Recently we were asked an interesting question by a senior adviser for a large family group in the UAE. His query: “What is the purpose of family business governance — is it to provide jobs for family members, or is it to secure and generate wealth for family members?”
The context of his question came from his experience of observing numerous family legacies in the region fall into decline. The statistics speak for themselves — globally, 97 per cent of family legacies collapse before the fourth generation. Which means, only 3 per cent of family businesses successfully transition the legacy beyond the third generation.
In the Middle East, many family groups are fast approaching this generational cliff. Most have second-generation family members actively integrated into the business, and others have incorporated some third-generation members. For these families, the choice of jobs vs. wealth in their governance model simply comes down a question of their mindset.
Start with Jobs
If the mindset of the family is geared towards creating a lasting legacy, one that continues for generations, then the answer in our experience is jobs. Put another way, sustainable job creation is a required aim within the governance framework for any family that seeks to achieve a sustainable multi-generational family legacy.
Wealth is an outcome of this journey, not the focus of it. Such a legacy avoids the perils of stagnation and in fact grows due to the sustained contribution of its members.
To use an analogy, think about governments around the world. It is not hard before you find examples of leaders whose primary aim is to secure the extreme wealth (and the power that comes with it) that the country generates. The result is that the society bifurcates into the haves and have-nots, with growing income and wealth gaps, finally leading to an implosion and revolution.
Other nations focus their resources and efforts towards ensuring their citizens are contributing members of society. These nations have historically achieved greater wealth and prosperity, and they do this because of their citizenry, not despite it.
Family leaders face a similar challenge as the family citizenry matures and as they undertake the responsibility of supporting and managing the growing numbers. Those who choose sustainable job creation as a goal and then implement it well, ensure that family members for generations are incentivised to develop and make their own contributions, thereby growing the legacy while also preparing them for future ownership.
Some will further drive the diversification of the family portfolio into other sectors and geographies thus reducing the overall portfolio risk. Others will drive a regeneration of the legacy business to bring it up to mark with the times.
Doing this right requires the family and business spheres to work closely to assess and develop family members, to plan and encourage their participation, to set and communicate clear expectations, and finally to support and be vested in their success. This process is not linear but circular, as in these modern times development is continuous, and success is not guaranteed.
Policies in the family constitution dealing with Eeducation, employment and welfare will need to be developed and carefully integrated, and the family council and board of directors will have to work closely together to implement these policies.
That said, is it not possible for family leaders to also focus on wealth preservation policies at the same time? The answer is yes, they can and should; however not as the foremost priority. With wealth as the primary concern, the likely scenario we have observed is that the family legacy will not survive past the current generation.
At this time, many family leaders in this region are struggling to find capable successors to take on the leadership mantle. Many also have issues between family members in light of the looming succession challenge.
These leaders often conclude that it is best to govern by securing the wealth and shielding it from family issues. They put in place legal and financial structures with trusts and wills to ensure the wealth is protected. They also “professionalise” the business by putting in place boards and an executive team with little to no involvement from family members.
The long-term results: the journey will continue, but led by professionals who manage the businesses, the investments, and the foundations long after the leaders have passed. Family members will draw dividends and support their lifestyles but continue on their individual journeys.
Some of the chosen ones will remain part of the original family companies, while others will become successful entrepreneurs or go into the professional sphere, and the rest will struggle to make ends meet. All will share a loose connection of being descendants of the great founders, but the legacy has dissipated, and the founding vision, values and stories are now relegated to the pages of a Wikipedia article.
To avoid this, family leaders must have the courage and stamina to create a participative and results-driven culture in the family and business, supported by the right policies and systems. An approach geared towards inclusion and support could yield different results.
Heirs apparent could be built among the third-generation to take over and grow the business. Others can be nurtured to support diversification of the group portfolio. Such a structure would set the stage for the legacy to sustain across future generations, with each group driving growth and diversification and making its own mark along the way.
Bob Kohli and Asin Nurani are Managing Partners at RTS Global Partners, a family business advisory firm.