CAIRO - 10 December 2019: Although family businesses varying in size are not uncommon in Egypt, little attention is given to understanding the factors ensuring the success and continuity of family business. Business Today Egypt attempted to learn more about that realm and get a closer look at the experience of family business owners and managers.
Family Business in a Nutshell
“As a start, I want to clarify the difference between a family business and a start-up. A family business is one that has been going on for at least two generations. A start-up is the first phase of a family business. We are talking about someone who founded something, and then, when a second generation joins the business, we consider this more or less a family business, especially if they are in top management or managerial positions,” Assistant Professor for Entrepreneurship, Strategic Management and Innovation at The American University in Cairo Ashraf Sheta tells Business Today Egypt.
Sheta adds that family businesses operate in low-velocity and high-velocity sectors. Answering a question on the industries where family businesses usually work, Sheta says there are no statistics; however, he observes that family businesses mostly exist in low-velocity industries defined as “industries where changes are not very intense.” Examples include agriculture, grocery, and food processing. On the contrary, high-velocity industries are complex and experience intense changes, Sheta clarifies.
Although the majority of family businesses fall into the SMEs category, “There are family businesses that grow to become corporates in Egypt,” Sheta says, citing the examples of Nahdet Misr Publishing Group, Hassan Allam Properties, Orascom Group, and Mansour Group. In those companies, family members own either 100% of the shares or a majority of the shares.
Explaining the factors that influence the continuity of a family business, Professor Sheta names family dynamics, governance, succession, professionalism, and ownership.
“Family dynamics, the relationship between family members, are very important and can be a major challenge. The more generations we have, the more complex it is. We are talking about family as a social unit, and social units are all about relationships…Complex relationships can exist between siblings, cousins or distant relatives. These are all related to family dynamics. This is a qualitative issue and can be very challenging,” Sheta explains.
As for governance, the professor clarifies, “In Egypt, we do not have the idea of governance in our mindset. When we talk about governance, we talk about bodies that support governance such as boards of directors, family councils, family meetings, family assemblies, advisory boards.”
“Succession challenges include nepotism, altruism, and unfairness. We ask ourselves what is the criteria for successor selection, the methodology to choose a successor, and what challenges the successor may face. We ask ourselves how the other family members in the business will accept such succession. How will employees accept such a succession?” Sheta points out.
“As for professionalism, it’s also important how non-family members can be treated within family business,” Sheta says, adding that such a question is pertinent to other questions like if there will be a separation between ownership and management, if non-family members will be on top management or not, and what employment mechanisms will be adopted.
Sheta highlights that ownership becomes more complex through generations and that its structure is often determined within “cultural boundaries” such as selecting the eldest son or family members who are part of the management for full or majority ownership.
Answering the question on the barriers women might face in starting a business that survives for at least two generations, Professor Sheta tells Business Today Egypt , “There are cultural barriers [women face], and the intensity of these barriers varies between Upper Egypt and Lower Egypt in terms of allowing females into the business.”
“Some people might think that women are not a good fit for businesses operating in tough industries like manufacturing, marble extraction. However, we have very successful examples of women starting family businesses such as Nahdet Misr, where the CEO is a woman. Gender inequality in family business is part of gender inequality existing in the work environment at large,” he explains.
Preparing young generations of the family to work in the business starts with intensive knowledge of the business. If a family member chooses to join the business, they will rotate jobs in the business, and they have to start from the bottom.
Sheta stipulates that 80-90% of businesses in the economy will shut down if they are not sufficiently institutionalized or if they fall short on governance, which affects continuity.
Family Corporate and Family Constitution
The success of Elaraby Group in running a “family” business is remarkable and inspirational, given the number of years that have passed and the number of family members belonging to four generations. The continuity of the corporate can be attributed to accomplishing governance and the company’s Family Constitution, as clarified by COO of Elaraby Group Mohammad Abd El-Gayed El Araby.
The Elaraby Group COO stated in a recent lecture at the American University in Cairo (AUC) that the company was founded by three brothers in 1964 to operate in the sectors of stationary and home appliances retail. Elaraby had become Toshiba’s licensee in Egypt in 1974. The beginning of the corporate organization as we know it today was in 1980, after Elaraby started manufacturing Toshiba fans.
At present, the total number of family members is almost 150, distributed over four generations. Due to the now-abolished inheritance tax, the corporate had to become a shareholding company where 18 second-generation family members currently hold shares. The Elaraby Group COO highlighted that the family’s constitution stipulates the shares must be exclusively owned by family members.
The second-generation business owner was eager to achieve governance, and so in 2004 its members studied courses on governance and family business. The major lesson they learnt was, “The preservation of original values set by the founders because the decline of those values would not maintain success.” Another principle the family members adopt is justice as pivotal in management.
The constitution supports the success and career choices of family members. The constitution recommends young family members to work elsewhere for around two years where they can make mistakes and avoid repeating them when they join the family business. If they start their career in the family business, it is very possible that workers will cover up their mistakes, which may have a negative impact on the business, Elaraby Group COO explained. However, there are two conditions that must apply to the other place where they work. It has to be operating in related sectors and it has to be larger.
A Family Council, whose members are elected and serve two-year terms, was introduced in 2006 to manage family affairs. The rules of the first election mandated that the descendants of the three founding brothers had to be represented. In later elections, that condition was eliminated so that voters would only pick members who represent their interests. Older generations ensure creating memories among younger ones by living in one building and holding events where they can engage in activities together.
