Family Owned Business in the United Arab Emirates

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Introduction

Companies owned by families are believed to be the current forms of business activities. Family companies dominate the economic background of various key global economies especially in developed economies.

For instance, across the globe, two thirds of the currently existing commercial businesses appear to be managed and owned by families. The success of these businesses is dependent on how succession is managed by the stakeholders including the potential successor, the incumbent leader and the business owners.

This study explores succession of family businesses particularly in the United Arab Emirates’ context. It considers the factors that prevent successful intra-family company successions and whether such corporations are successful of not.

The paper explores a variety of causations starting from the precursor factors to the immediate general causes hindering succession by a family member. By examining a wide range of literature, the study explores the issue facilitated by focusing on the United Arab Emirates family owned businesses.

Research indicates that there is an emerging consensus regarding elements that are anticipated to play a central role in successful family owned business successions. The processes and participants involved play essential roles in ensuring the success of successions in view of uncertainties that typically derail the process.

This view is in respect to the fact that succession is not an event, but a complex procedure that occurs over a long period. It requires the ability to be dynamic and adapt to the changing circumstances particularly in the increasingly competitive business world.

Problems of the research

Despite the prevalence of family owned firms across the world, their lifespan appears to be comparatively short. Often, barely a third of the few family owned corporations manage to survive the shift to the third generation while just very few such companies survive the change to the second age group.

Given the significance of family owned corporations in the economic development and growth, researchers have realized the importance of conducting studies in this field. However, the management field researches have hardly given keen interest in the family owned corporations’ practical as well as distinctive theoretical problems.

On the other hand, the growth of interests in the family owned corporations have improved exponentially. The result is the emergence of a distinctive and legitimate business research field.

However, most family owned companies are intended to pass the business of a given family to the subsequent generations in order to reinforce the bonds existing in family relationship. Given the order of succession from the founder to other generational family leaders, running family owned corporations have proved to be a complex process.

Globally and particularly in the UAE, top managers of any business are considered the essential determinants of a company’s strategies and the ultimate performance of the company. In this view, the selection of the successor of an establishment is critical for the future of the company and its effectiveness (Rajagopalan and Zhang 335).

Contemporarily, family owned businesses are essentially the bedrock of many economies and businesses. However, the pervasiveness usually goes unnoticed relative to other forms of businesses. It is hence imperative for research to be conducted regarding this important topic (Wallace 3).

Objective and importance of the research

There are unique challenges facing family-owned businesses. One of the main problems confronting family business is the capacity to make sure that there is competent leadership across generations.

The research to unravel the challenges to succession in family business is important as it helps owners, top executives and consultants to put effective measures in place to ensure that businesses do not stall due to the transfer of leadership across generations. Inherently, it has been discovered that slightly more than one-third of family businesses make it to the secondary generation.

More disturbing is the fact that less than 20 percent of the businesses survive to the third generation (Breton-Miller, et al. 305). This study investigates what it takes in order for family businesses to succeed upon succession across generations. In most cases, poor succession is the main source of failure of businesses to survive to the third generation.

Literature review

The ownership of family businesses with respect to control or management of firms as well as the relationship with other the preferred stakeholders has recently received substantial consideration in the governance literature. Inherently, family businesses contribute to the economies worldwide. Family businesses in developed countries contribute significantly to economic development.

Most of the businesses in these economies are family owned, managed and directed (Anderson 1303). They have become the spine of many newly developed economies. These businesses remain a vigorous element in the old industrializations. Experts state that family businesses encompass a majority of businesses in the private sector in the Gulf region.

These businesses account for more than 95 percent of the profitable activities in the Gulf Cooperation Council (GCC) countries. In other global regions, family businesses account for between 65 and 80percent. The interest to study family businesses stems from the fact that it is challenging to approximate the size of family businesses’ revenues and assets.

Additionally, there lacks relevant published data making the estimation of family owned businesses in the Gulf region. Inherently, a universal definition of family business has not been arrived at given the existence of a wide range of definitions as there are studies exploring the subject.

