DEFINING THE FAMILY-OWNED BUSINESS (FOB)

Before the specifics concerning family-owned businesses (FOBs) in Saudi Arabia, a definition of this form of doing business and some key concepts are in order.

There are many definitions of FOBs that pare down its few but essential operating parts into concise descriptions. One of the most simple yet useful definitions of an FOB that I have found, however, is by the International Finance Corporation, which in its IFC Family Business Governance Handbook 2008 says, “A family business refers to a company where the voting majority is in the hands of the controlling family; including the founder(s) who intend to pass the business on to their descendants.”¹ The IFC continues with its definition to deem the terms “family business,” “family firm,” “family company,” “family-owned business,” “family-owned company,” and “family-controlled company” as interchangeable in usage in its publication. We shall do the same in this book.

The IFC Family Business Governance Handbook also offers what it views as several insightful attributes of the FOB as it defines some of their distinguishing characteristics. In citing the inherent strength of the family's commitment to the firm's longevity, the IFC states:

I like this description because it describes very well many of the family-owned businesses with which I am familiar. These are companies in which their founders, through sheer personality and drive, have created enterprises that long retained those virtues and have in turn inspired successive generations to the cause of enterprise preservation, longevity, and growth for their offspring's future. The strength of family companies in Saudi Arabia, and for that matter worldwide, is as the IFC identified as the family enterprise's inherent ability to pass on “accumulated knowledge, experience, and skills” to succeeding generations of family members. Because the family name is the most visible identity of a family-run enterprise, the pride and effort that family members engaged in the business exert in growing it and maintaining its reputation are enduring strengths.³

In 2013, there were a reported 1.8 million commercial establishments in Saudi Arabia. This statistical reference from the Ministry of Labor included all commercial registrations of companies active and inactive.⁴ Although no hard figures are available in terms of commercial registrations categorized by establishments run as family owned businesses, the Jeddah Chamber of Commerce and Industry estimates there are approximately 5,000 family-owned businesses in the Kingdom, 156 of them are trading on the Tadawul, the local Saudi bourse. The Chamber estimates that the activities of these businesses contribute 25 percent to the Kingdom's GDP.⁵ There is no doubt that the government of the Kingdom of Saudi Arabia recognizes the importance and contributions of Saudi family-owned businesses to its vitality and economic future.

A viewing of the growth of Saudi Arabia's family-owned businesses, and in some particular cases their notable decline, has been a kind of time lapse photographic depiction of the challenges, struggles, triumphs, and growing pains of the Kingdom itself and its changing economy. Some of today's most recognized Saudi family business names, such as the Al-Quraishi, trace their lineage as merchants and powerful actors from the time when the Prophet Mohammad, Peace Be Upon Him (PBUH), walked the thoroughfares of the Islamic holy cities of Mecca and Medina. In his germinal book on the big businesses of Saudi Arabia and the Gulf States, Michael Field, noted one senior member of the Alireza family during his interview for Mr. Field's book traced the hereditary path of his family to commercial prominence in the Kingdom to “Amr ibn al Aasi, one of the lieutenants of the Prophet Mohammad (PBUH) and the man who had won Egypt for Islam in 640 A.D.”⁶

Another important book on Saudi businesses, J. R. L. Carter's Merchant Families of Saudi Arabia, is replete with notable business families that trace their lineage and success in business to their fighting alongside King Abdulaziz during his struggles to unite the country, the two world wars, the arrival of the Islamic faith to the Arabian peninsula and even as far back to the days of the ancient spice trade of the region. Many of Saudi Arabia's business families have seen their fortunes rise and fall in spite of, and often coinciding with, the political intrigues, military conquests, and economic developments that have occurred within the Kingdom. The history of family-owned businesses in Saudi Arabia is a fascinating one whose story, if told in the historical context, would engage the reader in dramas, tragedies, comedies, and suspenseful episodes ranging the full spectrum of the human experience. It would occupy volumes of literary work. Although such a chronicling of the subject would be a worthy and noble undertaking, my ambitions with this chapter are necessarily more modest.

The global activities of many of the Kingdom's family-owned businesses in the technology-hyped and globally linked world of today belies the humble beginnings many of them experienced in their rise to notoriety. In olden times, families engaged in mercantile and agricultural pursuits constituted the bulk of the commercial class in Saudi Arabia, well before the industrial age or the creation of the modern Saudi state. As alluded to at the beginning of Chapter 1, dating from eighteenth, nineteenth, and much of the twentieth centuries back to the dawn of Islamic society (and even the pre-Islamic period) the main engines of the Saudi economy have been agriculture, the activities of the durable merchandise and commodity trade routes that trekked across the Arabian peninsula, and the enduring pilgrimages to Mecca and Medina. The chief money earner for nations in the region in the pre-oil period, however, has far and away been the trade in goods and commodities.

In this regard, a common reference used by those familiar with Saudi and Arabian Gulf businesses is to broadly describe them as a commercial class with a “trader's mentality.” The pith of the reference and those of their kind is to describe the Saudi businessman as one accustomed to building prosperity and the growth of their businesses under the protected cover of a kind of mercantile environment within which they have operated. Until very recently in the Kingdom's history, leading up to its succession to WTO membership in 2005, this was an environment in which goods and commodities were available to them for purchase at the lowest prices allowing them to sell at the highest prices, sheltered by a government that protected their market interests by limiting foreign competition in a great deal of commercial areas within the Kingdom's borders. The stereotypical image of the meticulously appareled Arab negotiating trades in his equally regaled desert tent is a visual ingrained in most Western minds thanks to cinematic portrayals handed down since the early days of film. We humans are often creatures in search of simplistic ways of explaining the phenomena and environments we experience. It is true that the overwhelming majority of “merchant families” described in J. R. L. Carter's Merchant Families of Saudi Arabia and many of the progenitors of Saudi Arabia's largest and best-known family-owned businesses came from simple trading backgrounds. To describe today's Saudi business community as a nation of traders, however, is an oversimplification that begs the question and prevents a true understanding of the Saudi businessman. It is tantamount to referencing eighteenth-century America and describing the United States today as a nation of wealthy landowners.

