Are family businesses in Oman geared to face the modern challenges of doing business? Leading patriarchs and scions come together for a debate
Participants
ABDULREDHA MUSTAFA SULTAN
DIRECTOR, MUSTAFA SULTAN ENTERPRISES
HUSSAIN JAWAD
CHAIRMAN, W J TOWELL & CO
ISSAM SULTAN
BUSINESS DEVELOPMENT MANAGER, W J TOWELL & CO
KHALIL AL KHONJI
DIRECTOR, MOHAMED & AHMED AL KHONJI
NARU KESHAVJI
DIRECTOR, NARANJEE HIRJEE & CO
PANKAJ K KHIMJI
PARTNER, KHIMJI RAMDAS
BusinessToday thanks Grand Hyatt, Muscat for providing the Crowne Suite for the debate
BUSINESSTODAY: A fundamental question first. Can a business be run on the same rules as running a happy family?
KHONJI: Yes, I think it can. Running a family business is like running a small kingdom. If you protect the kingdom, it can survive for a long time. And the rulers of the kingdom can live together and continue with the history that has been started a long time ago.
ISSAM: Many a time, people presume that a successful business is a result of a successful or happy family. A lot of times, it is the opposite as well. The successful business keeps the family together. In a big family, a lot of members may have different goals, but the strength of the business keeps them together. So it works both ways.
KHIMJI: A happy family and a successful business are absolutely synonymous. They have to go hand in hand. To have a successful business and a happy family, you need to have good communication. It's all about communication and how you interact with each other, how you share information and how you share knowledge. No family will be happy without communication and no business will be successful without proper communication. So it is absolutely imperative that both of them go together.
JAWAD: Family business was the first type of economic activity. Even in the US, today a large number of businesses are family businesses. Among Fortune 500 companies, 35 per cent are family businesses. Similarly 80 per cent of Italian businesses are family business. For instance, we represent Mars chocolate, which is again a family business. Ferrari and Fiat are owned by business families. BMW is another example. These are happy and successful businesses associated with families.
KESHAVJI: I think family businesses can run only if you are happy, not otherwise. You need a leader to run the family and the business. It is like having a chief executive in the family who can guide everybody where to go.
ABDULREDHA: It all boils down to leadership. If you have good leadership, you see a happy family and a successful business.
BUSINESSTODAY: You have all mentioned the fact that a lot of companies in the US are family owned businesses. But if you look at it, a lot of them are run by a group of professionals, which is not common here in Oman.
ABDULREDHA: You have to look at the long history and legacy of businesses in the US that has evolved over the years. You see that evolution happening in family businesses in Oman. The way a typical family business was operated in the 70s was totally different from what is now. The process of evolution that is taking place is the same though the scale is different. That by itself is an evolution.
ISSAM: I agree with him. I have been told that in the old days, meetings used to take place at home and went on through the day. If you are looking at a certain time in European and US history and comparing it with Oman, I do not think it is a like-to-like comparison. If you look at businesses in the US and Europe in their infancy and compare them with Oman, then it would be comparable. But if a process of evolution is happening, then I think we are on the right track. Market forces will make families realise that just having family members is not the efficient way to run businesses and there is a need for professionals. If they don't, then they should not exist in the first place.
KESHAVJI: You have to move on with the times. In the old days, people used to have an office below and home upstairs. Whenever one got the time, people used to go home and then come back to work, it was that easy. But things have changed now.
KHONJI: What applies in America and Europe applies here as well. The older you are in the market, the more is the need for professionals. As the business diversifies and new companies are set up, there is a need for more professionals, though not necessarily at the level of chairman or chief executive. That still remains within the family in Arab countries because nobody else will protect your name better than yourself.
KHIMJI: As you said, you need to protect your name, your heritage and legacy and that can be done best by members of the family. The business can grow but will the legacy go on? No, the moment you 'SAOGise' a family company, you will see very little of the original company. What happened to Lucky Goldstar is a case in point. What I am trying to say is that you need the family to carry on the legacy but once the business grows beyond a certain level, you need professionals and the family moves back one step and goes into a check-and-balance stage, or a monitoring and mentoring phase. And that is what families need to do in the coming years.
