Dr. Khalid Al-Yahya Dubai School of Government Khalid.alyahya@dsg.ae Dr. Don Babai

1. Dr. Khalid Al-Yahya Dubai School of Government Khalid.alyahya@dsg.ae Dr. Don Babai Harvard University Challenges of Governance & Success in Family-Owned Enterprises: Insights from Old and New Generations of Entrepreneurs

2. 1. What is the state of governance structures within family-owned enterprise (FOE) in GCC? 2. What are the determinants of successful transitions to modern corporate forms? 3. What is the role of the government in coping with crises facing firms? 4. How does the new generation of entrepreneurs compare to the second generation of FOE? What are the challenges facing entrepreneurs in the Gulf? Today’s Themes

3. Major questions What have been the major sources of change in the organization and practice of family businesses over the last two decades? What rationales and motivations do leaders and managers of these businesses ascribe to their choices to either recast or maintain the structure and operations of their firms? What are the different modes of adaptation discernible among family-owned companies in the Gulf? What generalizations can be drawn about the type and scope of adaptations among companies in different industries and across national settings? To what extent is there evidence of the emergence of a regional standard in such domains as corporate governance or financing strategies?  Are family businesses in the Gulf undergoing a transition similar to that followed by their counterparts in other parts of the world? Does the historical trajectory of the family firm in the region suggest a distinctive evolutionary pathway—a Gulf exceptionalism? What are the areas of convergence and divergence in form and behavior? And how can the parallels and contrasts be explained? What are the limitations of current mechanisms and procedures for resolving conflicts within family businesses in the Kingdom? What is the proper role for the state in coping with problems facing family firms? Our study: Corporate governance & Public Policy

4. Information sources • In-depth interviews • Leaders/CEOs of major family businesses (1st, 2nd, and 3rd Generations) • Al Zamil, Al Rajhi, Al Aqil (Jarir), Al Jufali, Xenal (Aliriza), Al Othaim, Al Khorayef, Al Munajim, Olayan, Kanoo, Al Goraishi, Al Omran, Al Obaikan, Al Hubbayyeb (Najdiah), Al Mutlaq, Banawi, Binladin, Abdulatif Jamil, Al Drees, Batarji, Al Faisaliah • Business managers and consultants • Experts from banks, legal firms, Sharia experts, and academia • Government officials and policy makers • Business associations (Chambers of Commerce) • A group of young entrepreneurs • Documents: • company reports, constitutions, enterprises histories and archives, media reports, government records and laws, conference proceedings, Chamber of Commerce statistics • Survey: large sample of firms (approximately 1000 cases) Our study: Corporate governance & Public Policy

5. Modal forms: patriarchy and informality • Where do GCC firms rank along elements related to corporate governance?  • Separation of management from ownership • Decision-making and delegation of responsibility • Separation of business and family finances • Succession planning: beyond the rhetoric • Managing transitions and preparing of next generations • Transparency and accountability mechanisms • Examples of transition to modern corporate forms 1. The state of governance structures within family businesses

6. Family values • Family cohesion • International exposure • Market exposure • Why these adaptations are so far the exception • Why publicly listed do not necessarily fare better in corporate governance • Findings of TNI 2008 survey of company boards • Narrow concentration of power • 75% of all businesses in the region have at least 2 board members from the same family • A single family can own up 100 percent of board in Kuwait, 70 % in KSA • Directors sit on more than two boards • Convergence or differentiation? 2. The determinants of successful adaptations: accounting for the variations

7. Internal • Narrow concentration of power • Lack of formal mechanisms and protocols • Cultural factors • Reluctance to question or challenge authority • Secrecy and conformity • Saving face and social status • Lack of trust • Reactive, imitative vs. proactive, creative orientations • External • Legal system – Sharia courts: emphasis on justice and closure over economic considerations • Informal mediation and arbitration • Perverse effects of lack of taxation, reporting and disclosure requirements • Reinforces lack of transparency and disclosure Limitations of current mechanisms, procedures for resolving conflicts & transition

8. Changing role of government – from provider & care-taker (subsides, contracts) to facilitator & partner • Greater integration in and exposure to global market creates image conscience (Al Gosaibi & Saad) • Active (but reactive), historically informal role in conflict resolutions and acts of regional and local governors • Examples: Binladin, Maghrabi, al Hamrani, Al Rajhi, Mahfooz • A belated awakening (2007-): realization of systemic effects of family businesses that are too big to fail • New government guidelines • but guidelines are not law, and law does not always mean implementation! 3. What is the role of the government in coping with crises facing family firms?

9. No more “agent” opportunities; market is full • Government subsidies and grants; old generation depend on them • More strict labor policies • Banks tightening funding for small enterprises • The big guys enjoy direct access to top leadership and policy makers • “Too Big to Fail” vs. “Too Small to Fail” 4. Challenges to the new entrepreneurs (A)

10. No functioning representative bodies for young entrepreneurs (Chambers are controlled by the old FOE) Greasing the wheel and wasta are the new assets No functioning bankruptcy laws; this stifles risk taking New generation of family entrepreneurs have cash and search for new opportunities, crowding start-ups New foreign investment laws and service centers ignore local new entrepreneurs; they have to navigate bureaucracy alone (Doing Business Ranking!) Information asymmetry 4. Challenges to the new entrepreneurs (B)

11. Educational systems/professional associations lack any emphasis on developing or mentoring new entrepreneurs • Developing strategy and business plans are costly and complex • Women entrepreneurs • Reversing the mindset: • Public employment is still the preference • Get good grades, a good job and retire with our pension/benefits • The Self Employment Trap: Instead of creating a business, most entrepreneurs merely create a job for themselves 4. Challenges to the new entrepreneurs (C)