(Don't) keep it in the family

25 October 2016

Author: Jeremy Hazlehurst


(Don't) keep it in the family

Family businesses grow faster and last longer than their rivals. But managing them means negotiating some troublesome HR challenges

There are plenty of leaders who like to claim they operate their business like a family. But the Middle East is one part of the world that can claim the distinction is irrelevant. From the Emirati Majid Al Futtaim Group - which owns the Mall of the Emirates - and Saudi Arabia's Binladin construction company, to the Kuwaiti Kharafi Group, family-owned firms generate 80 per cent of the region's GDP, and 65 per cent of all billion-dollar businesses are owned by families. Most emerging and fast-growing mid-level businesses have family roots too.
 
There is little doubt family ownership can be very successful, promoting stability and deep engagement with values. But it comes with a complex set of problems for HR professionals. With a fondness for promoting sons (and, increasingly, daughters) to top management positions, and business affairs that can be tangled up in those of other families, these businesses can cause headaches. Can family firms modernise the way they work without losing what makes them special?
 
The first thing to realise is that family firms are by no means homogenous. "You get some that are run by the founders who set up the business, and others that are in their third generation where the heirs don't have the drive because they are more interested in hobbies and sports and so on," says Mark Houghton, managing partner of recruitment firm Odgers Berndtson in the Middle East. Dependent on their history and age, he notes, "there is a dramatic variation in family businesses. And obviously there are also significant variations between Saudi Arabia and the UAE, Bahrain and Qatar."
 
Size also matters. "The level of professionalism can vary from company to company. The larger family businesses tend to operate like big corporate firms with all the necessary governance frameworks and policies and procedures. HR tends to play a more important role in larger companies than smaller ones. In smaller companies, HR usually operates more as an administrative department with little or no strategic focus," says Asma Bajawa, founder and managing director of the UAE's PeopleFirst HR Consultancy, itself family-owned.
 
For all their variety, one of the common traits of family businesses is that their stable ownership leads to a long-term vision, meaning they can plan and invest for the future. Some family firms, for example, have kept the same people at the top for decades.
 
But their loyalty has a flip side. "One of the qualities of family-owned businesses is that they are often based on personal relationships and employee loyalty is a very important factor," says Bajawa. "In this instance, it is very hard for the owners to separate business decisions from emotional decisions. In my experience, owners of family firms tend to look after their long-term employees more than other companies. Quite often, business owners will retain staff, even if the employee isn't the best performer, just because of a sense of loyalty."
 
This is far from trivial. Favouritism, either to family members or others, can be seriously corrosive in businesses because the suspicion of a glass ceiling deters other professionals from joining. "These businesses tend be run by people who have known the chairman or owner for many years and there are huge loyalties that make it difficult for the chairman or expats who come in to implement change," says Houghton.
 
This also creates a challenge for recruitment, says Coralie Zaccar, a third-generation member of Lebanese family firm Commercial Insurance. "Some people say: 'I will never make it right to the top; there are limits to how high I can go.' So either they decide they are happy with the position they have reached, or they move to a non-family owned business."
 
Because family management can deter top talent, one consequence is that many families "are not directly managing any more", and instead choose to take on a purely ownership role, says Zaccar.
 
One of the most obvious consequences of this is that certain people - often family members, but also favourites - can be paid more than others. At smaller firms, says Bajawa, "details of pay and benefits for family members are often kept under wraps and not shared so it is hard to say if they get paid more than non-family members" Often, she adds, "smaller, family-owned businesses don't have such a structured approach to pay and benefits, which can result in inconsistencies. Negotiations can take place at an individual level at all levels of the company, not just senior levels."
 
This might sound like a quagmire for HR. The solution, says Renalda Hayek, general manager of regional HR consultancy ODCC, is that HR professionals should steer clear of any conflicts, and only deal with the outcomes. "CEOs have to understand that others will find out if someone is paid more than the standard amount, and then everyone in that band will want to be paid more. If they want to pay that price, then they can go ahead," she says. HR should carefully spell out the consequences and - importantly - the financial costs of favouritism, but should be careful not to get involved in the power struggles and emotional battles.
 
More broadly, Hayek says the problem of owners wanting to get involved in HR issues can be easily solved, as long as it is dealt with coolly. "Take recruitment. If everyone agrees with the policies and procedures, and HR is competent enough to draw up a pay scale that is congruent with the job descriptions, and is in accordance with what the business requires, then let the owner be involved," she says. "Say that if they want to decide, we will give them the tools to create the job descriptions and the key competencies, and train them to do competency-based interviews. After a while, they come to trust HR and will not want to get involved in recruitment any more."
 
