Together, family businesses and small and medium sized enterprises (SMEs) constitute more than 85 per cent of non-listed companies in the Gulf. Because many of these organisations are reluctant to change their traditional ways of doing business, family businesses across all types of industries are often perceived weak in their corporate governance practices, hampering their own growth. Introducing corporate governance structures could help this process by setting up appropriate governing bodies, such as a family assembly to deal with family issues. The Family Assembly structure should include all family members with the Assembly meeting conforming to the principles of equity, transparency and accountability.
Looking closer at the different types of businesses in the region, there is a crucial difference in the way family businesses are governed when compared to publicly listed companies. For example, family conflicts may be brought to the family business whereas this is rarely the case with listed companies.
Although family participation can strengthen the business because family members are very loyal and dedicated, these realities sometimes make ownership of a family business complex, interdependent and intricate. Dealing with family relationships can become particularly difficult when having to minimise or avoid conflicts and tensions. Transferring business responsibilities to the family’s next generation, appointing, promoting or dismissing a family member who is less competent than a non-family member, can also present some unique problems.
Checks and balances
Consequently, family businesses frequently require corporate governance reform that involves: prudent corporate governance structures, rules, procedures being put in place as well as checks and balances being introduced to define how the company should be governed. These measures can significantly reduce the likelihood of conflicts, abuses and internal clashes within the family and can have a positive impact upon the company’s growth and profit-making abilities.
Essentially, the role of the board in the family business is to ensure the success and prosperity of the company. For this, the board must take into account the interests of the family. One of the most popular ways of doing this is through family directors and regular reporting from the Family Council. The formation of a Family Council composed of a small group of family representatives that manages the continuity of family values, family identity, family education and family socialisation can provide guidance to the family directors about the family’s interest.
Shareholders
In addition, the board’s composition should be widely representative of the shareholders’ base and minority shareholder rights may need to be protected. Many corporate governance experts, in fact, suggest that the board should have a significant number of independent directors to ensure professionalism at board meetings.
In the end, well-governed companies are best positioned in today’s global marketplace to attract investors and are more agile and flexible in their responses to the ever changing business and political environments.
Dr Chris Pierce, Chief Executive Officer of Global Governance Services Ltd and expert collaborator to the GCC Board Directors Institute (BDI).
