Tackling the Gulf's Generation Game

Feuds and disagreements over succession are just two of the biggest challenges that the Gulf’s family firms face. How can some of the region’s biggest companies cope with the shift to a new generation?
Tackling the Gulf's Generation Game
By Sarah Townsend
Fri 10 Apr 2015 09:25 AM

Imagine the tensions that arise in your own family, multiply them by ten and add in the need to run a successful business,” says Farida El Agamy, general manager of advisory group the Tharawat Family Business Forum.

Her statement sums up the complex pressures many family-owned businesses face. Families are, by their nature, an intricate web of colourful personalities, competing interests and private grievances, and the potential for conflict is great.

But when a family is running a business together, private disagreements can become public and the repercussions can be catastrophic.

Loutfi Echhade, Saudi-based partner and family business leader for Middle East and North Africa at Ernst & Young (EY), says: “Potential feuds and disputes between family members can result in the disruption or collapse of a business.

“In Saudi Arabia, for example, there are feuds and legal cases between family members worth billions of dollars tied up in local courts.

“These feuds delay succession and certainly don’t provide good role models or best practices.”

Further afield, Hong Kong real estate company Sun Hung Kai Properties — owned by the three Kwok brothers — ran into difficulties in 2008 when elder brother Walter, who had served as chairman and chief executive for almost 20 years, brought his long-term mistress into the business against his siblings’ wishes, according to reports.

Walter, who was also married, was ordered to take a three-month leave of absence by his mother and majority shareholder Kwong Siu-hing, who stepped in to protect the family’s interests and prevent scandal.

Businesses have also suffered as a result of mistakes made by dishonest or negligent family members.

The three Abdullah brothers who ran jeweller Damas took millions of dollars of Damas funds for personal interests that ranged from paying for petrol to buying a shopping mall in Turkey, almost bringing the company to its knees about seven years ago. In 2008, Tawhid Abdullah disclosed that he had withdrawn almost $163.3m in 18 months for personal business and resigned from his post as chief executive.

However, not all family issues cause financial or reputational damage. They can prompt positive restructuring. In the 1990s, brothers Saif Ahmad and Abdulla Al Ghurair decided they could not work together and split the Al Ghurair Group to create two complementary companies, both of which remain successful.

Galadari Brothers Co, which owns UAE newspaper the Khaleej Times, faced management challenges and in 2006 the Dubai government intervened by taking a 30 percent stake in the company, restructuring the group and temporarily replacing the board.

Experts say family business disputes are so common that most are resolved privately by trusted family advisors and the public never hears of them.

Still, conflict remains one of the two biggest threats to the stability of family businesses in the Middle East, according to a PwC survey published at the end of last month. The other main threat is linked to issues over succession.

The firm’s latest annual study of family businesses in the Middle East notes that the intrinsically more emotional nature of family businesses compared to public and other companies is a key barrier to “professionalising” the family firm. That is, adapting to an increasingly competitive business environment by introducing more rigorous governance systems and recruiting outside talent.

“The strength and weakness of the family business model is right there with the name: family,” PwC says. “Working with your relations can generate much higher levels of trust and commitment but also lead to tensions, festering conflict and open conflict, as individuals struggle to keep head and heart separate and to make a success of their work and family life.

“The risks of not facing up to these challenges will increase with time.”

What’s more, the majority (60 percent) of the 44 Middle East family businesses surveyed by PwC between August and September last year are transitioning between the second and third generation, causing new stresses as the founders — typically in their 60s — begin to put together succession plans. Conflicts arise between younger family members’ generally more forward-thinking approach to running a business and the more traditional style of their elders. This is particularly evident if the younger generation has been to university abroad and learned new cultural ways of doing business.

“A significant number of family businesses in the Middle East, while continuing to flourish, are beginning to be impacted by the ageing demographics of the founding principals,” states Jerry Parks, a partner in the Dubai office of law firm Taylor Wessing.

Maha Bin Hendi, an associate at Hadef & Partners law firm, explains different generations have contrasting views when making business decisions. “The older generations think they have the know-how and market experience, which causes conflict with the second and third generations’ novel thinking. This can lead to full-blown disputes,” she says.

Adib Rashid, director of advisory services at EY’s Family Business Centre of Excellence, points out: “Compared to their counterparts in the western world, Middle East family businesses are relatively young. The families in the region enjoyed limited external competition and protected markets, which helped them to build large, diversified companies operating in multiple sectors.

“Many are facing succession issues now for the first time, which is a threat to the continuity of the business.”

For many Muslim family businesses, there are only limited questions over future ownership as this is dictated by Sharia law, says Fawzi Abu Rass, partner and Head of Family Groups at KPMG. Most family businesses in the region are conservative, he says. Traditionally, they pass the business on to the eldest son and other family members are appointed to run subsidiaries.

However, some businesses that followed this traditional approach have struggled to grow and manage the family’s relationships, says EY’s Rashid, and this has deterred others from following the same path. Compliance with Sharia law can sometimes add another layer of complexity and potential for conflict, such as when equity shares are not distributed to all family members in accordance with Sharia law.

The role of ‘in-laws’ or other, more distant, relatives is another common cause for dispute.

“People see the existence of cousins as a particularly tricky aspect,” says El Agamy. “Cousins may have grown up elsewhere in the Middle East and their lifestyles, ethics and upbringings may be quite different. Those differences make things harder, and many family businesses decide to buy out cousins, unless they are very close.”

