One of the most famous opening lines in Classic literature is in Anna Karenina. Happy families are all alike, it goes, every unhappy family is unhappy in its own way. In a single sentence, Leo Tolstoy masterfully focused attention onto his novel’s theme: the ill-fated struggle for happiness by several families.
It seems that family businesses, like the families in Tolstoy’s novel, tend to become the centre of attention when they are dysfunctional. In the Middle East, as around the world, family businesses make headlines when they are wracked by internal disputes or are sold to outsiders but that is only one part of the picture. To focus only on risks like moral hazards or failures of succession is an incomplete approach to analysing the family business.
Prevalence of Family Businesses
In the Middle East, wherever you are, you don’t need to look far to find a family business that is a leader in its field. Whether construction, retail, manufacturing and even the highly corporatized area of banking, the name of a founding family is attached and in many cases, the family DNA is strongly present even if the enterprise is traded on one of the region’s stock markets. This is the case even for some of the largest non-governmental banks in Saudi Arabia, Kuwait and the United Arab Emirates, as well as prominent Jordanian and Lebanese banks.
The Olayan, Binladin and Al Rajhi families in Saudi Arabia, the Kharafis in Kuwait, the Al Ghurairs in the UAE, the Kanoos in Bahrain and the Sawiris in Egypt, from the multi-billionaires all the way down to provincial tycoons and village merchants, the family business is the true engine of every Arab economy.
This reality isn’t unusual. Families are “basic units of social life”, as the United Nations dryly acknowledged back in 1994 when they designated May 15th as the first annual International Day of The Family. The role of the family as a central unit of society today is reflected by the fact that family businesses are still the main conduit of economic activity worldwide.
The number of family-owned groups and family-run corporations in the Arab region is so large that it would be prohibitive to compile a full list - even of those with more than 1 billion USD in annual turnover. While academic research at the country level is available and the Institute of Family and Entrepreneurial Business at the Lebanese American University has stated that 85 per cent of Lebanese enterprises are family-owned, coverage of Arab family businesses on a MENA level is in its early stages and mainly the remit of consulting firms.
Despite the shortage of scientific studies, family ownership is understood to play a greater role in Arab economies than in Europe and the United States. In fact, family ownership of wealth and productivity in large organisations is so regionally predominant that international financial advisory firms and investment bankers have been knocking on the doors of Arab family conglomerates for years, telling them of the growth advantages of publicly traded companies and of the risks that more easily befall family conglomerates as opposed to listed corporations.
The Downside of Family
Investigations of family businesses and the challenges they face highlight the most common risks members of a family business face whether as investors or employees. Firstly, non-family members who invest their energies into a family business as employees risk running into career barriers.
These proverbial glass ceilings keep anyone but members of the owning family out of the company’s senior management or inner decision-making circle. They lead to frustration, which commonly means the most talented leave the company, which then often drives other employees into a detachment from their jobs. Both are costly factors, hugely detrimental to productivity.
Another major risk for external and internal investors in larger family enterprises is the loss of financial performance due to inappropriate remuneration of employees who are family members, especially if this is combined with decision-making powers in the hands of those who aren’t appointed on the basis of experience and qualification. This risk can be exacerbated by the absence of governance mechanisms that would prevent a family member, or even the original owner-executive, from taking speculative risks that could place other shareholders and even the entire business in jeopardy.
The Upside of Family
Despite these risks and disparaging views on family businesses, even by economists in the Middle East, more recent investigations of their performance and resilience have shown that companies with a significant family ownership and managerial involvement can be role models. According to a Boston Consulting Group enquiry into billion-dollar plus companies in seven Western countries, the average long-term financial performance “was higher for family businesses than for non-family businesses in every country examined.”
Given that the global kaleidoscope of business enterprises includes large, successful private corporations in every sector, the case for the family enterprise today is as strong as it can be. But it is not a universal model.
Here is where Anna Karenina re-enters the story. It is well established that the long-term success of an organisation depends to a great deal on its ability to adapt to demand, which nowadays is usually known as rapidly changing demand. Adaptation requires success in several key areas and the inability to adapt in any one of them will lead to failure, according to a theory dubbed the ‘Anna Karenina Principle’.
This, however, is true not just for the family business. All sorts of companies have to wrestle with internal and external challenge but family businesses have to succeed in being a family in addition to navigating the axes of ownership and management. The added complexity of the family dimension makes it reasonable to assume that family businesses have an even greater chance of falling by the wayside than other businesses in the harsh market environment.
The upside is that there are more tools and solutions for meeting this challenge. International business schools and leading consultancies today have programmes and practices explicitly aimed at supporting family firms and as further encouragement, the evidence of highly productive companies shows that the adoption of family culture benefits even corporations with no trace of family ownership.
The motivation for starting a family business isn’t hard to fathom. It relates to the desire to prove oneself, to provide for one’s loved ones and to leave as substantial a heritage as possible for one’s offspring. Although there’s no single formula for success, the increasing evidence of great multi-generational family enterprises in the Middle East and North Africa offers encouragement that every family business has a chance of achieving the fullness of its ambitions.
