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Tue 28 Jun 2016 11:11 AM

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Successful heirs sustain family businesses

Legal frameworks have holes; all generations must support the management plan

Successful heirs sustain family businesses
Amr Al Dabbagh

It’s an often heard adage in the context of family businesses that the first generation builds the business, the second generation milks or harvests it, and the third generation must either auction what is left or start all over again. This is also expressed eloquently by the American cliché “shirtsleeves to shirtsleeves in three generations”.

In a region where 75 percent of the private sector economy is family-owned, identifying strengths and weaknesses, dealing with threats and tapping opportunities is now more crucial than ever.

In May 2016, the Family Business Council-Gulf (FBCG), the regional association of Family Business Network (FBN) International, launched a Gulf Cooperation Council Family Business Governance Code that will serve as a guide on how to effectively mesh family and business affairs.

Late last year, the first GCC family business survey concluded that more than half of the six-nation region’s family-owned enterprises are in the midst of a transition from the second to the third generation and only 15 percent are likely to survive it.

The key to achieving the goal is in preparing the family’s heirs to be entrepreneurs in their own right. From one generation to the next, the principles that have helped us grow are the ones that govern giving, earning and sustaining.

The number one reason for any breakdown of family business – and why only 15 percent survive – is internal conflict. The skirmishes could be over any one of a myriad of reasons – succession, involvement of family members in management, contributing to the community, or how to integrate in-laws.

The second reason lies in family expansion. Expanding a business is relatively easy when it is only the founder/entrepreneur at the helm. But as the business acquires value and the family grows from one generation to another, the sheer numbers make it difficult to reach consensus on crucial matters.

Third, family businesses don’t make it beyond the third generation because of a lack of clear rules, policies and procedures for governance.

A survey by PwC, titled ‘The family factor: Professionalising the Middle Eastern family firm’, notes that a majority of family businesses lack planning.

“A plan that is not written down is not a plan, it’s just an idea,” PwC said.

Statistics released with the new code say that only two-thirds of large family businesses in the GCC have initiated building blocks for an effective family business governance structure, and only one-third of them have fully implemented the structures effectively. Implementation, the logical next step, is also an issue.

Knowing that a planned approach is one of the prerequisites of converting threats into opportunities, it is important to implement a framework, ecosystem or code addressing issues such as family governance, ownership governance, corporate governance, wealth governance and public engagement, while providing a checklist with practical advice on succession planning and developing the young generation.

You can achieve a lot by promoting the right culture and mind set. Legal structures are limiting. They can be challenged; there will always be loopholes. The only way to promote a concept is to ensure you have buy-in. It’s not enough for the founders to differentiate between ownership and management; each successive generation needs to believe that and act in consonance with it.

What is needed is an organised approach to living a life of meaning. I have called this ‘omnipreneurship’ – a framework to meet the needs and challenges of the world today. It is an ecosystem that defines an ethical, behavioural and managerial backbone that works towards a cohesive rather than fragmented approach to one’s life.

Stakeholders who are successful in their own right are more valuable assets in the family business. If they are not successful they will become liabilities.  There is a correlation between the life plan of each family member and the sustainability of the family business. For example within Al Dabbagh Group we promote among each member of the third generation the concept of becoming a globally recognised leader in their own areas of interest. After all, most family businesses began as entrepreneurial endeavours.

An EY report titled ‘Preparing or procrastinating?’ based on a global survey of the world’s largest family businesses, says every business needs to be entrepreneurial to sustain growth, profitability and longevity. This is, in fact, more critical for family businesses, where the focus isn’t on the quarter or fiscal year, but on the decade and the next generation to come.

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