THE BIG SHIFT
Family businesses take leap towards globalisation
“FAMILIES FEAR LOSING CONTROL IF PUBLIC SHAREHOLDERS BECOME INVOLVED AND FAMILIES ARE NOT ACCUSTOMED TO THE DEGREE OF PUBLIC SCRUTINY AND ACCOUNTABILITY WHICH IS REQUIRED OF LISTED COMPANIES. THEY OFTEN ALSO FEEL THAT THEIR BUSINESS IS DOING WELL AND THERE IS NO NEED FOR A STOCK EXCHANGE LISTING.”
SHEIKH MOHAMMED BIN FAISAL AL THANI VICE CHAIRMAN AAMAL COMPANY
Privately-owned organisations span multiple businesses and are typically vertically integrated, own sizeable real estate portfolios, and their operational control is still maintained by the original founding family member or, in some cases, by the second or third generation.
The 19th century-born US poet Ralph Waldo Emerson was emphatic when he said: “It requires a great deal of boldness and a great deal of caution to make a great fortune, and when you have it, it requires ten times as much skill to keep it.”
For many families in business, the rapid pace of change and growth in the market place presents significant concerns regarding the manner in which they will continue to safeguard and preserve their heritage and wealth. The FOBs in the Middle East face a range of challenges that not only impact the success of their business, but also the professional and personal goals of their owners and their stakeholders at large.
In Qatar, family-owned and-managed businesses have been making a vital contribution to the country's economy and over 75% of the companies, which are registered with Qatar Chamber, are either family business groups or HNWIs.
Reputed FOBs include Salam International, Aamal Holdings, Jaidah Group, Ezdan Holdings, Mannai Corporation and Alfardan Group in Qatar, Olayan Group in Saudi Arabia, Kanoo Group in Bahrain, Al Ghanem in Kuwait and others in the GCC region. All of these business groups have started on a modest note and they have not only built empires but also contributed significantly to the economic growth of their respective countries over the years. They are involved in businesses right across the economy, including retail, real estate, automotive, finance, manufacturing, importexport, construction and so on.
Aamal Company Vice Chairman Sheikh Mohammed bin Faisal Al Thani says the FOBs in the GCC have a strong tradition of entrepreneurship that goes back many generations. Much of the Gulf countries' success can be attributed to the contributions made by them.
“I believe FOBs could do this because their experience, market knowledge, flexibility and entrepreneurial nature enabled them quickly to capture the opportunities created by the economic prosperity this region has been witnessing,” he feels.
Even a report by global management consultancy firm A T Kearney says the biggest advantage of GCC family business has been the ability to capture the region's significant growth via international partnerships and franchises across multiple sectors. These are reinforced by local regulations and exceptional leaders with strong entrepreneurial spirit and intimate knowledge of local markets, it says.
The report entitled “GCC Family Businesses: Unlocking Potential through Active Portfolio Management” also says that after a tough 2008, GCC family business-
es rebounded to some extent (as did the market), but this did not last. As the overall market has trended mostly up, family businesses have trended downward.
Sustainability is crucial, after all, as many of the FOBs are facing increased competition in local markets, pressure to continue to globalise their businesses, and challenges associated with generational transition of leadership and business management, the report adds.
Reasons for success
One of the main reasons why the FOBs have succeeded in the region is the involvement of the family members, who are willing to go to any length to achieve their goal. Besides, loyalty from the staff is another factor that has contributed to their success.
Abu Issa Holding (AIH) Chairman Ashraf Abu Issa, who took over the business when he was 19 following his father's death, says: “It was by no means an easy task as there were 36 employees at that time. However, my father was a role model for me as he nurtured the relationship with the employees based on mutual trust and respect and this continues even today. Ours being a family business, I always treat them as my family members and not as employees.”
Abu Issa says compared with private limited companies, family businesses are more concerned about their reputation. “Any wrong move will not only result in the collapse of business but also bring a bad name to the entire family. Hence the expectations are high and so is the outcome,” he says.
However, he has a word of caution. Though there are more than 1,000 FOBs in Qatar, not more than 5% of them have a formal governance structure, which is vital for the health of any business to attract best talent, ensure greater transparency and access to capital.