The names of Saudi family businesses that have come from humble beginnings and the nation's trading ranks are seemingly endless. The Alireza family, a business clan with worldwide holdings whose founder, Zainal Bin Alireza, emigrated to Jeddah, Saudi Arabia, from Iran in the 1840s while a boy, is one of the iconic business families in the Kingdom. The son of a camel caravan owner, Zainal and his sons and heirs all went on to contribute mightily to the development of the city of Jeddah and indeed the Kingdom in many areas beyond trade such as infrastructure, education, and politics.

The Al Gosaibi family, a family begun in the late nineteenth century by two brothers, Abdullah and Hamad Gosaibi, left behind a couple of mud villages to become traders in pearls, gold, foodstuffs, and contractors of oilfield services. It would be difficult to talk about family-owned businesses in the Kingdom's Eastern Province without the Al Gosaibi name coming into the conversation. Yet, as an illustration of the perils facing family-run businesses, perhaps more than any other, this business family has had its internal family dissension and strife dragged through the local, national, Gulf regional, and international press for all to view. As The National, a daily news journal out of Abu Dhabi, reported in 2010:

The Al Gosaibi embroilment and its very public nature have unsettled even the most jaded and experienced first-generation Saudi family business owners. Family matters, whether of the domestic or business variety, are always a matter of privacy in Saudi Arabia. The Al Gosaibi case has given many family business owners pause and led them to take stock of their own situations. As will be discussed later, having one's siblings as business partners proves challenging enough in the managed growth of a business. There is an added element of complexity, however, when partners and business participants enter the family business through marriage.

In selecting the few Saudi-owned businesses for highlighted discussion in this book, I received a good deal of advice on which family businesses to include. Some with whom I spoke thought it best to select businesses based on industry sectors. Others opined that it would be advisable to choose my subjects based on the length of time they could trace their lineage to doing business in the Kingdom. Still others, prominent business owners in their own right, advised me to select from only the largest of family-owned businesses. Choosing from within any of these categories would have yielded many interesting companies. As with Al Gosaibi and the Alireza, so it is with Al Olayan, Al Jumaih, Al Hokair, Al Othaim, Al Juffali, Binladen, Al Kanoo, Al Turki, and Al Rajhi. All are able to lay claim to deep and long-aged roots in the Kingdom with virtual mastery over everything in business from automobiles, food, banking, and chemicals to steel pipes, construction, and consumer retail. A discussion of all or most would have been impractical. What I aim to accomplish in this chapter, however, is to feature a few of the better-known family-owned businesses in Saudi Arabia that stand out in their rise from humble beginnings, the vision for growth of their businesses, and their concern for and service to the larger Saudi business community.

The Al Quraishi, Al Zamil, and Al Jeraisy are Saudi families whose businesses I have known since my diplomatic service in Saudi Arabia. I am acquainted with their owners and my admiration and respect for their hard work, attention to corporate governance, concern for their nation and business peers, and their successful global ventures have grown over the last dozen or so years. They have welcomed this book and graciously agreed to have some of their key family members interviewed for its content. I am deeply grateful to them and hope the presentation of their thoughts and views on the subject of family-owned businesses in the Kingdom will give the reader a greater appreciation for this important aspect of business in Saudi Arabia. Any company seeking to do business in the Kingdom must possess a good understanding of the dynamic environment within which these businesses operate, the unique challenges they face concerning corporate succession and the need for them to remain relevant in a rapidly changing and incessantly competitive world.

Before presenting the three highlighted Saudi family businesses, a review of a few overarching themes of critical importance to family-owned businesses in Saudi Arabia will serve to bring greater clarity to the subject matter. These themes and related issues are not exhaustive of all relevant questions facing these businesses in regard to their nature or future. I have selected, however, a few focus areas of discussion concerning Saudi family-owned businesses that I believe best facilitate an applied understanding of these businesses and the dynamics germane to their development within the Kingdom and the global business community. From the perspective of any prospective FOB partner or co-investor, or anyone looking to do business with these companies, an understanding of key elements of the family-owned business in Saudi Arabia is crucial to conducting business with them.

Let us examine: (1) the corporate versus social nature of the Saudi family-owned company or group of companies that is of fundamental importance when managing a relationship with such businesses; (2) the issue of corporate succession within Saudi family-owned businesses and the process of integrating second- and third-generation family members in to the businesses; and (3) the management of the strategic focus of generations-old family businesses and the importance of corporate governance to their future.

THE CORPORATE VERSUS SOCIAL NATURE OF THE SAUDI FAMILY-OWNED BUSINESS

One of the chief distinguishing characteristics of any family-owned business is that the energy that propels it both emanates from and is dispersed into its two fundamental defining states of existence, its corporate and social natural states. The rigors of running a family-owned business in adherence to an ever-changing national and international regulatory and competitive environment present pressures that are managed to varying degrees and influenced greatly by the personalities of its owners and those family members engaged in its operations. In the case of most Saudi family-owned businesses, a single founder, or two or more siblings or other close family members started the business. As is the case with Western corporations, building a profitable business in chosen business sectors and managing it to ensure its longevity have been of primary importance to Saudi family-owned businesses. However, unlike Western non-family corporate concerns, social considerations such as using a successful business to assure the welfare of immediate and extended family members, assimilating the input of key family members in the strategic direction of the business, and their integration into its operations are often all of equal import.