The issue of succession of family businesses raises significant aspects that may lead to the success or failure of business establishments. De Massis et al. assert that few family owned businesses move into the next generational leadership due to the problems that may arise. For others, the intergenerational transitions collapse soon after the taking of control by the second generation (De Massis et al. 183).

Naturally, the management succession of family business is a central concern for leaders of family business. Even though consultants are often engaged in the succession issues, little systematic attention has been paid to the molding of the features that prevent effective transfer of management control from one family member to another.

Under such situations, the prevailing problems deny the chances of the family growth and development in both social and economic fronts. In addition, such wrangles also derail the efforts of the current leadership and demoralize the stakeholders’ inputs into the business (Barnes 111).

According to Breton-Miller et al (2004), challenges in the effective succession are complicated considering that there are significantly a small pool of competence and talent to draw from. There are usually complicated emotional aspects on the part of the incumbent-successor relationship. Besides, the complexity in the family ties also influences succession.

In fact, the succession procedures are typically interpreted to entail the activities, incidents and corporate mechanisms through which leadership and ownership of the family business is transferred. Breton-Miller et al state that successful succession entails the ensuing positive performance of the business and the eventual feasibility of the establishment.

Additionally, it entails the gratification of the stakeholders with the entire succession process. Typically, the drivers of the outcomes of succession differ. Political appointments to the positions of family business leadership may gratify business stakeholders while hurting the bottom-line. On the other hand, appointing a technically proficient but independent leader may lead to anger among controlling business owners.

The attributes of an incumbent in Dubai family business context plays an essential role in the success of the succession. The attributes are characterized by readiness and job motivation of the sitting leader to handle over the leadership mantle, the value of the rapport with the successor, needs and personality of the incumbent. Another aspect important for successful succession is the successor’s attributes.

The pointers to the attributes include the relationship with the sitting leader, drive, concern and the commitment of the successor to move the business to a higher level of performance. The ability of the successor in terms of management is also important. The incumbent often plays a significant role in fostering and development of the successor.

Critical variables for the success of family business succession include career development, placement outside the family business, formal education and training of the successor. Competent family members appointed for succession makes a variety of considerations before accepting such appointments.

Failure of such individuals to pay appropriate attention to the activities and progress of the business often leads to the failure of the business to survive through generations. Proper attention, commitment, training and apprenticeship leads to success of the succession.

According to an article by Corbetta et al, family ties, personal objectives of the incumbent, the prospective successor and conflicts at the management level play a role in the success of succession of family business leadership. The distinctive overlap between the top management and ownership positions at the top of families consider successions as a disturbing moment.

This presents risks to aspects such as long investment plans and publicity of the firm. When professional managers hired from outside the family circles succeed family businesses, the successions are associated with improved operational returns.

Top executives appointed from outside families inherently have advanced competence given that the appointments are not based on heir-ship, but professionalism. In this respect, the top appointees are able to introduce attractive bulge in terms of business opportunities subsequent to the transition (Bennedsen et al. 647).

Non-family top executives are essential for the growth of a business. The presence of such managers in the family business context may accelerate the development of the business through the provision of the needed competencies and introduction of new ideas.

It is imperative to mention that such managers in collaboration with competent and committed business owners are the contributing factors to the success of the business after succession. Family successors require the advice and support of non-family managers to ensure the success of the business.

According to De Massis et al (2009), the aspects that contribute to the succession processes are not essentially the aspects that thwart succession from taking place and becoming successful. The nature of business, the objectives of the incumbent and the successor as well as the existence of a strategic plan for the business contribute to the absence of essential conditions for effective succession to take place.

The authors point out that succession problems arise due to aspects that are operational at the individual level either successor-related or incumbent-related. The successor-related factors include low ability, lack of motivation, personal sense of attachment, unexpected loss of the successor and conflicts among family members.

Research methodology

Substantial effort has been extended to this study as it seeks to explore family businesses in the Gulf region, particularly in the United Arab Emirates with regard to succession. The research on the United Arab Emirates family businesses has been challenging but essential facts have been established by this survey.

