The Succession Process
6th January 2016 Deborah Webster
Never has there been a more crucial time to take a closer look at the issue of succession, especially in the Middle East.
Succession has been of concern for families for generations, and never has there been a more crucial time to take a closer look at the issues.
Despite numerous financial structures on offer, in 90 per cent of cases family wealth is not passed beyond the third generation. This reflects not poor investment decisions, but rather a lack of cohesion and communication between family members, where the family fragments, and with it the wealth.
Many families in the Gulf Cooperation Council (GCC) now find themselves in a position to look at how to take their business and their family to the next level, and feel a need to consider succession planning, the next generation and legacy.
Over the years, I have seen that although the next generation from the region attends the best schools and universities across the world, they are still not properly prepared to tackle the challenges that face them when they return home. Each phase of life presents its own unique set of challenges. Families need to ensure they are doing their best to equip themselves and the next generation with the skills and knowledge they need to move ahead quickly and sure-footedly in their professional and personal lives. Awareness and specialised education are key.
To demonstrate the pitfalls and considerations family members need to take into account, I will take a closer look at some of the key stages and situations.
Challenges facing young people
Imagine a young person getting ready to embark on higher education abroad. We are all aware of the challenges youngsters face through peer pressure and a desire to fit in and make friends. These challenges can be enhanced for someone from the Middle East.
Sadly, it is common to hear of individuals bragging about their family’s wealth as a way to gain acceptance in a new environment, or of people making assumptions based on origin. If a young person is not properly grounded and prepared, this can make them easy prey to be taken advantage of by supposed friends.
In such cases, there are two common outcomes. The first is that the young person becomes surrounded by parasites, taking advantage of their wealth. The second is the young person succumbing to peer pressure, taking on behaviours or habits that would not be condoned in a Middle Eastern family environment. Although both examples are factors every family, regardless of origin, needs to be aware of, these two scenarios seem to be greater challenges for families from the region, due to the perception of wealth from the Middle East, along with the differences in culture and traditions between the Middle East and non-Islamic societies.
Who should succeed?
Succession does not guarantee success, and being the oldest does not make a person best suited to take over the family business. The Middle East has an additional layer of complexity with the cultural transition that is taking place in the female role in the family and society. Traditionally, families in the region have leaned towards the oldest son being the natural successor. However, history and excellent examples of female leadership have shown that this is not necessarily what is best for the family or the business.
Transition from one generation to the next can be challenging at the best of times, but the speed at which society is changing in the Middle East can add a different dynamic to succession. Alignment between personal values and family values can be perplexing, but adding traditional, cultural and religious values can add a further dynamic, especially in times of cultural and societal change. Ultimately, the person who succeeds should be the best equipped to ensure the long-term sustainability and longevity of the family wealth, to support current and future generations.
The need to create value to support a growing family is not the sole responsibility of the patriarch, but of every member of the family moving together towards a shared vision. Each member of the family must also take personal responsibility to ensure that they work in the family enterprise only if they add value. Failure to do so jeopardises the wellbeing of not only the family enterprise, but also the whole family system. No two people have the same combination of skills, talents, interests and aptitudes, so each needs to hone their skills to make them fit for whichever role best suits them, if any.
Consider the recent Olympics: being the son of a great athlete doesn’t make you a great athlete. You need to have a certain aptitude, talent and interest. You then need to have the resilience, tenacity and passion to develop and sharpen your abilities to be fit, to be skilled and to have the stamina to win. It is hard work being successful. It is imperative for families in the region to bear this in mind, to support them in passing the baton on to the family members who are best equipped to carry forward the legacy, as opposed to the traditional eldest son.
Ensuring sufficient value and growth
How does a family ensure there is sufficient value and growth in the family’s wealth to sustain a growing family? With increased longevity, there are now more family members across generations alive at any given time. In the Middle East, this figure is amplified by cultural traditions, creating larger families than other societies. Some families have around 30 family members across three generations. This increases the pressures families face in terms of having enough wealth to pass on to maintain an equivalent standard of living. In addition, there are greater challenges in inspiring cohesion and shared values among the family members. This makes the danger of wealth dissipation a starker possible reality.
Certain investments that may seem able to produce sufficient returns may not align with traditional Islamic principles. The fallout from the financial crisis has created a lack of trust and uncertainty in frameworks and asset classes we thought we could rely on before. But this may not necessarily be a bad thing. One could argue that, as leverage is not allowed under Shariah, those who employed financial strategies based on traditional Islamic principles would have weathered the recent storm better than others, and hence fared better at safeguarding the family wealth. In looking at how to grow and secure family wealth, one needs to balance risk and reward appropriately, aligning the strategy with long-term sustainability, as well as with principles.
One way to provide sustainability is through value-creating enterprises. This makes sharpened entrepreneurial skills even more essential in the Middle East. But this is where the shifting traditions, mentioned previously, can be a positive influence to the continuity of family wealth in the region. With more Arab women tapping into their entrepreneurial capabilities, the region and its families have greater potential in wealth creation, further safeguarding the family’s legacy and wealth for future generations. Hence, embracing the changes in society and the shift in traditional views, and supporting the role of women in business, is a way to benefit all parties.
Transition is never easy, and, for the patriarch, handing over while finding new direction and purpose can be challenging. Over the years patriarchs have gained precious experience and wisdom, and often still want to feel needed and useful. That said, transition also offers an opportunity for patriarchs to harness their wisdom, experience and interests for a new chapter, exploring and undertaking new ways to continue their legacy. But, as with all change, this has its challenges. Entrusting someone with your life’s work is no mean feat. The region has changed so much over the years that this can add an extra layer of difficulty for patriarchs from the Middle East.
Patriarchs have also seen a shift in the values that are being fostered in the next generation and the society we currently find ourselves in. The next generation, coming on board with a fresh pair of eyes, is eager to take on new frontiers. Managing succession requires all parties to understand the two perspectives, and finding balance between them is key. Passing on the legacy is a gradual process that comes over time, but eventually there is a need to let go. Leaving the transition to the last minute is likely to leave the next generation ill-prepared, with a greater chance that the wealth and legacy will be dissipated.
The process of succession
Ninety per cent of wealth, globally, does not go beyond the third generation, and the dynamics of families in the Middle East could increase that number even further. The poor statistics demonstrate the intricacies of navigating the phases of a succession process. And there lies the key: it is a process where the better prepared you are, the greater the chance of success.
As Kierkegaard said, ‘Life can only be understood backwards, but it must be lived forwards.’ It is all well and good understanding how an enterprise got to be, but, to succeed through the generations, it must be handed over to the appropriate stewards in a timely and responsible manner. This is not merely about setting up structures to ensure that wealth is passed on, but about creating a process to instil the next generation with the skills, tools and aptitude to succeed for generations to come. Stewardship, education and entrepreneurship are key.