Many of today's powerhouse family-owned businesses of influence and prominence in the Kingdom were started by their founders in the 1940s, 1950s, and 1960s. It was their determination, vision, and vigor that acted as the initial catalyst and subsequent power source for the early successes of their businesses. By virtue of them literally being “one-man shows,” these businesses were often run dictatorially or were authoritarian in manner of operation. Whatever the boss said is what most often happened. These pioneers knew of the Kingdom's aspirations to become a modern state and were well aware of the action it planned to take for it to fulfill its ambitions. In surveying the Saudi landscape in those days while assessing various ways to make money in a burgeoning economy, during a time when change was a slower-moving phenomenon, the opportunities must have appeared endless to these Saudi mavericks.

In these early days, FOBs were usually not governed by boards of directors. Certainly no one outside the family had any definitive say in the actions of the business or its strategic development decisions. Among its founding first generation and key family members, decisions were most often made through consensus after considerable debate. New commercial directions for an established and successful FOB were often taken slowly and frequently after the collection of facts and opinions concerning the overall prospect for success offered by a number of peers during informal gatherings or private conversations. Even in the modern era, when Saudi family-owned businesses assumed more formal corporate operating structures, including those with boards of directors, people outside of the family rarely exercised effective influence over the strategic directions of Saudi FOBs.

Today, a noted exception to the general absence of non-family-exercised influence in the operations of Saudi FOBs is most often found in the distinction between Saudi FOBs primarily engaged in industrial businesses as opposed to those with traditionally trading company platforms. Increasingly in the Kingdom, Saudi FOBs are forming joint ventures, strategic alliances, and other equity and business ventures whose governance is overseen by boards composed of family and non-family members. As Saudi FOBs begin to form more international partnerships to gain greater market, industrial, and capital access opportunities, their non-Saudi equity partners are requiring their participation on the governing boards of Saudi partnership entities and in some cases the board of the Saudi parent itself.

As any Western executive of a company participating with a Saudi FOB will attest, close proximity to daily operations of their Saudi partner in the Kingdom can yield a treasure trove of how business is done in Saudi Arabia. This is particularly the case if the Saudi FOB partner suspends the usual off-limits boundaries that normally separate Saudis from non-Saudis, and those separating Saudi FOB family members from non-family-member Westerners with whom they do business. The growing trend away from American and other Western companies stationing their executives in neighboring countries to Saudi Arabia such as the United Arab Emirates (U.A.E.), Bahrain, Kuwait, and Qatar in favor of a full-time presence in the Kingdom speaks to the wisdom in knowing more and becoming more fully engaged in not only the corporate realities of the Saudi FOB, but the social corporeality of the Saudi entity. If the foreign executive representing the Western partner of the Saudi FOB is attuned to and learns from the social perspectives and responsibilities all Saudi companies share, all aspects of the partnership are likely to be strengthened because of it.

As most often is the case in Saudi Arabia, new opportunities for business are discovered in conversation…casual conversation in social settings or in business meetings among peers. Anyone (exclusively males for purposes of this illustration) who has had the privilege to have been invited to a Saudi wedding and attended in the circle of prominent businessmen is familiar with the sense of community these gatherings connote. Serving as family gatherings, these occasions also bring together social peers and acquaintances that evoke tempered and considered ideas that may bring forth discussions on a wide range of the day's relevant matters, including potential areas of new business.

It has been suggested by many, and generally accepted by most, that the cultural and social attributes of life in the Arab world have guided the development of family-owned businesses toward a predilection for privacy in all matters and a penchant for using government and political power structures as a means of gaining new business and preserving its stature.⁸ When we discuss “social” considerations pertaining to Saudi family-owned businesses, one should not only consider issues affecting individual family members in the business, but reflections on the societal norms governing how these companies interact with governmental agencies and political power structures that must go into the calculus as well.

There is a level of support expected by the nation's leaders of all Saudi commercial enterprises in the Kingdom. Call it a type of responsible corporate nationalism or a kind of Saudi corporate patriotism. However one chooses to reference it, the act by the majority of the nation's businesses in publicly supporting accepted policy exists. Business communities in any country are usually expected, sometimes unreasonably, to get behind economic policies envisioned by their nation's leaders as engendering and fostering the improvement of the lot of its citizens. Even in a country as industrially advanced and globally linked as the United States, American business is expected to adopt governing policies and operating procedures in line with official U.S. government regulations and economic policies that are not detrimental to the nation's interests. This can most recently be seen in the United States between the U.S. President Barack Obama's administration and corporate America over the issue of tax inversion, the action taken by a company through which it becomes a subsidiary of a new, foreign, parent company for the purpose of falling under the beneficial tax laws of that newly acquired corporate domicile.⁹

On September 22, 2014, the Obama administration announced new rules it said would discourage U.S. corporations from engaging in tax inversion through moving their corporate headquarters from the United States to a foreign tax jurisdiction, thereby avoiding U.S. corporate tax rates. While recognizing the economic benefit to the United States of having U.S. corporate investment capital find its way to overseas markets, U.S. Treasury Secretary Jacob J. Lew in effect took corporate America to task for putting their interests before, in their view, what are in the best economic public interests of the nation by engaging in tax inversion transactions. In its September 22, 2014, press release on the subject, the U.S. Treasury Department said:

Furthermore, U.S. Treasury Secretary Lew said of the new proposed rules targeting tax inversion:

Similar to the quandary faced by American companies when considering the usefulness of tax inversion, businesses around the world often confront like predicaments when having to choose between the competing forces of profit and operational behavior that champions the greater economic good. Sometimes the way government wants the private sector to act is both good for the company and good for the nation. However, as is the case with the tax inversion issue with American companies, legal actions in the pursuit of profits taken by private sector entities in other countries ultimately may prove detrimental to the economic interests of those countries as well. Saudi FOBs are no different. In the end, it is the law, promulgated by those in national leadership positions, that defines what is good for the country. Businesses, like individual citizens, follow the law.

