Why conflict management in family-owned businesses is a key issue in times of uncertainty

In the GCC, nearly 80 percent of family businesses are transitioning from first-to-second or second-to-third generation leadership. Roughly $1 trillion (Dh3.67tn) worth of assets will transfer to these generations of business leaders in the next 10 years. Naturally, these powerful dynamics can create tensions, which are amplified by uncertainties from technological disruptions to pandemics.

Of course, conflicts are a natural part of life, but they are also a key reason why family businesses fail to succeed to the next generation. It is vital that family businesses proactively pre-empt and manage conflict through robust family governance and communication.

It is important to qualify that not all conflict is negative. In fact, when managed properly, conflict can be a helpful and positive experience. It can stimulate change, spur creativity, encourage fresh ideas and, when resolved, even build family cohesion.

However, when conflict is mismanaged, it can have devastating consequences that damages family relations and the value they’ve created over generations. Family feuds are not uncommon and some of the biggest family-run companies have experienced a public exposé of their disputes. There are lessons learned in these family stories, including that there are different types of conflict rooted in different sources of disagreements such as lack of fair process and transparency, sibling rivalry, succession issues, opposing views on business and strategic decisions, and ownership allocation, among others.

There are ways to mitigate or reduce the severity and cost of conflict. Preemptive measures include nurturing healthy family relations, fostering constructive and open communication, aligning goals, and establishing robust governance that ensures fair process, meritocracy and transparency in the family decision-making process.

Should pre-emption fail, and disagreements escalate, Alternative Dispute Resolutions (ADRs) mechanisms, in particular mediation, can help families understand the root cause of their dispute and allow them to disagree in a constructive way. Family business disputes may galvanise around a purely commercial issue, but in fact may be opaquely rooted in emotional and relational issues. That is why it is invaluable to put in place a process, moderated professionally, that allows everyone to express their views and be heard. In this process, a mediator can unearth the root cause and work with family to help them arrive at an amicable resolution with reasonable compromise.

Mediation as a consensual form of ADR offers many advantages. The process is faster, less costly, less antagonistic and less taxing on family relations than a formal litigation process. It is also less disruptive to the business, and more private without exposing family matters to public scrutiny. More importantly, mediation allows family members to retain more control over the situation than they would in litigation where a judge would issue a verdict.

This process can prove highly effective if the assigned mediator is trusted and accepted by all conflicting family members as a neutral, impartial facilitator. To be truly successful, a mediator must be equipped with several key qualities including creativity, perceptiveness, impartiality, patience and have multi-disciplinary competence – commercial, cultural, legal and psychological.

A recent study by Family Business Council Gulf identified ways to improve mediation options customised to family business needs that includes training mediators specialised in family business disputes, considering mandatory mediation for family business disputes that escalate to courts, and above all raising awareness of mediation as a viable option for conflict resolution.

In a live poll at a legal roundtable attended by GCC family business owners and their legal advisors, over 75 per cent of attendees reported they did not have or did not know if they had a dispute resolution mechanism in their family governance structure.

Many were unsure about the reliability of alternative dispute resolution (ADR), with just over half (53 per cent) saying that ADR was ‘somewhat reliable’. All of those polled said that ADR would be more reliable if the practitioner was a specialist in family conflict. Overall, those polled observed that the most perceived common causes of conflict in family businesses are leadership succession and management decisions.

There are steps family businesses can take to integrate mediation.

First, ensure that mediation is mandated as the primary dispute resolution mechanism in your formal and informal agreements. Second, jointly identify prospective mediators, should the need for their help arise in the future.

Third, foster open exchange of ideas and communication, by participating in curated family activities or multi-generational family business education programs.

Lastly, as Fadi Hammadeh, lawyer and family business author, says, "practice conflict management as opposed to conflict escapism".

Family businesses make up a significant part of our region’s economy, so proactively mitigating conflict-related risks is very important, not only to family businesses but also to the whole region, especially now as markets witness challenges and uncertainties from Covid-19. The future of our regional economy depends on how well we handle generational transitions and its associated conflicts through the efficient means of dispute resolution.

Sara Mohammadi is chief executive of the Family Business Council Gulf