Keeping businesses all in the family

Family conglomerates must implement more structured succession planning to help improve their historically low rates of survival, says the honorary chairman of the Al Fahim Group, one of the oldest and largest family companies in the Emirates. These firms could also learn from the recent financial troubles embroiling the Saudi Arabian conglomerates the Saad Group and Ahmad Hamad Al Gosaibi and Brothers through closer communications between management and shareholders over key business decisions, said Mohammed al Fahim.

Despite family conglomerates dominating business in the Middle East, with four of five firms in the region being family run, research shows that only one in 10 survive past the third generation. "Inadequate succession planning is one of the reasons why in the Arab world not many companies have lasted beyond a generation or two," said Mr al Fahim, whose father established the business as a shop selling coffee beans in Al Ain in 1958.

The group has grown to span 13 entities encompassing sectors including the car industry, travel and tourism, property, hospitality and energy. Headquartered in Abu Dhabi, the business employs 1,300 people and has offices in Dubai and Sharjah. Its hospitality arm invested Dh1 billion ($272.2 million) in developing the recently opened Fairmont Bab Al Bahr hotel in Abu Dhabi. Mr al Fahim took over the business from his father at the age of 18 before retiring from the day-to-day management and handing direct control of the group to his younger brothers in 2002.

It was vital that family businesses used a lawyer to put a legal framework in place before the current generation became unable to run it, he said. "Unfortunately, many businesses don't have anything in writing like an article of association specifying the responsibility of the family and the board of directors when a business is passed on from a father to a son," Mr al Fahim said. "They just rely on word of mouth. There also needs to be more sharing of information about the business between fathers and their siblings."

The Saad and Al Gosaibi groups have become submerged in legal proceedings after they defaulted on debt payments this year. Banks and investors are estimated to be owed more than $20bn by the Saad Group and its subsidiaries. The defaults have also focused attention on succession planning as intra-family disputes are believed to be at the heart of some of the difficulties facing the companies. "There are lessons to be learnt," said Mr al Fahim. "The responsibility of those who are executing business has to be limited to their sphere of expertise and not an open-ended carte blanche.

"The owners or shareholders also have to be informed about what goes on by executives and have to have regular meetings to talk about how the business is progressing." The dominance of family members on executive boards and committees also needed to be diluted with a greater mix of experienced business people from outside the family, he said. Financial pressures on large family firms in the Gulf as a result of the global recession was prompting some to consider shedding non-core assets, said Dr Karim el Solh, the chief executive of the Abu Dhabi private equity firm Gulf Capital.

"I know some firms which launched with 40 or 80 business, but now that cash is limited and bank finance has contracted they will focus on their core assets and sell the non-core," he said. "It's different than in the past, when the head of the conglomerate said all their businesses were sacred and nothing was for sale." @Email:tarnold@thenational.ae