In a region of ancient customs, prominent family businesses in the Middle East are at an economic crossroads: modernize or stagnate. Scott McCulloch considers the outlook.
Doing business in the Middle East is more often than not a family-to-family affair. It is estimated that more than 90% of businesses in Arab states are family-run or family controlled.
Traditions such as a handshake, even a merchant’s word, are upheld to this day as sufficient bonds of a business agreement.
Yet western practices are creeping in, especially in large firms.
On any given day, enterprising families in the Middle East are concerned with methods to professionalize, techniques to resolve conflicts and, increasingly, strategies to bolster business longevity.
Until now intergenerational endurance has rarely been a key concern. The international phenomenon, whereby family firms struggle to push past second generation has largely missed Arab family enterprises.
That may be changing.
Major family businesses in the Arab world tend to be diversified conglomerates. Large family firms flourish in the west, but many are widely-held quoted companies that comply with sophisticated governance requirements.
The Arab world has not quite followed this path say commentators familiar with Middle Eastern family firms.
Family businesses are vital to Middle Eastern economies, contributing 60% of GDP and employing more than 80% of the workforce.
Of the 500 largest family businesses on the planet 13 or 2.6% are located in Middle East states, according to the Center for Family Business at University of St. Gallen.
They have long enjoyed limited external competition and protected markets, which has helped them build large, diversified enterprises.
Many have succeeded because of a founding generation that possessed entrepreneurial insight, and groomed successful political and financial relationships, says PwC in its recent Middle East Family Business Survey.
“They also benefited from the fact that they were doing business in countries that were enjoying rapid growth, where a more informal business and regulatory environment made it easier to do business.”
But political and economic environments are changing. This has curbed current performance and growth expectations.
Of late, many Middle East family businesses cite significant challenges in the form of government policy, skills shortages and market conditions.
A looming near-term challenge for Middle East family businesses, says PwC, is succession planning. Indeed, 91% of Middle Eastern family firms have no plan at all.
All the more vital to plan carefully when some family members are working in the business but some are not, says PwC Partner Firas Haddad.
“In these circumstances, issues like ownership and entitlement are often not even discussed, which means there’s a risk that different people have different assumptions about the future.”
Haddad says cultural factors can exacerbate the problem. “We have seen families where there is a huge amount of resentment that is often left unsaid because of respect for the older generation and a reluctance to openly challenge the established hierarchy.”
Nevertheless, Arab family businesses are professionalizing. In a recent study, management consultants Deloitte interviewed 40 prominent families analyzing how they are managing change and expectations amid flux in regional economies.
“It is evident that one of the significant challenges facing family business is how to how maintain balance between business goals, such as growth, and family goals, such as preserving the family’s values and protecting wealth,” the report concludes.
One of Deloitte’s eight recommendations is that families tune up governance to better align strategies. But other more pressing issues are in play. The economic outlook, for one, has darkened.
The IMF virtually halved its growth forecasts for the Middle East and North Africa region for 2019, with oil exporters expected to bear the brunt of the slowdown.
According to the organization’s World Economic Outlook, economic growth for the MENA region is expected to be just 1.3% this year, down sharply from its previous estimate of 2.5% last October.
The good news? When it comes to international sales, more than 90% of Middle Eastern family firms do business internationally, compared with a global average of 70%.
Fortunately, Arab family businesses are more than willing to look beyond their regional borders. Many expect to trade in new countries in the short term.
That sounds like good day for business and family.