Insights from Hussein Shobokshi, Director of SHOBOKSHi Development and Trading

The history of family businesses in the Arab world has been a turbulent one. Bearing incredible success stories as well as human tragedies, Arab family businesses have lived through all kinds of socio-economic changes. Challenges with new government policies, as well as the fight for intellectual property rights have shaped the position of family businesses in today’s economies and their ambition to distinguish themselves.

Hussein Shobokshi, Director of SHOBOKSHI Development and Trading in Saudi Arabia, discusses the effect of nationalisation on family businesses, the listing of family businesses in the stock markets, and the challenges in protecting family business intellectual property in the Arab world. Throughout modern history, family businesses in the Arab World have gone through exceptional experiences. Their stories range from economical successes to human tragedies. In the Arab World, their tales are of great persistence in adverse circumstances, and of continuous hard work towards one goal. It is not possible to consider, for instance, the Arab Bank, a giant banking establishment, founded in Palestine but also spread all over the world in spite of its emergence from complex political surroundings, without also recognising the efforts of the Shoman family and Abdel-Hameed Shoman, the founder of the bank. The same thing can be said about Talaat Harb, the Egyptian expert of industry, services and ideas, who was indeed an economic icon in his country and who made a considerable contribution to GDP at the time. Of course, there are dozens of other examples all over Arab countries, changing the names of trading families into distinctive brands.

In the beginning of the last century, Arab family businesses were active and productive in traditional industries, such as agriculture, textile and the retailing sectors. Later on, companies developed gradually, activities grew, domains broadened, and the aspirations to enter into new industries, such as automotives, banking sector, construction, real estate development, and tourism increased. Some family businesses could not, however, protect themselves from the changes and political crises in the region; whether because of military coups, nationalisation policies, agricultural reform systems, wars, or religious radicalism, collectively or individually, all these aspects contributed to eliminate some of the most important family-led businesses in the region.

No country or sector was safe from concerns, which affected family business performance. Egypt, following the 23rd of July military revolution and its accompanying policies (agricultural reform laws confiscating land properties from their owners and distributing them at random among the people) suffered a destruction of a great heritage of family achievements. Moreover, nationalisation laws were instated, which enabled the country to seize stores, shops, warehouses and factories, and “employ” their owners. Favouritism, advocates and corruption ensued, dimming the chances for a productive business environment. In Egypt, the list of victims was long. Amongst those strongly hit in the construction sector, were the Arab Contractors (Osman Ahmed Osman and Co.), Egyptian Contracting (Mokhtar Ibrahim and Co.), and Hassan Allam Sons Co. The wave did not stop at the construction sector, but extended to the spinning and weaving industry, whereby companies such as Mahalla Spinning Company and Misr Cotton Export Company were mainly concerned. Others hit by nationalisation were Misr Navigation Company, Egyptian Iron and Steel Company, Misr Pharmaceuticals, Sugar Company, Transport Company, EgyptAir, Misr Cinema, Banque Misr, Misr Insurance Company, and more.

Nationalisation soon spread outside Egypt to afflict other countries in the Arab World. Syria witnessed the affliction of the Syrian Railways, Banque de Syrie et du Grand-Liban (BSL), Syrian Insurance company, Syrian Cement Plant, Syrian Glass, Sugar Refinery, Textile, Carpets & Leather factory, Syrian Oil Company and Al-Khomasia company. In Sudan companies such as Sudan Mercantile Co., Gellatly Hankey Co. and Mitchell Coast Company, not to mention the nationalisation of all commercial banks and newspapers were affected. Libya nationalised all banks and practically eliminated the private sector all together in the fields of trade, industry and oil. Even Iraq was affected as the government issued several laws, by which it nationalised all banks, insurance and reinsurance companies and about thirty commercial and industrial institutions. The development concerned a number of industries, such as cement, asbestos and cigarettes, which were turned into public sector companies.

