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Traditionally, family businesses have been reluctant or resistant to introducing corporate governance structures, perhaps viewing them as unnecessary or disruptive to their business model. A common misconception held by such businesses about corporate governance is that it removes or reduces the family’s control over their affairs. In fact, implementing an effective governance framework can often strengthen the business by embedding family values into the DNA of the business, while protecting against disruption and inter-family disputes and grievances. The potential benefits are significant both in terms of current performance and future growth and stability, protecting the value and unity of the family business for subsequent generations.
Protecting the family
The nature of most family-owned businesses means that executive and decision-making power is initially concentrated in the hands of a few individuals, but as the number of family members involved in the organization increases with each succeeding generation the business can become disorganized and disputes can arise. An effective governance framework makes clear the line between business and family matters, helps ensure each stakeholder has clear expectations about their roles and responsibilities, and provides a level playing field in terms of accountability, with no distinction between family and non-family members.
Long-term planning is especially important for the majority of family-owned businesses in the Middle East which are currently transitioning to the third generation. In our experience, this transition is a period of particular fragility, with under a third of family businesses surviving this stage intact. Succession planning is an essential tool for any organization, but in the case of family businesses, it is particularly relevant, as there may be a disconnect between the traditional model of inheriting ownership control versus a merit-based model which considers the best strategy for the health of the business.
When a family business is seeking outside investment, transparency is vital in proving to potential shareholders or lenders that their interests will be recognized and addressed on equal terms with those of the controlling family. This perceived extra risk can substantially increase the cost of borrowing, or limit the pool of investors available to provide capital. We find that family businesses that demonstrate effective governance are better placed to attract outside investment, whether from shareholders or financial institutions.
Corporate governance strengthens, rather than weakens, family businesses.
If properly managed, transitioning from the informal structures which many family businesses in the Middle East are built on to a model which incorporates best practice in corporate governance will complement rather than detract from the unique advantages and strengths of a company. In our experience, family-owned businesses that adopt a solid governance framework find themselves in a best-of-both-worlds scenario. They are able to maintain the drive, passion, and trust that comes with family control while building the transparency and accountability needed to manage internal disputes, disagreements, and changes in leadership with the minimum amount of friction, and successfully attract investment or access external capital. Ultimately, corporate governance is a key element of good stewardship, strengthening the foundations of family businesses, and ensuring they continue to thrive.