Family businesses 'need to preserve wealth'

Family businesses in the Gulf are waking up to the fact that they need to lay more emphasis on the issue of estate planning and wealth preservation, senior advisors told Emirates Business.

Firms in the region are also recognising that disputes could start to occur once the later generations take hold of the management and undertake exit strategies.

Unlike some businesses in developed countries, which have had dominion in certain business sectors for centuries, family businesses here have accumulated massive wealth only in the past four to five decades.

Until the 1940s, local economies were still largely dependent on commerce and the business sector was comprised mainly of small traders in food and textiles. It was only in mid-1940s (post-Second World War) that oil development programmes entered into full swing and diversified start-ups with focus on construction and financial services began to be seen.

In the 1970s, GCC economic development was driven by build-up of oil wealth. It was then that more diversification with increasing focus on retail as disposable income rose was witnessed. At the moment, some of the founders of those businesses are still involved thus there are still very few documented family disputes. But as the generation further matures, exit issues would be inevitable, which may lead to disputes.

"One of the main issues now is the transfer of wealth," Scott MacKenzie, Regional Vice-President and Branch Manager of the Montreal International Centre at Royal Bank of Canada (RBC), said. "How do you get that wealth out of the entrepreneur without saying you're done now. Can you say go retire and play golf and we'll sell the company and divide the company? No, that's not what the entrepreneurs wanted."

"The founder of a company would hold on to a company and pass on that company down to his children. But when the next generation comes up, they would say I don't want to work 24-7 like my dad or granddad. I just want to cash out and do this," MacKenzie said.

Wrinkle-free transition

He said the transition from the first generation (chairman and founder's time) to the second generation is usually wrinkle free. Problems, however, begin to spring out during the reign of the third and fourth generations.

Experts agree that disputes are not yet seen in the region because the family generation is still young. The issue will nonetheless soon be witnessed as the generation matures. "Today, decision making is with one or two people, usually with the chairman or the founder. It's [dispute] not happening at the moment but it may happen," said Rohit Walia, Executive Vice-Chairman and Chief Executive Officer of Bank Sarasin-Alpen and Alpen Capital.

"Growth has been seen here in the past two decades so in essence this [growth of family business] is a new phenomenon," said Hassan El Nahas, Head of Private Banking Middle East, ABN Amro.

He stressed that the region is becoming more aware of the likelihood of disputes as family businesses are passed on to various generations.

"Clients are coming to us to talk about it," he said. "There is a recognition in this market that this has been a problem. And this has to be looked at. Are there clear solutions in place? Maybe not but this is something they are talking about."

And getting an exit when the family is involved is not an easy business. These disputes mix generations and genders, cultures and ethics, brothers and sisters, spouses and relatives, tradition and technology and the influence of the hidden powers behind the thrones.

"How you exit is always an area of dispute and it sometimes becomes very dramatic," Tim Casben, Partner, Lawrence Graham, said. "If you are in the third generation and potentially there are 20-30 people interested in the business, doing an exit can cause huge problems. If the dispute becomes public and the hedge funds hear about it, then there will be a huge value loss within a company."

One of the most publicised disputes was the Cayzer family's so-called feud in 2001. The family created Caledonia Investments, an investment company, which in 1987 received the bulk of the family's proceeds following the sale of British &Commonwealth (B&C). The B&C was created when the Clan Line [the cargo shipping business founded by Charles Cayzer in 1870] made a successful takeover of the Union Castle Line in 1955.

The Cayzer family story hit the headlines in 2001 when the Cayzer Trust faced a dispute between shareholders with regard to the structure of the trust and how easily family shareholders could access its capital.

The Cayzer family then owned about 46 per cent of the issued ordinary share capital, the largest element [33 per cent] being held by the Cayzer Trust Company, a private company 100 per cent owned by Cayzer family members. The dispute arose because of a conflict between those who wanted to access value and those who were not prepared to break the Cayzer Trust. At that point in time, breaking up the trust would have forced Caledonia to liquidate and sell-o? its own assets.

The Cayzer Trust's holding in Caledonia Investments had to be carefully considered, since it represented a third of the business ownership, which at the time equalled roughly £250 million (Dh1.31 billion).

