Managing tricky bit of generational shift
A sound governance structure would not be amiss for family businesses in transition
The challenge of generational change for family businesses in the Middle East is complex and must be acknowledged as a high priority issue. It is estimated that over 80 per cent of all businesses in the Middle East are family- owned and constitute the second main employer in the region after government. Accordingly, the importance of sustaining these businesses for the prosperity of regional economies cannot be overstated.
The leading entrepreneurs of the Middle East were able to identify lucrative business ventures, many of which grew from small start- ups to hugely successful companies boasting large fortunes and influence on regional economies. Looking into the issues that arise, many Middle Eastern families do not have any detailed plans in place to ensure successful transition of their businesses from one generation to the next. Traditionally, the eldest child traditionally becomes a successor of the family business.
Transition brings about different challenges that the family and the business will face. Firstly, does the family have a unified vision for the future that can take the business to the next level and address the needs of the growing number of family members? Also, does the family have a clear process of taking collective decisions?
While holding onto tradition, the founding generation of GCC family businesses also has a tendency to retain certain assets for emotional rather than pure commercial reasons. With the changing business environment and increased competition, families need to conduct a strategic review of the company’s existing business portfolio to ensure alignment with a future vision and strategy of the family and the business. It is companies with coordinated and long- term growth strategy that are more likely to succeed through turbulent economic environments.
Family businesses benefit from an effective governance framework, enabling non- family senior executives and board members to perform their duties and manage potential risks without undue interference from shareholders. Having the help of an independent outsider on the board or a trusted adviser can bring a fresh perspective during the emotionally charged process of transition. The role of the family should be an oversight role to clarify the strategic direction of the business and for developing a unified vision for themselves as a unit.
The transition is usually a complex process, as the next generation may choose to pursue other interests, rather than be a part of the business. Those who choose to work in management must obtain the required credentials and gain the trust of the elders and the shareholders. In return, family members who are involved in management expect to have the respect and support of other family members to continue their role effectively.
To achieve a strategy that satisfies the objectives of both the current and future generations, an open forum for dialogue, where the family members can regularly air their views is required. Members should be satis- fied that their interests and aspirations have been taken into account when drafting the future vision and strategy of the business.
This should be especially prevalent with the handover process as, ultimately, the chosen candidates should have the skills in the best interests of the family and the business and should have the backing and support of the family to be able to succeed. The postholder has to contend with changing economic climates and manage a complex relationship between the family and the business to have a unified vision for the future.
It is also important to note that although the next generation of family members is often better educated, with international experiences and may well be more in tune with current global business issues than their elders, they may lack real business experience. They will thus need to gain the trust and confidence of the founders of the business as well as other stakeholders, before assuming greater responsibilities. Family members need to clearly understand their roles as business owners and ensure they act in a responsible manner that will minimise disruption. They also need to act professionally as members of the management and acknowledge that they are bound by governance shareholders.
Formalising a family governance structure to establish clear boundaries between business ventures and the family activities creates transparency and allows management to focus on growth strategies for the business. Some families create a private family office to handle the family’s private activities and manage personal assets and wealth.
Investing time in implementing a family governance structure will make all the difference in preserving family legacies for future generations. With a governance structure, agreed rules and decisions are set and dialogue is open for a strategy on the longterm vision for the family business.
With effective communication, transparent rules and a clear process for managing differences, family businesses can make the generational transition process in the best interests of the business.
After all, what is good for business is also good for the family.
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The writer is Director, Advisory Services at EY Family Business Center of Excellence.