Heir hunting

Succession planning may be a contentious issue in the region, but change is in the offing with many family businesses waking up to the problem and creating their own solutions – albeit with some help from outsiders
Heir hunting
By Pooja Kothari
Thu 16 Feb 2006 04:00 AM

|~||~||~|On December 19 last year, Sobhi Batterjee, president of the Saudi German Hospitals Group, appeared on CNBC Arabic to talk about a subject close to his heart – the management of his family businesses.

Over 200 million viewers in the Arab world watched as Batterjee held up a 280-page manual that he and his family had prepared over three years, with the help of a moderator.

Compensation of family members, their induction into the family business and dividend distribution – every imaginable issue has been dealt with in this ‘family manual’. But at the heart of Batterjee’s manual is the issue of succession planning – the bone of contention in many family-owned businesses and a topic that has broken apart numerous others.

“There is more than US$4 billion stuck in family feuds in Saudi Arabia alone,” says Batterjee.

He should know. The not-for-profit organisation he set up in Jeddah, Saudi Arabia, entitled the Family Business Academy, is currently working with six other families to prepare a similar manual for them.

Currently headed by its third generation, the Batterjee family has gone through the experience of being split in its second generation, when Batterjee’s father broke off from the family’s pharmaceutical business to establish what is now the largest healthcare company in the Arab world.

They aren’t the only ones. Many, including big names such as the Al-Futtaims, Al-Rostamanis and Al-Ghurairs in the UAE, have also faced succession issues.

It is not as if succession planning just concerns family-owned businesses alone. Since succession planning is about ensuring that a business can go on as usual in the event of key managers becoming unavailable to do their jobs, it is key for all businesses – government or private; local or global.

However, family-owned businesses form the backbone of the Middle East economy. Almost 90% of private enterprise are owned by families, and this is likely to remain the case in the near future.

Furthermore, unlike government-owned businesses and multinational companies, family-owned enterprises are more prone to battles over succession issues due to the non-division of ownership and management. So any discussion on succession planning becomes dominated by how family-owned businesses deal with the issue.

Succession planning is a touchy subject. In their hearts, most families realise that they could become a number like so many others. Statistically very few family-owned businesses survive beyond the third generation, yet very few have done anything about it.

“Succession planning in the region is not well developed. It is not taken off in the sense one would expect in the West. Hardly anyone focuses on identifying two or three successors and grooming them,” says Metin Mitchell, head of executive search firm Korn Ferry Middle East.

In the ten years he’s been covering the region, for instance, Mitchell has received only one mandate to search for a chief executive officer while there has been an incumbent. The rest have all been replacements.

It is almost as rare for a first generation entrepreneur to choose a successor before he or she steps down. The second generation is really the beginning of succession battles in most family-owned businesses – no matter what its size.

Businesses are often started by daring young entrepreneurs who dedicate their lives to building them but 30-years later, when the next generation is waiting in the wings, it becomes difficult to give up control.

“Your children want the money, as does your business. That’s when the fighting starts,” says Batterjee, who refused his son a managerial position in the family business, along with a Ferrari.

If anything, the social standing of a managerial position only makes matters worse. “A business position in the Middle East is also a social position,” says Khaled Al-Muhairy, chief executive officer of Evolvence Capital, a private equity fund.

“That makes it harder to give up control,” he adds.
However, Virgil Hundtofte, director of TIL Scotland and a succession planning specialist, who has been working in the region for the past ten years, says: “In the last five years, succession planning has gone from being a minor interest to a major one.”

While it is still the larger state-owned enterprises, especially in the oil and gas industry, that lead when it comes to succession planning, others in the private sector are increasingly gaining interest.

“I firmly believe in having a second and third line of capable people for key positions,” says Dr Anwar Gargash, executive director of Gargash Enterprises, the largest Mercedes Benz distributor in the region.

Evidence that the Gulf is getting seriously interested is also clear from the number of workshops and conferences that are devoted to the topic. Hundtofte, for instance, has been running an annual conference on succession planning and career development for the last few years. Similarly, there is an annual HR summit that has a dedicated session on the issue.

The rapidly changing environment has been a driving force. “The region is under pressure more than it has ever been,” says Mitchell. “Competition is forcing businesses to look for the best managerial talent in the battle for survival, which is expected to get fiercer as economies open up further in future,” he adds.

Moreover, the region is going through a bigger boom period than ever before. As local businesses expand, there has been a greater acceptance to raise capital though public offerings.

