Families in Business chaired a roundtable meeting at Campden's Families in Business conference in Bahrain to get a Middle Eastern perspective on transferring the family business from one generation to the next
Jawad Y Al Hawaj is general manager, Al Hawaj & Sons, Bahrain.
Farouk Yousuf Almoayyed is chairman, Almoayyed & Sons, Bahrain.
Tariq Al Saffar is director, ME Al Saffar, Bahrain.
Khalid Rashid Al Zayani is chairman, Al Zayani Investments, Bahrain.
Jane Dellar is MD, Bahrain Financial Services Development Bureau.
Amin Nasser is partner, Business Advisory Services, PricewaterhouseCoopers, Dubai.
Preparing and motivating the next generation to take on the family business is vitally important. How do you go about this? What techniques do you use?
Almoayyed: We are, all of us here, second generation. I think it's very difficult to motivate the third generation because they have lived a better life than we did.
We spent a lot of money on them and they have lots of money coming in. When they ask you for a huge salary it means nothing to them. Unless they can see that they are in power and are getting wealthy quickly, they get really despondent and, it has to be said, not all of them want to work. Some, I would say about 50%, are not really motivated. This is basically the problem we have and I don't know what the solutions are.
Al Saffar: My uncle ran our business and headed the family, but when he passed away suddenly we were forced into thinking "We have a business here that's been running for X amount of years, what do we do?" There wasn't any plan. There had been attempts to plan; you try and groom people to succeed, but even the best grooming doesn't necessarily work. Out of 10 people you might get one or two who will succeed.
My uncle wanted me to work outside of the family business. I was still able to come to some meetings, but working for someone else provided me with valuable insights. Obviously it depends on the different areas that you work in. It is important to keep your distance from the family business in the first few years so that the new generation stand on their own two feet and learn to be independent.
Being treated like any other employee also has its advantages. This works particularly well if you have a number of subsidiaries that distances the younger generation from reporting directly to family heads and instead makes them report into other companies. I think it's very important that no one takes anything for granted.
Al Zayani: I come from a family whose first business collapsed. I gave more than 20 years of my life to the other business and it was hard for me to re-start. However, what we have now is a more disciplined business which is better regulated as we chose to avoid some of the problems that have just been cited.
To start with, it is not a must that a family member joins the business. We don't force anyone to join. But we do insist that if they want to join they must get a good education from the UK, the US, or wherever.
They must also have worked abroad for about three years, but when they come back here they will not be automatically locked into a position within the company. Our rules include not working for your father, but working for another member of the family. And when they work their way up into a senior position they do not become CEO. There is a total separation between ownership and management.
There is no Al Zayani who manages in any of our businesses. Instead, we choose the best management we can afford. We pay top dollar and once a manager comes to join us, they present us with their business plan and, once we approve it, they are free to run the business as they see fit. They get bonuses based on performance so they have self-motivation to run the business.
The family members who join the business act as a support network. They become managing directors and are responsible to the main board to ensure that what the CEOs are doing is in line with the overall company vision. They are also vital at opening doors that other managers can never do, such as with government.
Finally, family members have the freedom to think and develop new business ideas. Ultimately, I think family members are wasted when they are involved in the day-to-day running of the business.
Nasser: One of the issues facing family businesses is finding the right people, whether family or non-family, to manage the business.
A recent study by a well-reputed consultant indicated that family businesses are not able to consistently generate competent top managers who are family members. Some of the family businesses interviewed as part of the study stated that the key factor of success is hiring the best people in the market. If they turn out to be good, then they get well remunerated, if not, then they get fired – but you cannot do that if you have family members in management!
Another related issue is the appraisal of family members working in the business. This is quite difficult and can get emotional. It is important that family businesses set up rules, criteria and formal appraisal processes for employing family members. Some families insist that their children should work outside the family business for 2–3 years before joining the family business.
A lot of families assume that a succession process is complete once the shares have been handed to the next generation. Sadly this is just the beginning of the problem. Succession is like a relay race. You run fast initially but as you get tired you slow down – but you hand over the baton to the next person while still running. Succession is a process, not an event.
