Family Firms in the Middle East: The New Rules of Engagement
When Shaker Group, a Saudi
Arabia-based air conditioning supplier, lists 30% of its shares in
an initial public offering (IPO) in Riyadh later this year, it will
be a signal that change is afoot among the Middle East's family
businesses. The company set up by brothers Hussein and Hassan
Shaker and today has an annual revenue of 1 billion riyals (US$267
million) is one of around 200 firms that the family conglomerate,
Al Muhaidib Group, runs, or holds a stake in. The IPO is part of a
massive restructuring plan that Musaab Al Muhaidib, a grandson of
the group's founder, is pushing through to sharpen overall
performance. Among other things, he says, such changes are expected
to "help the group drive value out of its companies."
Al Muhaidib is one of the thousands of family businesses in the
Middle East. According to various estimates, 95% of all businesses
in the region are family firms. What's more, consulting firm Ernst
& Young says almost three-quarters of family businesses in the
Middle East are owned and managed by the second generation;
one-fifth are the third generation.
They range from old-timers such as retailer and fashion brand
manager Jashanmal National Company whose founder opened his first
general store in 1919 in Basra, Iraq, before spreading out across
the UAE to relatively new start-ups, such as chocolate maker Patchi
which opened its first shop in Beirut in 1974 and now has 140
boutiques in 28 countries. A slew of others were founded as trading
enterprises back in the 1940s and 1950s that later diversified and
are now massive conglomerates. Some have thrived by providing
services around oil and gas, including industrial goods, real
estate and financial services.
Indeed, more likely than not, the region's energy riches have
bolstered growth at these largely private, family-owned businesses.
At the same time, some have benefited from their counties'
restricted competition practices, privileged access to senior local
officials through family connections and access to funding based on
their family name. Yet other factors are at play: In the Middle
East, just as elsewhere, family firms are more likely to take a
longer term approach to running their businesses than non-family,
quarterly results-focused firms, showing a readiness to invest
capital with patience that can become a competitive advantage.
Whatever the case, many Middle Eastern family businesses are
sharpening up their acts. Al Muhaidib Group and others are
scrutinizing their business portfolios to weed out firms that no
longer fit their aspirations or are underperforming; others are
consolidating and streamlining their vast portfolio of firms within
targeted sectors; and in a number of instances, they are recruiting
non-family managers for the first time or adopting corporate
governance standards more often associated with companies listed in
London or New York.
Mounting Challenges
Why the shift? In a report about family-owned firms in the GCC
published last year by consulting firm Booz & Company,
principal Ahmed Youssef cited intensifying competition as one
reason for the change. "If families do not take this seriously,
they will have a hard time," he notes from his office in Dubai.
Many Middle Eastern economies are pushing ahead with ambitious
reform programs, which entails opening up to foreign investors as
part of World Trade Organization (WTO) commitments. For the
incumbents, it means either changing or being left behind. Says
Musaab Al Muhaidib: "We have the pressure of globalization and the
WTO, and the challenges of the cyclicality of the economy."
Youssef says it doesn't help that nearly 90% of the largest
family-owned business surveyed for his study are active in three or
more sectors; of these, about half are in five or more sectors. He
cites the report's research into annual results between 2003 and
2007, which found that global family firms focused on one sector
broadly outperformed those in numerous sectors. In some cases,
though, when a group operates in many sectors, its family owners
are reluctant to streamline. It might be that some sectors define
the branding of the group, have sentimental value or the family is
worried that getting rid of a business will send out the wrong
message publicly. As Youssef notes, "When families put up something
for sale, unfortunately the perception of others is that the family
is in trouble."
Furthermore, the global financial crisis has taken its toll on the
region, as elsewhere. In particular, this is a part of the world
where, until recently, banks were happy to lend to big-name
industrial families. But, says Youssef, "when the credit crunch
hit, banks became very nervous, and now they're reluctant to renew
credit facilities." says Youssef. It was a situation only made
worse when Ahmad Hamad Algosaibi & Brothers and Saad Group, two
indebted family businesses in Saudi Arabia, ran into trouble last
August.
