Family-owned businesses should consider changing their business models and develop corporate governance mechanisms to adapt to evolving business environments, say two faculty members at American University of Sharjah (AUS) in their recent case study on family businesses in the UAE published in the Harvard Business Review Arabia.

“The reason for our research on family businesses is to support policy and decision makers within family-owned businesses and enable them to thrive. We studied the family firm that supports the Sheikh Saoud Bin Khalid Bin Khalid Al-Qassimi Chair in Family Business at AUS. The family is aware of the importance of family businesses in the region and wanted to share the experience of its members, the challenges they have faced, and the approaches they have adopted,” said Dr. Rodrigo Basco, Associate Professor and Sheikh Saoud Bin Khalid Bin Khalid Al-Qassimi Chair in Family Business at the School of Business Administration (SBA) at AUS.

The case study was successful in producing information that is relatable and useful to family businesses across the UAE and GCC.

“We needed to take an individual case and to present it in a way that could provide a model for other family businesses facing similar challenges. Since the decision to do a case study, we had to create a method to collect the data from individual members of the firm, analyze it, and distill from it information that is generalizable to produce a document that could be useful to multiple constituencies of stakeholders. Happily, the case has found its place and was published recently in the Harvard Business Review Arabia,” he said.

The study took three and a half years to complete. Its recommendations focused on the need for family firms to develop corporate governance mechanisms that allow family members to communicate, debate, analyze the evolving circumstances that affect the firm, and agree on the firm’s direction.

The recommendations were based on the study’s findings which showed that the survival of family businesses is dependent on how far different generations of a family firm are willing to adopt different strategies to meet changing circumstances.

“As the case study shows, the second generation was able to implement corporate governance practices and managerial decision-making processes that helped the firm transition from its initial growth stage, which was rooted in the construction boom in Sharjah in the 1970s and 1980s. It became a more diversified company that reduced risk-taking and balanced new projects with strategies to manage the wealth that had been accrued during the initial period of explosive growth. This change had been necessary to deal with an altered environment in the emirate’s construction industry, and different legal and political contexts,” said Tor Brodtkorb, Assistant Professor at SBA.

He added: “Our case focuses on the new challenges faced by the third generation. The changes successfully implemented by the second generation 15 or 20 years ago may need to be updated in order to adapt to facilitate the continuing success of the family business today. The lesson is that each generation may be required to reinvent the family firm to incorporate new ideas and maintain a competitive advantage in a constantly changing environment.”

Dr. Basco elaborated further on the challenges saying: “The first challenge family businesses face is that family members with firm ownership are growing exponentially. In the first generation, there is typically a single founder. The second generation consists of the children of the founder where we see parent to child or sibling to sibling relationships. With the third generation, you have a larger number of family members with ownership interests, and their relationship with each other is often distant like cousin to cousin. The second challenge is the generational gap between the second and third generations, which result in many cases in differing perspectives on the strategic goals for the firm, or even the reason for the firm to exist. It is more likely that the third generation will have members with different answers to the question: ‘Does the family serve the firm, or does the firm serve the family?’. Finally, the transition from the second to the third generation has local significance. Due to the history of the development of the UAE, a great number of UAE family businesses are at or near this transition point.”

Accordingly, families evolve with their businesses. “The business model for the firm changes from generation to generation due to shifts in the business environment, and the evolving business in turn creates pressures on the family to gradually adapt to the new demands of the firm,” said Brodtkorb.

Speaking about the importance of this study to university students, Dr. Basco said: “We have created a high-quality case study for UAE family firms. This is very important for our university, because we are able to provide our students with material that is produced by our own scholars, using local sources providing local information, resulting in a case that is contextualized entirely within the UAE culture, economy, and political environment. While it is also good for our students to have standard cases from the US or Europe or Asia, I have found that our students are especially responsive when they see a part of themselves, or their own families, in a case study. Our students’ learning becomes more concrete, specific, and relevant when they read a text that is localized and is based on a family business here that they may be aware of or its family. Our goal in the Sheikh Saoud Bin Khalid Bin Khalid Al-Qassimi Chair in Family Business is to continue to produce such case studies in order to develop a collection of regionally relevant learning material for our students.”