02 Jun 2010

Sample Essay: Succession Planning in Family Owned Businesses in Kuwait

The model employed in this study involves analyzing the previously published literature and research findings on the issue of succession planning in family owned businesses, and extending this discussion to investigate the relative practices in Kuwait as far as this subject-matter is concerned. Family-owned businesses have always been confronted with grave concerns about succession planning, irrespective of the locations where the businesses were founded ( Ciampa & Watkins, 1999). This realization points to three significant and direct criteria that are structurally related and helpful in understanding all issues pertaining to the past occurrence of successes or failures in family-owned businesses’ succession planning: (1) the refusal of the possible successors to recognize the existing management leadership of the business; (2) rejection of potential successors by the administrating groups; (3) the administrating groups fail to honor the potential successors, even though generally recognized by the family owing to certain undisclosed reasons.

Critical analysis of literature has also indicated that the three main issues highlighted above could be better explained by associating them with five strategic factors that determine the execution of succession planning in family-owned businesses. These factors include (i) Individual factors, (ii) relationship factors, (iii) context factors, (iv) financial factors and (v) process factors. It is interesting to detect that these five factors overlap as further investigations are launched on the issue of succession. In Kuwait, other minor mitigating factors may include but not restricted to religion, social status, personal intelligence and other important issues. However, sharp similarities exist among all cases of family-owned business successions; and this phenomenon indicates the generality of the issue (Sharma & Rao, 2000).

2.1 Individual Factors

It has been discovered that individual factors play a significant role in the issue of succession in family-owned businesses: this is against the backdrop that those who are involved in the process are classified into two different categories-the successor and the incumbent (Massis, et al., 2008). In Kuwait, family-owned businesses are of different types: they could be huge oil companies, agricultural firms or farms, trading and commodities’ businesses and so on (Oxford Business Group, 2008). And each of these businesses consists of the two categories-successor and incumbent. So, how does the nature of the successors indicate the possibility for successful transfer of business leadership power within a Kuwaiti family?

2.1.1  Lack of adequate business acumen in successor (s)

It is unfortunate that succession planning may become impossible if the successors are found to be lacking in the necessary managerial capability needed to run the business they are expected to assume its mantle of leadership (Morris, et al., 1996: Handler, 1990). Apart from on-the-job training, future successors in Kuwait are not necessarily groomed with the intention that they would take over the family business one day. It will have been wrong to think about such an issue when the head or leader of the family who heads the family is still alive (Parker, 2007). Only in recent times that members of some families are sent to universities in the West to acquire some useful knowledge in business administration in preparation for their eventual take-over of the family business (Parker, 2007)

2.1.2 Disinterestedness shown by the possible successor (s)

In a situation whereby a potential successor demonstrates acute disinterestedness in taking over the leadership of the business, this may cause the other decision-makers involved in the succession process to reject the successor, irrespective of his position or status in the family pedigree. This reveals that such a person will not be motivated in running the business successfully (Hoy & Verser, 1994). Not all Kuwaiti family mandated that their children should be involved in the day-to-day running of the family businesses (Al-Hijji, 2010). Hence, this kind of practice results in unmotivated and fearful future business leaders in the area: an attribute that may lead a family business into total failure if not avoided.

2.1.3 Sudden death of the known successor (s)

Kuwait, like every other Arab nation operates familial hegemony where the eldest male child of the family is expected to automatically become the next leader in case the head of the family has died. But in some unfortunate instances, the potential successors may also lose their own lives due to some natural or uncontrollable circumstances. In such situation, a vacuum will be created, and this may cause some difficulties in carrying out smooth succession process (Handler, 1990). To quickly fill up the vacant position in the family business, some clans have resulted in appointing a relative to do the job or even appoint unrelated private administrators to manage the affairs of the business (Handler, 1990). This circumstance may create some ethical problems among the rest family members if they are concerned about the success of the family business in the future, or wishing to jealously guard the business secrets that had helped the family succeed. An issue a total stranger may not worry about.