One of the core issues that deserve scrutiny in the United Arab Emirates context of family business is factors that prevent intra-family succession.

To facilitate the identification of such issues that significantly avert intra-family leadership progression from occurring, the study has reviewed journal articles in family owned business particularly in the perspective of UAE. Additionally, questionnaires were distributed to the stakeholders in family-owned business.

Two sets of questionnaires were used. One questionnaire was intended for family firms where succession had not taken place. It entailed questions associated with the businesses, performance and the environment. The respondents were requested to answer questions related to corporate governance of the companies such as the existence or lack of a formal strategic plan.

The respondents were also required to offer their views regarding succession planning such as the current generation running the business and whether there are designated successors or not. The family relations such as official family meetings and attitudes were also to be addressed in the questionnaire.

The attitudes included whether the stakeholders would accept a female chief executive officer as leader of the company. The second set of questionnaire was intended for family-owned business where succession had already taken place. The same sets of questions were asked.

The questionnaires were distributed to the redundant and successful business. Redundant businesses were important in the research as the information generated helped in establishing the effects of succession on the performance of the businesses. The researchers used the information gathered to establish important facts about success or failure of succession through qualitative analysis of the information.

A variety of factors was established as having significant impact on the success of family business succession. Businesses where succession had not taken place were observed to be significantly impacted by the external environment of the business industry. Potential successors were observed to be influenced by the industry in which the family owned businesses operated.

Inherently, potential successors with formal education and external placement were inclined to refusal of taking leadership positions in the family businesses. This was as a result of the successors considering working in other businesses as presenting additional opportunities for career development and better paying jobs.

The move is also influenced by the qualities of the interactions within the family including cooperation, accommodation, management approaches, cordial relationships and sibling interactions. When the interactions are harmonious, there is greater prevalence of confidence, mutual understanding and knowledge among stakeholders according to Breton-Miller et al.

Sample and population

In this particular study, all the family owned businesses were deemed viable. However, only a small number of participants including successors, the managers, and employees, and stakeholders were selected depending on the frequency with which they had been involved in the departmental management as well as other personal attributes including gender, age, experience and positions held.

From the five family owned corporations sampled, just 50 managers from these organizations were selected via a technique dubbed as convenience simple random sampling strategy. The well-designed research questionnaires were administered to these respondents to help in addressing the formulated research questions.

Data collection methodology

In exploring family owned businesses in UAE, it is imperative to explore factors that lead to success and failure of successions. The information exists in family business literature. However, to generate data in the United Arab Emirates context, it was essential for the researcher to develop questionnaires to be filled by non-family business managers, incumbent managers, business owners, employees and potential successors.

Although family members in top positions manage a majority of the United Arab Emirates family owned-businesses, some companies are managed by non-family managers hired to streamline and ensure the success of the business. However, the incumbent and prospective successor exercises immense influence on the hired managers.

These managers were a resourceful source of information regarding succession in United Arab Emirates family businesses. The selected managers were instrumental in aiding the researcher to gather information regarding the nature of businesses, the industry of operation, the attitudes of the owners and potential successors as well as strategic plan for operation and succession.

The incumbent business owners assisted the researcher in establishing the basic factors regarding family business ownership in the United Arab Emirates context. The potential successors and business owners who filled and returned the questionnaires within the requested timeframe played similar roles. Additionally, it was necessary to review family-business succession literature in United Arab Emirates.

This did not prove challenging as substantial amount of literature is available in books, published article and the internet. The published articles were particularly important, as the authors had carried comprehensive research regarding specific issues of concern in family business’ successions, successes and failures with important aspects about the history of family businesses in different parts of the world.

Data Analysis

The data collected through questionnaires was analyzed according to relevance and the responses given. That is, content analysis technique was used in the analysis of data. By using the responses, the study identified the family control over businesses as a fraction of the equity owned by families that allow significant control of the businesses by professional managers.

This was particularly the case for businesses where succession had successfully taken place. On the part of businesses where succession had not taken place, the data was used to establish factors that contributed to the prevailing condition.

