By Courtney Trenwith
Upsetting 125 years of family tradition is bound to strain relations. Prominent businessman Mishal Kanoo gives a rare, uncensored account of how one of the Gulf’s oldest companies is dealing with the fallout from bringing in outside professionals, and explains why many family businesses are too scared to go public
Family relationships are nearly always complex. Throw in a business that spans six generations and tensions are even more strained — especially when management is facing its most controversial shake-up in 125 years.
The Kanoo Group, one of the Gulf’s largest and longest-running family conglomerates, is bringing in outsiders to take on some of the most important roles, including CEO, for the first time. But the decisions, being led by some senior family members, are not supported by everyone in the clan.
“It has been difficult,” Kanoo Group deputy chairman, UAE and Oman, Mishal Kanoo readily admits when we meet in his Bur Dubai office.
“It’s a difficult concept, trying to get the family to accept third parties having a role, and I would say an effective role, within the organisation because it has been family dominated. [But] we are realising that we have limitations and we need to find the right people to come in and help change that paradigm.”
Established in Bahrain in 1890 as the Yusuf Bin Ahmed Kanoo Group of Companies, the business has expanded in line with economic growth, particularly taking advantage of shipping routes, the oil boom and the burgeoning travel and tourism sectors.
Having survived two world wars, several other regional conflicts and multiple economic downturns, the family is worth at least $6bn.
It spread to Saudi Arabia in the 1930s, followed by the UAE and now also has offices in Oman, the UK, France and India, with more than 4,000 employees and another 6,000 in its joint ventures.
But unprecedented changes are being made to top management. A chief financial officer and group treasurer have already been hired from abroad and the group is on the look-out for a CEO.
Even more radically, they are also contemplating independent directors.
“The idea is to try and professionalise the company a bit more. We’re trying to reduce the focus on family and focus more on getting professionals within the organisation, to take Kanoo to the next level because there’s some limitations of the family that we’ll always [have] and that’s natural,” Kanoo says.
“But because this is a family business you’ll always have a flair or a taste of the family within the organisation.”
There are no details yet on what the new management structure could mean for the company’s operations — that will be dependent on the incomers — but Kanoo says the benefits will be compelling.
“If there was no significance, if there was no benefit from it I wouldn’t be going through all this process,” he says.
“With family members there’s a lot of emotion because… it’s your name on the business; with a third party there’s hopefully no emotion and there’s more of a ‘does this make financial sense or not’.
“Our job as the family should be taking care of the political, taking care of the social, the guise that’s needed to smooth things over [with clients, contractors, regulators and the like], but as far as operations are concerned, as far as financials are concerned, this is where non-emotional attachment is required and that is what a professional should have.”
Unsurprisingly, some generations of the family are not impressed with the changes.
“The younger ones are much more acceptable because they already have the concept and they’ve seen it outside.
“The older ones are having a hard time — not all of them, some — because for them this is their reward, [they think], ‘I have been here long enough, I have done it and this is my reward and you’re taking it away from me’.
“I have explained we’re not taking it away from you, we’re trying to enhance that,” Kanoo says.
“Of course it causes family pain, it causes a lot of pain because some are prepared to go along and others are not prepared to go along.
“It’s a question of how diplomatic you are, and how blunt do you want to get. Sometimes you need to sugar-coat things for people to swallow it and other times you just have to be brutal. It depends on the personality of the person you’re interacting with.”
It is a difficult scenario facing scores of Gulf family businesses: the dilemma of wanting to modernise and increase professionalism and transparency in a competitive business environment while maintaining as much of the family tradition — and control — as possible.
Several high-profile family businesses announced plans to launch initial public offerings (IPOs) prior to the 2008-09 economic downturn, but few have been revived since the economic recovery.
Accounting giant PwC revealed last month that 15 percent of family firms in the Middle East planned to sell all or part of their business in the short to medium term. Of those, only half would be via an IPO, while the others would hand-select private equity stakeholders.
More than a third (38 percent) of the 44 family businesses surveyed said they intended to keep operations entirely in family hands, while a quarter would pass on ownership to the younger generation but bring in professional management, similar to the Kanoo Group’s plans.
Kanoo says while his company is bringing in outside management it still has no plans for an IPO and he doesn’t believe many others in the region do either.
“I don’t think many families are actually prepared for the rigours of going public because it’s very painful,” he says. “The type of questions you could be asked, the type of interrogation you could get, especially at the AGM; a lot of families are not prepared for that because they think no matter what, it’s my company, my name, I don’t like people asking me and questioning me about what I do, what I don’t do.
“There was until one time a thought that this was the elixir that would solve everything, by going public, and I think a few families quickly realised, if I could re-do it, I wouldn’t go public. Not because I have anything to hide, necessarily, but it’s just because the structure and governance that needs to go on sometimes is very rigid and you have oversight from the Ministry of Economy and sometimes from the regulatory body, and it can be very stressful to think about making sure that every quarter your information has to go out [and] you can’t buy your own shares within a certain timing.
