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Family wealth fails to make it beyond the third generation in 90 per cent of cases. This failure isn’t due to poor investment decisions, but rather a lack of cohesion and communication between family members, where the family fragments, and with it the wealth.
Some members of the next generation attend the best schools and universities across the world. However, they are still not adequately prepared for the responsibilities that face them when they return home. Each phase of life presents its own unique set of challenges. Families need to ensure they are doing their best to equip themselves and the next generation with the skills and knowledge they need to move forward in their professional and personal lives.
So how can a family increase the chances of success? Let’s take a closer look at the issues, and some critical stages and situations families and individual family members need to be aware of and consider.
Challenges Facing Young People
Imagine a young person getting ready to embark on higher education, perhaps abroad. Youngsters can face pressure from peers or from a desire to fit in and make friends. These can be more pronounced for someone from the Middle East. Sadly, it is common to hear of individuals bragging about their family’s wealth as a way to gain acceptance in a new environment, or of people making assumptions based on origin. If a young person is not adequately grounded and prepared, this can make them easy prey to be taken advantage of by supposed friends.
In such cases, there are two typical outcomes. The first is the young person becomes surrounded by parasites, taking advantage of their wealth. The second is the young person succumbing to peer pressure, taking on harmful behaviours or habits. Although both examples are factors every family, regardless of origin, needs to be aware of, these two scenarios seem to be more pronounced for families from the region, due to the perception of wealth, and the differences in culture and traditions between the Middle East and non-Islamic societies.
Who Should Succeed?
Succession does not guarantee success, and being the oldest does not make a person best suited to take over the family business. Families in the region, have traditionally seen the eldest son as the natural successor. However, history and excellent examples of female leadership have shown this is not necessarily what is best for the family or the business. The Middle East is experiencing a cultural shift, with women playing a more significant role in business and society. It would be wise for families to not overlook the women in the family and to capitalise on their capabilities.
The transition from one generation to the next can be challenging at the best of times, but the speed at which society is changing in the Middle East can add a different dynamic to succession. Alignment between personal and family values can be perplexing, but adding traditional, cultural and religious values can add further complexity, especially in times of societal change. Ultimately, the person who succeeds should be the best equipped to ensure the long-term sustainability and longevity of the family wealth, to support current and future generations.
The need to create value to support a growing family is not the sole responsibility of the patriarch. Every member of the family needs to move forward together towards a shared vision. Each member of the family must also take personal responsibility in ensuring they work in the family enterprise only if they add value. Failure to do so jeopardises the well-being of the family enterprise and the family system. No two people have the same combination of skills, talents, interests and aptitudes. So each needs to hone their skills to make them fit for whichever role best suits them – if any.
Consider the Olympics: being the son or daughter of a great athlete doesn’t make you a great athlete. You need to have a particular aptitude, talent and interest. You must also have the resilience, tenacity, passion and stamina to stay the course and win. It is imperative for families in the region to go beyond the default ‘eldest son’ and pass the baton to the family member(s) best equipped to carry forward the legacy and provide the support necessary.
Ensuring Sufficient Value and Growth
How does a family provide sufficient value and growth of the family’s wealth to sustain a growing family? With increased longevity, there are now more family members across generations alive at any given time. In the Middle East, this figure is amplified by cultural traditions, creating larger families than other societies. Some families have around 30 family members across three generations. In addition to needing more significant financial resources, larger families can also find it more challenging to create cohesion and shared values among family members, further increasing the potential threat of wealth dissipation.
As wealth transitions to the next generation, so does the investment focus. For instance, Morgan Stanley’s sustainable investing institute found Millennials (broadly defined as those born between the early 1980s and 2000) are more likely to align their investment choices with their personal values and are twice as likely as the overall investor population to invest in companies targeting social or environmental goals. The research also found Millennials purchased from a sustainable brand twice more often than the average investor population and were three times more likely to seek employment with a sustainably-minded company. Given the size of the Millennial generation, these are factors worth considering when choosing where to invest the family’s capital – be it the investment portfolio, family business or new enterprises the next-generation want to start. Smart families would seize the opportunity by exploring and aligning the family philosophy and its investment principles.
One way to provide sustainability is through value-creating enterprises. However, with the advancement of technology, businesses in the region are in danger of being disrupted, making innovation, tech-savviness, agility and sharpened entrepreneurial skills even more essential. It is also where the shifting traditions mentioned previously can be a positive influence. With more Arab women tapping into their entrepreneurial capabilities, families have greater potential in wealth creation, further safeguarding the family’s legacy and wealth for future generations. A proactive approach to disruption, embracing the shift in traditional views, and supporting the role of women in business, is a way to benefit all parties.
Transitions are never smooth and for the patriarch, handing over while finding new direction and purpose can be challenging. Over the years patriarchs have gained precious experience and wisdom, and often still want to feel needed and useful. That said, the transition offers an opportunity for patriarchs to harness their knowledge, experience and interests into a new chapter, exploring and undertaking new ways to continue their legacy. As with all change, this has its challenges. Entrusting someone with your life’s work is no mean feat. The region has changed so much over the years this can add an extra layer of difficulty for patriarchs from the Middle East.
Patriarchs have also seen a shift in the values of the next generation and society. The next generation, coming on board with a fresh pair of eyes, is eager to take on new frontiers. Managing succession requires all parties to understand the two perspectives, and finding the balance between them is vital. Passing on the legacy is a gradual process that comes over time, but eventually, there is a need to let go. Leaving the transition to the last minute is likely to leave the next generation ill-prepared, and higher risk for the dissipation of the wealth and legacy.
The Process of Succession
Ninety per cent of wealth, globally, does not go beyond the third generation, and the dynamics of families in the Middle East could increase that number even further. The unfortunate statistics demonstrate the intricacies of navigating the phases of a succession process.
Succession is not merely about setting up structures to ensure wealth is passed on. It is an intricate process through which the next generation is equipped with the skills, tools and aptitude to succeed for generations to come. The better-prepared families and family members are, the higher the chance of success.
We often hear ‘it’s a great company, they’ve raised $x’. This is the wrong metric, and recent disasters (e.g. WeWork, Uber and Theranos) have confirmed this. Thought it was time to peel back the layers on what we should be looking at. Here’s the article featured in Entrepreneur Middle East. read more