JAWAD: Coming to your question, this is the challenge facing family business in the Gulf - of transforming family businesses into more modern organisations. We have started to see separations in the Gulf. This is happening because they have not differentiated between professionalism and family. They have put family emotion very close to the business and so they have separated.
BUSINESSTODAY: Are professionals encouraged in the family business?
JAWAD: According to statistics, only 30 per cent of family owned businesses get passed onto the second generation, 13 per cent to the third and only three per cent of family businesses go to the fourth generation. Statistically this is what it is.
BUSINESSTODAY: But what do you all feel? How open are family businesses to this change?
ABDULREDHA: It depends on the leadership. Everybody feels there is a need for sustained growth. But there are a lot of challenges to achieving that. What the leadership plans and how it brings in professionals into the business matter here. So you cannot generalise by asking whether professionals are welcome or not, it all depends on the leadership. There is a definite process of evolution taking place. While outside professionals were being inducted into family businesses at a slow pace, now more are coming in and more of a corporate culture is seen in family businesses.
ISSAM: Majority of family owned companies agree with the fact that outsiders should be brought in. The struggle is not with the philosophy. It is with the pace. How quickly should it be done? Taking the decision rather than just believing in the philosophy is the problem. Just to go back to the like-to-like comparison with Europe, we need to quicken the pace or it will come down to the survival of the fittest, you will be left behind. It is not as if we need to take the same time as it took Europe or America to get there, and so we need to increase the pace.
BUSINESSTODAY: How difficult is it for you to pass on the reigns to the next generation?
KESHAVJI: On the contrary, we are happy to rely on them. I am just waiting for my sons and nephews to take over because we have very limited exposure. Though we went to India for education, we are still illiterate in terms of exposure to the world outside. The new generation has newer ideas, so it is easier to hand over the business to them.
JAWAD: If the handover system is going to be in the same fashion as it was in the past, I think we will not be in a position to transfer it. Or the new generation will not accept it. It must be systematic. In the old system, once the son graduated he would come to the father and say, "Now, here I am." The father would in turn say, "OK, so where do you want to be?" Today, that is no longer the case. Even if he has come from America, the son, Issam for instance, must go through the process. This evolution has come from both directions. He has been educated enough to know that the time has gone when he can ask for a big title from the family. In the past, it was not clear cut as to what he was going to get, what his remuneration and responsibilities were to be and so on. In today's handing over, what he is going to head has to be planned five years ahead. And the family is, of course, happy that he is going up the ranks. Unless you do these new things, the transition will be very difficult.
KHONJI: In our case, I am the third generation. The business was established in 1920 and it has been passed on to us. Now I am ready to pass it onto my sons and daughters. There was a time when it was only sons. But now one has to be ready for daughters too. But I think the challenges are greater now. And you need to protect the business with the right structure, the right constitution and regulations and ask the next generation to abide by it. The right person in the right place is also very important for the continuation because you need them to pass it onto their sons too.
BUSINESSTODAY: Do you encourage your sons or daughters to work outside the family business before joining it?
KHIMJI: Absolutely, I think it is very important to bring in a culture that is slightly different from one's own, bring in knowledge, best practices and an appreciation of global culture. I went through that phase working with a global institution like Procter & Gamble and then a regional institution like the Royal Oman Police. Those two experiences have been invaluable to me. In the case of families like us (the Khimjis) or the Towells it is easy for us because we work with a number of MNCs. It is easier to get family members to work with those institutions and bring back a certain amount of knowledge and perspective and adopt them into the system. This is possible because 99.9 per cent of business families in Oman are traders. We are not large manufacturing giants or large institutional players. We need to adapt as we are extensions of global multinationals and bring in that philosophy right through the system.
KHONJI: In the 70s, it was difficult to allow your son or daughter to work for somebody else because others were competition. But nowadays it is the right thing to do.
