Mohammad Al Habtoor credits his father for having the foresight to plan ahead.
Khalaf Al Habtoor, the founder and chairman of the Al Habtoor empire, had a well delineated succession plan in place for the family business to make a smooth transition into its second generation and ready to face up to the challenges thrown up by increasing competition and unforeseen economic forces in a rapidly globa lising world.
By making a clear separation between ownership and management, Khalaf put in place structures and rules that allocated rights and responsibilities among the children who stayed with him to continue the family business.
It is uncommon in the region to have succession plans in place before it is too late and conflicts emerge, fracturing familial relationships. Managing succession is a major challenge for the region's private businesses, more so in the aftermath of the recent global slowdown, which is forcing changes upon them, according to the experts.
"Family businesses don't survive that long for some inherent structural issues," says, Mohammad Al Habtoor, son of Al Habtoor Group founder and chairman Khalaf Al Habtoor. "There is a general perception that as family size increases, the pie sometimes does not grow commensurately and different members have different views and objectives."
He acknowledges the difficulty of keeping a family business alive beyond the second and third generations, but that can't be a rule, he says.
Khalaf Al Habtoor, the patriarch, says he is less anxious when it comes to his family.
"Thank God my children are on the right track, and I taught them how to manage their business. But still you can't see yourself in this modern generation and guarantee anything," he says. "However, with prudent business planning this can be mitigated," he adds.
Khalaf, 60, is worried how the new generations will take over the family business and stand amid the strong competition and challenges in the market, keeping the business as strong and efficient as it is now.
After working for three years with his father, the eldest, Rashid Al Habtoor, branched out on his own in 1993 to set up Al Habtoor Trading Enterprises. Today he runs his own diversified business in the Middle East and former states of the Soviet Union.
Mohammad and Ahmad, both educated in the US, and Amna, one of his three daughters, manage different segments of the group.
Mohammad, 41, is CEO of the Al Habtoor Group, which is one of the biggest diversified business consortiums in the UAE — dominant in construction, hospitality and car sales — with interests in the UAE and UK. Ahmad, 32, is the chief of Habtoor Motors. Amna, who has a degree in law, looks after the education sector. But all three have had to earn it.
Succession planning in Belhoul family
It was not much different in the Belhoul family when it came to succession planning. Dr Juma Khalfan Belhoul, 68, a qualified physician and the founder of the Belhoul Group of Companies, and who continues to be the chairman, mentoring the group, had all along maintained an effective business governance plan, strictly separating ownership and management.
The eldest son, Faisal Bin Juma Belhoul, 34, earned his father Juma Khalfan's trust working in project management on his return from the US in 1997. In 2000 he was made the chief executive of the Belhoul Group. The group has diverse interests in health care, pharmaceuticals, education, construction, garment manufacturing and travel and tourism.
Under his guidance it tripled in size, but more importantly, it underwent a restructuring, turning the family group into an investment office. After remaining at the helm for about five years, Faisal gave up his CEO position of the group and moved on to successfully steer his own private equity firm Ithmar Capital, founded in 2005.
Two of his brothers have an active role in other operating businesses of the group. The third is less involved on an operational level. The fifth is still in university. All the siblings are shareholders in the Belhoul Group and have all the rights that come with it.
"We tried to institutionalise and professionalise the management role," Faisal says. Most of the brothers, he says, are on the board of directors and they are consulted on key decisions. On a case by case basis they are offered an active role in the family business as a senior director to support the manager depending on their qualifications and their availability.
Facts on the ground suggest that the issue of succession and ownership in the region is indeed creating misunderstandings and conflicts among family members. Earlier, family business planning advisers used to visit the families to impress upon them the importance of succession planning. Today, the same advisers are receiving calls as members of families, mostly offspring, are no more ashamed to share their grievances with them and are eager to sort out differences with their parents, siblings, uncles and cousins in an amicable way.
Nasser Saidi, chief economist of the Dubai International Financial Centre, lists five major challenges with regard to succession planning in the GCC.
- Difficulties bringing in the younger generation into the business.
- Controlling the crisis of succession planning.
- Addressing the issue of dilution in big families.
- How to face up to the crisis of competition, with the opening of markets and having more players, both regional and global.
Five, businesses facing pressure amid the latest economic crisis — does that mean postponing or advancing succession planning?
Family businesses represent more than 70 per cent of all businesses worldwide. In the Mena region, it goes up to almost 90 per cent. We are talking not just small and medium enterprises (SMEs) but also major conglomerates. They play a key role in the economic growth and workforce employment. It is estimated more than 20 million jobs have to be created in the next decade and those have to come from the private sector.