On the other hand, the actions of the incumbents are also a serious issue of concern in the process of transferring family business leadership into the hands of any qualified, self-motivated and experienced successor (s).

2.1.4  Diehard incumbent can derail the succession planning

It is a common practice in Kuwait that if the first son does not perform to the expectation, the second son will take over from him to save the family business from uneventful collapse (2002). This practice could turn out to be ineffective if the incumbent (first son) has developed a strong liking for his position as the manager of the family business (Bjuggreen & Sund, 2001). The incumbent will strongly resist a change of leadership for the family business; hence, the succession procedures will be truncated.

2.1.5  When incumbent is at the centre of some events

In a circumstance where the incumbent engages in activities like divorce, marriage, or childbirth, it is likely that these events will hinder smooth transfer of business leadership to the successor (Bjuggreen & Sund, 2001). In Kuwait, business leaders are routinely involved in state functions or forum; if the incumbent is engaged in such a forum for a long period of time, this could also slow the process of transition into the new business manager. Divorce, childbirth and marriage can affect the actions of the incumbent in a way that it may take a longer period of time to allow a successor to take over the family business. In a situation there are personal rancor among the family members, the family business operations may be grounded during this hiatus (Ciampas & Watkins, 1999) .

2.2  Relationship Factor

The level of relationship within a family or a group of relatives could also determine the extent of success when dealing with the transition of business leadership from the incumbent to the successor ( Astrachan & Shanker, 2003; Martin, 2001). If there are rancor and unhealthy discord among members of the business family, this will definitely affect any effort to transfer the leadership of the business from one member to the other. These issues are described comprehensively in the following sub-titles.

2.2.1  Unhealthy Parent-child Relationship

Succession planning in a family where there is unhealthy relationship between the parent (possibly father) and the child who will succeed him sometimes makes the process unsuccessful (Dyer & Panicheva Mortensen, 2005). In order to prevent dangerous relationships from occurring within a Kuwaiti family, emphasis is laid on the moralistic important of Islam, whereby children are urged to accord more respect to their earthly parents (Ghabra, 1987).

2.2.2 Disharmony within a family

Constant misunderstanding within a family could make the members of the family hate each other’s gut (Goldenberg & Goldenberg, 2007). If attempts are not made to resolve any lingering disagreements among family members prior to the discussion about succession, such a problem may prevent smooth transition-and the family business will suffer.

2.2.3  Sensitive Nature of the Family Members

If family members are always the type that are quite sensitive about the issue of making the strategic decision, it may be difficult to quickly agree on a successor as Kuwaitis strongly believe in reach a common consensus on most issues (Ghabra, 1987; Al-Hijji, 2010). And overt reliance on the decision of a prominent member of the family, whom others deferred to, may delay the succession planning process.

2.2.4  Unreliable Successors

The family members are likely going to reject a successor they deem unreliable: this is because many family members would be unsure the successor could make good judgment about running the day-to-day operations of the company. This stigma of unreliability may force the successor to be defensive, and possibly cause a family rancor that could threaten smooth transfer of business leadership (Gallos, 2008).

2.2.5  Inadequate Commitment on the Family Part

The reality is that family members are generally going to show uncommitted support to a successor that lacks merit, business acumen, and the willingness to serve. The philosophy in most family businesses is that of loyalty to all the members (Galetic, 2002). A successor who lacks complete loyalty to all the family members may be inappropriate to represent the interests of all the members in the company;, hence, the family members may reserve their commitment to such a successor base on his or her character.