BUSINESSTODAY: Pankaj, did your family encourage you to work outside or did you do it on your own?
KHIMJI: It was the family. It came to a point where the older generation was not in sync with a multinational company. The multinational company would say, 'Get 20 vans, put in a marketing manager, a merchandiser'. And the older generation would say, 'Hold on, this is Muttrah souq, 90 per cent of Oman's business takes place here, what are you talking about?' The appreciation wasn't there that you have to move onto a different thing, there is a different culture coming along now.
ISSAM: In the past, the older generation was not accountable as they were the founders and nobody would ask them questions. Now I have a certain percentage in my family business and if someone who has been educated abroad says I can do better, the accountability of the directors increases. Their responsibility to justify their actions is more. How do you justify the perks and salary given to directors to a younger generation of the family who is better educated? It becomes a reason for getting professionals whose accountability will go up as the younger generation gets more educated.
ABDULREDHA: Earlier, the process of succession and induction used to happen by default. Now it is done by design. That is the difference. Some companies have made it compulsory that the second generation works and gets outside experience before they join the family business.
BUSINESSTODAY: When two generations are involved, what are the complexities that may arise? Is the thinking very different?
KESHAVJI: In our company, we have the father and sons working together and we give them different duties and tell them not to interfere in each other's work. At the end of the day, everyone in the company reports to the family. It works.
ABDULREDHA: Once the roles are defined and it is made clear that each one is supposed to play a certain role, there are very few issues. One of the weak links in most family businesses is that a clear definition of the role is not there. But both styles go hand-in-hand; the older generation needs the young blood to carry on the legacy and to inject fresher ideas to sustain the goal, and the younger generation needs the vision from the older generation. Once the roles are defined, it becomes process driven and there is objectivity.
KHIMJI: Two generations come together in three stages. The first stage is when the young man is inducted into some area of the business and at that stage there are really no issues. The second stage is when he is knocking at the door and asking 'Can I be a part of the decision making process?' The older generation feels he should be brought in, but when there is more than one partner with multiple children, it is difficult for the younger generation to come in. That's when the younger generation feels that he needs to be closer to where the action is and asks, 'Can I get a better part of the action or the process?'. It is difficult for the older generation to say yes, because with him comes a band of four or five other cousins. That transition is a twilight phase when you are not sure whether you are in the dark or in brightness. You need to tread carefully; it is important that the older generation holds their hands and guides them through this phase and does not let them stray. That's the phase when most young generations feel frustrated.
In the final transition phase, whether it is a handover or a takeover, there is no such thing as a murder. The older generation needs to feel comfortable in stepping back, and not draw a clear line like you are the boss and I am not. It comes on very gradually. Once the younger generation is getting along well with the older generation, the CEO, the CFO, the latter can settle for a limited role in the decision making process. It comes on gradually and there is no handover or takeover. The third stage is easier to manage than the one in the middle as the younger one wants more and the older one debates whether it is the right time or not.
BUSINESSTODAY: The Towells are a big family, so this must be something that you face?
JAWAD: The basis of any family business is tolerance, sacrifice and acceptance. If all these values are not ingrained in family members, then they are bound to fall apart. We are in the fifth generation and now we have defined titles that were not there earlier. Our uncle, the Late Haji Ali, started the trend of being addressed as chairman. In a family, it is not acceptable to have titles. Even today, I feel embarrassed to be called the chairman of the group; at the end of the day, we are all cousins. We have a rule that irrespective of the family relationship, in office the title should be used. We have titles such as chairman, vice chairman, general manager, family manager and all of the positions need to be respected without anybody trying to jump ranks.
ISSAM: I will give you the other side of the coin. It's like being Bruce Wayne at home and Batman in office. You need to differentiate between the two. It does not matter if someone is financially better than another, but the hierarchical structure has to be there. There are no ifs and buts about it.
BUSINESSTODAY: When you invest in a public company, do you insist on a family member being in the management of the company?
