Dubai: An estimated $1 trillion in assets will be transferred to the next generation of family owned companies over the next decade in the Middle East. The handover from the first to the second generation, and increasingly, the second to third generation will have tremendous implications on the sustainability and growth of these companies.
Management consultants and experts in family business say the region’s businesses need to incorporate a legal structure that best fits their succession plan, unique family dynamics, and goals.
“Empowering different generations within the family are a key factor determining the confidence and, ultimately, the success of a family business,” said Richard Jolly, Adjunct Professor of Organisational Behaviour at London Business School.
In the GCC, Gulf Family Business Council (GFBC), formerly Gulf Family Business Network, an organisation of family businesses has been working towards creating legal and governance structures aimed at managing generational changes at family business that supports sustainability.
“Family-owned and managed businesses account for a significant percentage of the region’s economy, yet creating and maintaining corporate behaviours that are the most conducive to business success remains a challenge across the Middle East,” said Jolly.
In the recent years family businesses in the GCC have made significant progress in putting corporate governance structures in place, but are still lagging in strict implementation, which could eventually challenge the very existence of these entities, according to a recent study by Gulf Family Business Council (GFBC) and McKinsey & Company.
Study conducted among the largest GCC family-owned businesses which collectively generate $100 billion in annual revenues showed that only 33 per cent of GCC-based family businesses have fully implemented governance systems that they have designed leaving significant potential for improvement in institutionalising governance by focusing on implementation.
Nearly 80 per cent of GCC family businesses are in the critical transition stage of first to second or second to third generation. In regard to succession planning, the Gulf has a unique dynamic at play. GCC family businesses are large families which presents them at an earlier stage in their evolution with complexities typical of families in their third and fourth generation cycles with large number of family shareholders. The likelihood of conflict and disputes increases with more family members who may have different views about the management of the family business.
“At the GFBC we understand that the majority of family business owners in the GCC are relatively young, between 40-60 years old, facing the critical juncture of transition of leadership from first to second or second to the third generation. One major risk during this transition is for large family businesses to get fragmented,” said Abdulaziz Al Ghurair, Chairman of GFBC.
Experts say empowering each generation and ensuring that they all buy into and contribute to the joint vision of the business is key to the sustainability of these businesses.
“For these businesses, having little separating the dining table from the board room table can be the recipe for not only family feuds but also for business strife. Adopting the right behaviours of a ‘confident’ organisation can be a game-changer not just for the business itself, but also for the professional and personal success of the owners and stakeholders,” said London Business School’s Jolly.
The McKinsey study showed that only a few family businesses in the region have been successful in completing end-to-end effective implementation of governance structures. Of the businesses researched, over 66 per cent of participants reported that they have started to put the building blocks in place. However, only around 33 per cent reported that the practices are fully adopted and are working effectively.
“Preparation is needed to avoid loss of family harmony and business disruption which in turn leads to loss of economic value. With around 75 per cent per cent of GCC private sector economy being family-owned, it is pertinent that we support the families to be equipped for the transition,” said Al Ghurair.
On the early inclusion of family in business affairs, the study revealed that 44 per cent of family businesses in the GCC have an employment policy in place for next generation from the family; nonetheless only 17 per cent of businesses have an effective assessment method in place to identify roles and responsibility for the next generation.
The study recommends that the ‘rules of the game’ should be clearly stated to the next generation as early as possible to allow for effective succession planning and transition of leadership. A development plan for the next generation and a clear business integration policy would ease the transition of leadership and set a reference to manage conflict.