The case for competence.

Photo by Mohamed Farag/Anadolu Agency/Getty Images

Running the Saudi Family Business

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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The family business has proved to be a remarkably durable institution. Far from being pushed aside by more modern forms such as the shareholder-owned corporation, family enterprises actually account for a bigger share of the Fortune Global 500 (19 percent) than they did a decade ago, according to McKinsey. 

There is one point at which family businesses are especially vulnerable, though -- when leadership is transferred. There’s a whole academic literature on family-business succession, the basic conclusion of which is: it’s hard. Do you go with the eldest son who has been groomed since birth to take over, or the younger daughter who’s twice as smart? What if the kids don’t get along? What if they’re not interested in business? What if they can’t control their anger around macadamia nuts?

Let us then consider the challenges of succession at one especially significant family business, the petroleum enterprise known as the House of Saud. This enterprise also happens to be a sovereign nation, and there are lots of other lenses through which one can view this week’s events in Saudi Arabia than that of family-business succession. But the reliance of the Saudi economy on one product does make it look more like a business than your average country, and it is definitely ruled by a family. A HUGE family.

The Last Kings

What happened this week is that King Abdullah, who had been king since 2005 but had been running the country since 1996 after his half-brother King Fahd was incapacitated by a stroke, died at age 90. Abdullah was succeeded by Crown Prince Salman, his 79-year-old half-brother. Yet another half-brother, the 69-year-old Muqrin, rose to the position of crown prince, having been appointed second crown prince back in March.

So far, so half-brotherly. Ever since the 1953 death of King Abdulaziz Ibn Saud, the founder of the Kingdom of Saudi Arabia, the country has been run by his sons. He had a lot of them -- 44 in total, 35 of whom were still alive when he died, according to Simon Henderson’s history, “After King Fahd: Succession in Saudi Arabia,” from which pretty much all my knowledge of Saudi succession springs. Muqrin is the youngest.

After that it is, finally, on to the next generation. The really big news on this came today, when King Salman appointed his nephew, Mohammed bin Nayef, as second crown prince. This wasn’t just a move to the next generation; it’s a move that bypassed most of the next generation. Of the 37 living grandsons of Abdulaziz, Prince Mohammed, who is 55, ranks 27th in age (according to Wikipedia, which in this case appears to be the best available source).

This seems like a pretty dramatic choice for competence -- Prince Mohammed led the successful campaign against al Qaeda forces inside the country in the 2000s, and has been Interior Minister since 2012 -- over seniority. Then again, it might also indicate a power grab by the descendants of Hassa Al Sudairi, a wife of Abdulaziz (he had 22) known for raising smart kids. King Salman is one of those kids; Prince Mohammed’s late father, Nayef, was another. But let’s focus on the competence angle, because it’s more amenable to analysis.

King Abdulaziz was ferociously competent. His family had been running parts of the Arabian peninsula on and off since the 1720s, but he grew up in exile in Kuwait after his father lost out to a rival clan. In 1902, at age 22, he led a band of 50 men that reconquered the family’s home-base of Riyadh. His father, impressed, handed his crown over to his son. Then, with a series of military victories followed by marriages to the daughters of the losers, Abdulaziz succeeded in conquering all of what is now Saudi Arabia. Having such a large family, then, was a means of acquiring power and exercising control.

When it came time to plan for succession, the king anointed his eldest living son, Saud, as crown prince. Saud was a bit unreliable, though, so Abdulaziz also decreed that the next eldest, the obviously more competent Faisal, would be Saud’s crown prince. This both inaugurated the unconventional Saudi practice of handing power from brother to brother rather than father to son and indicated that competence would be a factor in choosing the country’s rulers. In 1958, after five years of inept rule by Saud, the rest of the family demanded that most of his powers be handed over to Faisal. Several tense years followed until Saud abdicated in 1964.

In choosing his crown prince, Faisal (and his brothers; Henderson surmised that large group deliberations preceded all these decisions) skipped over the next oldest son of Abdulaziz, who was known for his hard drinking and bad temper, and appointed the one after, the even-tempered Khalid. Khalid took over when Faisal was assassinated (by a nephew) in 1975, and passed over a couple of unimpressive brothers to choose the experienced technocrat Fahd as crown prince. After some fraught family negotiations, Khalid then named the next eldest, Abdullah, as Fahd’s deputy.

Which brings us to this week. Abdullah ended up outlasting a long line of would-be successors. Salman, who became crown prince in 2012, was long seen as a promising potential ruler, but is now in ill health and possibly suffering from dementia. (Lawyers for the royal family say that any suggestion that Salman is suffering from dementia or any other mental impairment is untrue.) Last spring the Saudis skipped over several older sons of Abdulaziz to put Muqrin second in line. And now they’ve made the historic appointment of Prince Mohammed -- although of course much could happen between now and his planned succession to the throne.

These moves illustrate what seem to be three main priorities at work in the House of Saud. The first is keeping the family united and in control of the country, the second is choosing a competent ruler and the third is favoring one’s closest relations over more-distant ones. There’s always potential for conflict among these three -- managing it requires a constant balancing act. But while the Saudi system of governance can seem awfully medieval to those of us on the outside, families aren’t the worst mechanisms for managing conflict. Western observers have been predicting for decades that the next succession would be the one where Saud family unity starts to unravel. Could be. It hasn’t happened yet, though.

(Updates 11th paragraph of article published Jan. 23 to include comment from royal family.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net