“Because of those restrictions, it becomes a painful exercise. But some people are very happy with it, because it fits their mindset, they’re very regimented. Every family will look at it with a different point of view. I think a lot of the families in the Gulf are not prepped for that.”
The Kanoo Group first made its name in the shipping industry, challenging the long established British firms that had come to dominate the Arabian Peninsula. Kanoo Shipping now handles 11,000 port calls annually, covering every port from the Suez Canal to India.
The family also has one of the longest reigns in the travel industry, dating back to 1937 when it began providing refuelling facilities for Imperial Airways, one of the first British commercial long-haul airlines, for flights en route to India and Australia.
Today, Kanoo Travel is arguably the largest travel firm in the Middle East, with more than 140 offices and a global network of partners including American Express, for which it has a master franchise agreement to cover the entire North Africa, the Levant, GCC, Iraq and the CIS countries.
“It also supports at least 30 international airlines with operations, marketing and sales. The group also spans manufacturing, engineering, oil and gas, training, retail and property.
While it has been astute in its investment decisions for decades, the business environment has been changing. As the Gulf has matured in its global role, particularly since the 1970s oil boom, more and more people longing for an opportunity to make a buck have immigrated to set up their own enterprises.
While Kanoo says he welcomes competition, not all of it is warranted.
“The reality is, competition, if it’s taken to the nth degree, kills businesses because it’s a race to the bottom, it’s not a race to make things better,” he laments. “Certain things you cannot improve.
“If for example, the price of commodity X is at 5 cents and your margin is 2 cents and all of a sudden you have 10 competitors coming in, the price is going to go down from 5 cents to 3 cents. That’s great for the consumer but for the business, the question is how far can I go down?
“People don’t want to say what the reality is, they want to say what people want to hear. The reality is certain competition is good because you need to help bring down the prices, I understand that, but sometimes when there’s over competition it will kill you, it will kill every business, you can see that in any business where there’s a huge amount of competitors coming in and there’s hardly any barrier for entry.
“For example, anything to do with service-oriented businesses, people-oriented businesses, where anyone can set up shop.”
Kanoo argues the poor returns created by high competition do little to stifle further businesses from entering the market — in some cases they are happy to lose money because they are only after market share.
“There are a lot of people who don’t care, they just want to be in business. For example, a lot of foreign companies come to this part of the world because their markets are over-saturated, they have products or services they don’t know what to do with so they’ll find a third party to dump their products or services and bring it to this part of the world,” he says.
“The idea [is to] capture a market, even though it kills the market, but for them if I have this machine for example in Europe and it’s idle, it costs me, if I ship it over here and I use it and I’m still doing 50 percent, that’s 50 percent better than being idle in Europe.
“But what happens to the competitors over here? What happens to the current companies here, it brings [them] down. So even from a rational point of view you’re thinking competition is good, but for them because it’s not their home areas being hit, they’re foreign entities… [they think] ‘when things turn around in my country I’ll move back home’… but by that time they’ve crushed the market for the [other providers].”
However, he is hesitant to support market-entry barriers.
“On one hand I don’t want to have trade barriers anywhere, but the reality is… even the largest economies, for example the States, makes it incredibly hard for you to come into their market, so I figure if the States… do that why should it not be something we’d look at.”
Foreigners have also been influential in heating up competition in Gulf property markets, particularly in the UAE and Qatar. The majority of property in the region is bought by investors, rather than end-users, contributing to speculation and the rapid resales.
Property values plummeted more than 60 percent in the UAE following the global financial crisis. They recovered during 2013-14, climbing about 20 percent and 30 percent, respectively, reigniting concerns another property bust was on the way.
Kanoo does not expect the market to crash as it did in 2008-09 but he is concerned by the persistence of speculators.
“There’s a lot of people thinking ‘I’m going to make a good living out of this’, rather than saying ‘this is an important part of the economy’ or ‘this is a place where I want to live’,” he says.
“A problem with a lot of people in this part of the world is the realisation that the value of what they’re buying is really ridiculous. They’re basing it not on the yield, but on the capital gain. The problem is, capital gain can only happen if someone else is willing to pay more. What if someone isn’t? What if the market dries up?
“You can see the greed in people’s eyes when they automatically think not in movements of 3-4-5 percent, but in 20-30 percent movements. This is unsustainable. Unfortunately, a lot of people will say this is Dubai, this is the UAE or the Gulf, and the answer is, no it’s human nature, the greed part is human nature and you cannot legislate for greed, you can’t.”
Greed, whether symbolised by a fancy villa, a top-of-the-range car or flashes of bling, has become synonymous with Dubai, where Kanoo is based.
“It’s a first statement [of the UAE], I’m sad to say,” Kanoo says. “[Although] you have to distinguish, there’s a cut off. The people who are old enough to have lived during the early boom times, the ‘60s and ‘70s, will have a different perspective than those who’ve grown up in the ‘90s and 2000s.
