Implementing corporate governance in family firms

It is important that family firms take steps towards embedding governance principles to guard against potential legal issues in the future
By Damian Crosse, Pinsent Masons’
Sat 09 Aug 2014 01:54 AM

In the Middle East, family firms generate approximately 80 percent of non-oil GDP, with their companies creating up to 70 percent of the region’s employment. A a significant number have evolved into multinational conglomerates with highly diversified business lines. As the corporate structures of these firms have developed so too has a greater impetus to protect their success.

Corporate governance is now firmly on the agenda of governments, regulators and CEOs alike. Although the focus of such legislation tends to be public companies, there is increasing adoption among private-sector organisations, particularly financial institutions to adopt best practice principles. Whilst legislation is in its infancy, it is important that family firms take steps towards embedding governance principles to guard against potential legal issues in the future. This is particularly important for those firms who may consider conducting an IPO or bond issuance in the future.

Whilst many firms are not yet at the stage of considering a listing, it is vital that both the reputation and value of the company are protected and indeed enhanced, to allow the option to do so. In order to safeguard sustainable growth and ensure that management leave a well-run, successful organisation for the next generation, family firms are actively seeking to implement sound governance.

The point about being well run is particularly important, as with a generational transition comes increased numbers of shareholders and stakeholders within the family, all with a voice, all with an opinion, but often, not all with a direct responsibility for the running of the business. Beyond the evolving challenges associated with implementing good governance that affect all businesses, family firms face a very specific challenge of balancing the interests of the family with the interests of the business.

A recent research report by the Pearl Initiative, the GCC-based, private-sector-led, not-for-profit organisation set up to foster a corporate culture of good governance in the MENA region, and by Tharawat Family Business Forum, an independent, non-profit, private sector business network for Arabian family-owned companies, is based on the findings of in-depth interviews with leaders of five of the most prominent family firms in the GCC. When examining these case studies, two things are immediately apparent; unanimous agreement about the importance of incorporating robust corporate governance structures to mitigate risk, and the business benefits associated with doing so.

Despite often being challenging, the commencement of a governance programme can be a very useful exercise in analysing the business’ key aspirations and potential barriers to success. Therefore, when advising family firms across the MENA region, it is important to bear in mind a number of key principles.

Firstly, a corporate governance policy is only as good as the firm’s commitment to its implementation, and continued application. Secondly, for it to be meaningful, the policy should be specific to the aspirations of the family. Thirdly, there must be acceptance that the policy will evolve and therefore flexibility must be built in to facilitate for future growth. The manifestation of these principles often takes the form of a Family Charter. Compiling a charter is often the first stage in implementing governance as it creates a moral obligation on the family members to adhere to its governance principles, therefore solidifying the willingness of those bound by it. This commitment is secured by clearly outlining the family’s vision for the business including growth plans and agreement of direction of the company; information sharing processes; employment considerations; share ownership; and how each family member is involved in the management of the business.

As more and more successful family firms openly demonstrate their commitment to good governance, it is likely that others will follow suit making our region’s companies more competitive in the global arena.

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