Family Businesses

A Destructive Loyalty

June 13, 2021 | By Risktal Thought Leadership

In the Middle East and in particular in the GCC, family businesses form a significant part of the economy canvas.

While this region’s economy was predominantly oil driven, prominent family groups have been investing in diversified fields e.g. retail, real estate, hospitality, information technology etc. by acquiring distribution rights for global manufacturers and brands, which historically was the only way for global businesses to penetrate the local markets and establish operations.

As one can imagine, as the regional economy has emerged 50 years ago or so, opportunities for family groups were in abundance, and it was the first generation that built the building blocks for the mega-groups that we witness today; of course with the help of some advisors and employees who were lucky enough to ride the wave.

However, there were few research papers that revealed that there is a high probability that family wealth will be reduced as it reaches the second generation and diminished by the third. This led to many family businesses to develop some sort of succession planning and governance structures to preserve the legacy to the next generations.

Despite those measures, the reality is proving to be quite different than what was planned. We have analyzed a few of the factors that contribute to family businesses failures which are listed below:

  • Leadership Void – “The Captain” position for a family group is predominantly given to one of the most senior family members irrespective of the capabilities of the individual and experience in running a large business, let alone a group of employees, which requires the assistance of advisors, consultants and trusted employees. But that’s where the real issue starts to foster, as described next..
  • Destructive Loyalty Pt.1 – the “trusted circle” surrounding “the Captain” are predominately individuals who have been in the Group since the first generation and were inherited by the second etc. As the business develops, and the economy landscape evolves, the skillset of these personnel might not be in line with such rapid developments yet you find them in almost every family group influencing the decisions and blocking any attempt for change. What business owners fail to see or choose to ignore is that at the end of the day these personnel are after their own interest, and change will eventually expose their weakness, hence they will fight it at the expense of the organization’s interest. If one would look at the personal wealth of some of those “trusted circle” individuals and compare that to the improvement in the organization the results will almost always not tally.
  • Aging Workforce – Due to the destructive loyalty, the workforce is aging and the acceptance of change is non-existence, leading to the demise of these organizations.
  • Destructive Loyalty Pt.2 – In their attempt to prolong their tenure, the “trusted circle” endeavor to protect themselves by surrounding themselves with subservient personnel, or similar ethnicity, religion, origin etc. to ensure that nothing will ever rock the boat. This second layer of destructive loyalty, proves that shift of loyalty by employees from the organization to their “Godfather” (We have discovered that this term is widely used to describe such relationship) in the “trusted circle”.
  • Family Rifts –  Like any other family, not all members see eye to eye; however, this rift is generally fueled by the external influencers surrounding each member of the family.

The list continues; however, we would like to highlight a few strategies that family members in these business should adopt to reduce the risk of diminishing wealth:

  • Remove the Blind Fold – Assess everyone based on their merit and their Current contribution to the business. They have been well remunerated for their past contributions. The business should come first.
  • Hold People Accountable – While junior staff are generally subject to the strictest scrutiny, the higher up may get away with destroying the company. This should stop and everyone should be held accountable for what he/she are tasked to do.
  • Not Everything that Shines is Gold – Discard of “Yes” people. It does feel good to be told you are always right, but you need a dose of reality for the benefit of the organization.
  • Hire the Right Advisors –  There are worn down advisors who are willing to go with any flow to prolong their tenure. Assess their impact, assess the results of their advice and compare those to their cost, this simple analysis is guaranteed to send them packing immediately. Hire those who will tell you the truth as it is and genuinely can add value to your business and Empower them.

In an everchanging business environment, the historical advantage that family groups have been taking for granted will diminish as foreign businesses are progressively being allowed to operate in local markets without local partnerships. This will require family businesses to become more competitive and rethink their operating model to ensure a level of sustainability and resilience.