“Because those who have lived through what it was like to see and go through the birth of the nation and the pains they went through are less likely to be focused on bling, because it was very hard for them and they saw what their parents went through.
“Yes, who doesn’t like luxury, whoever says he doesn’t is lying, but to the point that it becomes the all-encompassing thing the way you want to be seen… there’s no other distinguishing factor for them.
“If you look at most countries in most parts of the world, a Corolla or Honda Accord would be the average car, here the average car is either BMW or Mercedes and I’m not talking about the smaller series, either. When you have that it shows that there is more of a concentration on status than there is a concentration on value.
“There’s no moral judgement in this, it’s just an observation of the reality of what’s on the ground.”
Kanoo argues there is little other than education that can be done to minimise such attention on status.
The Gulf Cooperation Council (GCC) states have again raised the notion of imposing a value-added tax (VAT) and the International Monetary Fund added impetus to the idea in a report published in December.
But Kanoo argues there are already “a hell of a lot of indirect taxes”. A VAT would hit the wrong people.
“The ones that would be hurt by taxes would be what you consider middle class, but the super-rich, a person worth a few billion… how is that going to hurt them?”
Yet he also does not advocate for an income-scaled tax system. “How is that fairer that a person who has worked and gained gets taxed by an entity that has not? How does that work to the benefit of society?” he argues.
“The purpose of any taxation, theoretically, is to take the money and spend it on society or community needs. In most parts of the wold, [state department finances operate in the] negative… in our part of the world they’re positive, they’re making money. So what’s the purpose of giving the government more money?”
The purpose, it has been argued, is to broaden the governments’ income bases. The Gulf states each rely heavily — but to varying degrees — on oil and gas revenues, which have been cut by tens of billions of dollars since mid-2014.
But Kanoo does not see the 60 percent decline in the oil price lasting.
“I don’t think there’s going to be much of an impact, per se,” he says. “Most of the governments here have a built-up treasury, [which] will last them a few years or months.
“People are saying prepare for $20, $10 per barrel of oil. I’m thinking, ‘yeah good luck to you believing that’. Will the price of oil move up to $100, $200, I don’t know. But what I can tell you is because this is a scarce commodity and it’s not replenishable, and no matter how much they tell me about renewable energy it’s still a small, very small part of the energy consumption of the globe and the majority of — actually I can’t think of an alternative — transportation uses this mode of fuel and I don’t see the number of airlines shrinking, the number of ships shrinking, economies shrinking, I see them actually growing.
“I’m not saying we shouldn’t be constantly looking at these things and constantly suggesting them, because the fossil fuel will run out, one day it will, but we need to not trick ourselves and lie to ourselves by saying we’ve reached the point where we have an alternative to fossil fuel. You will see the price naturally go up, where, when, I don’t know, but it has to.”
Tighter state budgets also are causing governments to re-check their spending, which could further stimulate moves to persuade public sector employees to transfer to the private sector, a desire that has so far been difficult to achieve without dramatic changes to nationals’ expectations.
Kanoo argues public sector employees will naturally move if their salaries are reduced and productivity is increased in line with the private sector.
“If I was getting a salary that was two times, three times that of the private sector from the government, if I was getting more vacation time, if I was getting less office time, if I was getting a guaranteed job, why would I go? Unless I’m self-motivated and I want to learn, why would I go? It’s as simple as that,” Kanoo says.
Similarly, he says efforts to reduce the number of expatriate workers, particularly in Saudi Arabia and Kuwait, will not work.
“If I don’t train up the people, starting from schooling before getting to university… and give them the mindset from the beginning then I’ve already lost,” Kanoo says.
That is part of the reason the Kanoo Group has been forced to look beyond the Gulf to find the level of talent it wants for its senior management team. It may be unfortunate, and controversial, but Kanoo is adamant it is very much in his family’s best interests.
“What’s the use of finally getting that Rolls-Royce and I reach a point where I’m nearly blind,” he says.
“I can do one of two things: I can squint and hope to God I don’t hit anything because I want to drive it, or alternatively, I hire a driver and enjoy the car.”
A very nice confession Sir! This is a very brave step by Kanoo group defining break out strategies. While dealing with few business houses in KSA, I felt similar approach as you stated. Expect break even in short time. Happy with agency commission without value additions, as its been traditional model. The knife of change when starts cuts all bad and good. Unfortunately if good is cut it takes time and resources to built again. A conscious approach and management style can always be useful. Management by feedbacks, management by involvement are two faces of coin. Finally group vision must remain intact. Sometimes, makeover as you said is very painful, unless all are agreed. It is said that, any old asset is supported by pillars hence refurbishing or modifying it, is very careful activity. Without having fresh pillars in place, not wise to touch old ones. Unless its about redefining the agenda and image which can also take the journey to square one!