The region's most successful family firms are coming to Cairothis month to find ways of passing on their success without losing it all
The firm traces its roots back to their grandfather's business founded 70 years ago. A pioneer in his field, Hassan Allam (1904-1976) started the Hassan Allam Construction Company in 1936. The business blossomed under his guidance, surviving a world war and the 1952 revolution, only to be nationalized in 1964. More than a decade later, Allam founded a new, privately owned enterprise originally called Hassan Allam Sons just a year before he died.
But despite its success, the family-run firm now faces one of its greatest tests: ensuring a smooth transition of power as the third generation takes on more responsibility within the company.
"Saying that we've figured it out is too big a statement to make," says grandson Hassan, the group's director of construction. "But we have been working with consultants about putting a succession plan together whereby third generation family members, based on their qualifications and education, are given clear cut roles within the organization."
It is perhaps one of the most daunting challenges facing family-owned businesses, which account for 95% of firms in the Arab world. Only 6% survive after the third generation takes over, according to Paul Dietze and Timm Tiller, German doctoral candidates at the Witten Institute for Family Enterprises of Witten/Herdecke University in Germany.
"Most don't make it to the fourth generation because they break up in the third. The third is the crucial generation," says Dietze who, along with Tiller, is organizing the first Arab-German Family Business Summit from October 17 to 19 at the Four Seasons Nile Plaza hotel in Cairo.
Part of the reason companies get into third-generation trouble is because choosing a successor becomes much more complicated as a family grows, as does the family dynamic, says Dietze. Companies also have trouble making the transition from a traditional family business structure to a more corporate model as they reach critical mass, which can result in a business failing, being sold or hiring new managers from outside the family.
Founders of the Witten Institute's international arm, the International Institute for Family Enterprises (IIFE), Dietze and Tiller will be bringing together some of the biggest names in family business and academia from the Middle East and Germany to discuss how companies can transition successfully, as well as topics like corporate governance, professional management and succession planning.
While the Witten Institute has organized related events in Germany for the past 10 years, the Cairo summit is unique in that it is the first time the conference will be held overseas by the newly formed IIFE, with support from both the Egyptian Ministry of Trade and Industry and the German Ministry of Economics and Technology.
Some of the participants are from the best-known businesses in Egypt, including El-Sewedy Industries, Orascom group, Al -Ahly Development and Investment and MAC Investments SAE. Representatives from over 75 families based in Germany, Austria, Switzerland and the Middle East, including a few royal faces, will be converging in Cairo.
Professional Management
Domestically, many Egyptian businesses attending the summit are already tackling some of these issues as they transition from second- to third-generation operations. Hassan Allam Holding, for example, is taking steps to re-organize the company's entire structure in order to make sure it is one of the 6% that survive to the fourth generation.
"I think the challenges are the same worldwide: the institutionalization of the family business model and having professional management who are truly qualified and competent to carry out certain functions of the business, rather than assuming family members will cover such managerial roles, regardless of their capabilities or qualifications," says Hassan, the group's director of construction.
Moving away from a traditional family enterprise structure is no easy feat. Family bonds and trust are key elements to doing business in the Arab world.
"I think when [we're dealing with family], in our case, it makes it a lot easier. We as a family have a very high trust in the group," says Amr, director of business development and investment for Hassan Allam Holding. "But, of course, with other employees, people we have been working with for years, we tend to gain a lot of trust. We have people who have been with us for 10 or 15 years and they tend to become part of the family."
But the traditional family business model will only take you so far, says Hossam Mestikawi, chief financial officer of household appliance manufacturer Olympic Group [OLGR.CA, bt100 number 19]. There comes a time when family members must realize there are definite benefits to corporate structures and hiring the right person for the job, which often means looking outside the family.
Before starting at Olympic Group over eight years ago, Mestikawi spent most of his career working with oil and gas giant Shell. His corporate background helped him understand why it was important to distance family members from everyday operations. "I came during the first phase of [becoming a publicly traded corporation], which was mainly led by chairman [of Olympic Group] Dr. Saad Sallam," says Mestikawi.
Olympic Group, which owns the nation's largest retail chain for appliances, B-Tech, began restructuring its organization in 1997 under the leadership of Sallam, the eldest son of founder Abdallah Sallam. The group is now governed by a six-person board of directors made up of majority shareholders, three of whom are members of the Sallam family. An executive board of professionals from outside the family runs the day-to-day activities of the firm.
In Mestikawi's opinion, going from the tradition of family management to hiring professionals from the marketplace is not the hardest part of the process. It's selling the idea to yourself, and then finding ways to get your family's support.
