Michael Chahine knows a thing or two about advising family businesses.
As the founder and chief executive of NexGen Desert Green, a firm offering family business and wealth management solutions, he has been advising such entities in the region for almost 40 years.
Now he is preparing to launch the Institute for the Next Generation in the UAE, a centre for family business and entrepreneurship studies. It will act as a hub for research linked to executive education, helping family businesses better prepare for the challenges of succession, ownership and leadership.
“It is a project close to my heart,” says Mr Chahine, adding that the biggest challenge now facing family businesses is the transition to the third generation – a critical step he says will affect about 30 firms in the UAE over the next 10 years.
According to a study from the Family Business Council Gulf and McKinsey, US$1.2 trillion to $1.3tn – without considering any offshore assets – is set to pass from parents to their millennial heirs during that period. But according to the research, only 15 per cent of the family businesses will succeed.
“If family businesses fail in transitioning and do not create value, the region’s private sector will be at systemic risk,” says Mr Chahine. “Their continuity becomes critical in this diversification effort that policymakers encourage.”
William Scott-Jackson, chairman of Oxford Strategic Consulting and co-author of The Gulf Arab Leadership Style, agrees that family businesses are a crucial part of the GCC economy. "They contribute significantly to the economic and social growth and have very close alignment to the country's strategic goals and visions," he says.
But as Mr Chahine notes, the third generation is a millennial one. “They are educated and think they can do better than their parents but they are not involved, so wealth is going to be fragmented,” he says, adding that to survive, family businesses must learn to innovate.
Dubai is modelling itself on Singapore and Hong Kong, he says, with the only way to surpass Singapore through innovation.
“Creating value is through entrepreneurship, SMEs and focus on technology and innovation,” he says. “We need to bring in FDI and talent. This is the country that will accept you, an incubator country.”
Mr Chahine names four challenges for Gulf family business in the coming years. The first is demographic, related to the millennial generation where siblings born to different mothers could create potential rivalry. The second is economic, as competitive markets are now open to new entrants and local businesses are not protected. The third is financial, with family businesses no longer able to borrow using their name alone – they must now present guarantees; and the fourth is educational – family members are not engaged in the business early on.
Mr Chahine says the way family businesses in the region operate hampers how the next generation takes the company forward.
“The patriarch will not release control until he is at his death bed and calls for his older son,” he explains. “In the West they bring their kids to the office to get familiarised; transition starts in the chairman’s late fifties. In Japan, the nation with the highest survival rate, every generation decides [among themselves] who is equipped to take over and they sell [their share] to that person, or stay as his financial investor.”
So what should regional businesses do to support the next generation?
Mr Chahine says children should get involved early and move up in the ranks. “In Switzerland or Germany´s apprenticeship [system], CEOs started at 16 or 17 as clerks,” he adds.
Mr Scott-Jackson says many firms have done a good job of “spreading control”, and “preparing the next generation to take the lead”, while others have bought in expert senior leaders as some ‘next gen’ successors either do not want a leadership role, are not well prepared or are “fundamentally unsuitable”.
However, Mr Chahine says just 15 to 20 per cent of family businesses are planning their succession, which is why action is needed.
“The patriarch’s biggest responsibility is to plan the family’s charter, the family governance and the roles,” he adds. “If nobody is ready, he should bring in external members, sell the company or take the company public to monetise their position.”
Mr Chahine says matters get complicated when the patriarch dies without a succession plan in place, leaving the courts to distribute the company’s financial assets.
“Family companies sometimes have pretty unclear sharing of rewards, power and responsibility so properly agreed share structures and governance is crucial, ” says Mr Scott-Jackson, adding that in centralised economies – like those of the GCC – it is in the government’s interest to help family firms succeed and ensure that transitions take place smoothly.
“They should encourage development programmes for family youth, sound governance and legislative structures. Some family firms may be judged too important to fail and so justify significant financial support,” he says.
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