“I feel that by having a streamlined management practice, family businesses can withstand changes such as generational transitions and thrive for several years. Since every family business is distinctive, the rules and procedures will be flexible to face their own challenges and become successful ventures. If there is no family business governance model, even good companies are prone to go the wrong way,” Abu Issa warns.
“Intrinsic qualities such as their longterm view on profitability (investing profits versus paying out dividends), their family fabric, value systems, history and tradition play a role in their success,” says Walid S Chiniara, Head of Private Company Services at Deloitte Middle East.
“Further, external factors such as favourable regional economic circumstances and the encouragement of foreign direct investment have supported the growth of family businesses,” Chiniara says.
“THE BIGGEST CHALLENGE TO FAMILY BUSINESSES IN THE MIDDLE EAST IS THE THORNY ISSUE
OF MANAGEMENT INTERFERENCE. ALL MIDDLE EAST RESPONDENTS FELT THAT HNWIS WOULD GET
HEAVILY INVOLVED IN MANAGEMENT DECISIONS.”
HARISH GOPINATH HEAD OF FAMILY BUSINESSES IN THE MIDDLE EAST AND ASIA
“SINCE EVERY FAMILY BUSINESS IS DISTINCTIVE, THE RULES AND PROCEDURES WILL BE FLEXIBLE TO FACE THEIR OWN CHALLENGES AND BECOME SUCCESSFUL VENTURES. IF THERE IS NO FAMILY BUSINESS GOVERNANCE MODEL, EVEN GOOD COMPANIES ARE PRONE TO GO THE WRONG WAY.”
ASHRAF ABU ISSA CHAIRMAN ABU ISSA HOLDING
According to Chiniara, the three major reasons why FOBs have succeeded in the past were a pool of educated next generation who were ready and able to take over the reins of control and become the next enablers; modern and sophisticated legal systems that support and offer the foundations to family businesses to team up with successful international brands; and a sense of privacy and confidentiality where family conflicts are kept private, limiting the negative influence they can have on the business or even the family's reputation.
An important trend that is being witnessed in the region is the deliberate, systemic improvement in governance, says Andrew Porter, Director of Research at London-based Campden Wealth, which provides intelligence and networking opportunities for reputed business-owning and financial families and their family offices around the world.
“Good corporate governance – related integrally to transparency, accountability and professionalisation – is helping these business families secure their legacies. The entrepreneurial, founding generation took many risks and weathered economic turbulence in order to build successful businesses; in many cases, we are seeing the next generation of business leaders take steps – notably through education, training, and professional experience and improved governance structures – to inculcate global best business practices,” Porter says.
Standard Chartered Bank's Regional Head (Private Banking Clients for EMEA and South Asia) Stephen Richards-Evans attributes the success to a number of reasons like heavy family involvement in the day-to-day management of the business, strong personal and family ties, and the ability to make difficult investment decisions that will benefit the company in the long run, unlike companies that are run primarily to deliver fast returns for shareholders and focus on not over-stretching the business. “Family businesses also adopt a conservative approach when dealing with business finance, only seeking credit where it is affordable and where there is a genuine need,” he points out.
Family-owned businesses in Qatar and the region, which represent the majority of the private sector, are well established in a vast range of industries such as retail, real estate, trading, and services. Family businesses have developed the necessary knowledge and captured the right opportunities to achieve high growth.
Sheikh Mohammed says many of them have evolved to become multi-billion dollar companies and earned an international reputation. Successful family businesses which also implement best practice policies and regulations, high standards of corporate governance and transparency have won public confidence and proved themselves over the years, expanding their operations and attracting foreign investments to Qatar, he points out.
“As far as Qatar is concerned, the advantages of FOBs are that the rules and regulations are very clear and there are
no grey areas in this regard. The absence of a tax regime is another reason why they have scripted many success stories in the past and also in the present generation. Moreover, they will be leaders in their communities and spearheading innovations,” says Abu Issa.
The flip side
The other side of the story is equally interesting. While the first-generation FOBs, led by the founder(s), had a string of victories in the West, succession wars, failure in overcoming hurdles during transition of power, and familial feuds have resulted in the downfall of many of them after the third or fourth generations, in many countries. In other words, the first generation makes money while the second generation tries to keep it and the third and fourth generations lose it, as is the case in the West.
