The buzz words in days of financial crisis are entrepreneurship and creativity.
Family firms in front
The buzz words in days of financial crisis are entrepreneurship and creativity. Observers have been generous in their offerings on these topics but when it comes to family business, the nucleus of entrepreneurship, their coverage seems to lack depth and scope. As the recession brings burdens to many businesses, big and small, family firms may be in a unique position to survive and even prosper. They long served as the backbone of deep-rooted economies and civilisations and they continue to dominate world economic activities.
Essentially, family ownership has many advantages. Mainly, they have a longer planning outlook, which can result in sharper investment decisions. Financially, they are said to outperform other genres of businesses. What one can state with certainty, though, is that in their cases combining the interaction of the family as a social entity with the business as an economic entity would affect the performance of firms.
Sustaining the capability to create value over generations, financially and strategically, is a major concern of many family businesses in GCC countries. The region is dominated by family businesses, most of which are still young and in transition phases. And most (ultra) high-net worth individuals in the Gulf have the bulk of their wealth tied up in those businesses. Having said that, many of those founders are in their 70s and 80s now, and facing succession. In many cases, there is little independence in the management structure away from the family owners, and succession can cause family members to struggle over a reorganisation, possibly leading to stalemate and disintegration.
In many instances these challenges are caused by the different understandings of how the business is to be run in relation to its strategic, tactical and operational orientation. To shed some light on the generational differences of UAE family businesses, a recent study was undertaken by the research unit at the Dubai International Financial Centre and the Centre for Global Family Enterprise at the Thunderbird School of Global Management in Arizona.
Entitled "Differing Perceptions and Challenges Facing UAE Family Businesses", the questionnaire was given in face-to-face interviews with family business founders and chief executives, other family members involved in the management and would-be successors. The study documents the tendency for owners and managers to be more optimistic than would-be successors about the procedures for which they have been primarily responsible.
The study stresses that increased self-awareness on the part of the chief executives can result in significant contributions to the future of the enterprise. It shows that while chief executives are relatively positive about their families and businesses, other family members are not as knowledgeable about succession planning and other managerial practices. This, in addition to concerns including open communication and power-sharing dynamics among family members, could be a trigger for future conflict and disagreement in dealing with succession decisions.
The findings also seem to indicate that investing in the family's health and harmony through guidelines for employment of family members, clear processes for succession and promoting co-operation among family members pays off for the firm. Another finding suggests that management and governance practices are critical to turning resources that are unique to family businesses into sources of value creation: product/service quality; a caring company image; customer-intense relationships; long-term perspective; and patient capital.
This finding is extremely significant to achieve both business continuity and family harmony. A prerequisite for a successful transition from generation to generation is gaining what I call competitive supremacy. Periods of economic recession require more than competitive advantage; they require competitiveness, innovation and adaptability. Two generations who disagree on the strategy of the business but are capable of acknowledging what has made the business successful thus far, while simultaneously talking about what needs to change in order to make the business ready for the future, can build continued success and competitive supremacy.
Given the above, the development of sound and transparent succession guidelines that put the continuity of the business at the top of the agenda and promote the unity of the family become crucial. Culturally, UAE family chief executives do not tend to allow participation in decision making. This makes it difficult to establish a direct and smooth succession in many cases. But the study found that the chief executives of those businesses are very receptive to external advisory bodies. This is welcome news.
Another observation has to do with the composition of the board of directors in UAE family businesses. The survey concludes that UAE families believe that they have effective boards; a finding that might be debatable. As my good friend Mishal Kanoo, the deputy chairman of the Kanoo Group, a company that participated in the survey, puts it: "This means that most families in the UAE don't know what are their alternatives, and that is why they appear to be satisfied with their board's effectiveness."
It is worth mentioning here that several initiatives in the region have been undertaken to promote corporate governance and the creation and evaluation of board independence and effectiveness, such as Hawkamah and Mudara, two initiatives of the Dubai International Financial Centre. These entities were established to help businesses in the region, including family-owned ones, embrace corporate governance standards; structure independent, effective boards; and ensure smooth succession.
Maintaining the ability to create value over generations in terms of financial outcomes and strategic sustainability is a primary concern of family businesses in the Gulf. Family businesses are too important to our budding economies to not be robustly and passionately studied and encouraged. Managers at family businesses have to move from a focus on sustainable, competitive advantage to competitive supremacy.Attributes of this new competitive paradigm include value, innovation, adaptation and flexibility, as well as creating knowledge and mining intellectual capital.
Dr Zeinab Karake Shalhoub is the director of research at the Dubai International Financial Centre