Saudi FOBs, particularly those that have reached a size whereby they have taken on strategic foreign partners and acquired global market presence, in many instances, have had to yield the promise of expanded profits to political and economic expediency. There is a type of corporate allegiance, a patriotism, if you will, owed and shown by Saudi companies to the greater good of the Kingdom of Saudi Arabia. Although the voice of the Saudi corporate sector is always heard when it objects to government-imposed policies that adversely affect their interests, as is the case with the earlier-discussed labor policy initiative Nitiqat, there is most often a widespread “implied buy-in” by business when it comes to government policies it recognizes as having been formulated, promulgated, and implemented with true and valid national interests at their core. Once again, the Nitiqat labor initiative and its stated goal of making more jobs available to Saudi citizens proves a suitable example of how Saudi FOBs have reacted with corporate social responsibility to government policy for the greater good.

The private sector's contentious opposition to the adverse effects Nitiqat and the shift toward more aggressive government policy to force increased employment of Saudi workers on the backs of expelled foreign workers from the Kingdom was mentioned in Chapter 1. This government policy represents an example of how previously legal business practices of relatively unrestrained private sector hiring of foreign workers ran contrary to the generally accepted goal of a much higher labor participation rate by Saudi citizens. I argue that although owners of Saudi businesses genuinely accept the need for much higher employment levels of Saudis, the perennial source of cut-rate labor from foreign worker pools and the dip in profits partly caused by their expulsion tended to trump the social conscience of many companies in this regard. For foreign companies partnered with Saudi companies and FOBs, the reluctance of some Saudi firms to hire Saudis over foreign workers went beyond the mere fact that Saudi workers came with a higher wage bill than their foreign counterparts.

During my time serving as U.S. commercial attaché in Riyadh, I often found it mystifying when some Saudi business owners would admit in private their reluctance to hire Saudis because of a seemingly stereotypical perception of them as unreliable and relatively unproductive in comparison to their foreign counterparts. I do not believe this is a widely held belief, however. It appears to be an all too familiar sentiment within the Kingdom. Some in the business community view Saudi workers as not as productive as foreign workers and are not disposed to take the kind of blue-collar, menial jobs expatriates readily fill. Compounding the problem, business owners relate experiences with Saudi hires, especially those filling office positions, of these new employees reporting for work for only a few hours after which extended coffee breaks are taken followed by “optional early dismissals” well before the workday ends.

The cliché of the irresponsible and undependable Saudi worker has not yet become trite in over-usage. As the ranks of employable Saudis are more fully engaged in hireable positions, however, these workers are gradually beginning to dispel the notion of the spoiled and capricious hireling.

Saudi government officials have consistently encouraged the Kingdom's businesses to assume more of the critically important role of making more jobs available to Saudis and reducing foreign employment. Both local and central government officials have articulated their view that offering more jobs to Saudis ensures that the mutual national interests of employer and employee are safeguarded as the Saudi government continues its decades-old effort of “Saudization” through the current iteration of Nitiqat. As if to underscore the nexus between the imperative of more jobs for Saudis and the inferred perils of a restless youthful unemployed en masse population, on November 25, 2013, the director of police for the city of Jeddah, Major General Abdullah Mohammed Qaitani and the director of the labor office, Abdul Monem Shahri, implored the business community at a Jeddah chamber of conference and industry (JCCI) organized conference to adhere to the rules of employment and participate in nation building through increased employment of young Saudis. The officials further urged the business community to search for Saudis with relevant skill sets and replace expelled foreign workers by employing them.¹²

Acting in fulfillment of their social responsibility, often contrary to what are perceived as their best economic interests, Saudi companies and FOBs are stepping up to the challenge to train and hire greater numbers of the Kingdom's citizens. The foreign partners of Saudi companies and FOBs are also realizing the need to hire more Saudis and to adhere to enforced Ministry of Labor regulations requiring them. They are also receiving help from business and trade associations within the Kingdom eager to show that the private sector is doing its part in assisting more Saudis join the ranks of the employed.

The Riyadh Chamber of Commerce and Industry (RCCI) established a center for employment and training, and has issued periodic reports on its progress in efforts to assist Saudi workers. In a report covering the first half of 2014, the RCCI reported that only 1,760 young Saudi men and women applied for 11,751 job vacancies made available by 70 private-sector firms in the capital city of Riyadh.¹³ The report stated that vacancies open to Saudis were offered by some of the Kingdom's largest companies engaged in the food, technology services, contracting, tourism, and retail industries, among other sectors.

As of the end of October 2014, 86 percent of companies and establishments in the Kingdom are compliant with the classification requirements for them to be in the green and platinum Nitiqat zones. Only 14 percent of firms in Saudi Arabia are classified in the unsafe yellow and red zones. A new enforcement regime was implemented in December 2012 targeting companies with 1,000 to 3,000 employees. The next phase of aggressive enforcement will cover companies with 500 to 1,000 employees. Deputy Minister of Labor for Inspection and Development, Mr. Abdullah Abu Thunain, reported that as a result of the ministry's enforcement program, more than 1.9 million workers, including 400,000 Saudis employed at a total of 731 firms have benefited.¹⁴

The Al Zamil Group, of which we will learn more in this chapter, has been among a group of Saudi companies that have determinedly pushed forward with collaborations and partnerships with the aim of increasing Saudi employment within their own companies and within the private sector at large. Various aspects of the Al Zamil Group's dedication to corporate responsibility as it pertains to employment and training can be viewed on their website from the “Overview” tab. This section of their website includes information on the company's “Abdullah Hamad Al Zamil—AHZ Community Service Center.” The mission of the AHZ Community Service Center states:

The company further states the goals of the Center as:

The AHZ Community Service Center encourages young Saudi men and women to pursue their areas of interest into full employment and funds small projects in which these trainees can go beyond their training to further distinguish themselves in their chosen areas of expertise. The center, and the Al Zamil Group's commitment to this area of corporate and social responsibility has an end goal of finding “real and renewed employment opportunities for Saudi youth.”¹⁵ The Al Zamil Group also runs a jointly administered program with the Saudi government's human resources development fund (HRDF) and the national system for joint training.¹⁶ On April 28, 2013, Zamil Industrial Investment Company, a Zamil Group's building materials–owned company, entered into a cooperation agreement with Dammam College of Technology to support the recruitment of Saudi graduates for employment placement.¹⁷

The sense of social responsibility felt by the founders of Saudi FOBs has been passed on to successive generations of those firms. Even as younger Saudis of prominence within these establishments begin to take on ever increasing areas of responsibilities, the awareness of a duty owed to society higher than the business itself endures within these circles. To be sure, the fervency with which this sense of duty owed is felt varies, depending on the individual. This is the case with opinion held by incoming generations concerning any aspect of the business. The methods and skills by which Saudi FOBs employ to coalesce the entry and effective deployment new family members into the business are a fascinating and critical aspect of these entities and the subject of the next section.

CORPORATE SUCCESSION WITHIN SAUDI FAMILY-OWNED BUSINESS AND NEW GENERATION INTEGRATION

Corporate successions as they occur in Saudi Arabia are distinct phenomena that are fascinating and instructive from a business perspective for anyone interested in the Kingdom commercial environment. As mentioned, Saudi FOBs are such an important part of not only the Saudi economy but are equally an integral part of the social fabric of society. Major shifts and well-publicized occurrences within well-known Saudi FOBs are readily discussed, content for featured newspaper stories, and easily become identifiable seams in the milieu of Saudi life. The passing of the founders of distinguished FOBs in the Kingdom are notable events. Depending on how well the transition from founder to second generation or second generation to third may proceed, these events also provide lessons for the wary FOB owner. When considering that 90 percent of all companies in the Kingdom are FOBs, this has serious consequences for the future prosperity and health of such firms in Saudi Arabia.

The subject of corporate succession has been studied and written about extensively around the world. There are industry organizations, global study groups, private sector associations, and whole sections within universities dedicated to the study of family-owned businesses, and in particular, the succession of generational owners into corporate management authority. One of the most interesting studies done on Saudi FOBs has been the study “Family Businesses and Succession in Saudi Arabian Culture and Traditions” by Abdulrahman Dahlan, MSA, and Dr. Leslie Klieb, published by the publication Business Leadership Review.¹⁸

The Dahlan-Klieb study provided a framework for examining Saudi FOBs in the context of their surrounding culture and traditions. They studied six factors of culture and traditions influencing the “sustainability and performance” of Saudi FOBs: “cultural attributes, family goals and values, founder's personality attributes, theory of planned behavior and the founder, successor attributes, and religious and legal attributes.”¹⁹ An impressive undertaking, the study managed to examine a variety of influence factors on FOBs in the Kingdom with a high degree of thoroughness and insight. In discussing the core nature of the Saudi FOB, Mr. Dahlan and Dr. Klieb state:

The Dahlan-Klieb study centered its examination on the nature of an FOB and how its operations are either “family” or “business” focused. The study sought to show how the “family” or “business” nature of an FOB influences its succession. Of course, as the study points out, it has been surmised that most Saudi FOBs experience difficulties in resolving internal issues. Founding members of most of today's largest FOBs are shrewd, astute, and business savvy enough to have not only considered corporate succession planning at length, but have acted on their concerns on the subject in consultation with their lawyers. Although not pervasive, many Saudi corporate leaders run global conglomerates with disparate interests in many world markets, so it stands to reason that the most capable among this commercial class would not leave a matter as important as the survivability of their firms to chance. Nevertheless, it is widely thought that widespread acceptance of the need for careful succession planning among the vast majority of Saudi FOBs has yet to be realized.

As the Kahlan-Klieb study suggests, an FOB's successful handling of internal disputes or generational succession often depends on whether its natural “default mode” is a “business” or “family” model. The drive toward “profit maximization” in a “business-natured” FOB may influence first-generation owners or FOB founders to more amicably face succession issues with one or two second-generation family members. When there are disputes containing the potent mixture of the competing personalities of family members and their emotional and financial interests with those pure business interests of the firm, however, you can end up with a lethal concoction that may sound the death knell of the company. This may be particularly true for companies that are trading companies or “establishments.” Such entities are essentially similar to sole proprietorships in common law jurisdictions. In regard to which family members take possession of family business assets or assume management control when multiple family members are involved, the absence of a succession plan can translate into uncertainty over an extended transition period. Such situations have resulted in operational paralysis for some companies and have had long-term deleterious effects for the survivability of those businesses.

For many of the Kingdom's well-established FOBs, the strong personalities of their founders have been the defining features of the stamina and growth of those firms. The imprints of their personalities and character speak volumes as to how they have managed to surmount untold challenges to their development and very existence. For those that have passed and whose generational family members have assumed ownership and management of their businesses, the influence of these leaders can still be felt. Besides the durable personalities of these business owners, another distinguishing feature of the Saudi FOB is the fact that their owners often die while still firmly at the helm of their companies. It is not uncommon in Saudi Arabia to see an original founding member of an FOB and his siblings or other family members, well into the eighth decade of living, running day-to-day operations despite the obvious advancement of old age. It is well-known in Saudi Arabia, and is often the subject of humor, that second- or third-generation members of Saudi FOBs who work within the family business for many years patiently waiting for their opportunity to take over and run the company watch the months on the calendar roll off without ever seeing their day of ascension arrive.