2.2.6  Non-members’ Influence on Succession Planning

It has been discovered that non-members can sometimes constitute a setback in the process of changing the leadership of a family business. This is evident in circumstances whereby there is a quarrel or some disagreement among the non-member, the incumbent and the successor. This problem can get complicated when the proposed successor had had some fights with the non-members (Gersick, 1997).  There could be conditions for distrust, non-commitment and total disagreement on the part of non-member when it comes to the issue of supporting the candidacy of the proposed successor (Bjuggreen & Sund, 2001). The non-member could be managers, auditors, or other officials of the company whose position in the company matters a lot for the progress of the business.

2.3.0  Financial Factors

Irrespective of the level of discipline in a Kuwaiti family due to the Islamic view on wealth possession and other monetary concerns, most family businesses still inculcate the art of money management into the minds of the children of the family in preparation for smooth and efficient succession (Warde, 2000). However, it is also glaring that if the issues of taxes (inheritance, corporate etc) discussed below are not properly handled, succession within a family business structure may be impossible. In fact, it could prove quite difficult for both the incumbent and the successor because having the appropriate knowledge about the management of inheritance, company, and property taxes are essential for leading a firm into legality and prosperity (Astrachan & Shanker, 2003).

2.3.1  Inheritance Tax Issue

If there are any indications that the proposed successor may not be able to sustain all tax burdens related to the company, it may be impossible for the incumbent, non-member and family members to ratify or approve the choice of such a successor. Although individual workers that work for a company are not expected to pay taxes in Kuwait, but corporation and other taxes related to the operation of a company cannot be avoided: it is punishable criminal action to do so (O’Shea, 1999). 

2.3.2  Financial Requirements

There are some costs necessary for assuming the leadership of a family-owned business-these include the resources needed to offset the financial requirements of heirs to the business and to employ professionals that will help in developing the company (Gersick, 1997). If there is any indication that the successor may not be able to handle these responsibilities, it is may be impossible for him or her to ratified as the successor. Technically, it requires professional employees to man the routine operations of a company and drive it to profitability. But in the absence of all these financial requirements, the family business may be heading to total failure or collapse (De Massis et al., 2008). A potential successor with enviable characteristics and management skill will likely enjoy the support of all parties involved in the succession planning processes. As hinted above, children of business owners in Kuwait are receiving some forms of on-the-training from their parents. Nowadays, parents also send their children to the universities to study business administration in preparation for succeeding them someday (Gersick, 1997).

2.4  Context Factors

It has been discovered that the context of the business may also hinder the succession process. The context includes but not restricted to the prevailing business environment, the political implication and cultural relevance (Ciampa & Watkins, 1999). This explains the observation in Kuwait where religion, culture and politics influence the day-to-day performance of a business (O’Shea, 1999).

2.4.1  Unstable Performance of the Family Business

When a family business does not function as expected, it is likely that this situation will affect transferring its leadership to a successor. Take for instance, a business may become redundant and unprofitable if the demands for its services have been drastically reduced. Previously in Kuwait there was a huge demand for bicycles, but as the economy improves and more Kuwaitis become rich, the business for cars begin to boom, while that of bicycles suffer a little (Ghabra, 1987). This situation may have necessitated that the incumbent has made an attempt to sell off the family business to stave off the losses (Al-Hijji, 2010). And once this action takes place, it will stop the incumbent from relinquishing his or her position to the successor.

2.4.2  Reduction in the Business Scale

When a family business continues to lose so many of its major customers and suppliers its scale of production will be dramatically reduced. In this circumstance, the successor would be unhappy to be given a moribund company to manage. The reason for the loss of customers may be due to the bad management exercised by the incumbent (Dyer & Panicheva Mortensen, 2005). In many cases, it will be difficult for the successor to resolve whatever problem his or her predecessor may have had with the customers. Hence, the successor will decide if it is reasonable to assume the leadership of a company that will be out of business within a short period of time.

2.5  Process Factors

The nature of the procedures adopted in succession process determines if it is going to be successful or not. If all the parties that are involved in succession planning are carried along in the process, they will likely offer their complete support for the process, and the succession will be done quickly and conscientiously: Kuwaitis strongly believe in communal harmony, and people are happy when they are respected and accorded appropriate recognition (Al-Hijji, 2010).

