The Gulf’s giant family-owned companies will soon see a massive generational shift. Can they adapt their business culture?
The Gulf Cooperation Council is home to some of the world’s richest people, yet most of them trace their wealth back only a few decades.
“Before the 1970s, there were very few companies. GCC family businesses really started with the oil boom,” says Tanvir Shah, managing director at The Partnerships Consulting, a management-advisory office based in Dubai.
Some 50 years since then, family businesses are now typically run by the founders’ children. But as they get ready to pass on ownership to the third generation, things get complicated.
“Moving from the second to the third generation is the real challenge. This is when the cousins come in,” says Harish Gopinath, partner and head of Enterprise at KPMG in the Middle East and South Asia. It’s not uncommon at that point for 20, 50 or more family members to have some ownership rights or interests in a company.
“Who has a right to what? Who gets a job? Who is a shareholder? It can be messy, and this is why most family businesses don’t pass the third generation,” says Jane Valls, executive director at the GCC Board Directors Institute, a nonprofit that provides corporate governance training and advice to companies.
Grandchildren are sometimes called the “killer generation.” According to multiple studies, around 10% to 15% of family businesses worldwide remain family-owned through the third generation, and just 3% to 5% make it through the fourth generation.
Governments are concerned about the economic ramifications of the family ownership model.
In the Middle East, where 60% to 70% of businesses are owned by families, according to the Gulf Family Business council, the recent drop in oil prices and strains on government revenue have prompted rulers to put extra pressure on the private sector to create employment. That makes it a serious concern when the prospects for quarreling and poor decision-making among heirs put a company’s future at risk.
Governments, accordingly, are nudging family businesses to diversify, adopt more-formalized processes for managing inheritances, and bring their corporate structures closer to the model that prevails in the developed world. Last year, for example, the United Arab Emirates as a whole followed Dubai’s 2017 adoption of an Al Waqf law that allows inheritances to be managed through family trusts (waqf) that separate ownership from beneficial interest. Governments have been trying for years to push family businesses to list their shares, as a way to boost local capital markets—although enthusiasm has declined since a first wave of initial public offerings in the late 2000s.
Albader, Neo Mena Technologies: We are witnessing the emergence of entrepreneurs and middle class professionals as significant proprietors of economic net worth.
Yet, the GCC remains a conservative business culture in which locals are particularly discreet about how they run their operations. “We function like a boutique family office, in spite of the size of our wealth,” says Mohammad Al Duaij, CEO of Kuwait-based Alea Global Group, which does not disclose its assets.
Until now, planning ahead for succession was not seen as a cause for concern, with family executives content to follow the guidelines of still-strong tribal traditions. “So far, the overwhelming majority of families rely on sharia kinship rules, which are not necessarily in the best interests of the business,” says Fadi Hammadeh, general counsel at Al-Futtaim Group, the Dubai-based conglomerate.
But Islamic inheritance law was not designed for modern companies. For instance, women can inherit only half a man’s share—in some cases, even less. “Some family members willingly exclude female heirs,” Hammadeh says. The latest International Labor Organization report shows women account for less than 2% of GCC company board members.
Gender barriers are softening at the management level, however. As family businesses transition into the hands of the third generation, more women are expected to take leading positions. “Of late, we see a lot of daughters, for example, taking up positions at board level or starting their own business lines,” says Harish Gopinath at KPMG.
Another challenge is lack of precedent to guide lawmakers, although GCC countries are starting to revise their legal frameworks.
Awareness of the need to mind succession started rising on the back of a series of business failures a few years ago. This prompted families to seek advice on how to successfully organize both ownership and management succession.
“Most families still run their business in a very traditional way, so first we tell them they need to separate the family from the company and have a proper governance structure,” says Gopinath.
To avoid leadership fragmentation, the second or third generation often drafts a conduct code, or constitution, and sets up a family council such that each member has a vote on family issues. “They need to set up ground rules, preferably when the patriarch is still around,” says Valls.
For example, it’s commonplace in the region for the entire family’s expenses—including education, travel, health and leisure—to be paid out of company accounts. A family council could formalize which expenses should be covered and which should be private spending.
These are delicate matters, however; and according to KPMG research, thus far only 20% of GCC family businesses have family councils. KPMG also reveals that while 88% of respondents agree that training their successors is very important, only 27% say their family business has processes to do so. “There is a lot of emotion at play, and it involves elderly people who are often suspicious,” says Hammadeh. “Sometimes I feel like a psychologist rather than a lawyer or a strategist; but the question elders should ask themselves is, ‘Am I going to leave a legacy or a dispute?’”
With succession also comes the thorny question of nonfamily members. In the GCC, families tend to view outsiders as a necessary evil, needed to effectively manage the business by virtue of their external skills and experiences. While KPMG’s survey found that most companies employ nonfamily members at senior positions, only 17% of family representatives would consider appointing an outsider as CEO. Selling shares is equally unpopular: only 21% are considering public listing.
“If we sell or go public, it would feel like we are losing our identity. With foreign shareholders comes interference in the decision-making process,” says Al Duaij.
“When there is a very good corporate governance structure, companies can start to welcome nonfamily members on the board and even detach or sell some noncore business units,” says Valls. “But the GCC doesn’t have that level of maturity yet.”
To remain viable in the long term and sustain a large number of stakeholders, family enterprises must generate growth. According to PwC, family businesses need 12% to 19% annual growth to maintain their current wealth levels. In the Gulf, oil income acted like a booster to private fortunes; but today, there is more pressure to achieve economic efficiency. For many closely held companies, this means expanding existing activities and starting new business lines.
“To thrive in today’s dynamic, complex business ecosystems, many family-owned companies will need to … take a more expansive view of the kinds of business relationships they can use to drive value,” advises Deloitte Consulting in discussing its latest study.
The third generation may be the key. Often educated abroad and digital-native, these affluent millennials are expected to inherit $1 trillion worth of assets in the next 10 years. Valls believes “ideas for new business models must come from them,” though she notes that for the time being they still face the formidable challenge of changing their elders’ views.
Those who don’t inherit are creating their own prospects, bringing new energy to the business sector. “Third-generation millennials are largely self-directed,” says Fahad Albader, CEO of Neo Mena Technologies, a regional fintech. “They are inherently curious and motivated to explore what solutions are available.” Albader says they are also changing business: “We are witnessing the emergence of entrepreneurs and a middle-class professional body as significant proprietors of economic net worth within the GCC.”
The companies rising with this new generation are changing the profile of GCC businesses. The first quarter of this year saw $156 million of total investment in 93 startup deals, including the first MENA unicorn exit (Careem’s acquisition by Uber) and nine other successful exits, up 150% from the same period in 2018. By the time such startups reach maturity, the founders (and their families) are usually minority shareholders. GCC companies may already be on their way to a new ownership paradigm.