Middle Eastern Family Businesses Have Unique Challenges
Family Businesses dominate the economies of the Middle East. In the region’s largest economy, Saudi Arabia, more than 50% of non-oil GNP is produced by family-owned businesses. In Bahrain, 70% of all businesses are family businesses. In Oman, it is 57%. In the Middle East at least 80% of all businesses are family run and family owned. In the Gulf region, family businesses control over 90% of the commercial activity.
Many of the family enterprises are not 100% private forms of businesses. In the region, there was a massive move for companies of the Middle East to go on financial markets. Many of the large family businesses of the Middle East had their stocks traded on the financial markets. The financial crisis hitting some of those large empires is widely seen as a major drag on the Region’s economy.
But what differentiates the Middle East is that those empires are built on bloodlines and trust, rather than on structural proven managerial systems. So the greatest asset in those businesses is not tangible nor is it monetary. The greatest asset lies in the reputation of those businesses, especially that the business in many cases holds the family name, and the corporate brand also happens to be the family name. Even if the business changes the family name to hold a professional name, the reputation of the family in the Middle East will take it over, and the general public will refer to it by the original family name. This is an indication of the strong social standing and social affiliation that the family gives to the business and vice versa.
Family businesses of the Middle East face a number of challenges that are inherent to their transition from one generation to the next: the succession challenge, the reputation challenge, the trust challenge, the changing role of women, the in-laws challenge, the father son conflict, the governance challenge, and the polygamy challenge.
1- The succession challenge
Although the average age of a family business in the Middle East extends slightly beyond the world averages (Fahed-Sreih, 2004), the succession challenge remains one of the most complicated challenges for family businesses of the Middle East. The average lifespan of family companies is 40 years, and 75 percent of those firms are now managed by the second generation (Fahed-Sreih, 2004). Some families in the Middle East survived for more than hundred years, and they refer to a number of reasons behind that such as, they didn’t allow in-laws in the business, and they didn’t talk about business matters in the family.
In the Middle East it is estimated that family businesses worth more than $1 trillion will be handed over to the next generation within the next 5 to 10 years (AlTharawat, 2009). So the challenge of succession is a renowned fact for Middle Eastern family businesses as the way these businesses would transition to the next generation of ownership will largely determine the economic outcomes of the Middle Eastern society as a whole. Family businesses in the region suffer from the lack of proper succession planning. They also suffer from the meshing of the family system over the business system and hence creating problems at the family level and the business level.
Succession planning should involve the identification of the right successor, and the process of educating him to take control. It also involves the gradual relinquishing of power and control from the previous leader, which can be very difficult in the Middle East as most family business leaders don’t retire and perceive themselves as unique in running the business.
2-The reputation challenge
Family businesses of the Middle East consider their reputation as one of the most critical challenges because it takes them years to build a reputation -- even a lifetime -- and a critically unforeseen incident can destroy it.
So the reputation is usually managed like any other asset, with great prudence and meticulous attention. Every business transaction, every business decision, contract and commitment is a building block in the edifice of reputation, especially when the corporate brand happens to be the family name.
3- The trust challenge
Added to the typical business challenges that companies face such as issues of strategy, planning, organization, structure, operational excellence and HR alignment, Middle Eastern family companies have to face the trust challenge and this is achieved through intense communication with other family members. To operate successfully in the business, family relationships should be smooth based on trust relationships among family members. Younger and older generations should align their vision and enhance their commitment to the family business to ensure its success.
4-The changing role of women
Women’s role in business in the Middle East has changed. The number of women entering the workplace has increased and family businesses have to address this added complexity. Although around 17% of family businesses tested would deny female ownership in the family business, around 37% are still undecided whether to give them ownership or deny their right in the family business; meanwhile women are imposing themselves into the family business and taking positions in them. A minority would give females ownership in the family business, around 46% of the sample tested (Fahed-Sreih 2004).
5-The in-laws challenge
Although 32% of the families tested would accept in-laws to work in the business and 27% would give them leading positions in the family business, based on a study conducted at the Institute of Family and Entrepreneurial Business at LAU (Fahed-Sreih 2004), the role of in-laws in Middle Eastern family businesses is still limited. The challenge of the in-laws inheriting the business is a major threat for families in business and they consider this as a problem that needs a solution. Many family businesses don’t mind giving ownership to their females in the business, but at the same time they figure out that the in-law is a major challenge to deal with in the future and want to limit this role legally in their businesses.
6- The father-son challenge
Another challenge is the father-son conflict whereby fathers would never retire from the business even if it is already handed over to the next generation. Hence, father son conflicts are very frequent in the Middle East.
7- The governance challenge
In spite of the efforts that Middle Eastern family businesses are embarking on to structure their businesses, they still lack the ability to apply the policies that they put in place. Most of the businesses devoted a lot of time in creating governance structures to their businesses, they delayed the establishment of family structures, and still the application of the rules and policies they put in place is a challenge to many of them. The complete separation between ownership and management is still a challenge in the Middle East; the reliance on professional management is always considered with difficulty in the region, unless it is the only solution to prevent conflicts.
8- The polygamy challenge
Polygamy in most Middle Eastern societies is an accepted fact. This leaves the family with a number of heirs coming from multiple wives, who inherit differently in the business. The different branches of the family have to find venues of communication with one another and it is complicated in some cases, because of intense competition among the different wives. So, the creation of family governance systems in the Middle East is very important and the application of the governance systems put in place can only be achieved through the education of the younger generation on family business matters.
In conclusion, family businesses of the Middle East share the same challenges that family businesses worldwide have; however, they have a number of added challenges to cope with.
Dr. Josiane Fahed-Sreih
Associate Professor of Management
Director, Institute of Family and Entrepreneurial Business
Middle East Coordinator, Family Firm Institute, USA.