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Family businesses in the region, many still being run by the founding generation, are beginning to understand that without proper governance and succession structures in place, their wealth might disappear before it reaches their grandchildren.

BY AYSWARYA MURTHY

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Y

ou don’t need to go to a B-School to discern the importance of leadership in business. It’s the most basic and impactful cog in the machinery of enterprise. To stretch the metaphor, for many of Middle East’s businesses it’s time to crank up the speed; they are at the brink of stagnation and making the giant leap towards globalisation. Now more than ever, business houses here need visionary leaders and often families have to find this quality in a small pool limited to their bloodline.

In Qatar, if there is one thing we know about family-owned businesses (FOBs), it is that we don’t know anything about them at all. The region itself is not big on transparency and this, coupled with typical FOBs’ characteristics of being notoriously private and extremely skittish about outside eyes on their inner workings, means that they are effectively information black holes. But with growing global aspirations, this is changing and for the first time we are able to peek into the majlis and witness Arab enterprise at its best, particularly how it’s customising and adapting practices like succession planning to suit their temperament.

In its most basic form, succession planning is a preparation to fill the leadership vacuum created by retirement or death and ensure business continuity. “At first glance, this lack of planning seems incomprehensible,” says Mark Nierada, Partner QATAR TODAY > NOVEMBER 2014 > 61

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“Planning for your succession will, by necessity, be a process rather than an event, as it will take time to address these issues. Planning five years in advance is good but planning ten years ahead is even better.”

MARK NIERADA Partner Integris

EY'S FIVE-PRONGED APPROACH THE METHODOLOGY AT EY ENTAILS A FIVE-PHASE PROCESS TO ASSIST FAMILY BUSINESS CLIENTS THROUGH THE GOVERNANCE TRANSFORMATION JOURNEY. Understanding the family history, family tree, culture, founder’s vision and values, family business structure, strategy and direction.

Holding private meetings (often oneon-one) with family shareholders to better assess their expectations, areas of concern, aspirations and worries about the future of the business.

Serving as facilitators and moderators in workshops held with the working group who fairly represent all branches and generations.

Documenting and presenting the family charter to all family members and facilitating the ceremonial event for signing the family charter.

Reviewing the corporate structure and governance framework to ensure that it is aligned with the family charter. Also, assisting in the development of the necessary governance bodies and defining their roles and responsibilities.

Developing an authority matrix and articulating the mechanism for the decision making process.

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at Dubai-based Integris. “But, when you look at the personal and family issues that are involved, it is easier to understand why many people avoid dealing with the issue of business succession. None of us like to think about or discuss our own mortality, for example,” he says.

Add to that the fear of losing control and we can begin to understand why it took so long for this concept to make inroads in FOBs in the region. As Ernst and Young’s Partner at MENA Family Business Leader Loutfi Echhade puts it, there is no dearth of reasons why the region’s businesses find succession planning particularly challenging.

So what is stirring FOBs in this direction now? Adam Lomas, Partner at the leadership and talent management consultancy firm Castor & Partners, with a rich experience in MNCs like Shell and later on in private businesses, says, “In Qatar, and the region, very often wealth was built up in the last 20-30 years, since the oil boom in the 70s. Because the market was captive and

the wealth in it was big, business boomed and it was impossible to go wrong. But to sustain that growth, families started looking at neighbouring markets (which were also soon saturated) and then the international market. They found out that to function globally, the business approach is quite different.”

And adapting the corporate practices to FOBs wasn’t easy either, because of the aura of confidentiality around them. “In MNCs the process is more open and transparent. You need to demonstrate to shareholders that you have a procedure in place and have promoted the right people for the job in order to maintain trust. But in family businesses, it’s extremely difficult to discover how their size and waelth are layered.” That is the first barrier to bringing in external consultants.

