Middle Eastern family businesses are usually poor innovators, and the built-in nepotism in upper management is partially to blame. The only solution is to separate ownership from control: family members get board seats and oversee executives, but executives are appointed on merit to ensure that innovation proceeds smoothly.
Family companies have for decades constituted the backbone of the Middle East private sector, especially the Gulf countries, due to the importance of tribalism. The result is structural nepotism, as owners appoint their brothers, offspring, and cousins to key positions.
When people complain about the ill effects of nepotism, they usually emphasize hiring an incompetent individual who unwittingly makes bad decisions, resulting in low innovation. While this effect is undoubtedly important, incompetent managers also consciously and willingly undermine critical elements of the process of innovating, because they perceive them to be a threat to their privileges.
To see why note that innovation is the development of new solutions to existing problems. For example, electricity is a solution to the problem of providing power to factories far away from a river, and telephones are a solution to the problem of letting people who are physically far from one another talk.
Accordingly, the first step to building an innovative organization is being able to systematically identify problems that require attention. Moreover, developing solutions to problems within the organization usually requires the collaboration of many employees, cutting across organizational units.
To create a successful new product, the development team must work with both the customer service and sales teams to gain a good understanding of the clients’ needs; with the logistics, unit to ensure that the product can be delivered at a competitive cost; with the marketing team to ensure effective advertisements, and so on. Similarly, if management is developing a new cost-saving workflow, then brainstorming with the entire organization will greatly improve the quality of the final workflow.
Appointing the executive team on merit motivates everyone in the organization to identify problems and develop solutions, resulting in innovation. This is why “innovation audits”, which are questionnaires that executives complete to identify their organization’s strengths and weaknesses in managing innovation, have a section that focuses on learning. Scoring highly requires demonstrating the presence of processes for evaluating performance in previous projects so that lessons can be learned, as these lessons are the launchpad for innovation.
For example, while the Galaxy Fold smartphone was a good product, it had many flaws, and a detailed and collaborative analysis of those flaws enabled Samsung to produce a far superior successor, the Galaxy Z Fold 2.
In contrast, nepotism in the executive team severely corrupts the innovation incentive structure. In particular, managers who lack the skills and qualifications to perform well will actively disrupt the process of identifying problems in the workplace because they correctly perceive the emergence and circulation of such information as threatening.
After all, upon completing a project, a thorough review of what the organization did poorly is likely to yield information that confirms the nepotistic manager’s incompetence. In the short-term, this undermines the manager’s legitimacy in their colleagues’ eyes, breeding tacit insubordination. In the long-term, if enough evidence of incompetence emerges, the board may dismiss the manager hired through nepotism.
Anticipating this, managers hired through simple favoritism torpedo the organization’s efforts at diagnosing its flaws, especially the forensic audits that form the basis of process and product innovation. Instead, they build a culture of “everything is fine” and “don’t rock the boat,” dooming the organization to perpetual stagnation.
Eager employees proposing ideas for improvement are rebuffed by a manager who maintains an illusion of utopia, resulting in a disenchanted workforce bereft of initiative. This link between nepotism and low innovation partially accounts for the chronically low levels of technological advancement in the Middle East, especially in the private sectors.
The only solution is purging the organization of nepotism, which means restricting family members to board seats and oversight positions or let them work their way up from the bottom. Top management posts should be reserved for experienced and able professionals for whom innovation represents an opportunity, not a threat, as there is no greater impediment to innovation than an incompetent manager who fears that innovation will expose their ineptitude.