Personal or cultural differences aside, once the business moves to second or third generation it is “feeding” a greater number of family members than when it was formed and that can be problematic financially, says Walid Chiniara, an international corporate lawyer and family business advisor at Deloitte. “Is the business growing at a fast enough rate to support all the people that depend on it?” he asks.

There may also be crucial differences between the spending habits of older and younger generations because in the Middle East family firms were often established with the principal aim of supporting society and using personal wealth to build local economic growth, Chiniara says. “It is not like in the US, where family businesses are flashy and concerned with generating enough cash to support lavish lifestyles.”

Well-known family businesses hold clout when it comes to securing bank loans — it is known as “name lending” in the Middle East — and disputes have occurred as a result of people abusing their position.

One family business advisor, who asks not to be named, recalls an instance where a family member took out a loan to finance personal interests, using the family business as guarantor. When the bank requested repayment and the individual in question was unable to do so, it hit the family business’ coffers. Similar conflicts of interest have occurred when a family member decides to pursue his own business interests outside the collective wealth of the family and becomes a supplier to the business. 

Other potential sources of tension, according to PwC, include decisions about the future strategy of the business, the performance of family members actively involved in the business, decisions around who can work in the business, how family shareholders can exit, and how shares and dividends should be distributed among family members.

In an increasingly sophisticated business environment, Middle East family firms are under pressure to define and regulate the relationships between family members in their respective roles as shareholders, board members, employees and in a personal capacity.

One way of tightening governance procedures is to bring in outside management. Arabian Business reported last week the Kanoo Group, one of the Gulf’s largest family-run conglomerates, is implementing the biggest structural shake-up in its 125-year history, by appointing outsiders to fulfil the most important roles, including that of chief executive.

“It’s a difficult concept, trying to get the family to accept third parties having an effective role within the organisation,” said Mishal Kanoo, the group’s deputy chairman for the UAE and Oman.

Naji Skaf, chief executive of Gulf Cryo, a private industrial gases company owned by the Huneidi family of Kuwait, has had first-hand experience of what it is like to take the reins of a company historically dominated by its founders. “Heading the executive branch of a family business can be a more complex job than a similar role in other types of businesses,” he says. 

“On one side, you are expected to deliver exceptional results. The family are intelligent people that have grown with the business, know it very well, and expect you to manage it better than they would. In addition, you have to keep in mind that, very often, the business you lead is one of their main sources of revenue, so it’s personal.

“The family carries the emotional baggage attached to seeing generations of family members start and grow the business through its ups and downs. Even if you are measured on short-term results, they have to feel that you share their long-term view and carry the decision-making parameters that made the business so successful throughout its history.”

Most outside chief executives who fail in family businesses do so because they either focus like hawks on short-term results, with little consideration to the softer issues or long-term horizon, or, says Skaf, “because after reading some book on Middle Eastern business culture and deducing that relationships are everything, they spend all their time socialising with family members and no time on actually running a performing business”.

Unfortunately, experts report that few family businesses succeed in bringing in competent outsiders to lead the business and resolve issues around succession. The bloodline for the family business is still considered of primary importance and conflict remains a fact of life whether the business is a tiny grocery or a huge multinational, says Abu Rass at KPMG. However, while you cannot prevent it, you can minimise its impact on the business.

Putting mechanisms in place to monitor recruitment and performance will ensure that people don’t end up working in the business purely because they are family, says Rashid. And clear, robust constitutions, governance structures and codes of conduct should be drawn up to avoid disputes, says Hadef & Partners’ Bin Hendi.

There are more creative ways to prevent disagreements from interfering with the business. In one anecdote related to Arabian Business, a sister was not involved in the family firm due to an historic argument, and her two brothers were running the show. But she had the most children and feared that if they weren’t included as shareholders in future, they would bear a grudge. However, her brothers understood this, and set up an internal forum for younger family members to prepare them for a future career in the business. The effect of this was that the sister saw her children being treated more fairly and her own grudge began to dissipate.

A last resort could be to split the business. “Sometimes it’s mature to know when things really aren’t working out. Don’t be a family [business] at all costs,” El Agamy says.

Some experts advocate separating the business from the family. “But we say you can’t separate the two things,” El Agamy says. “Try telling yourself you’re a different person at work than you are at home. You just have to try to be responsible and professional.” But sometimes this can cause tension in itself, as family members refrain from voicing issues to avoid hurting someone. “There is so much pressure on family businesses; you have to cut them some slack.”

KPMG’s Abu Rass agrees. “In the Middle East family is everything. Family disputes are frowned upon and highly sensitive, hence why few end up in the courts. Families would be terrified of becoming the subject of society gossip.”

The UAE recently introduced new rules to make it easier for companies to launch IPOs. Under the new rules, businesses will be able to float as little as 30 percent of their shares — a more palatable option for family businesses.

Although only 15 percent of respondents to PwC’s survey said they planned to sell all or part of their business in the short to medium term, the changes could give new food for thought. Family firms are valuable assets that offer stable returns — during the recession they substantially outperformed other businesses, according to data from EY.

“Family businesses in succession are moving from an autocracy to a democracy, and this is no mean feat,” Chiniara says. When it comes to family businesses, the owner can no longer be the only one who makes decisions.

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