Succession planning at 144-year-old Tata group of companies is something Gulf family businesses can learn from.
Tata looks beyond the family - and sets example
The smooth succession at India's Tata conglomerate offers a case study for companies around the world - and especially those in the Arabian Gulf, where more than 90 per cent of commerce is controlled by family businesses.
The incoming chairman, Cyrus Mistry, will be only the second person outside the Tata family to control the group in its 144-year history. Mr Mistry is the son of Pallonji Mistry, the single largest shareholder in the parent company Tata Sons, with an 18.4 per cent stake. And like his predecessor, Ratan Tata, Mr Mistry is a member of India's tight-knit Parsi community.
"This is an excellent example of how families can look beyond the immediate family to find a worthy successor," said Rakesh Pardasani, a partner in RSM Dahman, an accounting and auditing firm based in the UAE.
Family ties in the Arabian Gulf are as strong as in India, but instead of the final candidate selected, what companies here should emulate is the process itself, Mr Pardasani said.
The group launched a global search for Mr Tata's successor. A five-member panel was set up in 2010 to find the right person for the post, and that process took 15 months. Once selected, there was a year-long transition where Mr Mistry worked directly under Mr Tata to get ready for the top job.
"There is definitely a lot to learn for Gulf companies from this process," Mr Pardasani said. While planning and stress on capability of the person chosen were important, the Tata succession also showed the importance of the retiring person.
The person bowing out of company activities "must still be involved for at least a few more years to oversee, guide and share their experience with the new candidate while at the same time should not interfere in the decision making," said Karim Merchant, the chief executive and managing director of the Dubai-based family business Pure Gold Jewellers. His father, Firoz Merchant,an Indian businessman who is still the chairman of the company, set it up in 1989.
While Mr Tata, a bachelor, did not have to deal with deciding among children to pass down the wealth, the succession also lays bare the fact that the next generation should not take wealth for granted.
The younger people "must realise and appreciate that being a shareholder may not necessarily mean that you will have the management control as well," the younger Mr Merchant said.
The only Tata who came closest to being considered for the post was 55-year-old Noel Tata, who is the managing director of Tata International. Noel Tata is the half-brother of the outgoing chairman and is married to Mr Mistry's sister.
But the Tata model cannot be emulated in its entirety in the Gulf, said a Belhasa Group spokesman.
"The subject of succession planning in Gulf family businesses is a very sensitive one. There are factors in play here which are partly unique to the region and its exceptionally strong culture of company privacy and the importance placed on the trust that is assumed implicit on close blood relatives," said Suleyman Gary Busby, the chief executive of Belhasa Projects, a Dubai-based unit of Belhasa Group that has interests in property, construction, automotive, technology, education, trading, insurance, investment, travel and tourism.
"I do not see Tata's decision to move outside the family as likely to be quickly emulated in the Gulf," Mr Busby said. "The task in the region for the foreseeable future is to develop awareness of the need for, and advantages of, enhanced corporate governance in every sense.
"Non-family members on boards in more than advisory roles are part of that move, but it will not happen overnight."
Ahmed Saif Belhasa founded the company in 1968. It is in the hands of the second generation now with all board directors being sons of the founding chairman.
Amin Nasser, a partner at PricewaterhouseCoopers based in Dubai, said management and ownership succession were crucial events for family businesses. And yet, he said: "In our experience a number of these families have no real plans for succession and this leaves the next generation confused and unprepared for the challenges ahead.
"Most of the businesses in the second generation have the founder as making all the major business decisions."
At times when the second generation members work in the business, they often end up competing with each other to please the founder, and when he is no longer there, the next generation ends up in conflict with each other due to the lack of proper succession planning, Mr Nasser said.
In the Middle East, 75 per cent of the high net worth individuals Barclays surveyed said they believed in succession planning as against 55 per cent in the rest of Asia, according to the Transfer of Trust: Wealth and Succession in a Changing World report. It surveyed 2,000 high net worth individuals.
But the reality is far from the aspirations. Only 16 per cent of the family businesses in Saudi Arabia, Kuwait, Qatar, Oman, Lebanon and Jordan that Ernst & Young surveyed for a 2008 report said that they had a well-defined ownership transition plan.
Some of the big names in UAE family businesses - many of which are more than five decades old - include the Al-Futtaim Group of companies, which was set up in the 1930s and now deals in automotive, retail, electronics, engineering and technology, real estate, financial services and general services through 65 companies; the Al Habtoor Group, which does business in the hotel, automotive, property, education, insurance and publishing sectors; and the Al Ghurair Group, which opened Dubai's first mall, Al Ghurair Mall, in Deira and specialises in shopping malls and property.
While some of the old family businesses in the UAE have been handed down to the next generation, some still hold on. This includes Juma Al Majid, who heads the Juma Al Majid Group 62 years after founding the company.
In his last speech as a chairman in March, Mr Tata said he expected Mr Mistry to turn the Tata group of companies into a half a trillion dollar company in terms of revenues. A tall order that but it is not an unexpected aspiration, if one goes by the Barclays report from last year.
Almost 82 per cent of the respondents in Asia, and 94 per cent in Middle East, want their successor - children or stepchildren - to have greater financial success than they would have.
For Mr Mistry that would not be easy. With some of the Tata units pulling the burden of growth and the rest stumbling along, he is expected to trim the loose ends, according to media reports.