Flip through the latest issue of Gulf Weekly.
Managing a family business, and particularly succession planning, can present some unique problems.
An example of the conflict that can arise is demonstrated in a story, about Stew Leonard's Supermarket in Connecticut, about a family business owner whose son's performance was deemed unsatisfactory by his supervisor.
The father told the supervisor that he would take care of it. The father asked his son to come to the family home for a talk in the hot tub. When they were settled in the tub the father put on a hat which he said was his 'Boss' hat and told his son that he was fired. He then removed that hat and put on another calling it his 'Father' hat. Then he said: "Son, I'm very sorry to hear that you lost your job. Is there anything I can do for you?"
This fairly illustrates how family business finds it hard to go beyond a generation. In the GCC, where the economic landcape is controlled by families, it is worrying that on average fewer than five per cent of the family-owned business continue to create value past the third generation.
Studies have highlighted the corporate governance gap in the region and the need to encourage more diversification in its board rooms, to globalise the outlook of the boards and to support the important wealth creation role that they play for the economies.
An analysis of international and regional family businesses by Booz and Co. indicates that the most critical factor to success is families' co-ordinated and sustained long-term strategy for growing and controlling their businesses. This involves exercising patience in managing capital, holding onto companies through bull and bear markets, focusing on core businesses, and emphasising long-term performance ahead of quarterly gains.
In the GCC, family firms are an up-and-coming force. They tend to be relatively young - most are less than 40 years old - they are typically managed by first or second generation family members, with few seeing significant involvement from third generation members. Despite their short tenure, some family businesses have gained international stature in the past few years. Their success, however, has been based on factors specific to emerging markets and the region's cultural heritage.
Meanwhile, a study by Barclays Wealth and the Economist Intelligence Unit (EIU) found that family businesses fare better than listed companies in economic downturns due to their work ethic and culture ethos. Family businesses, according to some estimates, account for 70 to 90 per cent of global GDP.
In the report titled 'Family Business: In Safe Hands?' family businesses are the world's most prevalent organisational form and among the most enduring.
"While there is no panacea for coping with a downturn, the organisational structure, values and outlook of the family business can often provide a strong foundation for coping with difficult economic conditions," the report says, as opposed to listed businesses.
It states certain attributes that make such businesses resilient and advantageous in today's challenging environment.
Firstly, family businesses have a long-term perspective and are not subject to the short-term demands of external investors in the way that listed businesses are. Secondly, they tend to be financially conservative, and do not employ leverage to the same extent as many other companies.
Thirdly, they have close alignment between ownership and control, which helps to prevent the 'principal agent' problem, whereby a separation of ownership and control (as is seen in listed companies) can lead to managers pursuing opportunities that are not in the interests of the company and its shareholders. Fourthly, they have a close network of family members, who control the business.
The research shows that family firms are much more committed to the longer-term and not driven to maximise returns from one quarter to the next. According to analysts at Barclays Wealth and the EIU, a long-term perspective means that family businesses can exercise prudence during both upswings and downswings in the economy.
These advantages, though, will not insulate family-run businesses in the region forever. Leaders of many GCC family businesses have acted as 'restless entrepreneurs', more focused on developing new businesses and entering into new investments than on scaling and institutionalising businesses once they are created or acquired.
This is typical not only of family-run firms, but of any company that operates in an environment of strong economic growth, limited competition, and abundant capital.
Today, family businesses are going to be put to the test as they face an economic slowdown and an upcoming generational change. On one hand, the current worldwide economic slump, coupled with increased competition from both regional and global firms across industry sectors and the democratisation of business development in the GCC, will likely put additional strain on family businesses' cash positions and will force them to improve performance and better manage their capital and liquidity.
Booz has identified six key actions to drive the successful evolution of family-run conglomerates. They are: Re-evaluate the existing business portfolio, creating sharper focus; apply rigorous discipline when evaluating new investments; build management capabilities and relinquish control when necessary; separate family and business activities; create a formal governance structure to govern family and business activities; and appoint a change agent as some families split necessary actions among themselves, with no clear accountability.
