Family businesses in the

Gulf Cooperation Council

The journey to long-term sustainability
Findings from the inaugural GCC family-owned business survey
October 2015

In collaboration with:

Report Summary
 Introduction:
The GCC Family Business Survey was inaugurated in 2014 by McKinsey & Company in collaboration
with the Gulf Family Business Council (GFBC) and will be conducted on periodic basis in order to track
progress.
GFBC welcomes the research being carried out, as a means to enhance the governance, performance,
and wider contribution of family-owned businesses in the region. GFBC has provided insight to inform the
research on the context for family-owned businesses in the region. The research forms part of a McKinsey
global knowledge initiative on the governance of family-owned businesses. The conclusions of the report
are those of McKinsey. GFBC will value the ongoing discussion of the issues the research raises.

About the Survey:

The goal of the survey is to understand the health of family businesses in the region today; define an
actionable agenda, based on the areas where family businesses struggle most; and identify the role
models of the future.
As it is critical for the longevity of any family business for five dimensions to work together in synchrony:
1. Family
2. Ownership
3. Business
4. Philanthropy, and
5. Wealth management
We asked a set of specific questions for each dimension to understand what practices are currently in
place. Participants were assigned a score on each dimension, reflecting the presence and effectiveness of
the relevant practices.

About the Survey sample:

ƒƒ Representing many of the largest businesses from across the GCC
ƒƒ Relatively young; between 40-60 years old
ƒƒ Three-quarters of the businesses are run by the first or second generation
ƒƒ Collectively generate $100 billion in annual revenues across the region
ƒƒ More than 50% of the businesses have 5 or fewer shareholders
ƒƒ All businesses have at least one family member employed full-time in the business
ƒƒ 60% of the businesses have 6 or more family members working in the business
ƒƒ Most of the businesses have diversified significantly within their home markets
ƒƒ 88% of businesses are present in 5 or more sectors, most common being real estate, construction,
retail, manufacturing, and travel and leisure.
ƒƒ 76% of businesses have presence outside of GCC
Exhibit 2 Exhibit 5
Many family businesses in the region are approaching a critical phase Most have established presence across a broad set of sectors and
in their growth geographies
Generation cycle leading the business % of respondents
% of respondents Top sectors of presence1 Top regions of presence2
56
20 Real estate 88 GCC3 and Iraq 100

12 12
Construction 72 North Africa 40

1st 2nd 3rd 4th & beyond Retail 72 India and Pakistan 40

Typical 100% 30-35% 10-15% 3-5% Manufacturing 60 Levant 32

survival rate
(global Travel and leisure 60 Southeast Asia 32
benchmark),
% 56 28
Transportation and logistics North America

Company
~40 ~50 ~90 ~120
age, years 1 Sectors in which >=50% of respondents are present
2 Regions in which >=30% of respondents are present
3 Gulf Cooperation Council
SOURCE: GCC Family Business Survey; McKinsey analysis SOURCE: GCC Family Business Survey; McKinsey analysis

Overall findings:
This first year of the survey established a baseline against which we will measure progress in future years.
Overall, our sample performed relatively well across the five dimensions, with an overall average score of 62
out of 100 points. However, this overall score masks these variations in performance across the sample:
ƒƒ First-generation businesses underperformed their older peers. This is true on virtually every

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 dimension, except for business practices. The result is not surprising as first-generation members are
consumed in building the business and often postpone building the needed “guardrails” for continuity.
Exhibit 6 Exhibit 7
We measured the health of the family businesses by understanding what Performance varies significantly across dimensions, with first-generation
practices are in place across 5 key dimensions businesses underperforming their older counterparts
Average score (out of 100) across each dimension, by generation
▪ Vision and values ▪ Goals and targets
▪ Family forum ▪ Strategy and capital 1st generation 2nd generation & beyond Difference
Business allocation
▪ Family charter
and protocol
portfolio & ▪ Board of directors Family 50 59 +9
governance
▪ Next-generation
development
Ownership 55 62 +7
Wealth
Family Ownership
management
Business 73 71 -2
▪ Management of
investment outside
▪ Sustainability of family business Wealth
Philanthropy 50 64 +14
legal structure ▪ Governance Management
▪ Shareholder ▪ Presence of ▪ Strategy for
forum philanthropy investments Philanthropy 41 58 +17
▪ Shareholder ▪ Focus/strategy ▪ Association with
agreement of philanthropy business
Overall 54 63 +9
Participants were scored on each dimension

SOURCE: McKinsey analysis SOURCE: GCC Family Business Survey; McKinsey analysis

Specific insights across the five dimensions:

The following six themes emerged from our analysis of the data:

ƒƒ While family businesses have made Exhibit 9

While families have started to put policies and practices in place, many
significant progress in putting in place have yet to be effectively implemented

the governance systems, few have been Presence of 15 key policies, practices, and forums1
% of respondents, averaged across 15 practices
successful in implementation. We asked 100
our participants about the presence and ~1/3 don’t
have32them
The policies,
practices, and forums
in place
effectiveness of 15 practices that are key building ~1/3 claim
are effective just over
1/3 of the time

blocks of an effective governance system. they 29

are not
effective 39

Two-thirds of the time, participants report that

they have started to put the building blocks in
place. However, only around one-third of the
participants report that the practices are fully 1 Includes the following: employment policy, conflict-of-interest policy, roles and responsibilities of family members, conflict-resolution process, training
program for the next generation, method for family-member assessment, legal structure to ensure continuity, shareholder agreement, group-strategy
and capital-allocation guidelines, independent board of directors, performance monitoring, clear strategy and objectives, strategy, robust governance
structure, and mechanism to evaluate impact

adopted and working effectively. SOURCE: GCC Family Business Survey; McKinsey analysis

ƒƒ One of the most challenging tasks for families today is managing family dynamics, particularly
when it comes to preparing the next generation and managing conflict. While 44 percent of
families state that they have an employment policy is in place, only 32 percent believe they have
clarity on the roles and responsibilities of family members, 22 percent report that they have effective
training programs and 17 percent report that they have an effective assessment method in place for
the next generation. While this is a difficult topic to address given the sensitivities, it must be tackled
head-on and made a priority, especially that it is one of the most important enablers for a successful
generational transition.

