Family businesses in GCC risk split due to weak succession plans

Abdul Aziz Al Ghurair, the chief executive of Mashreq, said family businesses need to face tough realities. Antonie Robertson / The National

More than half of the family businesses in the region will split because of lax planning for successions, warned Abdul Aziz Al Ghurair yesterday.

He was speaking at the launch of an inaugural study by the Gulf Family Business Council, of which he is the chairman, conducted among 25 of the largest family-owned businesses in the region. Collectively they generate US$100 billion in revenues annually.

Although the 25 companies were not named, it was revealed that nine of the firms were based in Saudi Arabia, eight in the UAE with the rest spread across the GCC area.

Mr Al Ghurair, who is also the chief executive of Mashreq Bank, said family businesses need to face tough realities.

“Our businesspeople are afraid of making decisions against family,” said Mr Al Ghurair. “Succession should be discussed and decided early, before a chairman is 60 – after that he will not want to cause a family disturbance. Sometimes there can be eight or more offspring with our inheritance laws very clear on how the company should be divided.”

The study, undertaken with the management consultants McKinsey, found that the majority of family business owners in the GCC are relatively young – between 40 and 60 – with more than half of them transitioning from the second to the third generation.

This is a critical process, as just 15 per cent of those businesses will survive it.

The ranking, which looked at governance systems, succession planning and philanthropic efforts, puts the 25 biggest family businesses in the Arabian Gulf below the average on the global league table. The report also found that 60 to 70 per cent of Middle East businesses are owned by families.

“Twenty five of the biggest families worked with us and answered our questions honestly.

They want to know how to keep their businesses together and grow, and that’s important for their countries’ economies. The companies are generally only 40 years old so there is time to write articles of association, a legal framework, that all interested parties should know about,” said Ahmed Youssef, a partner at McKinsey.

Family-owned businesses contribute about 80 per cent to non-oil GDP within the Middle East region, according to the Deloitte consultancy.

Nearly half of respondents in a survey published last year by Deloitte said they reviewed succession plans only when a change in management required it, and 41 per cent did not have leadership contingency plans.

Many founders of family groups leave their succession plans until the last minute. This can create legal hurdles for family succession because heirs have to deal with legal loopholes that deter a seamless transition to the next generation.

Continuity of management and ownership are the two biggest challenges facing family businesses, Fadi Hammadeh, the general counsel for the Dubai-based family business Al Futtaim Group, said in April.

He helped to co-author a GCC white paper that seeks to provide recommendations to policymakers in the Gulf to improve the legal system for family businesses.

“Family business are not just important economically, but are important as a factor of social stability as well because they are the largest employer in our GCC countries,” said Mr Hammadeh.

Follow The National's Business section on Twitter