The attitude to control often associated with family businesses is typical of the founder generation. There is some truth in the cliche of the charismatic, buccaneering entrepreneur who likes to have a say in every hire and decision.
 
As the generations go on, though, the owners tend to take a more relaxed approach. Zaccar says that many years ago the family would keep a close eye on HR decisions, but "there was a gradual process whereby HR was trusted to make appointments, and most of the decisions are made by professionals. The founder would maybe see them in the second interviews. Now the CEO will only get to see them to finalise a senior position."
 
The question of which generation the family business has reached can be crucial to its behaviour. As the company gets older, the number of family stakeholders can increase quickly, especially if there are multiple children, not to mention cousins. "The businesses that tend to be most successful are those in which a small number of inheritors are running the business," says Houghton.
 
"It gets much more complicated where the founder has many more children and grandchildren, and there are multiple voices and stakeholders. Typically, the businesses with fewer decision-makers at the top have been able to instil best practice more effectively than boards that are made up of numerous family members, which creates more legacy and ownership issues going down the line."
 
One solution, if there are a lot of family members involved in management, is to split them up. "The trend is to make sure you don't have brothers and sisters under the same roof," says Hayek. "The best family businesses have learned from the European and American model: have one family member in production, one in sales and so on. Never have two in the same line of business." This has the benefit of avoiding conflicts derailing departments, and also ensuring that the next generation have complementary skills.
 
But skills only go so far. Houghton says he heard about a billion-dollar consumer goods company where the father promoted the son to CEO. He was in his late 20s, had an MBA from the US and was well qualified: "But despite his inherent business capabilities, he lacked the people skills developed through experience, and that caused issues with motivation and employee engagement." Revenues dropped and the son was pushed to one side, with the father coming back in.
 
Such stories only deter people from working for family firms. Good HR departments are trying to smooth their next-gen problems by bringing in expat executives to mentor heirs, though this is often only a short term fix. Others turn to specialist mediators and troubleshooters who know how to solve the sort of disputes that typify family businesses.
 
Does this suggest the prevalence and longevity of family firms is under threat? Not at all. And it is important not to overlook their upsides. After all, there are reasons that family ownership is so ubiquitous and successful. It often means long-termism, stability and a strong, well-understood culture.
 
"A big positive with family businesses is the engagement," says Hayek. "In HR now, we are often working on engaging employees, and instilling passion for the company. That is what you find in family firms. If we can keep it and mix it with the power and authority, I think family businesses will flourish."
 
Navigating the family firm: experts give their HR advice
 
Coralie Zaccar
Third-generation member of Commercial Insurance, Lebanon
 
The in-house HR team should bring in an external consultant from time to time. Sometimes, if you have long-term employees, they might find it hard to take constructive criticism from the in-house HR, who might not have been there as long. Also, there might be a suspicion that the in-house team is working in the best interests of the family, not the employee. An external HR person is immune to that. They can introduce best practice and say things that wouldn't have necessarily been accepted otherwise.
 
Mark Houghton
Managing partner of recruitment firm Odgers Berndtson Middle East
 
Do not make your decision about coming to work for a family business based on conversations with the patriarch - meet people from across the group of businesses and understand exactly what you are getting into. Take references from people who have worked there in the past, and get a view on the culture of the company and behaviour of the chairman.
 
Asma Bajawa
Founder and managing director of the UAE's PeopleFirst HR Consultancy
 
All newcomers to the Middle East, in particular those who are joining family-owned businesses, should take time to understand the culture and become familiar with local employment laws. The most important expectation a business owner will have from HR is to ensure legal compliance so that the company is not at risk. Also, gain an understanding of the company and business operations before making recommendations that may not be relevant.
 
Renalda Hayek
General manager of HR consultancy ODCC
 
Be understanding and flexible when the CEO starts telling you about HR strategy. You need to listen, understand and also be able to challenge. If you think the decisions are bad, prove it. Be scientific. Show it by proving the decision will lose money. But at the same time, you must be humble. Yes, you are an HR expert, but be aware of your own level of knowledge and expertise, and theirs, and do not let your own ego be a factor in your communication with the CEO or the owner.