Sheikh Saud Bin Majid’s Dilemma: A Case Study of the Al Saud Company (EN to AR)

Sheikh Sultan Sooud Al Qassemi, Managing Director of Al Saud Company

In 2016, a survey by PricewaterhouseCoopers (PwC) set out to find just how important family businesses are to the fabric of economy in the Middle East. Through it, PwC reported that family businesses contribute 60% of the GDP, and employ over 80% of the workforce in this geo-political region. The survey found that such firms would have initially grown because of the entrepreneurial prowess of a founding generation, which would have shown tremendous insight in order to successfully develop high-level political and financial relationships.

In the year of the survey, PwC also found that most family businesses were expecting to see a succession phase within the next five years, marking this period as host to one of the largest inter-generation transfers of wealth and inherited business responsibilities the modern economic world has likely ever seen.

While for some businesses this would be the first transfer of wealth and shares from the founding generation to the next, many others are looking at their third generations taking the helm of the family business. Sheikh Saud Bin Majid, grandson of the late Sheikh Saoud Bin Khalid Bin Khalid Al Qassimi, will be one of them. This article aims to look into the various influences operating around the Al Saud Company at the time of his succession, and how they contribute to his dilemma over its future.

Rise of the Al Saud Company

“Like digging small canals that flow into a larger river, my investment policy entails making small investments in a variety of firms.”

Sheikh Saoud Bin Khalid, founder of Al Saud Company.

Sheikh Saoud founded his business in the 1970s – a construction firm, building shops in developing coastal districts, renting rooms above those stores, and then evolving to building apartments for middle-income families. Given that this was also a time of rapid economic growth in the Emirate of Sharjah, Sheikh Saoud was willing to undertake opportune risks as a means to establish and consolidate a respectable name for his firm and his family in society.  

In line with PwC’s findings on the entrepreneurial prowess of founding generations, Sheikh Saoud began diversifying his firm’s interests by redirecting profits from other ventures into stock investments. Though the construction projects of the Al Saud Company were limited to the Emirate of Sharjah, he looked to the broader GCC region for smart investment opportunities.

Since this divestment of his firm’s interests was in a time without the convenient access to today’s technology, Sheikh Saoud established an investment strategy which would grant him knowledge of the most influential financiers in the region, as well as their various investment positions and inclinations. Being open to risks, he even invested in some companies for the sole purpose of accessing their financial statements and other records in order to get such information.

However, being open to risks did not mean that he was ever willing to endanger his company and legacy. He wanted the firm to one day be run by his eldest son, and the eldest son of his own son in turn. He managed the risk he undertook by diversifying it across firms, industries, and various countries within the GCC region.

This strategy worked extremely well for the Al Saud Company. Not only did it allow Sheikh Saoud to track the pulse of investment trends in the GCC and participate in them as he saw fit, it also ensured that the Al Saud Company was largely operating with businesses and individuals with established names and reputations – thus slowly minimizing the risk of his investments. 

By the early 2000s, the Al Saud Company began to drastically alter its business model. The construction sector had been growing increasingly competitive, requiring ever-larger investments of funds and specialized expertise – and this was starting to expose the firm to very high levels of risk. At this time, Sheikh Sultan – one of the Sheikh Saoud’s sons – convinced him to internationalize the firm’s investments and move their focus beyond the GCC countries, as a strategy to move away from the risks of the construction sector.

As history would show, this was the right call to make. The Al Saud Company continued to grow, elevating the prosperity of this business family far beyond the poverty experienced by the founder in his own youth. 

The Second Generation of Al Saud

In 2005, after the passing of Sheikh Saoud, the helm of the Al Saud Company was taken up by Sheikh Majid – the eldest son – and Sheikh Sultan, who’d been with Al Saud since the 1990s in order to spend time with his father while learning more about the business. Sheikh Majid – having more experience – became the chair of the firm, while Sheikh Sultan assumed the responsibilities of the managing director.

In his time before the succession, Sheikh Sultan had modernized the firm’s economic and strategic approach to their operations, and re-worked the family-business relationship by separating ownership and management structures. This helped avoid family disagreements over the running of the business from interfering in the firm’s daily activities. However, even after assuming control in 2005, the motto of both brothers steadfastly remained “do not take unnecessary risk”.

