13 December 2015
Plan for Succession, Build to Last
Contributor: Sara Mohammadi, Advisor Gulf Family Business Council

Passing the baton from one generation to another

In the GCC, the family enterprise are prevalent and many are approaching the critical juncture of generational transitions. According to WEF Middle East 2013, an estimated US$ 1 trillion of assets are set to be transferred to the third generation in the next five to ten years.

A 2013 study by PriceWaterhouseCoopers (PwC) stated that 60% of their survey respondents are transitioning to their third generation with top priorities being succession and conflict management.

Family business success is measured not only in terms of economic value, but also in term of their longevity – the ability to continue from generation to generation – to stand the test of time.

Some do stand the test of time such as the Houshi Ryokan, one of the oldest running family business in the world, founded around 1,300 years ago and always managed by the same family for forty six generation. Perhaps it is not a coincidence that Japan, the country where people live the longest is also home to some of the oldest family enterprises in the world. There is even a specific word for long-lived companies in Japanese: shinise.

Professor Makoto Kanda from Meiji Gakuin University says that Japanese companies can survive for so long because they are small, mostly family-run, and because they focus on a central belief or credo that is not tied solely to making a profit.

But is it realistic to expect family businesses to last forever and survive across generations?

According to Professor Richard Foster from Yale University, the average lifespan of companies listed in the American S&P 500 index has decreased over 50 years in the last century, from 67 years in the 1920s to just 15 years in 2012. He estimates that by 2020, more than 75% of S&P 500 firms will be companies not heard of yet.

The longevity statistics ascribed to family businesses are no less promising, given that ~30% family businesses are expected to transition to second generation, ~12% transition to third, and only ~3% beyond the fourth generation.

While some of these figures are due to mindful and planned exits, some are stories of failed succession due to issues on the family side.

Major national champions and icons built by generations are not exempt from such stark and declining lifecycle rates

In 2012, the popular fashion brand, Lacoste, owned by the French Lacoste family failed to retain majority ownership of their business, due to inter-generational family conflict. Michel Lacoste, a second generation owner of Lacoste, and his daughter, Sophie Lacoste Dournel, had a difference of opinions on who should lead and manage the company that culminated in a ruthless endeavour as she claimed her father’s seat as the Chairman of Lacoste. Michel believed that his daughter was unfit for the role, “she hasn’t spent a day of her life in a business and is not able to manage a successful company” and had designated his niece Beryl Lacoste as the suitable successor given her experience in the company. Ultimately, Maus Frères acquired Lacoste family shares, officially giving ownership of the company to another Swiss-family owned group.

So what contributes to the successful transfer and longevity of a family business from one generation to another?

According to His Excellency Abdulaziz Al Ghurair, Chairman of Gulf Family Business Council “There are no magic bullets or ‘one size fits all’ prescription, but families should commit adequate time in advance to properly plan and discuss key issues”. He adds further:

“Success rests largely in a gradual transfer of roles and responsibilities to give the new successors time to grow into their new position and allow the senior generation to adjust to their new role.”

At the Gulf Family Business Council (GFBC) we encourage families to communicate and act on a set of five practical steps.

The first step is to define the vision, goals and long-term objectives for the business and for the family. It is crucial for families to openly communicate about their internal drivers and priorities and how that is aligned or misaligned with the business.

The second step is to carry out a comprehensive situation analysis. This entails understanding the risks, challenges and opportunities as owners, a business and a family. The key questions families can ask themselves is do I have an appropriate legal entity and structure in place to handle an effective transition of management and ownership? Does our strategy align with our family business vision and goals? Are we geared for changes in technology, competition and regulation? Understanding the internal and external drivers will help the family establish an appropriate blueprint and select an appropriate model.

The third step is to identify the family business model – ownership, governance and business models – that best fits the family’s internal and external drivers. At this stage, the family can have a candid and constructive discussion about whether they aspire to truly be a long-standing dynastic corporation, or if there is a need to diminish their management roles, transfer management in hands of non-family executives, whether the family should consider partnerships and going public. In some cases, the latter is the optimal solution for the business and family.

The fourth step is to devise detailed succession plans for ownership and management. At this stage, the main action is for families to commit to transition timeframes and assign champions for each plan, including personal timeframes for retirement, handover of leadership or internal transfer of shares.

The final step is to monitor and review these decisions with key stakeholders and each new incoming generations to give an opportunity to adapt to new circumstances.

For families interested in being active owners or managers, among the multitude of these success factors, preparation and empowerment of the next generation of leaders and managers – custodians – is crucial.

Bekaert, is 135 years old and a world market and technology leader in steel wire transformation and coatings, listed on Euronext Brussels (BEKB) with customers in 120 countries and 27,000 employees. They established the Bekaert Academy, a bespoke in-house training program for their fifth generation who are over 18 years old. The Bekaert family has 180 members in the fifth generation, and 135 members are over the age of 18. The program covers corporate and family governance, finance, managing wealth, strategy and an option might be personal development. It aims to enable the next generation to become responsible, rather than entitled owners.

American families, such as the Mitchell family, shape the business life into the family. The foundation of their success is the passion to pass the baton to the next generation. It is an achievement they have embraced at an early stage. They work on the basis of a five year rule (forcing the successor to work outside the family business for five years), and transfer share equity at on early, to cultivate responsible owners.

According to Dr. Ashraf Gamal, CEO of Hawkamah, “the key is to recognize that there is nothing natural or automatic about the process of passing the business on to the next generation. Succession requires a great deal of effort and planning, and the importance of good communication cannot be underestimated. Successful business owning families are typically those that work very hard at setting up structures that promote and facilitate good communication within the family to develop and maintain a common understanding on the family’s relationship with the business.”

Succession is a dynamic and never-ending process for family businesses who strive for carrying on their legacy. The Houshi Ryokan with a 1300 year successful male tradition was at jeopardy, with their sole heir being a woman. In 2014, in order to carry the family business, Mr. Houshi broke the male tradition by assigning his daughter to take over the hotel.

Whichever generational cycle, families need to think, plan and implement a succession plan, and each generation will bring with it a new set of challenges and opportunities.

Tags: #familybusiness, #governance, #succession