Global studies have shown family businesses don't survive too long. By the fourth generation, only five per cent survive. Only five to 15 per cent survive into the third generation. And that's because, Saidi points out, of the inherent structural issues of informal management structures; ineffective oversight and control mechanism; non-alignment of incentives among family members resulting in conflict and lack of discipline.
Most of the family businesses in the Gulf are still relatively young, the oldest ones going back about 60 to 70 years. Most of them are in their second generation and some are just going into their third generation. The second generation has it easier compared to the third, which with brothers and cousins as co-owners makes decisions to be implemented more complex and difficult.
The situation gets complicated when the founder and patriarch has multiple wives or wives of different nationalities. The number of children of multiple wives is a challenge and distribution of rights and responsibility are something to be carefully negotiated.
Faisal, taking a page out of his father's book and his experience in dealing with family businesses as part of Ithmar Capital always favours early planning and early involvement of the family members to come up with the solution that can address some of the challenges.
"And to that extent we believe the right private equity partnerships can act as a major insurance policy against the risks that are associated with family disputes," he says.
Mohammad says he does not see much difference from what any corporate entity would face. Issues of change in management and diversification of risks in terms of businesses and geography need to be addressed.
"[By] maintaining a balanced investment portfolio and managing risks is an ideal way to diversify wealth," he adds. Keeping the ownership separate from management is a key message from successful families in order to address the issue of effective governance in business.
"That's a very important distinction that has to be created," Faisal says.
Khalaf, the founder of Al Habtoor Group says he manages to run his business successfully in challenging competitive markets by allocating management positions based on merit and qualification and not on relationships.
Family businesses have been able to cope well with the economic downturn since they have built substantial reserves over time, said Amin Nasser, family business advisory services leader, Pricewaterhouse Coopers.
"However I still believe that these families need to build long-term strategies including a good review of their current business portfolios in order to grow stronger. It is crucial for the economy that the large family businesses not only survive but also significantly improve the way in which their businesses are run."
But there are others such as Faisal who feel that wealth preservation should be the goal now.
"A lot of wealth has already been created. The emphasis now should be on how to preserve what they have and sustain some sort of growth," he adds.
With banks putting an end to name lending and money becoming scarce, families are being forced to clean up their act. That means bringing individual businesses under a holding company, with a clear separation between ownership and management and roles identified under each. Sole proprietorships are being advised to move to a limited liability structure.
On competition, Faisal says, businesses should work on forward thinking plans to ensure they have the right tools towards proper strategic planning and implementation — whether it is through private equity partnerships or others. "That's extremely important and adds a lot of value to the leading businesses of the region," Faisal says.
To ensure the survival and continuous growth of the company, the Rivoli Group, in 2007, sold a combined 50 per cent stake to private equity group Dubai International Capital (DIC) and watchmaker Swatch Group. The group, established in 1988, is known for its diverse portfolio of international luxury brands. It currently operates 300 retail outlets in the UAE and 35 others in Bahrain, Qatar and Oman.
"The partnership with Dubai Holding not only represents a government support but an important financial support. It is also very helpful in contact and legal advisory," says Adel Zarouni, managing director of Rivoli Group.
"The DIC investment will support Rivoli's aggressive growth strategy and ambitious expansion into new retail market," he adds.
The Rivoli Group selling part of its stake was more than just addressing the challenges of competition, access to capital and managing risk and liquidity.
Looking at the modern generation who have different ambitions, Adel is one of the Emirati businessmen who feels it is hard to keep family business into the third or fourth generation .
"Although nowadays there is no difference between boys and girls, but my daughters have chosen different majors and have not evinced interest in the family business," says Adel, 58, the father of three daughters.
His eldest daughter Mariam, 22, an engineer at Dewa, says she might have the passion, but she is not so sure about her talent and expertise to run the business. Though she does not involve herself in the day to day running of the company, she says the siblings do provide their views in major decisions.
"We do care about our family business and we are trying to keep an eye on it and we will do our best to keep Rivoli name big in the retail market," adding that her sister, who is studying finance might help run the business in future.
She dismissed the possibility of her future husband taking over the Rivoli family business. "It is not because he doesn't belong to Rivoli family or he is a step son but because my fiance is an IT professional and he is very successful in his career and has a big post in government," says Mariam, who plans to get married next year.
The issue of the son-in-law varies from family to family. With the daughter yet to be married, the Belhoul Group hasn't faced a situation of whether to offer a shareholder position or a managerial position to a son-in-law. The strict separation between ownership and management and the roles defined under each should take care of the issue, Faisal says.
Should businesses generally have a succession plan? How important is it for businesses to develop an effective corporate culture?