ƒƒ While all families are involved in some form Exhibit 11

While all families are involved in charity, very few have developed
of charitable giving, very few have developed organized philanthropic efforts
% of respondents
organized philanthropic efforts. All families 100
in our sample report that they are involved in
charitable giving. However, relatively few have
defined a clear strategy for their giving (36 36
percent), established a robust governance 20 16

structure to oversee their giving (20 percent), or

Involved in Defined Robust Impact
determined how they will evaluate the impact of charitable strategy governance evaluation
giving structure mechanisms
their efforts (16 percent). This may be in part due
Have a systematic approach
to the relative youth of family businesses in the towards philanthropy

region. However, given the general desire of many

SOURCE: GCC Family Business Survey; McKinsey analysis

families in the region to engage in philanthropy, as

well as the role philanthropy can play in galvanizing family members around a common set of values,

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 many families would benefit from being more systematic about their efforts in this area.

ƒƒ Over time, families may need to shed their reluctance to tap into external sources of liquidity.
Today, very few family businesses in the region have public ownership at either the holding level or the
subsidiary level. As the family grows, external sources of liquidity could become more important as a
means of giving family members an exit and pruning the shareholding.

ƒƒ On the business side, geographic Exhibit 13

Most families are present in multiple sectors and geographies, but they
diversification is a big priority for most family have yet to establish meaningful presence outside their home country
% of respondents
businesses. While most family groups have Most families have presence across …however most are still heavily
multiple sectors and geographies… focused on their home countries
established some presence outside of their Number of sectors of presence Share of business in headquarter country

home countries (76 percent have some activity 60

76-100% 60
outside of the GCC), many have yet to make 24 16

51-75% 16
this presence meaningful. Roughly 60 percent 1-5 6-10 >10

of family businesses still derive more than Number of geographies of presence 26-50% 12

75 percent of their revenues from their home 24 28 32 11-25% 4

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countries. Many, however, have aspirations to 4
0-10% 8
1 2 3 4 5 or more
expand internationally and establish regionally
and globally competitive businesses; this SOURCE: GCC Family Business Survey; McKinsey analysis

will require family businesses to develop an

exportable competitive advantage and an institution that allows them to infuse the family’s DNA in new
businesses.

ƒƒ Talent management emerges as one of the biggest challenges from a business perspective.
Less than a third of our participants believe that they have an effective career-development and
retention program in place for their nonfamily executives. This will clearly need to change if these
groups want to attract the best global talent. Furthermore, while most families believe they create a
level playing field for family and nonfamily executives in the business, it is quite possible that nonfamily
executives do not share this point of view.

Recommendations:
Based on our findings, there are a number of priorities that emerge for family businesses in the region.
Specifically on the family side, the clear areas of focus include: ensuring effective implementation;
investing in preparation of the next generation; and being much more strategic and systematic about
philanthropic efforts. Based on our work with families, in the region as well as globally, the following
guiding principles should be kept in mind by any family designing its governance system:

ƒƒ Ensuring effective implementation:

—— The process is as important as the outcome – the families that have been most successful are
those that engage the broader family, not just those who are in positions of authority or involved
in the business, to ensure their buy in and commitment. They also recognize that this is an
evolutionary journey, and are willing to take it gradually.
—— Making tough decisions is unavoidable – and families must be prepared to make them as they
embark on this journey, in order to avoid future conflict.
—— Clear ownership for decisions and implementation is a must – the family must establish
upfront how decisions will be made and who will make them, to keep the process moving and
avoid ambiguity.

ƒƒ Preparing the next generation:

—— You can never start too early – the most advanced families in this regard start the process early
to form a bond between the family members and the business. This can involve company visits and
events, joint projects with other members of the next generation, internships, etc.
—— Clarity must be created upfront for the next generation – to the extent possible, it is important
to educate the next generation on the “rules of the game” as early as possible – i.e., Will they be

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 allowed to work in the business? What will make them eligible? What sorts of roles will be open to
them?
—— “Rules of the game” must also be clarified to nonfamily executives – to minimize impact on
the business (in terms of tainting a meritocracy, or demotivating a high performing professional) the
plan for next generation family members should be clarified to relevant stakeholders.

ƒƒ Engaging in philanthropic efforts:

—— The cause must be aligned with the family’s values – in order for philanthropic activities to be
sustained, families are typically best off selecting causes that are most closely aligned with the
family’s values.
—— Sustainability of funding should be ensured – some families choose to “protect” the funding
source for their philanthropic efforts to enable the build-up of a sustainable organization.
—— Clear governance mechanisms should be established – those foundations that have the most
impact over time are the ones that rigorously measure the impact they are having, and ensure
continuous alignment of their activities with their mission.
On the business side as well, family businesses must continue to up their game in order to thrive in an
increasingly competitive environment. As highlighted by the survey, areas of focus include geographic
diversification and talent management.

Conclusion:
Looking forward, we are optimistic about the pace of change, especially given the surge in awareness
among family businesses on the need to change. At the same time, we are conscious that the real test
is yet to come. The institutions that are being designed and implemented today will be stress-tested
in the coming years as next generation members transition into leading those businesses. Our survey
participants, who are amongst the largest family businesses in the region, will have a responsibility to
serve as pioneers and role models for their peers, who could learn from their achievements to date.

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