By Layan Damanhouri
Saudi Gazette
THE majority of challenges faced by family-owned businesses are internal rather than external, according to businessmen and industry leaders who led panel discussions at the 2-day Family Owned Businesses Forum that ended in Jeddah on Thursday.
Social traditions such as promoting the elderly rather than merit-based criteria, a male-dominated society neglecting the role of women, and old-fashioned methods of management lead to the failure of many family businesses.
90% of Saudi companies are family-owned businesses and contribute to 10% of the GDP. They further make up a large portion of the Middle Eastern market, in which 48% of family owned businesses in the region are Saudi Arabian.
“Serving self-interests and neglecting other partners is the most recurrent conflict,” said Mohammed Abudawood, chairman of Mohammed H. Abudawood Group.
This often leads to neglecting female members of the board. “We’re a chauvinist society,” he added. “Many companies neglect to include women in their decision-making even though they have shares in the company and have a right to exercise leadership power.”
Ethics and creating a family culture of strong values to sustain a business in the long term is important, according to business owners, who added that merit-based leadership is more effective than familial relations.
“Some of the senior members of the family in the business are not aware of the new trends in an industry. One example is new media marketing,” said Abudawood. “There needs to be flexibility in choosing the right person in the right position in management.”
In addition, separation of ownership and management makes for effective corporate governance.
Corporate governance prevents owners and partners from playing unfairly, according to lawyer Yaseen Khayyat, who estimates the average life span of the total number of family businesses in Saudi Arabia is three generations, ranging between 60 to 80 years old.
“Having a family constitution is crucial,” he said referring to a moral document serving as a guide to manage conflict of interests. “It should dictate clear rules on management and transfer of power.”
He added, “Minorities in a family company usually get treated unfairly because of their legal illiteracy. There needs to be awareness on their legal rights.
Challenges also include the inability to lock down a position or job for a long time. One way to counter this is creating ownership schemes to guarantee leadership positions.
“Creating this moral document in a family council plays a significant role in resolving conflicts,” said Head of family business consultations at KPMG, Fuad Chapra.
“Planning succession is equally important to sustain a family business”, he added, “in order to have a smooth transition without shaking the fabric of the family.”