In order to solidify this motto in the company culture, the brothers established the nine commitments of the Al Saud Company:

• No New Bank Accounts
• No IPOs
• No Structured Products
• No Funds, Period
• No Leveraging
• No Private Equity
• No Lifetime Opportunities
• No Financial Forecasting
• No Currencies

The nine commitments suffered no major disagreement in the family, since they were viewed as in line with the spirit of their father’s wishes and his legacy. However, the general stance of risk-aversion itself was met with some resistance from non-executive family members who would prefer exploration of higher risk/higher reward ventures, or for the firm to move into more business fields in general.

The conservative approach of the brothers at the helm proved itself however, when the firm faced minimal troubles during the 2008 global market crises – a time when more leveraged companies in the GCC were faced with significant problems, if not the threshold of bankruptcy itself. In the 2 years following Sheikh Majid and Sheikh Sultan at the helm, the Al Saud company’s income grew by 55% and 60% respectively. Furthermore, Al Saud only reflected a roughly 15% decline in annual income in 2009, with both 2008 and 2010 enjoying positive income growth.   

During their time in charge, Sheikh Majid and Sheikh Sultan avoided investments in technology companies, believing that that particular sector’s share prices and earnings reflected a bubble of investors’ beliefs in possible yet uncertain future growth – rather than current justifiable value. They also stayed away from any construction projects which would require raising additional finances, rather than using existing capital assets, as a way to minimize the risk from remaining involved in the construction business.

As a result, during their time, the main avenues of income creation for the firm continued to see the shifting trends started under their father. By 2018, 72% of the Al Saud Company’s income was generated through stock investments, 27% from their real estate holdings and further construction projects, and 1% from earnings on cash deposits.

However, since a majority of their income was generated through stock market fluctuations, the Al Saud Company also kept a policy to distribute income from investments among its shareholders in the family only when the invested companies distributed their dividends. This ensured that the family members’ incomes weren’t artificially inflated at any point through the act of investment itself, and avoided the Al Saud from distributing money from its business coffers towards personal incomes unless an investment bore fruit – further protecting the business from risk.

The Family Behind the Al Saud Company

Many among you readers with their own family businesses must be aware – the ‘family’ portion of a ‘family business’ is no less important than the economic activities of the firm itself. As PwC noted in their survey report, only 53% of family businesses claimed that their family’s strategies and goals were aligned with their business’ goals. They even went further in the same segment to clarify that their own work with family businesses in the region would suggest that this number may be inflated, and that the real percentage alignment between family and business goals in the Middle East may be far lower.

Basically, in any family business, there is disagreement to some degree or other. A family isn’t a single organism – it’s made of a variety of people, all of whom bring their own experiences, wishes and motivations when they interact with the business, even if they treasure each other as family members. The Al Saud Company was no different in its potential vulnerabilities from the family.

Sheikh Saoud and his wife Shekha Na’ma had had seven children, four sons and three daughters – all of whom had been granted shares at birth. In keeping with Sharia law, the male members of the family held higher percentages of ownership in the firm. However, the family of the Al Saud Company defied one local norm – they left the female members with their ownership stakes rather than letting them be bought out by the males, as was custom. While gender progressive, the idea behind the Sheikh Saoud and his wife’s actions may have also been to ensure that the family stay as a cohesive unit, tied through the firm.

Upon assuming leadership in 2005, Sheikh Majid and Sheikh Sultan continued to build upon their father’s vision in this regard – with Sheikh Sultan assuming the role of the primary peacemaker between family members. A family charter was established to ensure that the family and firm would stay together, and the brothers even convinced other members of the family to restore assets of the firm which had been distributed by their father before passing away.

By this point, ownership meetings were established where the second generation’s non-executive members could gather as part of the firm, receive updates, have their voice heard in a formal business setting, as well as vote on future action. While not attempting to curb dissent, Sheikh Majid and Sheikh Sultan were able to maintain a strong voice in these meetings with the help of their mother – Sheikha Na’ma also being a significant stakeholder in the firm with more than 10% ownership.

Besides Sheikh Sultan making ample space for Sheikh Majid to focus on long-term strategic goals by ensuring that non-executive members wouldn’t allow disagreement to turn into discontent, the other all-important segment of the business-family interaction was the buy-and-sell agreement in the family charter.

As we discussed above, the Sheikh and Sheikha Na’ma’s likely vision was that the entire family remain united through the firm, and the leaders of the second generation were determined to keep this vision alive. The buy-and-sell agreement was a way to incentivize the non-executive family members to not abandon their stake in the firm if they disagreed with the executive direction. It prohibited the sale of company shares outside the family, and even discouraged sales within the family by setting the price of shares at 25% below market value.

