This trend contradicts the conventional wisdom that argues the private sector of the future would be controlled by incorporated joint stock firms in which ownership was separated from management. Family businesses were expected steadily to be consigned to the history books.
The entrepreneurs dominated businesses until the start of the 20th century. Management, as well as ownership, was passed down through the generations as a matter of practice. And then a revolution happened: the growing scale of modern manufacturing demanded the mobilisation of vast amounts of money. This in turn required more robust and flexible sources of finance. Joint stock corporations quoted on major stock markets started to grow faster than family businesses dependent on bank debt and private wealth. Shareholders in these giants demanded careful management of their investments and professional managers started to take over from the family proprietors of the early phases of industrialisation.
By the second half of the last century, the idea of major businesses being run by the families of their founders seemed anachronistic, even foolish. The diminishing number organised this way were viewed as legacies of a past era. Top business schools taught that professional managers trained in scientific methods were destined to take over from exceptional founders of major businesses like Henry Ford and John Pierpoint Morgan.
And so it happened. The world worshipped at the shrine of the joint stock corporation, most famously in the books and lectures of management guru Tom Peters. Family businesses seemed doomed. In the UK, one of the last great attempts to set up a business essentially run by and for a family, the Maxwell Corporation, collapsed in 1991 amid death, fraud and scandal.
But all was not well in the joint stock firm. At the end of the 1990s, the Enron scandal exposed corruption at the heart of a great public corporation, shook public confidence in the integrity of professional managers and shattered illusions that the systems put in place to regulate quoted firms were fireproof. This shock coincided with a great equity market reverse and the horrible realisation that some of the world’s greatest financial institutions had knowingly promoted defective technology businesses to their clients.
In failing so badly, joint stock companies at the start of the 21st century unwittingly highlighted the merits of businesses based on the implicit trust that lubricates healthy families. Firms controlled, owned and even run by blood relations suddenly began to look more interesting.
Curiously, the row at News Corporation about the appointment of James Murdoch as chief executive of BSkyB, the listed media firm, has demonstrated that family businesses have a future. The 30-year-old would never have been given the job if his father Rupert was not chairman of the mother company which owns more than one-third of BSkyB’s stock. And yet, it is surely telling that Murdoch senior, who is no romantic, and non-family shareholders, was prepared to give James the benefit of the doubt when every professional adviser would have argued for someone with no family connection to the business. This would not have happened even five years ago.
Companies, family-owned or not, tend to operate on a tribal basis. It is human nature. The fact that family businesses have a bond of blood and loyalty make them more robust and even more trustworthy than the conventional model.
So there is reason for the family businesses of the Middle East, particularly in the Gulf, to look to the future with growing confidence. Many Gulf families are seeking to restructure, incorporate and modernise their businesses rather than sell them off, as financiers have been urging.
This is surely a good thing. Family businesses in the region are significantly larger by comparison to the conventional sector than their counterparts elsewhere. They provide the bulk of private sector jobs, account for most of the value-added outside government and control much of the mountain of investable wealth held outside the region. Their health and stability contribute substantially to economic development. I suspect they will continue to do so for much longer than the experts so confidently predicted not so long ago.