The Future of Family-Owned Business

16 June 2002

A sense of equilibrium and detachment are prescribed virtues not just for individuals but also in the business world. Indeed the adage that doing one's duties without expecting the fruits of one's labour is, similarly, a good personal and commercial philosophy.

Following the sharp quadrupling of oil prices in the early 1970s, family-owned businesses began to mushroom in the GCC, principally driven by a few enterprising and resourceful individuals who networked well to reach out and identify good franchising, agency and sponsorship opportunities . Supported by an able and loyal team of professionals, the national businessmen of the yesteryears, led from the front. In the historical context, family-owned businesses are not unique to this part of the world. Both in the Western world and in Asia i.e. the Far East or in the Indian sub-continent, many familiar names sprout up in one's minds, be it the Rockfellers, the Barings, the Gettys, the Li Ka Shis, the Birlas and the Tatas of the world. Numerous other illustrious individuals spawned wide ranging enterprises but some of them did not survive in the shape and size in which they originally operated.

Mortality rates or statistics about family-businesses are a little alarming. It is said that a less than 5% of such family-owned entities survive beyond a third generation. This may be a global average and empirical evidence in the GCC would suggest that it is a mixed bag here and therefore cannot be validated or verified. Nevertheless the parting of ways by family members, amicable and otherwise, have been a recurring feature, albeit with exceptional frequency or scale.

In India, the JHF (the joint hindu family) was written into the law as it was a precursor to the managing agency law during the British days. Similarly the private joint stock companies and partnership laws in the U.K. were enacted to facilitate activities of this nature i.e. legal forms that were designed to facilitate closely-held entities and businesses.

Typically, the virtue of detachment (or the lack of it) is not a commonly prevalent practice in businesses; especially where the entrepreneur is very much hands-on and feels responsible for all commercial and administrative decisions. Like obsessive parents, who freeze and carry in their minds, the images of their children as young, dependent individuals, not very wise in the ways of the world and therefore needing hand-holding at every step, this presumption then leads to certain distrust and distance between the two generations within a family, say between the father and the sons. In this part of the world, this syndrome is further complicated by the fact that the women in the household do not, except in a few recent instances, grow into the higher end of the family's business hierarchy. Their cousins and nephews congregate and arrogate to themselves all the plum positions.

The inheritance distribution triggered by application of the Sharia is another issue that will need to be clearly and carefully understood by the family patriarchs. The businesses may have grown from what was a small set up to a large conglomerate. The owners, therefore, have to rely on externally recruited and professional managers. It would be impossible and indeed inimical to their interests if they fail to delegate authority and responsibilities appropriately or retain the sole power to make all the decisions. Again all these are easier said than done. The original driver of the business or the CEO who decides to make every single decision and sign all the cheques etc. soon finds that if he were to even relent a little bit, he may not be in full control. This denouement engenders a sense of insecurity that all is not well. The fact that others are transient professional managers leads to a sneaking suspicion that some of them are lured by the lucre to compromise ethical business practices and / or confidentiality of the information when they hop from one job to another.

Such expatriate habits tend to feed a certain paranoia in the minds of the older local generation who fostered the businesses personally and originally and therefore, feel naturally, paternal and possessive. Similarly they are rattled when they see the young having had higher education overseas and exposure in different parts of the world, proffer some radical ideas. Their new-fangled thoughts do not suit the innate conservatism of the older family members and this leads to avoidable tension.

An eminent international audit firm has developed a well known "family office-concept" further in a highly interesting manner. They wish to engage in conflict management, succession mapping and business continuity planning. In some instances, corporatization and induction of professional managers are clearly the answers; whereby the ownership is separated formally from the ongoing management of the entities / businesses. This is much valuable counselling that these accounting firms can do; given their global reach and experience. Working with investment banks and corporate finance houses, they can enable businesses to consider capital restructuring, fund raising and market access in order that they can be holistically dealt with.