There are other pressures that might be all too familiar to
counterparts in other countries. Succession planning is a case in
point. In some cases, a patriarch is unwilling to cede control; in
others, the younger generation has not been well groomed. Often,
family members assume a plum job in management is their birthright
rather than something to be earned and sometimes, their executives
succumb to the personal interests of family members and invest in
whimsical ventures that in other types of firms would never see the
light of day.
And as family members multiply, there's growing pressure to pay
dividends, rather than reinvesting earnings in the growth of the
business. "There's always pressure from family members who are not
involved in the business to get more dividends," says Raffi Amit,
professor of entrepreneurship and management at Wharton. "That's a
tough balance to keep."
Go Where the Action Is
Against that backdrop, these companies also need to address some
particularly thorny local business challenges. In Saudi Arabia,
some 60% of the population is under 25 years old but unemployment
is running as high as 35% among 16 to 24 year olds. To soak up new
entrants to the labor market, consulting firm McKinsey &
Company says the Gulf region's private sector will need to create
three million jobs in between 2005 and 2015, compared with just
half a million created in the previous decade.
So far, the private sector has done little to alleviate the
problem. The oil sector, in particular, provides jobs for only a
very small fraction of locals. Meanwhile, the region's start-ups
and small and midsized businesses (SMEs) have chipped away at the
problem in a 2009 ranking run by the Saudi Arabia General
Investment Authority of the country's fastest-growing SMEs, 45 of
the companies cited created 15,000 jobs in the past five years.
Yet there are worthy stakeholder value-enriching opportunities,
too. As policy makers in the Middle East try to diversify their
economies from oil dependency, for example, there could be plenty
of promising growth in sectors such as tourism, health care,
engineering and construction. Home-grown family firms may have a
good chance in this case, given their access to local know-how and
connections.
Looking further afield, family-owned businesses are in a strong
position to build on their strengths to become regional champions
across the Middle East and North Africa. As Hassan Jameel, whose
late grandfather founded Abdul Latif Jameel Company (ALJ), a global
auto distributor in Saudi Arabia, points out: "Family businesses
are the cornerstone of the economy, in the Gulf, as elsewhere."
Peak Performance
It comes as little surprise, then, that some family companies in
the region are drafting a new, more sustainable approach to their
businesses. For example, in 2008 Al Muhaidib merged some 50 of its
Giant Stores in Saudi Arabia, as well as Qatar and Kuwait with a
chain of 60 or so Panda supermarkets, which were owned by Savola, a
publicly listed foods firm. Following the merger, the new
supermarket company found it had more than 1 billion Saudi riyals
of real estate on to its balance sheet, which it has since divested
in a sale-and-leaseback agreement. "That has brought … 1 billion
riyals to the company and freed up assets," says Al Muhaidib. "And
it has focussed the company on what it's good at retailing."
Aside from operational improvements, family businesses are
increasingly pushing through changes in governance, according to
experts. "If there's a large business that has the intention of
being globally competitive, bringing in professional management
early on is of the utmost importance," says Wharton's Amit. In the
case of ALJ and others, that also means introducing executive
committees, independent audit committees and independent advisory
boards the latter reviewing management performance twice yearly. At
such firms, governance practices exceed local requirements, and
match standards more often seen among public companies.
Some large industrial families are also tackling touch management
issues. Among other things, according to Amit, they are drafting a
family governance document, charter or constitution. Such a
document spells out the families' corporate values in black and
white, including discussions about ethics and philanthropy. "Some
of these families are very large," he says. "So in addition to
having the governance structure in the family business, they have
to have a governance structure in the family, which enables family
members to make decisions." Al Muhaidib, for one, has introduced a
charter that family members sign on turning 16 years old.
Above all, however, leading industrial families are learning how to
articulate the relationship between family members and the
business. "In regard to family members, there is a clear
segregation of ownership and management, which means any family
member who works for the company is regarded as an employee and not
a member of the family," says Jameel of ALJ.
Al Muhaidib, too, has agreed with his family the terms of
employment in the company. These terms place family members and
non-family managers on an equal footing. Family members are put in
management positions, he says, only if they can show how they can
add value. As he says: "It's about starting from the bottom; the
good ones go up the ladder."