The Family Council ensures that the family members are periodically assessed with the aim of providing them with the necessary training when needed, so they would stand out when compared to non-family members. Family members who do not want to join the business still enjoy the right to receive family-funded training in any field of choice. Yet, older generations do not cease trying to convince them to be part of a family business as they suggest funding a business for them or partnering with them. The family also considers establishing a fund that finances enterprises for fourth generation members, if they present feasibility studies. In return, the fund would hold 25% of shares to guarantee a significant role in the decision-making process.
Not just a business, It’s history
Tamer Zein El Abedin comes from a long bloodline of stone producers and is the third generation owner and Chairman of Almotassem Zein Marble and Granite Factory and the CEO of the Flora Ranches residential compound.
“It was difficult for me to decide early on [whether to join my family’s business or not] since I did not have the experience to understand the pros and cons of either decision,” he tells Business Today Egypt of his early years in business. “However, I knew from early on that I wanted to be an engineer, and that is what I studied in my university years. It also gave me time to fine-tune what I really wanted in my career. During my undergraduate years, I would spend the summer vacation at the family business to test the waters. By the time I was graduating from university, I had already understood that I’m more wired for the private and family business,” Zein Al-Abdeen says.
Speaking about how he prepared, Zein AlAbdeen says, “This business was established by my maternal grandfather. I was fortunate to receive a lot of mentoring and guidance from my mother, who is an engineer with a lot of hands-on experience in that field.”
“At the beginning we kind of had a vision and a master plan for my learning curve. It involved numerous layers of learning to become competent and independent pairing me with experienced people. Responsibilities were given to me gradually and in adequate doses. I was also fortunate enough in the sense that she gave me space to try new things and practice new ideas and approaches,” Zein Al Abdeen elaborates.
Zein Al Abdeen’s contribution started with taking up a share of others’ tasks, then he began to offer more efficient solutions to fulfill regular duties, and now he also works on strategic matters such as product line developments or market share increases. The young businessman has never worked elsewhere, but he sat for internships at his clients’ and suppliers’ facilities so as to better understand their needs. He also learned “how to maximize the output from whatever equipment or materials they’re supplying.”
As for what he anticipates from younger generations, Zein Al Abdeen says he sees two very important expectations. One is a positive, consistent desire towards learning and improving. The other is resilience and discipline.
From Business to Family Business
Mohamed Badawy began his career with the aim of starting a business separate of his family’s, but he then held a deep conviction about the importance of preserving the family’s business. Badawy holds a bachelor’s degree in law from Cairo University, and began working at a young age while he was still a student. He also worked in media production right after his graduation, learning skills that proved beneficial throughout his career. While he chose not to mention the name of his family business, he explains that he eventually joined it later in his career.
Badawy managed his friend’s business - operating in the field of programming - for a while and that’s how he realized that having a business is quite profitable. However, he discarded the idea for some time as he worked for a media agency that gave him a good job offer. Simultaneously, his father had a very large business in the food service industry that ran many restaurant chains and branches. Whenever Badawy faced challenges and wanted to join the family business, his father would encourage him to remain in the agency until he learnt more. After his resignation, he started his own business in the field of media production, but many declined to retain his company’s services because it was not registered and could not provide invoices.
“In 2013, my father had an idea for a branch in Cairo Festival City, but did not have enough funding so offered me to join them. I accepted. Based on this ownership, I gradually got involved in the management. We opened two other branches and I became in charge of supervising them,” Badawy says, although he chose not to reveal the name of his family’s business.
“We initially were not eager to involve nonfamily members in the business, because of lacking trust. We attempt to assume tasks typically performed by professionals in respective realms. When my father got ill, we decided to sell shares and bring in professionals to manage financials in particular, as my father had been the expert in that field. As a result, I had more free time. I did not have to be physically present at the branches. I would receive daily reports, based on which I made decisions. I also took up a 9- to-4 job in the American University in Cairo,” Badawy recalls.
The seasoned business expert firmly believes “no one would care for the business like the family.” Explaining this further, he says each party can contribute by taking on the tasks that are relevant to their passion. “I would love that my kids join the business but I would not compel them to do so,” he tells Business Today Egypt.
Shapes of Family Business
Hisham, whose name was changed as he spoke on condition of anonymity, is a second generation owner of a family business operating in the plastic industries sector. Explaining how he entered the business, Hisham says, “At first, I didn’t want to, but then I changed my mind. I didn’t want to because I thought I wouldn’t find my field of interest there, but then I changed my mind when I found a lot of fields that I am interested in.”
As for how he was prepared and what he added to the business, Hisham says, “My father would take me to work since first grade. That way the work would sink in little by little.” Later on, he worked on improving the computer systems, developing the enterprise resource planning (ERP) system, updating the database system, adding new big customers, and improving the final product’s quality. In his family business, non-family members hold managerial positions and have significant agency to make changes as long as it is in the scope of their department.
Hisham, who has never worked elsewhere, adds, “I am currently satisfied because there are several things that I know I can still add and improve the business with. Also, leaving the family business is not an option right now because no one can make up for my role.”
Dina, whose name was changed as she spoke on condition of anonymity, is a second-generation manager of a family business working in the field of fast fashion. Dina has worked in the business since her teenage years, knowing she would definitely be part of her family’s enterprise in the long term. She did not face significant difficulties when she first entered and has long worked to add structure to the business.
Dina says “there were problems over succession and management” and that she hopes to quit her job in the family business. However, she expects from younger generations to undergo “extensive training” in their time running the business. As with Hisham’s business, non-family members are given major roles in the company.