Some of the well known family names such as Barings and a few of the French and Italian fashion houses etc. did not survive when the older generation relaxed their grip and did not introduce robust corporate governance and ethical behaviour. In some instances, this resulted in a general breakdown of discipline and authority; leading to some confusion. Therefore these soon became ripe recipes for crises within their organizations. Some leading lights (including successful and not so spectacular) come to mind. Cadbury, Pilkington, Marks & Spencer, Sanisbury, Schroders in Europe etc. In the U.S., there is a legion of family-owned entities. Given that even Royalties or emperors have become big family businesses, the Queen's pomp & splendour in the Golden Jubilee, contrasted with her 'annus horribilis' and family fracas a few years ago.

The 'future of family-owned businesses' is perhaps a little too dramatic a title for this article but this is not to question, the innate merits or demerits of family-owned businesses. Nor is this a new case of the 'mom & pop shop syndrome' in the U.S.A. that is altogether of a new genre. Many traditional businesses grew rapidly when a few members of the family pitched in and used their clout, competence, contacts, connection and cash. These soon flowered into a vibrant entrepreneurial and business flair and acumen that was difficult to find or replicate in the cold, calculating corporate world. The benefits of 'small is beautiful' apart, they could comfortably co-exist with the large multinational professionalized entities. However, when the scale and size of family businesses outgrew the original entrepreneur's ability to control, problems tended to creep in. Besides after a fruitful foray into business, the family head, in his sunset days, needed to feel ready and prepared to hand over reins to the younger generation. Like all 'A' type retirees i.e. those that were heavily involved, he needed to loosen up and readjust. He should recognise his own mortality, i.e. he cannot go on forever; however much he may not believe that the next generation is ready to assume important positions and responsibilities. Such reconciliations with realities are hard to come to terms with, for anyone. The old man also needs to nurture the youth into senior roles and this grooming ought to be a planned and proactive phenomenon and not crises-driven, where illness, old age and death force certain business reorganization that can prove to be haphazard and cause a lot of heartburn.

In the ultimate analyses, even in the new Millennium, the family-owned business will continue to be a major springboard for a number of new business initiatives in different economic segments. Rather than run them down as being somewhat of a relic of the past or fraught with nepotism or condemn them as crude unviable propositions in the modern industrial era, it is worth introducing 'best practices', quality issues and corporate governance within such entities. It is wise to bring in robust techniques and tools / templates that have worked well as part of the work ethic and practices in larger professionally-managed international organizations. To the extent, those traits are universally applicable, the consulting firms can render a valuable service by designing models that preserve the flexibility, dexterity, nimbleness that family-owned businesses possess and not to sacrifice them at the altar of this adjustment to a more modern form of governance.

In this part of the world, the Sharia-related inheritance issues will suggest, for themselves, the need to avoid fragmentation upon a key family member's demise. Fortunately, many of the family-owned businesses in this region have developed a good 'brand equity' that the financial markets would be ready to accept and invest in them either on a private placement or a public offering basis. This logical and natural progression will be called for; when the business volumes and complexity grow. It would no longer be possible or feasible for a few family members to own and operate in the 'old school boys' network manner. Without wishing to dramatize this point, many family-owned businesses have brought in and do need to build cadres and teams of reliable, professionally qualified and experienced managers. They should shoulder the corporate burden and would be able to add considerable value to the products and services that some businessmen themselves may previously have been merely retailing or acting as sponsors for.

In conclusion, there are a whole gamut of issues surrounding family businesses that have been a subject matter of conferences in different parts of the GCC, be it in Jeddah or in Dubai recently. Some young nationals from leading families have articulated their thoughts ably and succinctly in this regard. Such a discussion needs to be further developed dispassionately within the family majlises. Therein perhaps lie the seeds of innovative solutions, to what is an emotive and yet economically an important issue - that should strive to preserve the best of both worlds i.e. family nucleus and corporate culture.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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