Succession planning is the key
Family-owned businesses need to think early about continuity into next generation
By Manoj Nair, Associate EditorPublished: 00:00 January 19, 2011, Dubai
Family can often be a distraction, especially when it involves a business. Or more precisely, who should run the business.
The Gulf’s corporate history is replete with searing disputes breaking out over succession issues at some of the leading family-owned enterprises. While many of these led to a parting of ways with minimal disruption to the business, there were some which required direct intervention by the highest authorities in the land to broker a lasting solution acceptable to all parties.
But the nature of the way business is run in the Gulf ensured that this were done behind closed doors — and quite unlike what happened at the Ambani Group, the Indian energy-to-telecom Fortune 500 conglomerate, following the death of its founder, Dhirubhai.
Immediately afterward a spat erupted between his sons Mukesh and Anil, regulars in any rankings of the world’s richest, which played out on every conceivable public platform. It finally required the direct intervention of their mother to get them to carve up the original Reliance empire. Yet, the echoes of that break-up reverberate even now in India’s corporate corridors.
In the Gulf, the pulls and pressures of competing familial interests are still there in some of the larger enterprises and becoming a regular feature even in the small and mid-sized business space. And the stakes are higher in SMEs because the very size and scale of their business mean there are less assets to divide among family members.
This is why succession planning at family-owned SMEs is of such vital importance if the founder’s vision is to be carried forward.
“Succession planning involves deciding who will lead the company in the next generation — this is a challenge equally for big, medium and small family businesses,” said Dr Hesham Al Agamy, an executive director at IMD and founder of the Tharawat Family Business Forum for Arab family businesses.
“A PwC Family Business Worldwide Survey shows that the most persistent problem and, at the same time, the most frequent reason for family business failure was and remains the succession process.
“Yet, over half of the firms surveyed still have not set up proper succession planning. Business owners may be reluctant to face the issue because they do not want to relinquish control, feel their successor is not ready, have few interests outside the business, or wish to maintain the sense of identity work provides,” Dr Al Agamy said.
Even where the planning is in place, it need not ensure a smooth run. In early 2008, a Dubai-based, mid-sized company with interests in light manufacturing and trading was split up between two siblings. The plant and related assets went to one, and the trading and distribution related interests to the other.
But due to the global recession, the manufacturing side of the business was hit by orders getting cancelled, inventory pile-up and a biting cashflow issue. The plant is now running at less than 50 per cent capacity and having trouble meeting its salary commitments.
In contrast, the trading division is cashflow positive and putting in growth of 15 to 20 per cent. The siblings are now engaged in a legal tussle over a more “optimised” division of assets.
This only highlights the fact that succession planning requires forethought and not a little bit of good luck for all the pieces to fall into place. But it also raises the question whether success for an SME in the absence of its founder-entrepreneur can actually be passed on.
“All businesses need to appreciate that the entrepreneurial spirit does not lie within one person or a generation — it lies in the motivation that a person has to search, select, implement and grow opportunities,” said Dr. Ashraf Mahate, head of export market intelligence at Dubai Exports, an agency within Dubai’s Department of Economic Development.
“If the rewards for such activities diminish with time or from one generation to another, so will the entrepreneurial spirit. The rewards are not only financial — although they are very important — but can stretch to non-financial aspects such as the level of control, position, etc.”
It may also be that the second-generation may not be as enthusiastic about joining the family business. If he or she is forced to do so, it represents another dilution in the “entrepreneurial spirit”.
“More problematic and totally inadvisable is the forced transition situation, especially where there is internal pressure and resentment for change,” said Dr Mahate. “Under these circumstances it may be best not to oppose change, but seek ways of bringing the new generation in.
“This needs to be carried out with causing any alarm to the other stakeholders — that is, financiers who may be worried that such a change may increase firm-specific risk. Suppliers may be concerned about providing future credit facilities or even doing business with the company.
“Customers may be fearful of long-term relationships with the company. Therefore, it is in everyone’s interest to have an orderly change to the new structure. At the same time, it is important for the new structure to be transparent and gain the buy-in of all family members with an interest in the business.”
Easier said than done, perhaps. as the situation at a local business house illustrates. The founder and current chairman has two daughters, and their husbands have both been brought in as full-time directors. There is talk seeping through into the markets that not everything is hunky-dory within the boardroom.
“No one expects all members in a family-owned business to have the same vision and how they intend to pursue it,” said a banker. “But when the founder delays naming a succession strategy, it spooks us. We do not want to be caught in any future family strife.”
Dr Al Agamy understands where such concerns stem from and provides a recipe to mitigate them.
“There is no one magic formula to help family businesses face the succession challenge,” he said.
“But there are some basic foundations that the family has to start working on early enough and before they are obliged to do so due to death or illness of the current leader.”
The family enterprise should develop a map of sets of learning experiences and business exposure where the young generation gains a better understanding of the family business, its operations, strategy and visions, he added.
“The next step is the selection process, which should be divided into various phases. It is critical that the selection should be for a pool of talents and one or two individuals.
“They will have to learn how to become leaders in a specific sector of the business and make business decisions and carry the consequences,” Dr Al Agamy said.
Regional dynamics: The extended family
The Middle East has its own dynamics where family businesses are concerned. “There is the additional problem that a consortium of cousins may share the same paternal linage but not the maternal due to multi-marriages,” said Dr. Ashraf Mahate, head of export market intelligence at Dubai Exports. “From a regional perspective, a consortium of cousins or even step-siblings can be aligned to the new structure as it aims to be inclusive rather than exclusive.”
Over 80 per cent of businesses in the Middle East are family-run or owned, with an estimated Dh3.67 trillion expected to be handed down to the next generation in the next five to 10 years. Yet, 48 per cent have no succession plan and of those that do have one, only 50 per cent have decided who will take over the top job. These issues will be debated at the Family Business Retreat, which opens next week in Bahrain.
Facts and figures
• Management expert Nancy Bowman-Upton recommends a four-stage process in succession planning for family businesses — initiation, selection, education, and transition.
• In the US, 90 per cent of businesses are either family-owned or controlled. Combined, they account for about half of the country’s GNP.