated back into a previous generation-type setup where there's only one or two people owning it, and then institutional investors, you're basically rebooting the business," he adds.

"It's amazing what happens after that - they are no longer obsessed with sibling egos and so on, and it's like putting nitrous oxide in the business' gas tank."

This boost is likely to push the firm towards an eventual IPO.

After all, strong growth will need to be augmented by an injection of capital - such as that raised by going public.

According to Abu Dhabi-based investment bank Gulf Capital, at least 120 IPOs worth a total of US$24bn are planned in the GCC through to 2010, as more and more companies look to equity markets to raise funds for expansion.

At Zamil Group, Dr Al Zamil believes that large family companies should look to expand through becoming stockholding companies, with a view to eventually going public through an IPO.

However, he accepts that such firms are likely to have to undergo significant restructuring before they will be able to operate in a more "professional" manner.

"We are not selling to get out of the business, we are selling to expand," he insists.

"However, first there must be transparency and a legal framework that is not affected by family conflicts or divisions. In a modern company nobody should be able to freeze the operation of the company, nobody should be able to write to a bank and say 'we are having differences as shareholders, so freeze the account until we have settled the problem'."

At Ernst & Young, Bitar notes that family-run businesses are rarely structured in a truly corporate manner that allows for a breakwater between the family and the decision-making process of a firm.

As soon as possible, the heads of family businesses have to convince their children and other family members of the need to instill a meritocratic culture in their companies.

"The influence of the family overshadows the structure of the decision-making process, and so it is not always done in a professional manner that is best for the business," he argues.When a corporation is based on a family, it is not based on a professionally run organisation.

Although he insists that Gulf family companies should have started to restructure "a long time ago", Bitar says that many are now finally recognising the need for change.

With the emergence of a new generation - many of whom have been educated or trained in the West at large established corporations - a number of Gulf family firms are taking the succession issue far more seriously than might have been the case before.

"You can assess and plan for succession, but the actual implementation takes a long time," suggests Bitar.

"You've got to identify who has the aptitude and ability to be able to go forward in a specific manner, and then try to help the successor to develop in that manner over a number of years until they are ready to take on that challenge. It takes years to go from a traditional family business, to a professionally run one."

Over 30 years ago, Mohi Din BinHendi opened Dubai's first international fashion outlet - Pierre Cardin, in Deira - and sowed the first seeds of a business empire that has since successfully introduced more than 60 prestigious international brands to the UAE.

While it remains headquartered in Deira, BinHendi Enterprises is now a world away from its humble beginnings, with brands including Hugo Boss, CK Jeans, Porsche Design, Japengo and Bella Donna.

The family business has become a family empire, and so the succession issue is one that carries even greater weight.

"If the next generation is not into the business you are doing, then you are domed," BinHendi tells Arabian Business.

"Likewise if the next generation is not well brought up and has no business discipline, and survives on day-to-day management with no long-term planning, then you are also doomed."

"It's about 20% down to upbringing, and the rest is down to luck," he smiles.

"By that, I mean the kind of human being your son or daughter is; if that person wants to unite the family and bring it forward, and loves the business."

Last September, BinHendi appointed his daughter, Amna, as CEO of BinHendi Enterprises.

However, the promotion was by no means a fait accompli - BinHendi is adamant that his daughter had to earn his complete confidence before he turned over the keys to the family stores.

"If I had found her irresponsible and not up to it, then I would not have appointed her to be CEO of the company," he insists.When it came to assessing Amna I had a very close look at her performance to make sure she was the right person to take the company forward.

Both BinHendi and Dr Al Zamil refute the argument that family members should be separated entirely from a stockholding corporation.

"The name of the family members opens a lot of doors, and that is something that is absolutely unique to this part of the world," argues Dr Al Zamil.

With all of these modern organisations, the one thing that they have to retain is the family touch and identity.

"When we talk about 'family corporations', it doesn't mean that you have to own all of the stock or even the majority of the stock," he continues.

"It's not the majority, it's the way it is managed and who controls what, that defines a family business."

Dr Al Zamil uses the example of German giant Siemens, which is considered a family business "even though [the family] only controls two or three percent now".

"You will find that half of the shareholders are buying those shares because they have confidence in the family," Dr Al Zamil points out.

"Many people want the shares, but immediately they give you the authority because they trust the organisation."

Whether as stockholding corporations or public companies, the number of family businesses will inevitably reduce as consolidation takes place across the burgeoning Gulf market.

Meanwhile, as the next generation becomes more educated - and the older generation moves on - then the region should see even greater sophistication in terms of the strategic management of Gulf family firms.

Ultimately, however, the older generation can only do so much to ensure the future success of their business empires.

"It's your judgment about your son or daughter's suitability for the role, and you do what you have to do," smiles BinHendi.

"When I leave this world then it's a different story - I'm not responsible."

RELATED LINKS: In times of test, is family best?

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