When the death of a founder of a Saudi FOB that is a joint venture partner with a foreign firm occurs, there are a number of issues and potential consequences befalling the joint venture, which should be considered. An instructive piece prepared by the law firm of Crowell and Moring, and authorized for reprint in this book, examines these considerations in the box that follows:

Although formal succession planning has only recently been adopted as a required part of corporate operations within Saudi FOBs, the method of integrating new family members into the business has been well-established in most businesses. From the early days of the Kingdom's well-established FOBs, founding owners would send their sons, brothers, and nephews off to work in various parts of an FOB conglomerate. The relocation of young family members to FOB overseas subsidiaries, offices of foreign partners, and other extraterritorial locations was intended to give the young aspirant as much exposure to real-world operational and management experiences as possible. The grooming of next generation FOB owners and managers is a task that has always been tended to as much out of fulfillment of family obligations as it has been out of good management practices. And, for some FOBs, the task of selecting family members for placement within the firm's operations can be a daunting task.

It has been the integration of the next generation of Saudi FOB members to the businesses of the Kingdom that has given new vitality and direction to these decades-old firms. Some of these young mavericks have contributed to new directions for Saudi FOBs and in some instances changed the core businesses of these companies. They are also influencing the embrace of best practices in corporate governance with their family's businesses.

MANAGEMENT OF STRATEGIC FOCUS AND THE IMPORTANCE OF CORPORATE GOVERNANCE

Saudi FOBs have come a very long way since the 1930s, 1940s, and 1950s, when many of Saudi Arabia's well-established firms were created. There have always been pronounced distinctions between Saudi FOBs that have been predominantly trading establishments and those that have early on developed into industrial production, construction, and development companies. A significant number of Saudi FOBs that originally began as agents representing foreign manufacturers of goods sold in the Kingdom have evolved to integrate some areas of their business to exploit the rapid and diverse changes in the Saudi industrial landscape.

Some Saudi FOBs were service contractor start-ups in the 1950s and 1960s working for Saudi Aramco, but later diversified into other businesses not directly tied to the nation's oil and gas industry. Well-established and easily recognizable Saudi FOBs achieved their starts through the provisioning of goods and services to Saudi Aramco. Sheikh Ali Tamimi founded his company in 1953 supplying parts to Saudi Aramco. Today, it is a global company known as the Tamimi Group (a member of the USSABC), and engaged in a diverse range of activities such as food, construction, manufacturing, tourism, intermodal transport, and information technology. The Tamimi Group has foreign joint venture partners and agency relationships with such companies as GE, Safeway, Firestone, Halliburton, and Red Wing. Previously mentioned Ahmad Al Gosaibi had its start supplying goods and services to Saudi Aramco.

Other well-known enterprises counted among the Kingdom's original start-ups were those formed by Sheikh Sulaiman Olayan and Khalid Ali Al-Turki. Sheikh Sulaiman Olayan, orphaned in childhood, leveraged his early adulthood experience of working in various positions with CASCO, the precursor of Saudi Aramco, into what is today among Saudi Arabia's most internationally invested and diversified companies. The Olayan Group (a member of the USSABC) has a dazzling array of stellar joint venture partners such as HSBC, JPMorgan, Chase Manhattan, Coca-Cola, Colgate-Palmolive, Credit Suisse, Kraft Foods, Kimberly-Clark, Xerox, and Toshiba, to mention only a few of them.

Sheikh Khalid Ali Alturki, another eminent progenitor of Saudi start-ups who ascended the ranks of current-day Saudi corporate elites through original work done for CASCO, now sits atop a global company with a diversity of businesses owned and managed by Khalid Ali Alturki and Sons (Alturki). Alturki is a leading investment and development company that has been operating in Saudi Arabia since 1975. Its subsidiaries and joint venture companies are focused on construction and infrastructure, building materials, real estate, oil field services and renewable energy, information and communication technologies, and general industrial sectors in Saudi Arabia and neighboring Arab countries. Companies like Alturki have installed good corporate governance practices. Second-generation leadership by family members engaged in Saudi FOBs such as Alturki have been change agents for accelerating the adoption of progressive corporate governance in established and new companies within the Kingdom. Rami Alturki, president of Alturki and the son of Sheikh Khalid Ali Alturki, is an example of one of these change agents and is making a positive difference in his own family's business as well as influencing other Saudi firms. Rami's thoughts on Saudi FOBs and SMEs in Saudi Arabia appear later in this book.

As mentioned earlier, in those days, the idea of having major decisions such as opening new areas of business, disposition or acquisition of significant corporate assets, or changing the structure of the firm taken by a board composed of non-family members was an alien concept. With the complexities of today's Saudi FOB and the myriad challenges faced by these firms, corporate governance is increasingly viewed as the best way to bring regularity and conformance of a firm's management, activities, and investment decisions with globally accepted business practices.

The financial growth of family companies managed by first-generation founders and owners was in many instances self-funded. The accumulated wealth of these businesses was reinvested to sustain the growth of their companies and to meet the challenges of an ever-evolving domestic market in the 1960s, 1970s, and 1980s. As the industrial expansion priorities of the Kingdom created ever-larger projects, with mega-projects in the country becoming more commonplace, securing the capital needed by Saudi FOBs to pursue these large contracts, bid successfully, and ultimately execute them efficiently was of paramount importance. By the 1980s, the demand for more and more growth and operational capital by the Kingdom's largest and industrially engaged Saudi FOBs began to outgrow their own internal finance capabilities. Greater access to commercial bank and public funding was sought.