2.5.1  Communication

It is imperative that there must be good communication among all family members, the incumbent, the proposed successor, the non-member and all other parties involved in succession proceedings (Shamah & Rao, 2000). This will help to iron out controversial issues without giving a chance to doubt, distrust, misinterpretation and other disturbing concerns (Ciampa & Watkins, 1999). The incumbent will be happy to introduce the successor into the business, if he or she has no knowledge of such before; the successor does not do anything to undermine the current efforts of the incumbent at the company; both the incumbent and successor have good support from the rest family members, non-members and the customers.

2.5.2  The Due Process

It is unlikely that a succession can occur if both the incumbent and successor refuse to follow the due process required for such a transition to take place (Ciamppa & Watkins). If there are personal grudges between the incumbent and the proposed successor, the due process may not be recognized. The incumbent may decide to lengthen the time required for such a transition to occur and prevent the successor from mounting the position of leadership.

References

Al-Hijji, Yacoub, Y. 2010. Kuwait and the sea: a brief social and economic history. Lancaster: Arabian Publishing Ltd.

Astrachan, J.H., & Shanker, M.C. 2003. Family businesses’ contribution to the US economy: a closer look. Family Business Review, 16 (3): 211-9.

Bjuggreen, P.O., & Sund, L.G. 2001. Strategic decision making in intergenerational successions of small-and medium-sized family-owned businesses. Family Business Review, 14 (1): pp. 11-23.

Ciampa, D., & Watkins, M. 1999. The successor’s dilemma. Harvard Business Review, 77 (6), pp. 161-168.

De Massis, A., Chua, J. & Chrisman, J.J. 2008. Factors preventing intra-family succession. Family Busness Review, 21 (2): pp. 183-199.

Dyer, W.G. Jr. & Panicheva Mortensen, S. 2005. Entrepreneurship and family business in a hostile environment: the case of Lithuania. Family Business Review, 18 (3): pp. 247-59.

Galetic, L. 2002. Characteristics  of family firms management in Croatia. MER Journal for Management and Development, 4 (1): pp. 74-81.

Gallos, Joan, V. 2008. Business leadership: a Jossy-Bass leader. London: John Wiley and Sons.

Gersick, K.E. 1997. Generation to generation: life cycles of the family business. Boston: Harvard Business Press.

Ghabra, Shafeeq, N. 1987. Palestinians in Kuwait: the family and the politics of survival. Jackson (TN): Westview Press.

Goldenberg, Irene & Goldenberg, H. 2007. Family therapy: an overview. Florence (KY): Cengage Learning.

Handler, W. 1990. Succession in family firms: a mutual role adjustment between entrepreneur and next-generation family members. Entrepreneurship Theory and Practice, 15: pp. 37-51.

Hoy, F., & Verser, Verser, T. 1994. Emerging business: emerging field: entrepreneurship and the family firm. Entrepreneurship Theory and Practice, 19 (1): pp. 9-23.

Martin, H.F. 2001. Is family governance an oxymoron? Family Business Review, 14 (2): 91-96.

Morris, H., Williams, W. & Nel, D. 1996. Factors influencing family business succession. International Journal of Entrepreneurial Behavior & Research, 2 (6): pp. 68-81.

O’Shea, Maria. 1999. Kuwait. Singapore: Marshall Cavendish.

Oxford Business Group. 2009. Report: Kuwait 2008. Oxford: Oxford Business Group.

Parker, Philip M. 2002. Executive report on strategies in Kuwait. San Diego: Icon Group International, Inc.

Sharma, P., & Rao, S. 2000. Successor attributes in Indian and Canadian family firm: A comparative study. Family Business Review, 13, pp. 313-330.

Warde, Ibrahim. 2000. Islamic finance in global economy. Edinburgh: Edinburgh University Press.

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