In these companies, the attitude of stakeholders seemingly plays a central role during successions. Where necessary, graphs were used to establish whether family owned businesses are successful or not.

Discussion

According to the findings, various family owned companies in UAE indicated success in the management of the businesses. The successes of these firms clearly indicate that family owned business should not wholly be done away with but strengthened and opened up for non-family members also to be major stakeholders (Lang 83).

For instance, the information taken from firms such as The Al Habtoor Group clearly indicates the factors that show the success of such businesses.

The Al Habtoor Group

The Al Habtoor group is a family owned firm founded in 1970 with its headquarters in Dubai. The business continuously realizes massive growth within the United Arab Emirates and is famous for construction services. In addition, the company is internationally identified through its participation in hotel, automotive and education sectors. Further, the firm is involved in real estate, insurance as well as publishing services.

The family members have possession of ninety percent proportion of the firm’s ownership. More importantly, the firm has laid down a trust scheme aimed at smoothen the succession at the company. In essence, the scheme would enhance the company’s continuation beyond the current chairperson’s lifetime. The firm carries out its operations within the UAE, Qatar, Bahrain, Egypt and Jordan.

Over the years, the group has assembled a firm and devoted client base ranging from the open to private sectors. The group has diversified its operations on five major subdivisions comprising infrastructure, building, rail, oil and gas together with mining.

Moreover, the firm’s commitment to develop and grow business in diverse segments has ensured its growth all over the globe. Worth noting, the group’s executives are exploring the prospects of venturing the business operations in the Asia-Pacific expanse and specifically in Indonesia, which is currently the most steady and fastest budding market in Asia (Lang 83).

The recent global financial crisis put the firm in a dangerous economic switch. In fact, just like the other international firms, the group faced huge challenges in restructuring the debts that accrued during the financial crisis. Through the group’s hard work, honesty and strong team attitude characteristics of every echelon of the management, the firm realizes escalating growth and success as well as the achievements of its target goals.

Further, the group’s increased investment in the training and development of its employees has enhanced and reinforced the company’s management as well as the overall quality of services since the personnel have the necessary technological advancements needed in the modern operations of the firm.

The Emiratization program also enables the company to ensure the government’s initiative of employing the most proficient personnel with the necessary expertise. Further, the group’s introduction of the automated continuous monitoring solutions is vital in monitoring the financial control and data of the company effectively.

The management of Al Habtoor undertakes a pro-active approach in the management of the firm. The group is also investing $1.6 billion on its projects. Further, the group’s ventures depend on the cash flow strengths. Profits are also expected to rise by sixteen percent in the year two thousand and eleven.

Moreover, the groups Habtoor engineering together with the Leighton Holdings Limited of Australia operate a joint venture of which the former has a twenty-eight percent stake. Of more importance, the firm is valued at $6 billion.

Al Ghurair group

Similar findings are also observed in the other family owned business Al Ghurair group. The business was established by the owner and founder 40 year ago and operates in the whole of UAE particularly in Dubai. The group specializes in retail businesses, investments, manufacturing and real estate development. The group businesses are diversified with the manufacturing sector specializing in metals and packaging materials.

The Al Ghurair group is owned and managed by the Al Ghurair family. The group operates the eight core business units categorized as manufacturing, real estate development, retail and investments. Among the core business units includes Gulf extrusion, the only firm that specializes in the extraction of aluminums in the gulf region as well as the packaging and corrugated board.

The diversified business strategy has enabled the firm to remain competitive within the UAE and ensured that the group satisfied a wide range of customers. Though the group is still owned by the owner and the founder, most of the management positions and senior employees originate from the Al Ghurair family.

The family owns ninety percent of the stake in the firm with the rest left to the close members. The conglomerate serves the whole of UAE as well as the international market.

The environment in which the firm operates is highly competitive particularly from similar family owned businesses. Diversification was adopted by the family business particularly to reach a wide range of customers within various sectors. In addition, the business faces various economic and technological challenges.