The whole succession process and knowing how and when to let go proves very difficult for most family businesses. In one example, a founder told me that he was no longer involved in the business and that he transferred ownership and management to his five sons. However, in reality it was a "fake retirement". He came to the office everyday and was still very much involved in the business.
The alignment of the family vision between the founder and the next generation is also important. I have come across some families who do not share a common vision. I recall one founder saying that it was his strong wish for the family business to continue for the second, third and fourth generations.
However, I subsequently met his son, who was discussing his plans for the future of the family business which included an IPO after five years!
Dellar: Interestingly it is often the case in the West that families only have one heir, which brings its own problems. In most situations they are forced into working for the business, even if they have absolutely no business acumen.
One of the wonders of Bahrain is, in my opinion, the extended family that you have. Brothers, uncles, nephews and nieces are all there for support and help. Again I think that, particularly compared to the UK where relationships are much more father to son/daughter rather than extended in terms of the broader family, you have an advantage.
I would like to come back to this idea of sending the next generation abroad to study and work. Obviously there are huge benefits to learning about different cultures, but is there any conflict when they return? For example, are business practices fully transferable between the West and the Middle East?
Almoayyed: When our children come back with their Western education they have a bigger vision and they want to do things in "the modern way".
They don't always accept it when we tell them that we are not prepared to do it the way they learnt it from a case study in the West! While it gives them that perspective of how to run a global business, it does not necessarily make them good managers.
Al Hawaj: When they come back we definitely notice changes because their horizons have broadened and we have to understand that.
Today's youngsters are perhaps more interested in real estate and IT, but, equally, fathers and sons both now use the internet. Whereas there used to be a big gap between two generations, it seems now it is less so. Ultimately there will always be some conflict and we need to accept it, understand it and find a solution to work with it.
Saffar: Personally, I believe that there will always be a conflict, but conflicts have different levels. When youngsters come back from their studies they are enthusiastic, and in their
eagerness believe that they have fantastic new ideas.
However, it's important that the older generation sits down with them to share the objectives and visions of the family to ensure these new ideas fit in. It is very crucial that you do not kill that excitement and enthusiasm.
Do you think that in the future, given the success of places like Bahrain and Dubai, more of the next generation will stay locally, rather than go to the West?
Almoayyed: Maybe families in more traditional countries will not want their children to go to the West because they believe it is decadent, etc. But, I think for most people going to the West opens their eyes in a good way.
Dellar: I find Bahrain very tolerant of a lot of different ideas whereas maybe some of the neighbouring countries are not quite as tolerant. But I don't think it's a West versus Middle East argument. I just think it's generally a view of being able to absorb many different ideas from Asia, Europe and the US.
If we return to this idea of ceding control. From a Middle East viewpoint, do you agree that hanging on until your dying days is the wrong thing to do?
Almoayyed: It is true that our fathers were in their office until we took them to the cemetery! I think that is very bad in the sense that his life was his business. I would like to do other things. I have managed to diversify or empower my managers so that they don't come to me unless they need help.
Hawaj: We have to accept the fact that when you build the business you live your life around the business, but I believe that there is a time to empower and to hand it over to the next generation.
Zayani: Within our business the retirement age generally starts at 60. I was asked to stay another five years but if I had the option I would have left the business at 60. My father is our honorary chairman, but he owns zero equity and has no decision-making powers.
The business is run through a board of directors for each company alongside the main board, whose retirement is set at 65.
Nasser: Founders are reluctant to let go. They are usually unsure about how decisions would be made and whether the children will get on with each other. It is important that families have transitional arrangements in place where the founder allows the children to have a business relationship with each other, but also has the power of veto in case the
children are not able to get on with each other.
Zayani: Making a mistake is actually learning how to do things right. When we started our first business my father allowed us to go and make mistakes – you have to lose money to make money.
Dellar: I think the family is very respectful in the Middle East compared to the West, where it is not quite the same. I think part of the difficulty with giving up a business from the European and American side is ego.
Nasser: There's a story of a father who is 80-years-old and who has a large business. On his 80th birthday, he calls his son to tell him how grateful he is for all the work he has done over the years. The father tells his son that he would now like the son to take over the running of the family business.
The son looks down for a minute and says: "Father, thank you very much, but I'm 55-years-old and I am thinking of retiring myself!"