Chiniara, however, says it is entirely different when it comes to the Middle East, as most of the family businesses in the Middle East are still owned and controlled by the founding members. “One can often see three or four generations cohabitating under the same roof whereby they have not yet experienced the transition from generation one to generation two, three, or four,” he says.
What is about to happen over the next decade, he says, is a transition from first generation to third or fourth generation, depending on the circumstances. But he is confident that the new leaders are qualified to take over from their seniors and that they will beat this statistic. "I believe that each generation of leaders should behave as if it is generation one. They have the responsibility to keep the dream alive and the entrepreneurial spirit thriving,” he says.
However, Abu Issa feels that the majority of FOBs do not survive due to loss of family values and motivation over the years and also due to the dominance of the older generation.
The FOBs also lack a proper succession plan to endure their businesses, which is again part of good corporate governance. The autocratic approach never helps and the next generation should gain experience from the founders/successors while they are still at the controls, Abu Issa points out.
The success percentage of transition is 30% to the second generation while the corresponding figures for the third and fourth generations are 10% and less than 3%, respectively, says Porter. “Family businesses fail not because of operational blunders, misplaced patents, or mismanagement but due to familial feuds,” Porter adds.
Establishing a governance framework to regulate the family's roles as shareholders, board members, and managers is essential because it can help avoid these pitfalls.
Richards-Evans says the main issues affecting FOBs survival across generations is lack of proper planning for personal wealth transfer, family conflicts, nepotism and
“THE MAIN ISSUES AFFECTING FOBs’ SURVIVAL ACROSS GENERATIONS
ARE LACK OF PROPER PLANNING FOR PERSONAL
WEALTH TRANSFER, FAMILY CONFLICTS OVER MONEY, NEPOTISM AND KEEPING THE BUSINESS PERSONAL RATHER THAN INSTITUTIONALISING IT. THIS EVENTUALLY RESULTS IN POOR MANAGEMENT
AND DISPUTES OVER THE SUCCESSION OF THE BUSINESS LEADERSHIP AND
STEPHEN RICHARDS-EVANS REGIONAL HEAD, PRIVATE BANKING CLIENTS FOR EMEA
AND SOUTH ASIA STANDARD CHARTERED BANK
“THE THREE MAJOR REASONS WHY FAMILY BUSINESSES HAVE SUCCEEDED IN THE PAST WERE A POOL OF EDUCATED NEXT GENERATION WHO ARE READY AND ABLE TO TAKE OVER THE REINS OF CONTROL AND BECOME THE NEXT ENABLERS; MODERN AND SOPHISTICATED LEGAL SYSTEMS THAT SUPPORT AND OFFER THE FOUNDATIONS TO FAMILY BUSINESSES TO TEAM UP WITH SUCCESSFUL INTERNATIONAL BRANDS; AND A SENSE OF PRIVACY AND CONFIDENTIALITY WHERE FAMILY CONFLICTS ARE KEPT PRIVATE.”
WALID CHINIARA HEAD OF PRIVATE COMPANY SERVICES DELOITTE MIDDLE EAST
keeping the business personal rather than institutionalising it. This eventually results in poor management and disputes over the succession of the business leadership and management.
Sheikh Mohammed feels that it would be impossible to pin point one specific reason why FOBs do not survive. Family businesses cannot succeed for any number of reasons and indeed the reasons for failure are the often same as for any business: they are badly managed, fail to control costs or simply suffer from an economic downturn.
“There are, however, certain factors that are prevalent in family businesses that can contribute to their demise. Specific factors can include informality of fundamental business practices, a lack of robust processes and controls, or lack of firm leadership with different family members pursuing their own agendas. What is clear is that without strong corporate governance a business is unlikely to succeed in the longer term,” Sheikh Mohammed says.
Like successes and failures, FOBs in the region have many challenges to sustain and grow and they include concentration of assets in the hands of seniors, centralised decision-making process frustrating those not involved in it, lack of transparency and communication between beneficial owners and interested parties, and retention of talent among others.
“One of the major challenge is a rising generation of educated, capable next generation entrepreneurs, particularly female members of the family who are looking to secure their share of the ownership in the business, and who are beginning to challenge the status quo,” Chiniara says.
The other issues are difficulty in letting go and passing the baton to the next generation, an opportunistic (emotional) growth strategy that leads in many cases to the misalignment of the vision between seniors and juniors, and also growing international competition, Chiniara says.