To settle the dispute, a governance committee consisting of non-family members was set up. With the disagreement out in the open, the threat of liquidation was highlighted in the media and Caledonia found its reputation in the firing line, particularly with regard to its long-term investment philosophy.

At the end, a favourable outcome was reached and a lesson was put in textbooks for other family businesses to learn.

More open communication

JP Morgan and London Business School said one of the lessons learned by the company and family throughout this ordeal was to move away from its "fairly secretive and very discreet" attitude, and to begin to communicate more openly. The company has become more media-savvy and now issues financial updates on its website on a regular basis.

"Disputes involving family, as in the case of the Cayzer trust, illustrates they do have dramatic effect," Casben said. "The biggest thing to watch out for here in the Middle East and India is that families tend to retain a very significant stake so if you have disputes in family level, it will destroy the value of the shareholder." Similarly, the lack of transparency and corporate governance has led to the lost of Abdullah Brother's grip on Damas. In March, Dubai Financial Services Authority fined the the founders, which own majority of the company for withdrawing Dh365m and about 2kg of gold from Damas funds for their own personal use. They were also banned from directorships with any company in the Dubai International Financial Centre. The case was also forwarded to the Public Prosecution and Dubai Police.

Asked whether this incident has stalled family's plan to go public, Walia said: "I don't think so. Many of them are very mature in terms of transparency. The only reason they have not come to the market is they haven't felt the need to do so."

"The corporate governance should have been much stronger there [Damas]," he added. "They went public but they did not follow the basic tenets of being a public company. It will be a lesson for all of us – to the investment bankers, auditors and families.

On the issue of succession crisis, Walia said it should not be a big problem going forward because of the culture of respect. "The culture here is about respect of the elder. That will never change quickly," Amin Nasser, Partner, Advisory Services, PricewaterhouseCoopers (PWC) said. "The eldest member of the family is always respected. However, family understands that in order for businesses to move, you need competent people to make sure that the company is run well," he said.

"Conflict is another constant and the clock isn't going back – that's the other reality. I don't think conflict is not manageable, Sandy Shipton, Executive Director, Wealth Managemnt, DIFC Authority, added.

"Generations of family here are still 1.5 or in the second. There is a transition going on – many of the players are mixed gender are male and female. Many of them are coming back from good business schools and are challenging convention.

That is the key. That challenge is the healthiest thing that's going on because it will stimulate discord and dialogue."

MAJOR ECONOMIC FORCE

Family business remains the major economic force in the GCC. According to the DIFC, more than 90 per cent of all commercial activity is estimated to be controlled by family firms in the region. These firms number more than 5,000, hold combined assets of more than $500 billion (Dh1.83 trillion), and employ 70 per cent of the workforce.

"In the board room, families still rule," Dr Nasser Saidi, DIFC Chief Economist, said. Citing figures from the UAE bourses, he said families occupy two-thirds of the boards of UAE-listed companies, with multiple family members on the board of same company.

"The region still has ways to go in building more independence in the region's board rooms," he said.

The dominance of family businesses is happening all over the world although the concentration here in Mena is much higher at 90 per cent. In many countries, family businesses represent more than 70 per cent of the overall businesses and play a key role in economic growth and workforce employment. In Spain, for example, about 75 per cent of the businesses are family-owned and contribute to 65 per cent of the country's GNP on average

One-third of all companies in the S&P 500 index and 40 per cent of the 250 largest companies in France and Germany are family businesses.

Most family businesses have a very short life span beyond their founder's stage and some 95 per cent of family businesses do not survive the third generation of ownership.

Studies have shown that two-thirds to three-quarters collapse or are sold by the founders during their own tenure. Only five to 15 per cent continue into the third generation in the hands of the descendents of the founder.

This is related to its innate weaknesses such as informal management structures, ineffective oversight and control mechanisms, non-alignment of incentives among family members, family conflicts and lack of discipline.

Succession crisis or the transition to the third generation is just one of the many difficulties that GCC firms are facing, Saidi said.

The other four are control crisis which deals with the ability to manage large number of businesses given fragmentation; dilution crisis which deals with managing overwhelmingly large families; the dilution crisis which comes when the market opens for competition; and economic crisis.

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