To achieve this companies have to run themselves more transparently, introduce professional managers and adopt modern management practices. Succession planning for key positions is one of the many such moves.

Multinational corporations that have a presence in the region have also been driving home the message that attitudes towards succession planning should change.

Fearing disputes over succession among local partners, international organisations are demanding that professional managers run local agencies. Exposure to these international best practices helps keep the subject front of mind and that key positions in local organisations get treated as they would in a multinational’s worldwide way of doing business.

Emiratisation – or the process of hiring in more local talent – has also been driving the need to identify and groom people for key positions. Most GCC countries are pushing for more local talent in top management positions in businesses. This has led to substantial investments, at least in big companies with large budgets, in identifying and grooming such talent.
Some companies have learned the succession planning lesson the hard way. A key figure of a multi-billion dollar Saudi business, for instance, was hurt in the Riyadh bombing a few years ago.

Typically, if a business loses a key person within top management, there tends to be a negative impact of between 5 to 10% on its turnover. However, in this case, the Saudi business lost 50% of its turnover in the few months its key person took to recover completely.

While there are guidelines to succession planning, it is often a case of each his own. Large companies with big budgets have been proactively recruiting outside consultants to put in place formal succession planning programmes involving the identification of talent, rigorous testing and competency mapping for current as well as future needs of the business and training.

Saudi Aramco, for example, reportedly has its own internal assessment centre – a highly developed tool for assessing managerial strengths and weaknesses.

Others like the Saudi German Hospitals Group have come up with their own succession programmes. “Our programme is like an assembly line,” says the 55-year-old Batterjee.
Any family member can step into the arena at any point in time, and go through a battery of psychometric and leadership tests to get into the reckoning for managerial positions within the group. Most of these tests have been bought off-the-shelf. Thereafter, they have to undergo further testing and training before they can step up the corporate ladder.

Over at Gargash Enterprises, the division of ownership and management has been crucial to successful succession management. Although owned by the fourth generation of the Gargash family, the day-to-day operations of Gargash Enterprises is in the hands of professional managers.

Therefore, it is very careful about hiring the right people.
“We are very calculated in our hiring decisions. People with extensive industry experience are hired after thorough and diligent checks are made,” says Dr Gargash. The family itself is represented via a three-member board, which takes care of macro issues such as strategy and investments.

While there is no ideal way of going about succession planning, what is clear is that for any key position, work should begin at least three years in advance; although five years before would be even better.

“Candidates can be seen in action during those years and trained in a different environment for the future,” says Barry Cummings, managing partner, Action in Business International, a Dubai-based HR management consultancy that works with corporates in the Middle East to help them identify and groom successors.

Before the identification exercise can begin, it is important for the organisation to identify its business strategy and plan for the next three to five years. Only then can it figure out what skills are needed to get there. “Unless the strategy is in place, 75 to 80% of these efforts will fail,” warns Hundtofte.

The size of a business also plays a part, in the sense that smaller companies don’t need many tools to identify potential talent.

“In a small, growing organisation, superstars stand out anyway because of their superior performance,” says Thomas Bartridge, an independent human resources consultant. In these cases, what is important is to make sure that the potential candidates gain overall experience and their development is sped up.

It is the bigger concerns with hundreds and thousands of employees that need to have a formal process to identify those with potential for development.

Bartridge suggests a GE-style approach in those cases. Under its former leader Jack Welch, it was made known to managers at GE that their promotion was dependent on having groomed at least two people for the job.

At SABIC, a Riyadh-based conglomerate with 15 independent companies, one of the features of the succession plan for senior level positions is that potential candidates should have experience in more than one of the group’s companies.

Hundtofte advises that companies contemplating succession planning programmes should initially try a pilot programme. When he worked with a GCC-based company with 40 000 employees a few years ago, he first did a pilot for manager-level employees.

There was a huge amount of scepticism around the boardroom, and it took two years before the company saw any benefit out of the programme.

Chief executives should be warned though, time isn’t the only cost attached. The internal costs of placing people in a succession planning programme are two to three times higher than the external cost of having a consultant run the programme.

“At least 50% of some person’s time is going to be spent in being an in-house champion for the project, promoting, supporting and mentoring the development of those in the programme,” says Hundtofte.

And it goes without saying that such a programme cannot run without serious commitment from the top management.
Think of succession planning as an investment in your business’s future. That alone will sustain interest in
the exercise.||**||

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