Besides repaying the huge debts incurred during the financial crisis, the company faces various market challenges particularly due to the fiscal imbalances in Europe as well as the nations within the gulf region. The economic crisis and the market uncertainties have resulted in the slow growth of the family group particular in the financial year 2009 to 2011.

However, the fast recovery of the economic growth of as well as the government’s increased spending in the infrastructure has enabled the family business to experience sustainable profits over the turbulent periods.

In addition, the UAE government’s support of the privately owned businesses has enabled the firm to operate without any political huddles. The UAE government’s policy that the members of the family must have at least 51% stake in the family owned businesses has also provided the company with good political climate to operate.

As indicated, the family owns ninety percent of the stakes of the group with ten percent left to non-family members particularly the royal family as well as other members from countries in which the group’s businesses operate.

Financially, the firm’s total investments are valued approximately at 12.3% while the shareholders equity is valued at 14.6%. The group is among the major employers in UAE. The company employees are approximated to be around 21 thousand working within UAE.

Besides, the family group has good corporate administrative structure based on the good industry practices as well as the UAE regulations. The industry best practices and the good corporate administrative structure has enabled the firm succeeded in the sound controls of its finances as well as ensure transparency and accountability in its operations.

In addition, the management of the company consists of board of directors who are majorly non-executive and are family members. The only executive and non-family director is the company chief executive officer who is a foreigner. However, the two directors are also non-family members and have no relations with the company shareholders.

In essence, the board of directors consists of the chairperson who is the owner of the business and the close family members, the two non-family members and the chief executive. The directors have three-year term and are selected by the company stakeholders.

Abdulla Al Masaood & Sons

Trends also indicate similar observations of the Abdulla Al Masaood & Sons Group. Abdulla Al Masaood & Sons Group is also one of the largest and highly regarded family owned firms in UAE. The family owned business began seventy years ago and grown exponentially in the subsequent decades to become one of the largest family group of businesses in UAE. The group also specializes in commercial, services and manufacturing.

Similar to most family owned business in the UAE, the company is facing economic and social challenges. In the social front, the firm operates under highly competitive environment. The competition comes from other family owned companies, national firms and the international corporations.

Politically, the owners of the firm are required to hold over 51% stakes in the company. However, the firm’s operations are supported by encouraging political, economic, technological as well as social environment advanced by the UAE governments.

Most of the family owned businesses in UAE show similar model of management structure. The Abdulla Al Masaood & Sons Group is well structured with board of directors majorly drawn from the immediate family members. The board of directors is the major decision-makers and the chief executive is chosen by the stakeholders to serve the company for three years similar duration to the board of directors.

In Al Masaood & Sons, seventy percent of the board of directors is family members while thirty percent are non-family members majorly from the royal family.

Al Masaood sons are currently controlling the firm. The business has the succession plan in its core strategies indicating that the board of directors will resolve the disputes that may arise. In the case of the division of the business, the assets and liabilities are dispersed according to their value of the business.

Al-Mashreq bank

Similar trend are also observed in Al-Mashreq bank a family owned business in Abu Dhabi, UAE. The family owned business has its operations located in UAE as well as in the international markets especially within the Gulf region. The firm provides banking services, asset management, insurance services, financial management services and real estate development.

Founded in 1967 to provide lending services particularly to the family owned small businesses, the business has transformed into big firm providing financial and other related services in UAE and the gulf region. The bank has huge opportunities following the recovery from the financial crises given its unique business strategies as well as its position in the UAE market.

The company’s experiences during financial crisis around the globe notwithstanding, the family owned business have shown a commendable growth in the last three financial years because of the diversified economy of the UAE. The UAE economic growth has shown a strong recovery particularly due to the increased oil prices in the last financial year.

The positive changes in the oil prices have also been accompanied by the government’s increased spending in the infrastructure enabled the rapid economic growth that provides an economic environment that encourages the growth and expansion of the family business.

The family owns 60% of the stakes of the firm with the rest left to non-family members predominantly the imperial family as well as other citizens and foreigners from countries in which the group’s businesses operate. Financially, the return on assets is approximated to be 11.5% while the shareholders equity is valued at 40.6%. Returns on the firm’s equity are round 6.9%. The firm is also one of the major employers in UAE.

