Before the outbreak of COVID-19, our 2019 Family Business Survey revealed signs that a sustained period of higher growth levels was beginning to weaken in response to falling oil prices. The pandemic has only exacerbated the situation. More than half of the family businesses in our 2021 Middle East Family Business Survey reported that COVID-19 has had a negative impact on their sales.
In this environment, there is intense pressure on family businesses in the region, which are much larger than their western counterparts in terms of family members, to maintain the double digit growth rates that are required to sustain the standard of living for the next generation of shareholders.
To ensure family harmony, smooth succession and continued growth, Middle East family businesses will need to approach their family matters with the same level of professionalism that is applied to operational decisions and business strategy.
Challenges family businesses are facing now
Family businesses in the Middle East are often driven by two key considerations – to maintain family harmony and to continue to grow.
Family issues
Family harmony is often influenced by various factors, such as lack of trust and transparency between family members, perception of unfairness, lack of communication, inadequate measures to resolve conflicts or disagreement over which family members can work in the business. Below is a list of common family issues that can impact family businesses.
Typical family issues
- Lack of clarity about the family’s vision and philosophy
- Lack of trust and transparency between family members leading to perception of unfair treatment
- Lack of clarity around rules relating to family employment
- Deciding on the future leaders of the family
- Minimal processes to mentor and train the next generation
- Potential conflicts of interest arising when family members pursue private business opportunities
- Inadequate processes for resolving conflicts
Business issues
Family businesses are more likely to not have clear policies for performance management and remuneration of family members or have a lack of alignment between the shareholders and the board of directors on the future of the company – all considerations that can seriously impact growth prospects of the business. Below is a list of common business issues that can impact family businesses.
Typical business issues
- Lack of alignment between the vision of the shareholders, the board and the management
- Determining the size and composition of the board including the criteria for selecting future board members
- Decision-making and the rule of the majority
- Performance evaluation of family members working in the business
- Setting remuneration levels for family members working in the business
- Agreeing the terms and process for exiting the family business
- Reinvesting profits in the business versus dividend distribution
How to solve these issues?
Family issues
Most family issues faced by Middle East family businesses can be addressed by introducing good family governance, including protocols or family constitutions.
A professional governance structure and a clear process for conflict resolution strips emotion and personal bias, common stumbling blocks for families, out of the decision-making process. It can separate family issues from business issues and set a foundation for the key values that the family adheres to. It’s also a helpful tool for facilitating clear communication and decision-making across ownership, family and business considerations.
It’s important to note that family governance policies need to go hand in hand with good corporate governance and should evolve as the business grows and changes.
Best practices in family governance
- Separate ownership issues from business issues
Create separate forums for the family and the business. For example, create family councils or shareholders’ assemblies – a separate gathering from the board of directors – for the family owners. - Set up good corporate governance mechanisms
Ensure accountability and reporting to the board of the holding company and shareholders. Prioritise transparency and constant communication. - Establish the family rules
Agree on a set of rules which address key ownership issues. These values, often referred to as family protocols or the family constitution, are vital for establishing strong intragenerational business relationships. - Create conflict resolution mechanisms
It’s vital to introduce conflict resolution mechanisms that help family members air out their differences and resolve any issues in an amicable way. For family businesses, it can be especially beneficial to set up conflict resolution or arbitration committees that include third parties who are trusted and well respected by the family and offer their independent and objective views.
Business issues
Business issues are often closely linked with considerations that also affect the family. For example, when decisions need to be made about the compensation levels of family members or how they can exit the business.
To reduce the likelihood of this type of conflict, family businesses in the region are taking steps to professionalise family employment and are implementing clear employment models for family members working in the business.
Below we highlight some of the most common employment scenarios that family businesses can adopt depending on the dynamics of the family.
Family employment scenarios
Employment for all
Merit-based employment
Employment in non-key positions
Selective employment
Board service
The new entrepreneurs generation
Employment for all
What does this scenario look like?
- Every member of the family can be employed as desired
- Available positions determine employment
- No particular selection criteria
- Mostly implemented (and suitable) in the inception stages of the family business when only a few family members are involved
Merit-based employment
What does this scenario look like?
- The business starts selecting family employees based on skills, experience and capabilities
- As the business grows it is important to enhance the skillset of the employees
Employment in non-key positions
What does this scenario look like?
- Family members serve in positions other than senior key management positions such as CEO, CFO
Selective employment
What does this scenario look like?
Select family members are allowed to serve in the business (e.g. one or two children from each family branch)
Board service
What does this scenario look like?
Family members may serve on the board of the holding company or subsidiaries, the Shareholders Assembly, the Family Council, various committees but not occupy operational or management positions in the business
The new entrepreneurs generation
What does this scenario look like?
NextGens are not allowed to work in the business but may utilise business capital and resources to invest in new ventures with the family business
Family businesses face many challenges and issues that can affect growth and relationships between family members. To avoid conflict and disappointment, it is increasingly important for families to employ strategies that remove emotion and personal bias from the decision-making process.
On the family side, this means separating family issues from business issues, establishing family rules and conflict resolution mechanisms. On the business side, it’s vital to set up good corporate governance and prevent any issues that could arise from family members working in the business. The latter can easily be addressed through family employment scenarios and policies that set out clear rules for family members who want to add value to the company.
Ensuring that there are mechanisms in place to solve both family and business issues will be key for Middle East family businesses that want to ensure continued growth and family harmony.
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