KHONJI: It is always safer for someone from the family to be there. If you have a 20 per
cent stake, then it is very important to have
somebody there to protect your interest, both on the board and in management.
KHIMJI: If a family business has made a large investment in a business, then it is fair that the family is represented at the board level. I would not say that somebody should necessarily work in the company. Instead somebody from the family should be encouraged to represent the family at the board level.
JAWAD: I agree with what Khalil said. I would say yes if the person who is going to work in the company is really good and competent. But sometimes what really goes on is that since the father is a multi-millionaire and with a 20 per cent stake, he can send anyone, maybe even the son whom he wants to get rid of.
BUSINESSTODAY: Which are the family companies that have been successful going public?
ABDULREDHA: Renaissance. You will see more and more public companies. In some form or the other, the Towells have gone public with some of their companies.
KHIMJI: You see a lot of spin-offs and with it you see a part of the family also being spun off. Some members of the family will take some part of the business, while others will stick to the core business. There is a new phenomenon of holding companies. Under the holding company, you will have different profit centres which are run by professionals. I see a lot more of this taking place. The holding company can have 300 shareholders and for all you know, it may turn into a family SAOC. In Oman, you have a situation where apart from the lineage, spouses and their families come in by inheritance. But the question is, are family businesses in Oman big enough to go public?
KHONJI: I strongly believe that family business can survive over five or six generations. As I said earlier, if you believe that your business is your kingdom and you have to protect it, then it can survive over five generations and more.
ISSAM: At times, one rotten apple can spoil the basket.
KHONJI: If you cannot manage your next generation, how can you manage others?
ISSAM: It would be too late if a family says it would do things in 50 years. A family needs to put in systems to secure the business' longevity.
JAWAD: We can probably see the next step with family companies in the region. In the last three-four years, there is an awareness about family owned companies; governments have started recognising the importance of family owned companies and encouraging them to go public. However, the government should modify legislation to encourage family owned companies to form joint ventures with other family owned firms. Probably, these companies would be
better managed than SAOG companies.
BUSINESSTODAY: A final word from each of you.
KHIMJI: I think we are a small nation but a very proud nation. As families, we are proud about our businesses and most of us would be very keen on maintaining the business. Very few would be willing to shed the business and just have an overview. It is a very difficult process and once you are part of it, you are bound to get emotionally attached to it and that's why you have the legacy. So how much you may want to become a public limited company so that it can be run professionally, it's difficult.
ABDULREDHA: There is a lesson to be learnt from the statistics. All businesses should invest time in learning the lessons as to why family owned businesses do not continue beyond a few generations. One lesson is that you do not leave it to nature for things to happen. You have to do it by design and that design starts today. If you do not have your house in order today, then things would be a case of either-or. If you are lucky, then things would happen and your legacy would continue.
ISSAM: I would add that you have to get the right people. You have to realise the potential of the people and then explore it. It is a sin if you have potential next door and you keep searching for it miles away to realise that you have lost that potential or that you have not cared for it much. After all, it is the people who run those companies and we need to invest much more in people.
KESHAVJI: I agree with Jawad's suggestion about family companies joining hands to create bigger companies. That's a good idea for the future as it will help in sustaining family owned companies.
KHONJI: We need to differentiate between running a business and running a family. The problem starts when a family member or a shareholder is ignored because, for example, he is not educated or professional though he is the owner. There needs to be a family council where the family gets together; socialising is very important. Like the AGMs in the SAOG, once a year they get together. There is a professional board that runs the company and this is a must. I think it is part of our duty to pass on the experience which we have inherited to others in our company and help them start small business in the community, not just to employ new people but use this experience to create more family businesses.
JAWAD: We should continue as family houses and encourage and promote them as most of the initiatives that you have mentioned have come from family businesses. There are definite challenges but we need to overcome those. In the Gulf, we are in the midst of a very good economic boom, so there is room for everybody and the cake is large enough for all of us. So each of us should encourage each other to attain the standards of European companies.
© businesstoday 2005
