Family Business Continuity in the Middle East & Muslim World - Betting Against the Odds

Chapter 2:
The Four Pillars of Successful Succession Planning

“Your first duty, in completing your service to your race, is to feel within you all your ancestors. Your second duty is to throw light on their onrush and to continue their work. Your third duty is to pass on to your son the great mandate to surpass you.” Nikos Kazantzakis

Owner’s Will

The successful initiation and implementation of any succession planning process depends on the will of the founders, without which no such process can exist or begin. Human will (not a legal will and testament) involves consent, desire, and choice; it is a mental framework comprising the rational and irrational.

In many cases, founders or family owners may willfully resist succession planning, at least initially. There is the innate desire to cultivate and perpetuate control, and some founders may view succession planning as the “beginning of the end”—akin to planning their own funeral. It is therefore not unusual for owners to feel overwhelmed by denial, anger, or even depression while working with advisors through succession issues. This challenge must be overcome, however, especially as the owner’s will is the condition for the rest of the planning process. Resistance can be countered by the next generation’s patience, trust, and positive communication.

Values

If succession planning is the heart that pumps life into a business, family values are the blood running through it veins. Desired values must be clear, well-articulated, understood, and properly communicated. Strong values align the business; the lack of values derails it.

Governance

For decades, corporate governance has been a requirement of publicly listed companies. Private companies are given the option to sidestep it. Succession planning demands corporate governance as a fundamental precursor to its success. The governance structure of a family business must segregate the “family” from the “business” when necessary; enhance positive communication between family members; encourage transparency and accountability to avoid or help settle disputes; manage family members’ expectations (regarding dividends, education, employment, compensation, exit rights, philanthropy, etc.); and enable better access to funding and business opportunities.

This part of succession planning involves the drafting of a family constitution (to govern the dimensions of family relationships within the business) and the creation of various family governance bodies (e.g., a family assembly, council, or office plus ancillary policies).

Legal Solutions

Drop everything and pick up this family business motto: Hope for the best and plan for the worst.

Outside the Middle East and the Muslim world, family firms can often create a legal platform for continuity simply by writing a will or creating a trust. In the Muslim world however, finding and choosing an appropriate legal platform poses a much greater challenge. Sharia mandatory inheritance requirements (Faraids) discourage wills and trusts; moreover, these legal instruments can prove unenforceable. Creating a will, drafting a family constitution, or even forming a governance model are all meaningless exercises when there is doubt about their recognition and enforceability. Thus, the most significant challenge to family business continuity in the GCC and the Muslim world is building an effective legal platform that enables and supports family succession.

We will discuss in detail each one of these four pillars and how they can together contribute to perfecting the succession planning process, and enhancing GCC and Muslim world family firms ‘chances of generational survival’.

The Owner’s Will

“The biggest challenge in family businesses is the patriarch who lingers too long.” Gordon Pitts

Types of Founders

There is no legal, governance, or mandatory rules that compel family business owners to maintain their business or to protect its continuity. Succession planning is therefore largely a judgment call and a matter of good sense. Ideally, succession planning will be initiated by the founder. This requires a sufficient level of maturity and long-term vision and the founder must be able to come to terms with his own mortality and realize that no business that is solely dependent on one person—no matter how charismatic, hardworking or savvy—can endure for long.

Establishing a business from scratch is a stressful and perilous process that demands hard work, dedication, and sacrifices. The experience of founding a business shapes the behavior of the patriarch, who may adopt one of the following patterns of behaviors.

The Authoritarian Founder

This type of characters is especially common in the Muslim world, and is the most recognizable behavior pattern. All power is centered in the hands of the founder, who is not as adept in handling emotions, displaying kindness, or offering support. His focal point is the business, and he remains preoccupied with it around the clock—at the expense of caring for his family.

An authoritarian leader may delay the succession planning process for all kinds of reasons. The longer a patriarch delays, the higher the likelihood of conflict arising after his demise. Understandably, this makes the projected survival prognosis rather bleak.

Children of a low-emotion authoritarian leader tend to become either fearful of or rebellious towards their father’s authority from an early age, with a lifelong insecurity and bitterness stemming from sibling rivalry that has been bred and encouraged by the parent’s own competitive nature and emotional distance.

The Indulgent Leader

In contrast to the Authoritarian Founder, the Indulgent Leader tends to be emotionally intelligent but is not as adept at handling power. These founders tend to be nurturing parents who give their children the freedom to engage with the business as they wish. The children tend to become spoiled by wealth and often take their families, business, and privileged financial situation for granted. Such an environment often produces reckless and unmotivated young adults who can be disdainful of parents and uninterested in the family business.

A climate of excessive indulgence and freedom may cause family members to go their separate ways without regard for each other, resulting in a fragmented and centrifugal family, with each member flying off into his or her own individual world. When the time of transition occurs, many family members do not hesitate to extract as much cash as possible from the business as soon as the patriarch departs, paving the way for ownership discontinuity and business disintegration.

The Benevolent Dictator

This founder tends to be a hybrid of the Authoritarian Founder and the Indulgent Leader, having mastered both emotions and power. In a family business environment, such leaders mentor their children to become part of the business (or may equally discourage them from doing so, depending on the situation). Either way, this style is most effective in balancing the needs of the children, achieving results, and keeping the family together.

Initiating Succession Planning

If the founder is oblivious to the risks associated with a lack of planning, “too busy” to consider them, afraid of “the end of an era,” or unwilling to consider succession planning because it is “too early,” the heirs should step in. The next generation, supported by honest and experienced advisors, must broach the subject as tactfully and technically as possible. If the founder is not adamantly opposed to the concept, there are many different approaches that the heirs and advisors can adopt to initiate the process.

In scenarios where the founder or owner actively resists or delays initiating or adopting a succession planning structure, succession often ends up being a matter for competent court authorities to adjudicate. Such an intervention typically occurs when, in the absence of a clear transition plan, heirs begin disputing assets distribution, business management, financial rewards, and corporate strategy. A juridical intervention doesn’t necessary translate to the end of the family business; it will, however, morph it into a different existence, smaller and more segregated, often distributed among the heirs or sold out to strangers. This is...