Andrew Carnegie, an incredibly successful American businessman, famously said “Three generations from shirtsleeves to shirtsleeves.” Here, shirtsleeves mean the clothing of a (poor) blue collar worker. This is probably the origin for the more modern day warning “The first generation builds it, the second generation enjoys it, the third generation loses it.”
In the GCC a quick and informal survey of family businesses would suggest that the second generation not only enjoys it, but often is the generation that loses it. This process seems to take years as often as it takes decades. Are there issues that we face that are different from those faced by the rest of the world, or are we just better at squandering family fortunes?
I will argue the former, and that blindly applying global best practice therefore harms regional family businesses. I will pick a number of the more salient issues that should reinvigorate the discussion.
The first issue is the inheritance tax that is usually applied in most of the rest of the world. This tax, having gained the delightful sobriquet death tax, can be 50% and higher. Therefore to protect the family inheritance from the inheritance tax, the legal concept of a trust was developed. A trust is not owned by anyone in the sense that you might be used to, but it owns the family assets and is managed by trustees who must be different from the inheritors. The inheritors are the beneficiaries of the trust, i.e. the trust doles out money to them.
In this scheme the inheritance does not have to pay the death tax, a great benefit to the inheritors. The inheritors do have to pay tax on income the receive from the trust. But what this structures creates as a result of tax planning is a legal structure over which the inheritors have little or no control.
The difference in control of the inheritance, driven mostly due to tax considerations, can easily explain one discrepancy in the difference of inheritor behaviour locally. A second consideration is that trusts rarely survive the second generation, which could explain why globally the third generation is perceived to squander the wealth.
The second issue is the degree of institutionalisation of operating companies in the family business. A good example is Germany’s Mittelstand, or SME, sector. German discipline in institutionalising their companies includes, but is not limited to, introducing non-family non-executive members of the board of directors long before there is any change and requiring younger generations to work and gain experience outside the company. If family members wish to join the company then they are required to do so on a meritocratic basis and at a position appropriate to their skill level and experience. This culture becomes institutionalized and therefore survives generational change.
Although the GCC is certainly improving, there remains a large gap. Board members are almost exclusively family members with little training and outsiders are usually the same age as the first generation, making it likely that there will be little continuity in that area. Working outside of the family firm remains tied closely to relationships with the family, i.e. wasta, and career horizons are a short 2-3 years. Finally, there seems to be a wide trend that family members are hired, or quickly promoted, to the C-suite or even to the board.
Why the difference? Partly a lack of belief in the professionalism in non-family members and a misplaced belief in secrecy. Partly a misunderstanding of human nature and how people develop. Partly it is the ego and narcissism of the younger generation who want the C-level title.
What might the solutions be? Laws and custom rule out anything like a trust. So that leaves early institutionalisation as the answer.