Living examples The general consensus, however, is that awareness is on the rise. Succession planning has gained real momentum in Qatar and elsewhere in the region according to Gary Watts, Partner and Regional Head of Corporate Commercial and Regional Head of Family Business, at the law firm Al Tamimi and Company. He says that FOBs are starting to experience and witness the “difficult scenarios which have arisen following the passing of founders of family businesses. There have been highly visible cases of conflict between the heirs and those cases have served as warnings to other families. This renewed emphasis on succession planning will continue to grow and develop in Qatar and in the wider GCC.” Echhade concurs, pointing out that several families have started and completed the journey and more still are seeking outside help (see box). “Still, many have not done anything formal or initiated steps to develop their governance framework. We also witnessed a number of such businesses that suffered or went out of business due to family feuds, conflicts and unreconcileable differences,” he says. Lomas has a reservoir of such local stories where it has all gone south due to lack of foresight. “Ultimately it’s the family’s choice between absolute control and some sort of compromise. Most FOBs have sufficient understanding of the market and are willing to look at alternatives, even if it conflicts with their moral and spiritual system.”

To Sharia or not This moral and spiritual system is, more often than not, the Sharia Law. The shadow

“Our goal is to develop a culturally sensitive Arab leadership model. The region has a huge leadership history but this might not necessarily resonate with the modern world. But we also can’t impose leadership models from America or Europe.”

ADAM LOMAS Partner Castor & Partners

of Sharia looms heavily over businesses in the region and under it, the already limited options for leadership is further narrowed.

“Obviously, in the Middle East, succession planning has a different dynamic to succession in, say, civil law countries (which is often about mitigating tax) because of the way in which distribution of estates occurs on death due to Sharia law. When you have fixed heirship provisions, your planning options are reduced,” says Nierada. But there are ways of getting around it and a handful of companies choose to take the ownership offshore (register the company abroad) to get around the Islamic law. “This way you can mitigate the effects of Sharia and plan the business succession with a free hand,” he continues. “But this can be a delicate subject because of the Sharia issue and the question of whether people, especially Muslims, should be seeking to avoid its provisions.”

Lomas is skeptical of these “backdoors” because, though you get away on a technicality, he feels families would still have to answer to public opinion. “I personally would like to help create a leadership culture within Sharia law; this will prove to be more successful,” he explains. “Often it’s about the perception among friends and family. So we have to craft a story for the family to accept and tell their peers.”

Watts argues that Sharia law is not at odds with succession planning and is, in fact, entirely in harmony with it. “However, there is confusion in the minds of some between Sharia inheritance rules and the distribution of assets during the lifetime of the founder, which are two entirely different things. This confusion does sometimes lead to paralysis and hesitation in dealing

with important business issues, which are usually best tackled during the lifetime of the founder.”

Collapse vs compromise The other alternative available for families is to bring in an experienced person to run the business until a family member is sufficiently groomed to take over. “We examine the skills within the family, sometimes one of them has clearly got leadership skills and we suggest working with them. In some cases, it is not as obvious. Either there is no potential or it’ll take longer to build,” Lomas points out. “In these instances, we suggest finding outside help. We recommend bringing someone in for a fixed period of time, like two to three years, who can coach and mentor the next in line. We have a large database of executives who have worked in the Middle East and have a passion for Continued on Page 65

“Factors relating to the tradition and culture in the region that hinder effective governance. Reluctance of the founder to let go of control, power and management of the business; Lack of professional and competent top and middle management resources; Poor utilisation of the women’s role; And the lack of good understanding and knowledge of family governance framework and protocols.”

LOUTFI ECHHADE Partner MENA Family Business Leader Ernst and Young

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SUCCESSION PLANNING DONE RIGHT

A CASE STUDY

ZAMIL FUTURE LEADERS (ZFL) PROGRAMME PARTICIPANTS IN NUMBERS

111 101

32

Family members participating in ZFL

26

of which employed in the business

4

of which employed outside the group

2

of which fresh graduates

T

he Pearl Initiative is an “independent, not-for-profit, by-business for-business institution working across the Gulf Region to influence and improve corporate accountability and transparency.� Recently, they released five case studies on Middle Eastern firms to illustrate good governance in family business. For excellence in succession planning, they pointed out the initiatives undertaken

by Saudi conglomerate Zamil Group. With several divergent business interests, this FOB, which was established in 1934, is currently being managed by its second, third and fourth generation family members, 30 of whom run the various verticals that employ over 12,000 people.

