Family businesses are the lifeblood of the Middle East. How do we ensure they survive?
August 8, 2019 | Source: World Economic Forum
Some of the biggest family businesses in the MENAT region grew from humble beginnings; what was behind their success? As governments in the region and beyond increasingly acknowledge that family businesses are key to meeting ambitious goals for private sector growth, Hassan Jameel, Deputy President and Vice-Chairman, Abdul Latif Jameel Saudi Arabia, discussed this topic extensively in a recent article for the World Economic Forum. The article is shared below, with kind permission of the World Economic Forum; read it in its original location here.
For many, the idea of a family business immediately conjures up an image of a small shop, in which a son is stacking the shelves while his father ponders the proud day he hands over the keys. It is easy to forget that some of the business world’s biggest names, such as Ford, Walmart or Tata, are or once were family enterprises, built on big ideas seized by bold entrepreneurs that have now been passed down through generations.
In my home region of the Middle East, family businesses play an outsized role, accounting for over three-quarters of the private sector economy’s workforce. Many of the largest businesses in the region remain family-run, having grown over the course of several generations from small enterprises into conglomerates spanning sectors and geographies. Abdul Latif Jameel Company (ALJ), established by my grandfather, started off as a small vehicle distributor in Jeddah, Saudi Arabia. Today, 70 years later, the company has grown to become a significant global distributor and has diversified into multiple sectors including energy, real estate and finance, operating in more than 30 countries around the world.
For governments in the region and beyond, family businesses are key to meeting ambitious goals for private sector growth. For existing businesses like Abdul Latif Jameel, they represent a significant part of our ecosystem of partners, suppliers and consumers. Given this, it is in everyone’s interests to understand and address the challenges of family businesses and ultimately to ensure their survival.
Whatever their stage of development, family businesses create a unique dynamic that features certain strengths and weaknesses. There are obvious upsides to the natural bond, commitment and tolerance within a family that you don’t always get in a ‘normal’ corporate environment. Surveys by leading consultancy firms frequently highlight the long-term strategic perspective, fast and flexible decision-making and shared values and ethos as key strengths – all areas that traditional businesses work hard to develop.
The same surveys reveal that preparing and training the next generation and putting in place succession planning are the primary concerns for senior generations, who want to ensure their values and guiding principles are cascaded through generations. Despite identifying these concerns, a survey this year by PwC showed 69% of family businesses in the Middle East (and 85% globally) have no formal succession plan in place.
Nurturing the next generation of leaders in a family business is, unsurprisingly, a delicate mix of good corporate practice and good parenting. A strict senior generation that centralizes authority and keeps subsequent generations out of decision-making can stunt the skills and potential of future leadership.
While it may be tempting to seek to groom a carbon copy, giving the next generation room to take responsibility in the business while listening to their concerns and perspectives helps them develop their own leadership style and accountability. Allowing next generations to fail and giving frank and honest feedback – as one would with any employee – is key to ongoing development.
There is no doubt that effective governance is a cornerstone of any corporate entity and it becomes more critical within the family business context. The same entrepreneurial spirit, close-knit ownership and rapid decision-making that gives them a competitive advantage can manifest itself in weak transparency and poor treatment of investors, partners and employees from outside the family.
It is essential to find a balance between the family’s informal approach and more professional governance, gradually shifting company culture from a kitchen table to boardroom table approach. Companies that have been through this transition can play a valuable role in transferring knowledge to others, through organisations such as the Family Business Council Gulf, which launched guidelines for governance in 2016.
Governance and strategy become more of a challenge as the business and family grow. Family members may have different appetites for risk, interests or ambitions, or be more focused on preserving and protecting hard-earned wealth than creating more. If families cling to old ways and consensus-based decision-making, there’s a risk the business becomes paralysed, weakening the entrepreneurial spirit that made it successful in the first place.
Whether it’s a first-generation start-up with dreams of creating a dynasty, or an established, diversified multinational with family across the business, flexibility in the corporate and family setting is key. Putting in place the structures to empower and nurture future generations, and giving them the room to explore and develop their interests, is the best way to encourage strong leadership and success in the long-term.
Few could have envisaged how both the automotive industry and the Jameel family business would transform in the seven decades since my grandfather first started selling cars in Jeddah in the 1940s. While our business has grown and evolved, we are still guided by the same values and vision, which we endeavour to pass on through our family and our employees today.