Today, with the existence of institutional, or semi-institutional, organisations to protect capital through regulations and stock market systems, significant Arab family businesses enlisted shares in stock markets for exchange. Through this move, like other joint-stock companies, family businesses have obtained more space for growth and expansion. The Saudi Exchange market has successful examples today, indicating the ability to successfully turn family businesses into at least partial joint-stock companies, such as Aldrees, Zamil, Jarir, Al-Sarea, Babteen and others. The same applies to Egypt, where Oriental Weavers, Ezz Steel, Orascom, and others, successfully listed. The approach is not limited to Saudi Arabia and Egypt, but it also includes Lebanon, Jordan, Kuwait, United Arab Emirates, Qatar, Bahrain, and Oman. Syria also sees more and more family businesses willing to turn into joint-stock companies.

Another matter that has led to the demise of family businesses in the region, is that of intellectual property right infringements. Some reputable Arab family businesses have suffered bitterly from the violation of their intellectual property rights and lost fortunes without being able to protect their names or bring violators to justice. The challenges in protecting intellectual property rights are not necessarily limited to multinational players but can affect emerging market companies as well. For instance, men in the Gulf countries know that the first “Ghutra”, which they wear from their early childhood on, goes back to “Al-Attar”, an old Meccan family. However, this deep-rooted brand has been violated through allowing the market entry and selling of replicas with no action or sanction. The same goes for “Al-Farouqi Coffee Beans”, “Halwani Brothers” and “El Rashidi El Mizan”. These examples remind of what happened to the tobacco farmers of the famous Cuban cigar; they registered their trademarks in the US after Castro’s military coup against the capitalist system in Cuba. (America later imposed a severe embargo on the Cuban products, which is still in force). However, the Cuban government, which nationalised the private properties of the Cuban trading families, kept exporting their products under the same brand names. This created a kind of duplication in property rights, which has been decided by the country of origin, Cuba. Still, the claims of the unjustly treated families remain un-responded, as the Cuban government has not compensated them or even acknowledged their usurped rights.

One of the serious issues impacting on the position and status of family businesses, and consequently their market “values”, is the stance and role of governments as well as their interference in the family business conflicts. Broadly, there are two approaches a government can take when it comes to family-owned companies: The first states that governmental interference is necessary to save such businesses due to their importance and value to national economy. The second approach views it necessary to leave matters to market variables and complications, and not to influence the survival or termination of a company, thus, keeping all options available to businesses, whether through restructuring or referring the matter to judicial authorities.

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Arab business communities have witnessed both approaches applied by governments when dealing with family business-related matters. Judging which of the two approaches is more useful and efficient remains difficult. On an international level, family business cases have shown the severity of the losses that can be suffered by both the company and/or by its respective national economy. India, for instance, still remembers the big fight of the two Ambani brothers who had inherited a huge and prosperous business. The aggressive dispute between the two brothers led to the division of the legacy between them. Their fortunes continued to grow separately; whether the undivided company would have achieved more success than the divided one is still open to debate. In the Arab world, there are several cases similar to the one in India; some family businesses were divided by mutual consent or a judicial decision, causing services and trade agencies to be distributed among parties, in other cases companies were forced to cease providing some of their services and trading activities.

Accounting systems may not have found a technical method in adding the “stability” element to the assets of businesses in general, and the family ones in particular, yet, as includng the brand equity as an assessable asset is not possible. This might represent the coming challenge for family businesses; being able to incorporate and institutionalise stability into their structure and form their identity and culture through it, thus securing their distinctiveness. Family businesses seek a distinguished position on the global economic scene where they can excel and shine. This is especially the case in countries like India whose economic growth is led by a group of family businesses such as Ambani, Tata, Godrej, Hindujas, Bajaj, and others. This raises hope that the ambition of creating added value, and consequently distinction for family businesses, is legitimate and achievable. Yet, it is important to make use of innovation and creativity to secure success and sustainability. Once family businesses realise that they are a part of the larger economy, and that accordingly they are accountable for implementing sustainable development with added value, they will see their efforts achieve real success.

Tharawat Magazine, Issue 6, 2010