Succession lessons

Thursday, 01 May 2014
As a growing number of Middle Eastern family businesses seek advice on succession planning, James Howe offers some tips for practitioners.

Succession planning in the Middle East is a live issue. Families are becoming more aware of the challenges associated with the preservation of their wealth and are spending a great amount of time, money and effort to find and implement appropriate solutions. Addressing the problems associated with succession planning is complicated, due to issues of culture, family history, hierarchical structures and the importance of Shariah principles.

With approximately 90 per cent of business activities in Gulf Coast countries controlled by family businesses, it is no surprise that surveys show families are worried about CEO and shareholder succession planning.

When the head of a family takes a step back from their day-to-day business to think about the family wealth, they consider three things: the individual, the family and the community. The three objectives any family head wants to achieve can be summarised in the acronym ‘PET’: protect wealth; enhance and grow assets; and transfer wealth to family and community. These can be achieved by implementing the following three steps.

Step one: consolidated reporting

Work out what assets the family head owns now. This requires some homework and planning, as it is an audit of current wealth. Look at all of the asset classes, such as cash, bonds, stocks, options, real estate, investments, and insurance and pension policies. Keep it simple, and write down the various asset classes, institutions and countries involved. You might want to segment the family’s liquid and investment assets in one document, with real estate, chattels and fixed assets in another. Great care is needed when looking at the family business, as it may have been handed down over generations, with built-in assumptions and expectations. 

Also think about the currency and geopolitical asset split. US bonds and property in New York will be treated differently to domestic cash and investments in Saudi Arabia. In other words, think about onshore assets in one basket and offshore assets in another.

Finally, think about what assets you expect the family head to receive during the rest of their life in terms of income, gains, inheritance and commercial profits. This may take a few months. Step one ends when you can produce a consolidated reporting statement. Most importantly, you must keep this up to date. Look to achieve, at the very least, a quarterly report.

Step two: personal assets

Think about the family head and their partner. List those assets that are personal and will be at the family head’s disposal for the rest of their life. Such assets may or may not fall into the family structure. These assets are under the family head’s control and will be covered by a will or pass under Shariah principles. The family head may have a view as to a woman’s rights to property: a daughter’s inheritance is usually half that of her brothers. 

Step three: family protocol

An audit of both onshore and offshore assets should be carried out for those assets that are seen as part of the family assets. These may be in different jurisdictions, but the family will be guided by the principles to be written down in a family protocol document. This will usually be done with help from the family’s lawyer.

The family protocol document sets down the philosophy of the family and its values and rules in making decisions. It may have a committee for investments and one for executive decision-making. When a family protocol is accepted by a family, it tends to be strictly applied and, in most cases, helps to ease tensions that may arise between family members. An investment committee will look at assets in terms of growth and income, and risk versus return. The executive decision-making committee will review the control mechanisms, spending and saving, and the transfer of assets between family members.

The family head will need to look at family members’ education in terms of the family protocol and develop a mechanism for power-sharing across generations.

Usually, there will be a strong desire to ensure that all zakat (charitable contribution) obligations continue to be met, and, typically, very wealthy families will be involved in other charitable and philanthropic activities.

The family can use a fiduciary structure for the offshore assets, such as a foundation or trust, and can create a private trust company to control the assets in line with the family protocol, using a wealth partner to administer the structure in a disciplined manner.

By following these three steps and establishing an effective, well-managed structure, you can not only enhance wealth during the family head’s lifetime, but protect it for future generations. 

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James Howe

James Howe TEP is Director of Fiduciary Services at Hawksford.

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