In the early 2000s, after an external consultant was brought in to conduct an organisational analysis of the group, the importance of strategic talent management and development within the family became very clear. The family established a junior board to start involving the next generation in a more organised way. During these

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Next batch of non-family particiipants

Non-family employees participating in ZFL (from across 16 companies)

early years of the new millennium the family started developing a family constitution alongside policies for succession and employment of family members.

The Zamil succession policy was introduced in 2010 after a three-year development process. The values of the policy are anchored in the Zamil family constitution and the following principles: The importance of talent recognition and assessment Identifying the personal development needs of family members

Identifying high-potential and high-performing talent Developing career paths for family members The policy also states that family members are not entitled to occupy certain positions in the group and that promotions in the group are solely based on merit and achievements.

Furthermore, a Talent Committee was formed comprised of four family members and the group HR director, and was responsible for creating a long-term strategy for the development of family members. A first programme called Zamil Third Generation (ZTG) was launched. Under ZTG 18 family members (even those not involved in the business) took part in a psychometric assessment to evaluate their strengths and personal development needs. Sparking a first wave of personal development plans and seeing the impact of those plans, the family quickly decided to start including non-family members in the talent development strategy and ZTG was transformed into the Zamil Future Leaders programme (ZFL).

As a result of this well-structured and longterm initiative ZFL has provided smooth transitions from academia to business for family members who joined the business as employees and is experiencing an increased level of confidence in the overall succession process and transition management.

“If legal advisors are involved when the founder is considering the relevant structure with the family members, it allows for them to inform the family on the legal implications and legal processes involved as well as identifying key issues which the family must discuss and agree before moving forward.”

GARY WATTS Partner and Regional Head of Corporate Commercial and Regional Head of Family Business Al Tamimi and Company.

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nurturing Arab leadership.” But Echhade admits that few families go down this route.

“The bloodline for the family business is still of primary importance and in limited cases, in-laws are appointed as leaders or key executives,” he says. Lomas accepts that in his experience businesses weren’t very receptive to the idea at all until he spelt out the consequences. “Some families consider this a big risk but the bigger risk is the collapse of business.”

Starting a dialogue FOBs in the region are, for the most part, still young, only just making their way down to the second and third generations. So best practice cases are quite limited and skill in the area of succession planning specific to the region is also lacking. And in the Arab culture, where the word of mouth from a respected elder counts far more than volumes of management school theses, it’ll take a while . “We are trying to build a reputation,” Lomas says “We speak at conferences and help people understand the concept. Right now it’s rare for us to be invited before something needs to be corrected.”

Watts says there are challenges around the “soft issues” i.e. the relationship between family members and ambitions of the second generation. This is exactly why Lomas believes it’s important to get a dialogue going between the different generations; and it is often not easy. “There is a huge respect for the patriarch in the Arabic culture and the younger generation is often reluctant to speak their ideas and go against an approach that might no longer be working. So there is no discussion, a big deterioration in business and a loss of revenue.”

In many cases, the second generation is

already in their 40-50s and might have little interest in the business, having been used to a different lifestyle, Lomas says. “The next generation - Gen Y - have a different way of looking at the business altogether, with their internet-age ideas and social media savvy, which is often at clash with the patriarchal generation. So if the leadership is to skip a generation (and there are provisions for this within Sharia) there is a huge difference in understanding what has to be bridged. The very first thing we do is try to get a conversation going between the two.”

Groomed to lead Lomas says that recognising a natural leader is often a gut feeling; unlike the West, psychometric tests are not very prevalent here although some businesses are starting to open up to the idea. “You look at some and see an innate ability. They are charismatic. People listen to them out of interest.

They are passionate. These are important qualities because leaders need to be loved.

This is a difficult concept in the Arabic culture where the majority still believes in power, fear and control. They lead by right.”

These are the qualities he tries to exorcise out of the successors he is often charged with nurturing. “We tell them that it might be hard but they have to earn their employee’s respect. We often take them outside Qatar; teach them to follow before they can lead. We go to places like South Africa where they would have to do jobs that they would consider menial. But it helps them better understand the people they are going to be asking things of in the future. We have to help them build an experience of 20 years, of people who have come up in the organisation, within a few months.”

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