Managing the transition from one generation to the next is fraught with pitfalls. The Gulf's family-owned businesses must find ways to ensure a smoother switch. Image Credit: Gulf News

Family enterprises are widely acknowledged as one of the engines of post-industrial growth. They foster entrepreneurial talent across generations and have a long-term strategic commitment to the organisation.

According to KPMG’s research, family businesses account for about 60-80 per cent of global enterprises; they also make up more than 40 per cent of the Fortune Global 500. Family businesses create over 70 per cent of the world’s GDP.

The Middle East is no different, where family businesses contribute significantly to GDP, and employ a large part of the workforce. Perhaps more than anywhere else in the world, family businesses in this region tend to flourish. From small and medium-sized enterprises (SMEs), to renowned multinational companies, family-owned and managed companies form the backbone of the economy.

Core performers

Governments in the Middle East appear to be increasing their support for family businesses, as they form such an integral and significant part of their respective economies. For example, Saudi Arabia is encouraging more family-owned companies to list on the Tadawul stock exchange, in its overall move to reduce reliance on oil revenues.

The regulator has relaxed the traditional initial public offering (IPO) requirement to list at least 30 per cent of a company.

In the UAE, the government is recognising the importance of SMEs, many of which are family-owned and run. In fact, they represent more than 94 per cent of the total number of companies operating in the Emirates, and provide jobs for more than 86 per cent of the private sector workforce.

In Dubai alone, SMEs make up nearly 95 per cent of all companies, employing 42 per cent of the workforce and contributing around 40 per cent to Dubai’s GDP.

Not primed enough

With current demographic and societal changes, family businesses around the world are exposed to new challenges that make traditional methods of succession and governance less relevant.

Generational changes are affecting the way family business leaders manage their firms. Each demographic comes with its own approach, redefining the status quo of families and their businesses. Identifying the generation the current family business leaders belong to helps better understand how such changes impact family businesses in the modern era.

Generational shifts

According to the latest Babson STEP and KPMG Global Family Business Survey, in North America, 15 per cent of family businesses are led by CEOs from the “Silent Generation” (those born from 1925 to 1945). This figure is more than double the global average.

Meanwhile, the situation could not be more different in the Middle East and Africa, which has the highest percentage (27 per cent) of millennial family business leaders.

There is likely to be a possibility of performance differences related to CEOs and their leadership styles. The Babson STEP and KPMG “Global Family Business Survey” revealed that family businesses led by CEOs belonging to Generation X and millennials show higher degrees of performance than family businesses led by the Silent Generation and Baby boomers, both of whom experienced a fall-off in performance.

This indicates that Middle East family businesses are likely to be in better shape than their global counterparts.

Where’s the plan?

The lack of a formal succession plan continues to affect many family businesses. The survey shows that almost half of global family business leaders are confident their organisation will stay within the family in the future. This increases to 55 per cent in Asia-Pacific, Middle East and Africa, but is as low as 33 per cent in North America.

This trend tends to decrease with the new generation, suggesting they might have less emotional attachment to the family business.

Diversification will be a key focus area. Family firms in the Middle East are usually highly diversified compared with similar organisations in other parts of the world, with the vast majority having a presence across several countries, and most operating in several distinctive industries.

The future of family-owned entities is likely to depend on their ability to innovate and adapt to a rapidly changing business environment. Fostering a culture of innovation and agility in operations and decision making is emerging as a priority area.

A number of companies are striving to embed innovation as part of their organisation’s culture and CEOs believe agility is one of the crucial components to running successful businesses in today’s times.

When global family business leaders were asked about concerns that keep them up at night, the availability of talent ranked number one (16 per cent), followed by taxes (15 per cent), regulation (14 per cent), digital transformation (12 per cent), emerging technology (11 per cent), and supply chain concerns (10 per cent).

To come out on top, family businesses will need to adapt and innovate, resolve succession, governance and leadership development issues and look at harnessing new technologies for diversification and expansion in the future.

- Nader Haffar is Chairman and CEO at KPMG Lower Gulf.