How do you establish corporate governance in a family owned business?

As the expression states, we have to deal with a corporation which means that the private wealth has to be separated from the company’s assets. In most countries, it is more or less automatic because the tax burden is different between individual owners and corporations. In the GCC, this exercise needs to be thought through, particularly in relation to real estate which typically is an important part of the wealth. The creation of one or several holding companies rationalizes the ownership. The funding of the company’s activities and the family cash flow requirements have to be looked at before deciding on a legal structure.

Before a Board is actually created, the Company needs to have certain management tools in place, such as budget, quality reporting, strong processes for key areas, and a delegation of authority framework.

What do you mean by delegation of authority?

Typically the owner of a company or a group of companies controls by himself, all expenses and investment decisions. The creation of a Board will require that those decisions on expenses and investments will be shared between Shareholders, the Board and the Management. With delegation, higher controls are necessary.

What about the Board?

A Board without proper legal organization and management tools cannot function. The role of the Board is to provide entrepreneurial leadership with appropriate controls. Each word is important. Entrepreneurial because the decision making has to be in sync with the business opportunities to identify and implement a growth strategy; a company that does not aim to grow is dying, in particular in countries open to market forces, like the UAE for example. Leadership, because the Board is not actually implementing the strategy; it is guiding the Management. Controls, because the various stakeholders need to be protected.

The Board does not only represent the family shareholders?

The Shareholders are providing the capital and the vision and without those, the company would not exist. However a number of other stakeholders are important to the success of the business such as employees, suppliers, creditors, regulators and etc. The controls in place will protect the wealth of the shareholders and secure the other stakeholders.

Who should be on the Board of a family owned business?

You can see from the previous answers to your questions that having automatically all members of the family on the Board is not the best solution. To become a Board member, you need first to qualify. It is not about passing an exam - It is about making sure that a potential Board member understands the dynamics of the business, the risks and rewards associated with it, and the separation of duties between the Shareholders, the Board and the Management.

How to decide who should be on the Board?

The Board members are chosen by the Shareholders. Depending on the number of members of the Family, not everyone can be on the Board; the Family needs to choose the most qualified to sit on the Board and to organize various channels of communication with non-Board members of the Family, through a Family council for example. In addition, the Board members should not have a conflict of interest which could create a bias in their decision making.

What is a conflict of interest in a family group?

It is not unusual that some family members have their own businesses which could compete with the Family group or, to the contrary, which rely on the Family business for their survival and reputation. You have some Family members that are employed by the Group and therefore are receiving a remuneration while others do not. All these situations have to be identified clearly to avoid conflicts.

Do you think that independent Board members are necessary?

An independent Board member would be someone who has no material business relationship with the group, who is not a significant shareholder and, who has no family ties with the shareholders. The main role of an independent Board member is to bring additional business knowledge and judgment to the Board. They could be very valuable because within a Family you may not have all the skills available for the proper leadership of a sometimes complex organization. Their experience, wisdom, previous dealings are additional assets for the Group. However it is difficult for many Families to accept to open the books to a non-Family member! Indeed, it is often difficult for Family members themselves to have clear view of the books.

What is your recommendation?

Corporate governance is a journey and there is no need, unless forced by events, to rush into “best practices”. You have to start and gradually make the governance work. It could imply that the Family starts with an advisory board before it evolves into a full board, it could be that the Board opens up progressively to non-Family members. Each Family has its own history and DNA, corporate governance can be adjusted accordingly as long as the basic principles of transparency, fairness between the shareholders, and accountability are respected. The best one to start the process is the Founder of the Family group because all options are open. When the second generation becomes involved, the options are restricted by the decisions taken by the Founder and by the number of siblings. In any case, someone has to drive the process diligently; otherwise the problems will come, as it happens in every family around the world, and everyone will be in crisis mode!