By the 1980s, there were 12 private commercial banks operating in the Kingdom. Most of these banks were owned by Saudi investors with a portion of public-sector ownership. For example, National Commercial Bank (NCB), also known as Al-Ahli bank (Arabic: ), the first Saudi bank to be chartered by royal decree, in December 1953, is the largest bank in the Kingdom and the biggest bank in the Arab world by assets. In 1999, the Saudi ministry of finance's public investment fund (PIF) became the bank's majority shareholder, greatly expanding its lending capabilities and investment banking through its subsidiary, NCB Capital (US$12 billion in assets under management (AUM)). NCB went public in October 2014 and within 15 days of its debut on the Tadawul, 1.16 million investors were reported to have bought shares of the partially privatized bank, totaling a record value of US$59 billion.³⁵

Banks such as NCB have led the way to unprecedented bank lending to the Saudi private sector. Bank lending for megaprojects have been beyond the capacity of Saudi private banks. Saudi public-sector lending institutions such as the PIF have provided added lending volume to satisfy the demand for capital project financing. In terms of private bank financing to the Saudi private sector, however, it has historically been the Saudi private bank sector that the Kingdom's FOBs have relied upon most to fill its funding need for growth. It has been the private banking community's historical willingness to lend to these companies based on their family names and stature within the close-knit national business community that has driven FOB growth financing. In fact, it is has been generally accepted that the tight lending practices of Saudi banks, with the exception of loans to the largest of Saudi FOBs engaged in government-funded projects, caused consternation among smaller Saudi businesses and some government officials.³⁶

With the Al Gosaibi debacle of 2009–2010 and the public spectacle made of easy lending practices gone awry, the light shed on corporate governance and transparency within the Saudi business community was never brighter. As foreign banks have become more numerous in the Kingdom, the capital they have to lend Saudi enterprises usually comes with the kind of scrutiny into a borrower's corporate affairs to a degree that most Saudi companies are unaccustomed. Of the 23 institutions that are licensed to carry out banking operations in the Kingdom, 12 are classified as Saudi institutions, while the remainder are branches of foreign banks.

These notes on corporate governance in the Saudi context of the financial strategic direction and growth of FOBs is indicative of the type of modern challenges facing Saudi FOBs as they seek to advance the pecuniary interests of their enterprises. As the Saudi corporate community pursues closer proximity and access to global funding sources, the struggle between observing deeply engrained cultural mores in running one's business and rendering the kind of full disclosure required by international commercial and investment banks have caused weaknesses in corporate governance practices in the Kingdom to visibly surface. In many ways, the strident outside calls for increased corporate transparency and the cultural rules enforcing privacy in business and social matters have always been viewed as conceptually inimical by many Saudi business people.

Despite the historical predisposition of Saudi FOBs against a robust disclosure of sensitive management and financial information about their companies, many are embracing accepted standards of good corporate governance. A growing number of Saudi companies are realizing the advantage of creating established principles of corporate governance that aids the business in conducting its affairs more efficiently, responsibly, and ultimately, more profitably. The added advantage of adopting internationally accepted principles of governance positions the enterprise well in accessing external funding sources from internationally accredited investors.

However, the adoption of globally accepted standards of corporate governance in Saudi Arabia, or in non-Western countries for that matter, has proven to be problematic because of the historical and cultural differences in how enterprises have been managed and operated around the world. For this reason, simple definitions of minimally acceptable corporate governance standards, as the one offered by the Organisation for Economic Co-operation and Development (OECD) are not wholly instructive in the Saudi context. The OECD defines corporate governance as:

Therefore, acceptable definitions of corporate governance as a starting point for most Saudi businesses beginning to contemplate establishing standards will vary, depending on the unique ownership, managerial, and core businesses of the enterprise. One definition of corporate governance quoted with no small amount of credibility is one posited by Sir Adrian Cadbury, chair of the corporate governance committee. One of the greatest impetuses in the creation of this committee, which was constituted in May 1991 by the Financial Reporting Council, the London Stock Exchange, and the accountancy profession in the United Kingdom, was the global financial contagion to the banking community following the 1991 seizure and liquidation of the Bank of Credit and Commerce International (BCCI). This was a financial debacle of global proportions and threatened a huge swath of the world's banking community. In its 1992 report, the Cadbury Committee generally defined “corporate governance” as:

This definition focuses on the operational dynamics of all involved with running the corporation. Other definitions address the mechanics of governance from a regulatory perspective. In particular, some definitions of corporate governance deal directly with the duties, obligations, and expectations of owners and management in regard to the financial aspects of running a business. Actionaries, that is to say, stakeholders in joint stock companies, are recognized under most definitions as owing fiduciary duties to ensure adherence to operational procedures that satisfy the need for openness, transparency, and accuracy in financial reporting as well as disclosure to governmental regulatory authorities required of the jurisdictions within which they operate. As more and more Saudi businesses seek international investor funding, creating good corporate governance structures within their companies is increasingly becoming a competitive imperative for those firms seeking to remain relevant in the global economy.

An often-quoted pair of authorities on corporate governance, renowned economists and academicians, Andrei Shleifer and Robert Vishny, in their 1997 publication “A Survey of Corporate Governance,” defined corporate governance as dealing with: “…the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.”³⁹ The authors further stated: “Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the inflows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance.”⁴⁰

Most of the hundreds of joint ventures between Saudi and American firms operating in Saudi Arabia are composed of U.S. partner corporations containing top management structures controlled by well-entrenched corporate governance bureaucracies that act as bulwarks in protecting these entities against both external and internal threats. More importantly, at least from the U.S. partner side, their established and well-articulated corporate governance practices provide public and private funding sources relatively clear views of their current financial positions and reasonable assurances of returns on capital by way of full financial disclosure. The corporate governance area, and in particular how those practices in the Kingdom are developing, is a subject wherein U.S. and Western firms are having a significant impact. Most Saudi companies have yet to adopt a full range of corporate governance principles that would replicate those found among the foreign joint venture partners with whom they are invested.

