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Dubai’s family businesses feeling fragile

Amy Schuman is a principal of the Family Business Consulting Group and a founding facilitator of the Next Generation Leadership Institute, part of the Loyola University Chicago Family Business Centre. 

It's impossible to pick up a paper anywhere in the world without encountering news of the debt drama in Dubai. The Sunday Financial Times was banned in Dubai on 29 November 2009 when it proclaimed: "How Dubai's dreams sank in a sea of debt." 

There are those who believe that the situation is being painted as worse than it actually is, whilst at the same time explaining that business is truly suffering. Mishal Kanoo, deputy chair of the Kanoo Group (an esteemed Middle Eastern family enterprise), explains: "No one could have anticipated the fall in shipping prices from $30,000 per day to $5,000 per day. To do so would have required a crystal ball"

Family businesses dominate the economic landscape of the United Arab Emirates (UAE) and Dubai is no exception. According to the DCCI Certificate of Origin Database, approximately 31,000 of the 56,000 businesses in Dubai are family controlled. Although details of their balance sheets remain confidential, given their preponderance in real estate, automotive and retailing, Dubai family businesses have undoubtedly seen millions - even billions - of dollars wiped off their balance sheets in a matter of days.

"Historically, family businesses in Dubai have been powerhouses, but some are increasingly fragile," according to Penny Webb, a senior associate with the Family Business Consulting Group who frequently works with family businesses in the region. "Until now, family firms have been cushioned by close, interconnected relationships with other family enterprises in the region. They will have to make some significant changes in order to remain competitive going forward. Whilst family businesses have distinct advantages if they have managed risk, maintained conservatism and engaged proactively in establishing appropriate governance structures, they will survive."

Large, paternalistic families in the region operate strictly according to tradition. Succession is limited to males and top positions are awarded to the eldest male, regardless of their level of skill, experience or even interest in leadership. Opportunities for talented non-family executives can be severely limited, which can limit the influx of talent to the business. 

According to Kanoo, "Unless meritocracy reigns and high calibre non-family professionals are brought in, allowed to succeed with minimal micro-management from the family and to disagree with the family", the talent pool for family businesses will be compromised. Family employment has been seen as a source of strength in the past - trustworthy family members are seen as best able to quickly understand the business, to achieve the business' purpose and lend continuity. 

Now, it may be more of a weakness as family businesses that have operated almost exclusively in the UAE seek to expand into other regions of the world, many for the very first time.

It's common for Middle Eastern family members to disperse into Western countries for education. Given the current economic uncertainty, it may be more difficult to attract the best family talent back into leadership roles in Dubai. According to Dr Otis Baskin, Professor of Management at The Graziadio School of Business, Pepperdine University also with the Family Business Consulting Group, "The uncertainty created by the economic crisis could be discouraging for potential successors. Combined with concerns about a business that's based on local customs and relationships, rather than more sophisticated global practices, next generation family members may worry about limits to their careers at home." 

Kanoo also stipulates that a minimum of five years and two promotions outside the family firm can enable family members to "self-actualise", learning about themselves and their capabilities. He encourages all family firms to pursue this policy but recognises its minimal practice in the region.

In fact, some families are encouraging their next generation to remain outside the country and seek opportunities to expand the business on other continents - an approach that would have been inconceivable before the recent crisis. Some family business leaders have privately expressed concerns that the emirates business model is not sustainable, and they are urgently seeking avenues to branch out of the region.

Kanoo believes that to reduce risk for family firms, they need to be "intelligent enough to organise themselves. They need to put proper financial facilities in place, talk to creditors and build fully transparent relationships with the banks. They need to PLAN for the future, enable succession to happen meritocratically, put appropriate governance structures in place and educate themselves deeply around best practice for family firms. All of this must be proactive." 

"Historically, family businesses in Dubai have been reluctant to look outside their family," says Webb. "Ten years ago, families were reluctant to come together to share information. Now there's a push to open up family business education, and companies are beginning to share and learn from each other for the first time."

Baskin agrees. "Dubai family businesses felt they had a competitive edge because they were local and understood the culture. However, it's not an edge if they will have to compete outside the Middle East for business. Some of the best practices of family businesses around the world can help them as they prepare for a more competitive, less protected, business environment."

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