The majority of the company board of directors consists of family members and two non-executives. The chief executive officer is the only executive and non-family director.

The chief executive officer is a foreigner. However, the two directors are non-family members and have no relations with the company major shareholders. In other words, the board of directors consists of the other members and the chairperson who is the owner of the business, the two non-family members and the chief executive.

The Al-Futtaim Group

One of the largest and highly regarded family groups operating in UAE. The family owned business began in the early 1930s and grown exponentially in the subsequent decades to become one of the largest family group of businesses in UAE. Currently, the company is an incorporated commercial, services and manufacturing firm. In addition, Abdulla Al-Futtaim controls the automotive and the retail sectors.

Al-Futtaim Group is headquartered in Dubai but operates in almost all parts of UAE. The company reputation has enables the business to expand rapidly in the recent year and employs over thirty thousand workers.

Moreover, the company currently operates eight sectors spread across various industries including services such as insurance, electronics, manufacturing and automotive. However, following the financial crisis the firm is looking for new opportunities to expand and develop particularly in areas such as retail and property development.

Like any other family owned business in the UAE, the company is faced with economic and social challenges. Socially, the firm operates under highly competitive environment particularly from its rival the Majid group. Besides, the firm faces the increased competition from the other family owned companies, national firms and the international corporations.

Politically, the corporations are under legal obligations to go public and allow over fourty-nine percent ownership to other members besides the family. However, the operations of the firm are supported by encouraging political, economic, technological and social environment advanced by the UAE governments.

Like many of the large family owned businesses in UAE and the Middle East, the Al-Futtaim Group is well structured with board of directors majorly from the family members.

The board of directors makes decisions and hire the chief executive that carry out the daily operations of the firm. In Al-Futtaim Group, seventy percent of the board of directors is family members while thirty percent are non-family members majorly from the royal family.

Currently, the firm is under the management of Al-Futtaim. Following the succession wrangles with the controller of the Majid group, the business came up with the succession plans, which indicates that any dispute may be resolved by non-family board of directors. In the case of the split of the business, the assets and liabilities are distributed depending on the businesses in possession of the defunct party.

The model was incorporated following the split of Al-Futtaim Group and Majid group when the royal family came in to resolve the issue.

Conclusion and recommendation

As can be observed, family owned business should not be done away with but strengthened and opened up for non-family members also to be major stakeholders. In addition, Family owned businesses dominate the economic background of UAE.

Even though upward pressures to change the manner in which such businesses operate increases, such structural changes should be accompanied with regulatory framework that foster growth and provide environments which encourage business operations.

Works Cited

Anderson, Ronald. “Founding-Family Ownership and Firm Performance: Evidence from the S&P 500.” Journal of Finance, 58.3 (2003): 1301–1328. Print.

Barnes, Louis. “Transferring Power in the Family Business.” Harvard Business Review, 54.4 (2006): 105–114. Print.

Bennedsen, Mark et al. “Inside the Family Firm: The Role of Families in Succession Decisions and Performance.” Quarterly Journal of Economics, 122 (2007): 647–691. Print.

Breton-Miller, Isabelle, Danny Miller and Llyod Steier. “Toward an Integrative Model of Effective FOB Succession.” Entrepreneurship Theory and Practice, 2.3(2004): 305-328. Print.

Corbetta, Guido, et al. “How do Managerial Succession Shape Corporate Financial Policies in Family Firms?” Journal of Corporate Finance, 17 (2011): 1016-1027. Print.

Lang, Peter. “The Separation of Ownership and Control in East Asian Corporations.” Journal of Financial Economics, 58.2 (2000): 81–112. Print.

Rajagopalan, Nathan and Yung Zhang. “Once an Outsider, Always an Outsider? CEO Origin, Strategic Change, and Firm Performance. Strategic Management, 31(2010): 334–346. Print.

Wallace, Jeffrey. “Family-Owned Businesses: Determinants of Business and profitability.” All Graduate Thesis, 59.4 (2010): 1-86. Print.

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