74% of Middle East family businesses expect to grow in the next two years.
Family businesses have ambitious long-term goals as they emerge from the economic turmoil of the pandemic. Businesses in the Middle East were hit particularly hard but even so, 65% say that they grew in their most recent financial year and 26% reported double-digit growth. If family businesses in the Middle East are to maintain double-digit growth rates, they will need to navigate this uncertain and challenging world.
The growth that family businesses in the Middle East achieve in the coming years will be built on trust.
Family businesses are more trusted than other businesses – this is confirmed by the Edelman Trust Barometer, which shows that the trust score of family businesses is 12 percentage points higher than that of businesses in general. This trust translates into a competitive advantage – higher levels of trust can result in better performance, as demonstrated by recent PwC research showing a strong correlation between trust and profitability.
However, The notion of building trust in business is fundamentally changing. Due to powerful demographic shifts, most of today’s customers and employees hail from generations – millennials and Gen Z – with different values from before. Issues such as environmental, social and governance (ESG) and diversity, equity, and inclusion (DEI) have become litmus tests for trustworthiness. Family businesses, which, for years, have relied on a trust premium, built up over generations, have been slow to get the message.
At a basic level, the formula for building trust is expanding. Businesses will need to consider new groups of stakeholders who have different expectations around what builds trust, and who consume information in entirely different ways. When it comes to these new measures for earning trust, family businesses will need to do a much better job of showing and telling. They will need to increase the visibility of their efforts and communicate them consistently to stakeholders.
Most Middle Eastern family businesses believe that the trust of customers, employees, and family members is essential to their success. The trust-based relationship between these three groups is highly interconnected.
Trust levels in the Middle East among these stakeholder groups are higher than globally – two thirds, for example, say they believe they are fully trusted by customers compared with just over half of the global sample – but even so, there remain significant gaps in trust levels, particularly when it comes to customers and employees.
The nature of trust is changing; family businesses need to earn the trust of a wider group of stakeholders and in ways that go well beyond what they have done in the past. If family businesses in the region are to protect their trust premium, they need to transform and adopt to the new trust formula – they will need to change policies and practices, revisit their priorities, and communicate those changes to every stakeholder group and across generations.
Let’s look more closely at what needs to be done to build trust with the three most important stakeholder groups for family businesses: customers, employees, and family members.
According to research carried out as part of PwC’s Global CEO Survey, levels of consumer trust are one of the next biggest determinants of performance variance – and under the new trust formula, strong ESG credentials are an essential ingredient. According to our Middle East Consumer Insights Pulse Survey 2023, around 40% of consumers are willing to pay above-average prices for locally-produced luxury goods and products from companies that use ethical practices. The 2022 edition of the survey found that shoppers were increasingly influenced by sustainability issues – 60% considered themselves more eco-friendly than before and the same proportion said they consider sustainability factors when deciding what to buy.
While most Middle East governments and businesses are advancing on their ESG goals, family businesses still have a long way to go and have reported slower progress when it comes to incorporating ESG policies. This gap was observed in our 2023 Family Business Survey where respondents did not identify ESG issues as a top priority:
We have observed that despite a long history of giving back to the communities, 93% of family businesses engage in some form of socially responsible activity – they are less effective in communicating this commitment to stakeholders. This begins with measurement of performance through non-financial as well as financial targets, but while family businesses routinely measure growth and customer satisfaction, only 4% set targets for DEI, and only a fifth do so for social impact.
Trust is built from the inside out; a company is less likely to be trusted by its customers if it’s not trusted by its employees. According to our survey, Family businesses in the Middle East are faced with a trust gap; only 55% say they are fully trusted by their employees.
We believe there are key areas to tackle and steps family businesses can take to eliminate and minimise this gap and build employee trust:
Purpose and values.
This is traditionally where family businesses excel - 74% say they have a clear purpose. Half of the family businesses in the region build purpose into their appraisal and reward processes. However, there is still more to be done in communicating purpose and values internally – only 56% say they actively and regularly communicate their purpose to their employees and the same proportion (compared with 68% globally) take action to ensure employees understand what their purpose and values mean.
Commitment to ESG.
Given the heightened awareness in the region when it comes to ESG commitments and transparency on economic and environmental impacts, family businesses must create a strategic roadmap defining their commitment to ESG, with the next generation of family business leaders taking the lead in this growing movement.Currently only 11% of family businesses have set targets around their environmental impact and only 38% regularly communicate how they are performing against non-financial indicators.
Accountability
Overall, 33% of Middle East family businesses describe themselves as ‘very advanced’ in their leadership, encouraging a culture of accountability, compared with 43% globally. An important element of a culture of accountability is a structure that allows employees to speak up about their concerns. 26% of family business owners in our region say they are already ‘very advanced’ in creating the internal processes for employees to appeal or question management decisions – this is more than the global average of 22% but there is significant room for improvement.
Family businesses in our region have a strong understanding of the role that purpose and family values play in their success. 80% say they have a clear set of values – compared with 70% globally – and more than half (59% compared with 45% globally) have a documented purpose and vision statement in place.
Family conflict is often inevitable and incidences in the region have risen in recent years – 42% of family businesses in the Middle East say conflict occurs from time to time, compared with 33% globally. This is contributing, in part, to trust levels that are lower than the global average.
Strong governance, which reflects the business’s purpose and values, is vital to building trust within the family and throughout the business. One outward expression of how family businesses are falling behind in demonstrating their values is the composition of their boards. A diverse board – which we define as including two or more women, one board member under the age of 40, one non-family member and one from a different sector background – will help to display strong governance and a commitment to diversity and inclusion, as well as bringing a range of ideas as businesses plan for the future.
Today’s formula for building trust requires a transformative approach that may seem unfamiliar to many. The long-held commitment to “giving back” to society through philanthropy must be refashioned into well-articulated, strategic actions centred around what matters most to a broader stakeholder group. First and foremost among those actions, family businesses should:
It’s not enough for family businesses to say they have strong ideals. They must model those ideals in their relationships with internal and external stakeholders, starting with a fair internal system for reporting misbehaviour and a clear feedback mechanism for customers. These are visible solutions that will help to build trust.
Family businesses have become used to keeping a low profile and are often reluctant to share details about their business publicly. But transparency is essential to trust. This means regular public reporting of the company’s ESG and DEI targets, and its performance against those targets.
Family businesses are expected to be more vocal, visible and active than before. Public trust matters, and that means showing that you care about what’s going on in the world.
PwC surveyed 2,043 owners and executives in 82 territories, between 20 October 2022 and 22 January 2023. The purpose of the survey was to get an understanding of what family businesses are thinking on the key issues of the day.