The differences in corporate governance principles adopted by Saudi FOBs and well-established corporations from advanced economies may be viewed as a consequence of the differences in their development culturally within their respective countries. For U.S. companies, particularly those whose shares are publicly traded, transparency and financial disclosure are legally mandated and governmentally regulated. For Saudi FOBs, SMEs, or other Saudi corporate entities, there is a tension between meeting the calls for strong corporate governance principles by Western joint venture entities and the need to follow cultural, social, and family accepted norms of conducting business.

The Capital Markets Authority (CMA) of the Kingdom of Saudi Arabia, the nation's regulator and developer of its capital market, was established on July 31, 2003, by royal decree No. (M/30). It is the government agency that regulates and monitors the issuance of securities and is charged with fostering a transparent and trusted investment environment. Those Saudi businesses that become public companies on the “Tadawul,” the Kingdom's exchange for trading, clearing, and settling transacted securities, are required to follow increasingly strict regulations concerning how public companies adhere to corporate governance practices.

The Tadawul went into operation in October 2001. On November 12, 2006, the CMA issued regulations governing the corporate governance of Saudi public companies.⁴¹ These regulations, and subsequent amendments aimed at strengthening this law, have brought well-accepted seriousness to the Kingdom's efforts to protect the investing public, resonate its message of transparency to global investors, and follow through with its intentions to improve its competitive position among the world's capital market venues.

In a February 2009 appraisal of Saudi Arabia's financial market regulatory environment, the World Bank praised the Kingdom for improvements it made to the regulatory regime of its securities market. In benchmarking CMA corporate governance regulations against those of OECD nations, the World Bank stated: “The corporate governance laws, regulations, and institutions that have been put in place generally reflect international good practice.”⁴² The institution also noted some concerns, however. In the “Principle Review of Corporate Governance” section, the World Bank stated:

In demonstrating how important good corporate governance practices are to a nation's ability to attract foreign investors, the World Bank went on to recommend further strengthening in specific areas: “Particular areas of emphasis are the disclosure of ownership information and other non-financial disclosure.”⁴⁴ The need to secure capital for industrial expansion or technological upgrades by Saudi FOBs through partnerships with foreign firms is often tempered by the reality of having to reveal more of their inner workings and the disclosure of detailed financial information. A preferred method of ensuring a foreign partner's interest in a joint venture's strategic direction and preservation of its invested capital is securing seats on the board of directors of the enterprise.

The appointment of external board directors is still uncommon among the core family operating companies of the largest and best-known Saudi FOBs. Although having foreign executives serve on the board of a Saudi FOB is still rare in the Kingdom, registered joint ventures formed between Saudi and American firms often have external board members. External board directors afford a measure of control to foreign entities doing business with Saudi entities in the Kingdom. However, as mentioned earlier under the Crowell and Moring section on corporate succession, steering decisions by diverse boards toward the foreign JV partner's interests may prove problematic when those decision concern the disposition of JV assets.

Proper due diligence on prospective Saudi partners and the fullest view of their ownership, managerial, and financial health is absolutely essential to American companies considering alliances in the Kingdom. But, it is not only Western industry partners that constitute sources of additional expansion capital and management expertise. Saudi companies are turning to other suppliers of investment capital such as investment banks and private equity to serve their plans for growth. These establishments, however, require the same level of corporate governance from target Saudi firms that would provide them reasonable assurances of returns on their investments. There are growing numbers of Saudi FOBs cognizant of the need to bolster their corporate governance bona fides.

In its November 2014 report on the potential of private equity to aid Saudi FOBs and their pursuit for expansion capital, “Saudi Arabia—A Promising Proposition for Private Equity,” Alkhabeer Capital, a leading investment and asset management firm in the Kingdom of Saudi Arabia, stated in its report:

Abdulla M. Al-Zamil, chief executive officer of Zamil Industrial Investment Company, and a member of the board of directors of Gulf International Bank, was quoted in the Saudi Gazette as recognizing the change in Saudi corporate mentality concerning corporate governance: “Conference and forum, such as this corporate governance in family business forum, is important. It is telling owners of family businesses that it is in their interest to embrace good corporate governance as the way to conduct business.”⁴⁶

As Saudi Arabia's FOBs have improved how they run their businesses, they have also grown in the diversity of those businesses. There are hundreds of large family-owned businesses in the Kingdom. There have been several attempts to rank these companies with regard to assets. As discussed, however, due to the lack of transparency, which is so culturally ingrained in the Arab business world as well as in Saudi Arabia, such rankings only afford a slightly luminescent view as to Saudi FOBs' financial stature. It is a widely observed maxim in the business world that good corporate breeding compels one to refrain from inquiring into or discussing one's net worth or company valuations…that is, of course, unless you happen to be into well-advanced deal terms. There is nowhere in the business world this is more embraced with relish than business in Saudi Arabia. So, as mentioned earlier, I did not select the following three family-owned businesses because they hover at the top of the listings of the largest family-owned businesses in the Kingdom, although all three have been found on several rankings that have been compiled.

To be sure, in today's Saudi business world, your financial strength and size still account for much when you are an owner of a large Saudi FOB and find yourself among one's peers in business or social settings. The measure of the worth of a Saudi FOB today, however, may also be measured by the social and national activities engaged in by its owners and how much they serve the national interests of the Kingdom. By any measure, the founders and following generational leaders of the Al-Jeraisy, Al-Quraishi and Al-Zamil family businesses should be viewed as high contributors in this regard.

ILLUSTRATIONS OF SAUDI FAMILY-OWNED BUSINESSES