Richards-Evans says there is increased competition in the market and the challenges associated with transition of business leadership to the next generation. “A key challenge to the successful transfer of business across generations stems from the lack of talent inventory and/or lack of readiness among the next generation to lead the business,” he says.
According to Porter, recruitment and retention of qualified staff are a perennial challenge for GCC/Qatar-based family businesses, though they are not alone in facing this issue.
As many family businesses prepare for the inter-generational leadership transition, it marks an opportunity to establish and develop relationships with external (non-family) business leaders, thus expanding and professionalising their networks.
“With the GCC governments according priority to education and human capital investments, one can expect the FOBs further professionalising through the recruitment and retention of senior staff, managers and executives in the coming years,” Porter says.
“There should be more awareness among family businesses about the threat of globalisation and how it can negatively affect their business if they don't prepare for it,” Abu Issa adds.
Listing in bourses
Despite their successes, the majority of FOBs in the region are not keen to get listed on the stock exchanges in their respective countries for fear of losing control over the business if public shareholders become involved, as families are not accustomed to the degree of public scrutiny and accountability which is required of listed companies, complying with regulatory conditions, transparency in accounts and accountability to the shareholders.
The other reason is that the region's economies are not yet market-based and they depend mainly on entrepreneurship and private capital. Institutionalisation is a process and it usually takes between three and five years for a company to become IPO-ready.
Sharing similar views, Sheikh Mohammed says FOBs often feel that their business is doing well and there is no need for a stock exchange listing. “But I believe that more effort should be made to highlight the benefits of a public listing and encourage them to take this step,” he says.
However, things have been changing over the past decade in the GCC judging from the success of companies like Mannai Corporation, Salam International, Ezdaan group etc in Qatar, just to name a few success stories.
With the GCC governments initiating economic reforms, FOBs are considering expanding their operations by going public and raising additional resources both
within and outside their countries.
“It's like moving from dictatorship to democracy at the business level. In addition to introducing management and accounting systems, the mindset of the owners and that of the executives working within such businesses needs to evolve whereby collegiality, transparency, empowerment and accountability become second nature,” Chiniara says.
“The FOBs have become FDI-friendly and are investing heavily in infrastructure, most notably education, healthcare, transportation, logistics, and telecommunication. We strongly believe that the partnership between the private sector (dominated by families in business) and the government will ensure the sustainability of the economy over generations to come,” Chiniara adds.
An interesting aspect is that four-fifths of Middle-Eastern businesses are seeking external finance, while three in five have previously offered equity in their business to external investors, according to a recent global survey by KPMG, a global network of professional firms providing Audit, Tax and Advisory services.
The survey says that 58% of family businesses globally are currently seeking external financing to fund their investment plans, but finding the right strategic investment partner can be challenging. This is not the case in Qatar, where banks are “very willing” to lend to FOBs, the report says and identifies that HNWIs are an untapped resource in the region.
The findings also show that the top priorities of HNWIs and FOBs align: HNWIs name long-term capital appreciation (37%) as their top driver for investment, while family-owned businesses name long-term orientation towards investment returns as their top investor characteristic (23%).
“The biggest challenge to family businesses in the Middle East is the thorny issue of management interference. All Middle East respondents felt that HNWIs would get heavily involved in management decisions,” Harish Gopinath, KPMG's head of Family Businesses in the Middle East and Asia, says.
“Investment between family businesses and HNWIs in the Middle East is not common, mainly due to the perception that HNWIs would want to get closely involved in the management decisions and day-today operations of the family business. However, family businesses are seeking external finance and, in addition to financing, connecting with HNWIs can bring about synergies and tap into the knowledge and experience of HNWIs which will enable them to grow to the next level, “Gopinath adds
GOVERNANCE – RELATED INTEGRALLY
TO TRANSPARENCY, ACCOUNTABILITY AND PROFESSIONALISATION – IS HELPING THESE BUSINESS FAMILIES SECURE THEIR LEGACIES. THE ENTREPRENEURIAL, FOUNDING GENERATION TOOK MANY RISKS AND WEATHERED ECONOMIC TURBULENCE IN ORDER TO BUILD SUCCESSFUL
ANDREW PORTER DIRECTOR OF RESEARCH