But they are necessary changes; the alternative is eventually losing the business or your competitive edge in a constantly changing economic environment, on both a national and international scale.
"There's a trend in many companies to inject professional management into their organizations. Traditionally, with 100% family-run businesses, people believe they don't really need professional managers, so they offer very low [employment] packages," says El-Mestikawi, thereby losing qualified managers to foreign multinationals setting up shop in Egypt.
Dr. Florian Amereller, one of the summit's presenters and vice president of the Arab-German Chamber of Industry and Commerce, will be facilitating discussion on how to take family businesses public alongside Samih Sawiris, board chairman for Orascom Hotels and Development [ORHD.CA, bt100 number 23].
"Say you want to make your company independent from family to a certain extent, to save it for the third and fourth generation, one possibility is to make the company a listed company," Amereller says. "This facilitates access to capital markets, increases accountability of management and helps you at a later stage to tell your children: 'You can sit on a family council, but you might not be involved actively in the governance unless an independent board decides you are exactly the right person to do so.'"
Based in Dubai, Amereller is a founding partner of Amereller Legal Consultants and has an office in Egypt. He is credited with advising on over 250 joint ventures in the region, often representing huge Western-based corporations. Due to the sensitive nature of his job, Amereller is careful not to mention the names of his clients, but says he offers a variety of services, from corporate work to private wealth planning.
The transition to a publicly traded entity may give a company added clout on the international scene, but Amereller points out that not everyone wants the public transparency or accountability that comes with it.
"You will always have the old guard and the new guard and always have people that feel threatened by change because these systems create accountability and a certain transparency," he says. "That transparency again threatens certain members of the corporation because they are used to exercising power by monopolizing knowledge and processes."
But this kind of transparency is exactly what Egypt needs to have in order to foster fair competition and good economic management, according to Mestikawi.
"If you look at OG [Olympic Group] and how we're unique, we're the only company in our industry that is listed and publicly traded in Egypt. But when you look at our competitors in the local market, they're all family businesses. None are public. So the level of transparency is very, very limited. We know nothing about them," he says. "The challenge is for management and family to accept the fact you will be transparent and open to the whole world."
Mestikawi lists the benefits of going public as a larger capacity to grow, better value and monitoring from global players and easier access to international markets. He says going public can also help the economy by making the size of each sector clearer and companies more accountable fiscally, while eliminating "hidden businesses" that operate under the radar.
"I think companies that reach a certain volume in the market should have to make a minimum commitment of transparency in terms of their financial statements, shares, etc," says Mestikawi. This could prove to be a difficult task for regulators, however, because businesses here run the full gamut when it comes to structure.
"Egypt is a country of extremes. You have family businesses that are totally separated, are comprised of different companies, have corporate governance structures and are independent," says Amereller. "And then you have the classical, old families where the father still signs every single check and the 40- or 50-year-old son is treated as if he's just starting out."
There are good reasons for staying privately owned, says Dietze. They include keeping the positive connotation with which family businesses are associated, compared to their "profits-driven" corporate counterparts.
There is also a lack of pressure from the stock market, though this does not necessarily mean companies are any less driven by their bottom line. "The fact that we don't disclose our figures eliminates extra pressure that's related to market performance and how shareholders or the stock market feel about our performance and our strategy," says Hassan, describing the kind of pressure he feels as "internal."
"We are a large family with various shareholders and they need to see numbers at the end of the year. It's like we have our own internal stock market," he says.
Family-owned businesses also often have greater financial freedom thanks to large family fortunes, adds Dietze. Family members feel an obligation to put money back into the company when financial troubles strike, as opposed to shareholders who feel no such obligation. Dietze calls it a "security blanket" because family-owned enterprises may be able to better withstand recessions or long periods where the company is not profitable.
The Problem of Succession
Professor Dr. Fritz B. Simon, who teaches leadership and organization at the Witten Institute, will be hosting a workshop at this month's conference. He says the family dynamic in business is complex at best and it's not as simple as learning how to get along in a high-pressure environment or forgetting your differences as family members.
"The interactional rules in the domain of business and family are very different and in many respects contradictory. If you apply the rules of the business inside the family and the rules of family life inside the business, you get into trouble," says Simon. "Conflicts are unavoidable. Usually the actual problems are based on very old conflicts between family members. The business becomes the battle field of sibling rivalry and hate between family lines."
Amereller's advice when it comes to business is to protect your company by enshrining certain 'golden rules.'
"For example, I always tell my clients that when you establish a company it should be mandatory to exclude property that a family member would expose to a marriage dispute or divorce. This way there is a 'golden rule' that is unchangeable by the family. You implement a system that survives which makes life easier for your family," he says. These rules can also govern how the organization is set up as well as who will manage day-to-day operations.
