Numerous family-owned businesses in the Kingdom are in crisis or stagnating due to the death or old age of a once vibrant founder. It is hard for anyone to face up to the effects of the aging process. For heads of family-owned firms it may be especially difficult to acknowledge that the time has come to allow younger blood to take control of more than the day-to-day running of the firm.
Succession is not just the event of handing over the reins of a family business to one or more chosen family members. It is a process of transition. It is not giving up or giving away the control of the business to others. It is a process of transfer of governance and there is no one right way to achieve this goal.
As a part of its service to the community, Bait Al-Batterjee Medical Co, Jeddah, has promoted the Family Business Academy (FBA), a not-for-profit organization. Sobhi Batterjee, of Saudi German Hospitals Group, is president of FBA and Professor B.P. Murali, its director. The mission of FBA is to foster family businesses, creating trans-generational wealth and values through educational programs, consultancy, mentoring and networking opportunities. The FBA has been organizing workshops with the active participation of family business owners, partners and managers. The workshops aim to help the business leaders of family-owned businesses appreciate the complexity of the succession process and prepare for it in order to facilitate a smooth transition.
“A family business is one in which business and family relationships have significant impact on each other,” said Batterjee. “Technically, any business in which two or more members of a family have a controlling interest is defined as a family business. Globally, they account for about 90 percent of all entrepreneurial ventures. Only a third of family businesses survive to the second generation and a mere 10 percent survive to the third generation. The private sector in the Kingdom is dominated by family-owned businesses. Thus, helping family businesses survive and grow from generation to generation amounts to facilitating the overall economic development in Saudi Arabia.”
According to Batterjee there are three key challenges facing all family-owned businesses — succession planning, conflict resolution and communication among the family members. How family businesses can create trans-generational wealth and values is another pressing issue.
“For the founder, the business is essentially an extension of himself, a medium for his personal gratification and achievement, above all,” explained Batterjee. “But when he is ready to move on to seek new challenges or retire, his legacy can be greatly diminished without a good succession plan. The closest that a business leader can come to immortality is to put in place plans for the continuity of the business to the next generation. Further, a well-formulated succession plan when properly communicated to all concerned makes it clear that the business will not suffer from transition trauma. This enhances the goodwill of the business and its value in financial terms.”
That said, it is usually the founder of the business who must put forward the succession plan and unfortunately it is quite difficult for any founder to think of giving up the control of the business that he has built. The fact is that nobody enjoys thinking about illness or death. Children, spouses or other relatives normally won’t bring up the topic out of fear of being considered greedy, pushy or ungrateful. Even worse, it is necessary to put in place a plan for succession when the business is doing well, and few companies during moments of triumph want to consider losing their leader.
Some founders are reluctant as well to choose between their offspring or to completely step away from appointing a son or daughter as the next corporate head. For the company to succeed, the next leader must be chosen by competency, not by blood. The requirements for the younger family members who are interested in joining the family business have to be specified and there is a need to put in place a grooming plan for the potential successors.
“One might consider employing the younger generation in the business with a specific job description and performance appraisal. Let the best emerge as the next leader,” said Batterjee. “It is important for the youngsters to think of the greatest possible contribution that they can make to the family business, not their reaping the greatest possible benefit.”
If there is no strong leader for a family-owned business, conflicts may arise among family members playing an active role in the corporate management. Shareholders in family-owned businesses may try to get employees of the firm to take sides. Sometimes the conflict may even be leaked into the public domain. This can cause serious harm to the business.
“Differences of opinion among key members in a family business are a common occurrence, but they can turn into full blown conflicts if not managed properly. Such conflicts could then have a crippling effect on the business,” remarked Batterjee. “Many of us know of situations when one member of the family business approached the bank saying that there was a conflict among the shareholders of the business. The bankers sometimes then go to the extent of freezing the corporate accounts.”
There are ways to resolve conflicts in a family business. Batterjee suggested that companies hold an annual family business retreat where all the family members meet to share their views, ideas and concerns. There should also be monthly meetings of those family members active in the business, where issues are put forward at an early stage. Family firms may also put in place governance structures such as a family council. This is an advisory body set up to balance the interests of all stakeholders. There should always be clear operational systems that define the authority and responsibility of family members active in the business, a compensation system for those family members and rules for the entry of younger members of the family into the business.
This last is very important as Batterjee stated that it is widely believed that in a family business, the first generation creates wealth, the second generation manages it and the third generation spends it.
“As I mentioned earlier, trans-generational wealth and values are issues for family-owned firms,” said Batterjee. “In the balance sheet of a family business, individualism and conflicts fall on the liability side, whereas values and shared vision fall on the assets side. Thus, wealth without values is not sustainable. To ensure sustenance of family wealth across generations it is essential to keep the family together through a strong value bond driven by four factors — spiritual drive, shared vision, making the family business a work place of choice and defining the rules of the game through a family manual. The spiritual drive that binds the family together emanates from the larger goal of the family business. Such a goal is not just about creating wealth, which is a means to an end. The goal has to be in making difference to people’s lives.”