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Kuwaiti family business at key transitional stage

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Amin Nasser, PwC, Partner – Middle East Entrepreneurial & Private Clients Leader

KUWAIT: The Kuwaiti family business is playing a critical role in the future of the country and its innovation and continuity is at a key transitional stage today,  said Amin Nasser, PwC, Partner – Middle East Entrepreneurial & Private Clients Leader. Talking to Kuwait Times, he said family businesses have been the very foundation of the GCC economies and explained how entrepreneurs diversified their business interests over the years in the region and especially Kuwait. Nasser also spoke about the dual challenges family businesses face today. Excerpts:

KT: Can you briefly tell me about the family-owned businesses in Kuwait and the region?

Answer: Family owned businesses have played a pioneering and pivotal role throughout Kuwait’s history.  Key businesses and industries throughout all sectors of the economy have been the brainchild and continue to be run by families.  The employment and future development of human capital in Kuwait is based on the success and support of family owned businesses.  Innovation and continuity of the Kuwaiti family business is at a key transitional stage given the rapid development from all angles and hence such businesses will play a corner stone in the future of the country.

 

Challenges

KT: What are the key challenges family businesses face today? How do you propose to address them?

A: Family Businesses face dual challenges which include operating in a difficult global economic environment as well as managing the transition into the 3rd generation. Transitioning of the current generation to incoming generation (succession) is a huge issue. Significant number of families will undergo generational change in the next 5-10 years. If this is not properly structured, it could easily fragment family businesses.

As family numbers increase, decision making becomes more difficult. Also business formerly controlled by siblings with the same mother is now controlled by cousins with different mothers and weaker family ties. Also due to the average size of the Middle Eastern families, certain studies indicate that a typical family business needs to grow at 18 percent each year to maintain same level of wealth across generations.

Family conflicts are also increasing and a number of Mideast families are going through some family feuds and family conflicts. Conflicts always exist in families and will exist in family businesses. Managing conflicts is key not just to the survival of businesses but to the survival of the family itself. Conflicts arise mainly because there is a perception in a family members mind that he/she is not being family treated. Conflicts also arise when situations are unclear – lack of transparency. However the culture of respect for the elder generation has to some extent protected these families.

 

Access to finance is also an issue. Name lending is no longer favored by the financial institutions. Family Businesses however have a strong aversion to debt and leveraging their balance sheet.

Many families fail to retain top executives because they have been unable or unwilling to accommodate their development, empower and delegate responsibility to them and create the right incentives, remunerations.

The family businesses in the region can start addressing these issues in a number of ways including:

• Creating formal governance structures for both the owners of the business as well as the business activities. 53 percent of family businesses surveyed recently do not have family constitution or a formal family governance structure. If the family generational change is handled well, the continuity and passing of the business to the next generation will promote growth, employment and stability in the GCC. If it is handled badly, this could well result in fragmentation of the family businesses, the economic consequences of which could be catastrophic.

 

• Separate family and business activities. In the GCC, the line between family and business activities is often blurred. It increases the potential for conflict among family members.

• GCC families should push forward with more comprehensive governance measures. They are often reluctant because they feel it might threaten their control of the firm. This view is particularly common among the 1st generation founders who have their own strong management style. 2nd and 3rd generation family would normally look at ways to improve corporate governance practices.

• It is important that each family has a vision for the future and is fully committed to the success of the business. Families need to plan for the future and need to address the following:

•Their philosophy for continuity

• How will decisions be made

• What are the needs of the next generation

• Will the next generation have the skills and enthusiasm to continue

• How will the next generation be transited into the business

• How will family members exit the business in a structured way?

• How will conflicts be resolved

• How do we engage the passive members of the family etc

• Family Businesses also need to professionalize their boards – Discussions at the board level should address global challenges, growth, strategy, profitability etc rather than family issues. Families have reached a stage where it is necessary to have a more structured governance process – one which is less dependent on a charismatic founder.

• These businesses also need to carry out a stringent non-emotional evaluation of their existing portfolio of business – This exercise may result in divestment of certain businesses set up a long time ago and no longer fit into long term strategy. This should be done without retaining an emotional attachment!

 

Sharia system

KT: How useful is the Sharia system in advancing the family business?

A: Sharia is a system of distributing wealth and the estate of the deceased amongst the heirs. The continuity and advancement of Family Businesses depends more on the vision and the willingness of the next generation family members to stay in business together. It is important that the family shareholders have a common vision and philosophy for the future of the family business and are fully committed to its success.

KT:  There is a growing demand for a proper succession plan for the family business. What is your opinion on that?

A: It is evident that family businesses with proper succession planning and ownership structures are more viable than others. However, in practice, a number of the GCC families rely more on traditional word of mouth arrangements with each other rather that formal written agreements. Families that can decouple ownership issues from management issues and draw clear lines of separation between their contractual relationship as business owners  and as family members have a more vibrant family business.

 

Foundation

KT: How do you envision the future of family businesses to be in this region?

A: Family businesses have been the very foundation of the GCC economies. In fact, more than 80 percent of the GCC businesses are either family run or controlled indicating that they are the basic fabric of the society and the regional economies. A large percentage of the commercial activity in the GCC is controlled by family business groups who are involved in several sectors and constitute the majority of the gross domestic product (GDP) not related to oil.

The family businesses in the GCC also employ a substantial percentage of the regional workforce and therefore the transformation of the family business will have a significant impact on the region’s economy. Family Businesses in the GCC began as entrepreneurs and over the years diversified their business interests. A significant number of these businesses started in the early 1960s and are accordingly considered relatively young. GCC family businesses are mostly managed by family members of the first or second generation, and only few are in the third generation. Some of these families have created a number of successful conglomerates which play a significant role in employment in the region.

In addition, many family businesses in the GCC have multi-location / multi-business activities, including retail, automotive construction, importing, shipping and travel, insurance, agriculture, financial services, real estate, and manufacturing.  Some have synergistic operations which have enabled them to participate in the development projects shaping the region over the past few years. Family Businesses in the ME have performed well and are bullish about growth in the next five years (83 percent have grown over the last 12 months compared to 12 percent globally) although economic environment remains a key external challenge, family businesses in the Middle East are less fazed by the general economic situation.

In general, GCC families have been less vulnerable to the economic downturn since they have overtime built considerable reserves and also due to their conservative approach on business strategies.

By Sajeev K Peter

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