PwC reported that 75% of family businesses in the Middle East have at least one procedure or mechanism in place to deal with familial conflict. The Al Saud company didn’t just have such mechanisms in place, but also had a system where all family members – male or female – felt involved and incentivized to speak up openly rather than try to leave the firm.  

The Third Generation’s Dilemma

“Without a change, the company risks stagnation. The prioritization of stability above all else could prevent any improvement to the way things are done… I don’t want change for the sake of change or risk for the sake of risk… Any changes would need to be introduced gradually, in a way that retains the consensus of the second generation.”

Sheikh Saud Bin Majid, member of the 3^rd generation and future leader of Al Saud Company

PwC notes that, across the world, the average family business only makes it to the third generation. The reason is almost always the same: problems within the family. Considering that the average number of stakeholders is comparatively far lower in the founding and second generation as compared to the third, the potential for dispute and disagreement rises exponentially by the time the third generation takes over a business. More stakeholders means more voices in meetings with more differing motivations and expectations from the running of the family firm.

To that end, the second generation of Al Saud Company agreed in a 2016 ownership meeting that the third-generation members that represent future stakeholders would be allowed to participate in these meetings as observers – no vote, and no voice. The purpose was probably to counter the very issue outlined above by PwC.

Allowing the future stakeholders in such discussions would hopefully imbue them with the sense of c the current eight stakeholders – ‘we may disagree, but we’re still a family, and we will stick together for the betterment of each other and this firm’. Doing so before the future stakeholders gain a voice of their own may help foster a deeper respect of the conflict-management procedures that the second generation put in place, even if it doesn’t quell dissension among non-executive family members.

Furthermore, the current seven ‘second-generation’ stakeholders may also be hoping to pass their own knowledge and individual perspectives to their respective children through this measure – before those children have to one day sit in that room and engage in decision-making, in line with Sheikh Sultan’s philosophy outlined in the first quote of this article.

Furthermore, the buy-and-sell clause within the family charter prevents the possibility of the family ever diluting its control of the Al Saud Company. And to their credit, no stakeholder within the second generation was ever so dissatisfied with Sheikh Majid and Sheikh Sultan’s management that they exercised this particular clause. 

However, while these steps by the second generation may take care of many of the problems that family businesses face as the number of stakeholders grow – one fact remains. Unless inter-generational successions are accompanied by important changes, the income needs of the new total of stakeholders are unlikely to be met to the same quality of lifestyle to which they’re accustomed. And there lies Sheikh Saud Bin Majid’s biggest dilemma.

While Sheikh Saud, the eldest son of Sheikh Majid, was given the option to refuse the third generation leadership if he chose to do so, that he was expected to take up the mantle was made clear both implicitly and explicitly. To that end, he gathered experience working in the financial field in various international and local banks as well as at a private equity firm, before working in the Al Saud Company under the tutelage of his uncle to earn his family’s confidence in his abilities.

The PwC report had identified the lack of a succession plan in place as the “most obvious failure factor” within family-owned firms. Another 46% of family businesses stated that they plan to pass on the firm to the next generations, but bring in professional managers to run them – presumably because they weren’t confident in the skills and/or experience of the chosen leaders of the next generation of their family. With the steps taken by the second generation of the Al Saud Company, most of these problems seem to have been dealt with before they would have a chance to arise.

Furthermore, Sheikh Saud Bin Majid’s experience has already guided him to the fact that the risk-averse strategies of the second generation may not be the best path forward – especially if the firm’s and the family’s incomes are to grow.

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“When my father and Uncle Sultan took over the company from my grandfather, they made a lot of changes, and it was the right thing to do. I believe the market now is different from my uncle’s period. Now it may demand calculated risk taking to succeed.”

Sheikh Saud Bin Majid

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With this, Sheikh Saud Bin Majid has already shown a clear grasp of the ‘what’ he believes to be the biggest threat to the family’s standing in his post-succession years. The second generation of his family had clear aversions to risk since they wanted to leave behind a positive legacy of growth for the firm, but that may no longer be enough.

If he follows their path, and fails to provide sufficient returns on the investments, the 25% penalty in the buy-and-sell agreement won’t be enough to stop the stakeholders from cashing out of the family business, thus endangering the unity his grandfather, father, and uncle worked hard to preserve. However, he will need to find his path and his ‘how’ while assuring the second generation that his actions won’t cause the firm’s downfall from the business end of things.

 For the moment, he still has the second generation’s ear for advice in helping him find that path to controlled risk. Only time will tell the actual steps he takes to turn those ambitions into reality.