Much of the accepted understanding of corporate governance throughout the developed world has been learnt from the experiences of multinational and national enterprises.
The changing business environment since corporate governance first became formalised in North America and Western Europe two decades ago has highlighted an increasing need for enhanced transparency within organisations. Strong corporate governance systems provide clarity to both internal and external stakeholders on the accountability of an enterprise.
For an established national or international enterprise, the implementation of robust corporate governance principles is likely to be a straightforward — if not always welcomed — process. But what about smaller, family-owned businesses that are the lifeblood of the UAE?
Given the nature of their business environment, and the unique dynamics that are found within every family, the process is can often be much more complex. Also, given the more personal nature of these smaller family-owned businesses, they are often more reluctant and less amenable to incorporating corporate governance principles than a large enterprise.
The challenge of simply surviving will always take precedence over the institution of practices that are primarily targeted at formally managed enterprises, and do not take into account how families work together. But it is also true to say that the best time to incorporate new ideas is during a period of significant change.
When perceived wisdom and long established practices are challenged, new ideas can be developed and implemented while the key players are in receptive mode.
Good practices
So is there a right time for a family business to begin to think about corporate governance? Experience shows that even micro-enterprises can benefit from complying with the spirit of good practices, even when they may only have a single owner/manager.
A small enterprise is understandably not expected to demonstrate that it has an independent board of directors, or any extensive organisational structures that encourage accountability and internal control systems. But it would be very beneficial if they were able to show that informal advice was available when necessary.
At this stage of a family business it is most useful to focus on growing the enterprise rather than to be distracted by issues that may never happen.
But if a family business grows to the extent that outside investment is considered, or the size of the enterprise becomes unmanageable or overcomplicated, then this is an ideal time to combine business practice with corporate governance principles. By this time it is likely that the founders are considering the role of the next generations, and the transition from a smaller to a larger enterprise.
It is during this stage that founders can implement changes to management structures so that their knowledge and understanding of their business is used at board level, passing responsibility for day-to-day issues to others. However, without the necessary structure in place, and as is unfortunately often the case, the founder maintains sole control and misses a unique opportunity to pass on knowledge which will ensure the future of their enterprise as new generations take over.
Informally managed
Recent research grounded in the practical work of the Cass Executive MBA in Dubai has highlighted the importance of the role of corporate governance in the transition of family businesses from an informally managed, unstructured, and directly controlled model to a delegated, structured, formally managed larger enterprise. Prior transitions of this kind have not always been successful either for founders who are reluctant to loosen direct control, for other family members who wish to enhance their roles, or for the newly appointed managers who are negatively impacted by the preceding issues.
If on the other hand the transition is managed with strong corporate governance structures in place, the potential for success is greatly enhanced. Implementing a new management structure with additional checks and balances is much more likely to be accepted.
It is also important to make it clear that these structures are there to protect the integrity of a growing business, and not simply as an extension of the founder’s influence.
Creating divisions and sub-companies that report to a single board of directors sends a similar message, and has the added advantage that released from day-to-day operational responsibilities the senior family members can focus on the overall strategy of their enterprise.
Finally, the creation of even a small advisory body ensures that potential external partners and investors can be assured of the commitment of the enterprise to integrity and responsible management. Linking corporate governance principles to transition is likely to ensure that smaller businesses can aspire to growth and their long term future with increased confidence.
The writer is a professor at Cass Business School — Dubai Centre’s Corporate Governance expert.