The summit later this month will bring together two of the top experts in the US on family business succession, Dr. Kelin Gersick from the School of Organization and Management at Yale University and Dr. Ivan Lansberg from the Kellogg School of Management at Northwestern University. They will join Mishal Kanoo, a renowned businessman in Dubai and deputy director of one of the oldest family businesses in the Arab world, The Kanoo Group, which is over 100 years old.
Gersick, who has written a book on the topic, will be delivering a keynote address, as well as facilitating a workshop on transferring control to the next generation.
Knowing his generation will either ensure Hassan Allam Holding's survival or ruin, Amr sees a bright future for a company riding a booming construction sector. "I must say, as the third generation, we have a lot of harmony, enjoy working together and see eye-to-eye on all issues in the business."
But even when succession has been sorted out, getting your hands 'dirty' for the first time is easier said than done. "Entering a family business is somewhat difficult, no one really tells you how to expand the business, what to do or how," says Safwan Noaman. Noaman is managing partner at Noaman Engineering and has been working for the company for seven years. He knows how hard it is to take the reins from your father from experience. Founded in 1981, Noaman Engineering focuses on industrial automation and process control.
"As a member of the second generation, you have to create your own way through; it's like finding your own tools to win new customers and new markets by utilizing the experience and reputation of the family and your own enthusiasm."
The Summit
The three-day conference is a great opportunity for Arab and German businesses to network, share best practices and benefit from Germany's long history with family business, says summit organizer Tiller.
"Sharing diverse experiences on family business' specific challenges and opportunities is the key benefit to our participants. Due to the fact that almost all family businesses have to deal with similar challenges, the summit will be a forum that encourages every participant to interact with their peers and to create sustainable relationships," he explains.
Germany itself has a long history of family firms. Many have been around for decades. Others, like multi-billion-euro earner Haniel, are hundreds of years old. It stands to reason that since these companies have been around for so long, their leaders have been doing something right, but not without making a few mistakes as well.
Over 100 years ago, Haniel, now involved in everything from pharmaceuticals to recycling, was run by three brothers who did not get along. They decided to fix the problem by allowing each brother to run the business for four months of the year. This was disastrous, says Dietze. After realizing they were running the business into the ground, the brothers decided no member of the Haniel family would be allowed to hold a day-to-day operational job ever again.
The declaration holds true to this day: There are about 650 shareholders who are family members and not a single one works within the company.
Amereller sees the major advantage in how German businesses are organized. "The Germans are particularly known for their structures. Frankly, I have seen no other countries which have had such a great focus on family structuring," he says.
DW-World, a website dedicated to doing business in Germany, reports that family businesses account for 41% of all sales in Germany and provide some 57% of the nation's jobs. According to the site, Germany's 500 biggest family businesses increased their staff by 10% between 2003 and 2005 to 2.2 million, whereas the number of jobs decreased by an average of 3% nationwide during the same period.
Dietze and Tiller founded IIFE after visiting Egypt as part of their studies, and discovered the large role family businesses play in the Arab world. They plan to use the contacts and information gathered at the event to create a think tank dedicated to family businesses in the region. The project, involving between 15-20 other doctoral students, is non-profit and will take three to five years to complete.
Dietze and Tiller are already thinking about next year's conference, which may take place in Dubai, after receiving what they call an "amazing and overwhelming" response to the 2008 summit.
The topic is close to Dietze's heart, as his father is CEO of his own family business, Hans Holzhauer GmbH & Co. KG, which specializes in caravan parts and supermarket food trays. Dietze is not sure if he will eventually join the company as a member of the fourth generation, but knows if he does it will mean something special.
"I met a man running one of the largest German family businesses. He told me: 'I don't see myself as running a company; I see myself as keeping it for my children and grandchildren. It's not my company, it's my children's and grandchildren's company,'" says Dietze. "This can be a definite strength for family businesses." bt
Family Gathering
Some of the companies from Egypt attending the Arab-German Family Business Summit.
Al-Ahly Investment and Development Alamia Publishing Allweiler-Farid Pumps Amr Helmy Designs ECTRA Company El-Araby Company El-Rashidi El-Mizan El-Sewedy Industries Engineering Consultants Group Eva Cosmetics Hassan Allam Holding International Group for Investment Juhayna Food Industries MAC Investments SAE Nile Holding Olympic Group Orascom group Osman Group Peugeot Abaza Pico International Petroleum Samcrete SEKEM Group Taqa Triangle Trading and Engineering.
By Jessica Gray
Business Today Egypt 2008
