Unresolved conflicts and misunderstandings are the family business’s greatest enemy. Especially, when conflicts happen inside the family, the ramifications can be serious for both private and business relationships. A well-structured approach to the three dimensions of family, ownership, and management through the creation of shareholders’ assemblies and family councils can prevent miscommunication and ensure family business continuity states Amin Nasser, Partner of PricewaterhouseCoopers and Family Business Advisory Leader Middle East.

What role do family businesses play in the Gulf’s economy?

Family businesses have been the very foundation of the GCC economies. In fact, more than 80 percent of the GCC businesses are either family run or controlled, indicating that they are the basic fabric of society and the regional economies. A large percentage of the commercial activity is controlled by family business groups that are involved in several sectors and constitute a major part of the gross domestic product (GDP) not related to oil.

Family businesses in the GCC began as entrepreneurs and over the years diversified their business interests. A significant number of these businesses started in the early 1960s and accordingly are considered as being relatively young. These companies are mostly managed by members of the first or second family generation, and only a few are in their third generation.

Some of these families have created a number of successful conglomerates, which play a significant role in employment in the region. In addition, many family businesses in the GCC have multi-location and multi-business activities, including retail, automotive construction, importing, shipping and travel, insurance, agriculture, financial services, real estate, and manufacturing. Some have synergistic operations, which has enabled them to participate in development projects, shaping the region over the past few years.

Why do conflicts occur in family businesses?

Most family businesses wish for business prosperity and family harmony; however, they often have to renounce to one or the other and see themselves confronted with underperforming business units and/or unresolved family conflicts.

The two greatest threats to family businesses continuity are conflict and succession. Conflicts in family businesses are rarely caused by poor business performance; most they arise because owners perceive that their needs are not met.

Conflicts also surface when situations are unclear or not properly understood. The management of conflict becomes the key to the survival of both the business and the family. Indeed, the main reason behind the emergence of conflict in family businesses is the lack of understanding and communication between the three family dimensions; family, owners, and management.

Understanding these dynamics is extremely important as everyone within the family has his or her own point of view on them. The individual views will differ based on personalities but also based on where they are positioned within the three circles. Some family members will be active shareholders involved in running the business while others may just be passive shareholders. However, there can be a significant communication issue. When you are active in the business, you understand the challenges and opportunities faced; but when you are an outsider, often, nobody provides you with insight into the workings of the business. This divergence in knowledge often gives rise to conflicts.

The core issues likely to cause tensions or conflicts in a family business include:

  • Decisions about the future strategy of the business
  • Performance of family members actively involved in the business
  • Decisions around who can and cannot work in the business
  • Family members actively involved in the business not consulting the wider family on key issues
  • Deciding between the reinvestment of profits and the payment of dividends
  • The role ‘in-laws’ should or should not play in the business
  • Setting the remuneration level for family members actively involved in the business.
  • How can family shareholders exit?
  • Agreeing on the basis valuation for shares in the business
  • Choosing the future leaders of the family and business succession
  • Growth in the number of family members requiring financial support

A PricewaterhouseCoopers Survey carried out in 2007/8 revealed the following:

  • More than one-third of the family firms interviewed had quarreled about the future strategy of the family business.
  • More than 25% had argued about the competence of family members actively involved in the business.
  • Two-thirds of the family business had no defined criteria for choosing which family members should be allowed to take an active role in the organization.
  • 70% of the family businesses surveyed did not have any procedures for dealing with disputes between family members.

Impact of conflicts on family wealth?

Destroying successful family business sadly, conflicts between family members usually lead to the destruction of the family business in terms of reputation and structure as it disintegrates into smaller less effective units.

Negative impact on family harmony & relationships

As family members start fighting with each other, the family cohesion and harmony is negatively affected. These conflicts end up in family members not only leaving their family business but also leaving the family.

Freezing of assets and family wealth

In the Middle East, a number of family disputes have ended in courts who implement strict rules on asset management under dispute and sometimes freeze assets.

What do successful families do to minimise conflicts?

Most family businesses have reasonable governance procedures to deal with the business. Few, however, set up formal governance structures for the family and owners dimensions. As a measure against this lack of structure, a number of family businesses have created family councils to deal with family topics and a shareholders’ assembly to deal with ownership issues.

Establish the Family Rules

Through the family council or the shareholders’ assembly, the family usually builds and agrees on a set of rules, which addresses key ownership issues. The rules, which the family establishes are often referred to as family protocols or family constitutions. Successful family businesses have adopted these rules and understood the need to establish strong intra-generational business relationships. Being brothers, sisters or cousins may not be enough at times.

Creating a family constitution lies at the heart of building a base for family business success.

Decouple family issues from business issues

Very few family businesses in the Middle East have clear lines between family and business activities and this lack of clear separation increases the potential for conflict between family members. Families that decouple or separate the ownership issues from management issues and keep a balance between their relationship as family members and their contractual relationship as business owners have a more viable family business.

Establish a family forum (family council)

Families create family councils and shareholders’ assemblies for the family owners, which is a separate forum from the board of directors and the management of the company. The family council becomes a forum, which allows family owners to be actively engaged in the debate surrounding ownership and family issues – the emphasis here being on the fact that all family members can participate, regardless of whether they are actively involved in the management of the business. In this way, the threat of family conflict is lessened and the chances of the next generation embracing and supporting the family business are improved.

This practice has been followed by families all over the world and in some cases, the family council and the shareholders’ assembly occupy as much time as the management of the company.

Concept of fairness in the family

Fairness in the family means that all family members should be treated in a consistent and fair manner. Divisions and fragmentation between family members can be caused by family members suspecting others of benefitting at the expense of the family. The whole family should have a real commitment to fairness. This in turn calls for the family constitution to be created with the fairness concept as the key ingredient.

Conflict Resolution Mechanism

A recent PricewaterhouseCoopers survey of Family Businesses indicated that although most of the families interviewed admitted to having conflicts, over 70% of the families did not have any mechanism for dealing with disputes between family members.

Family businesses are increasingly creating formal conflict resolution mechanisms, which provide a forum where the family members in dispute can air their differences and hopefully resolve the issues in an amicable way. However, in family businesses, emotions are sometimes quite high, which makes it difficult to resolve issues in an effective way. Therefore, families set up conflict resolution committees including the involvement of an outsider, a person who is trusted and well respected by the family, who offers that independent voice. The role of independent outsiders can be of huge value as they can bring in objectivity when they are called to help resolve family conflicts.

Tharawat Magazine, Issue 5, 2010