Family businesses constitute a key business demographic in the Middle East. The challenges faced by family businesses have increased significantly due to a number of factors: increased competition, a global economy that is going through turmoil, reduced or more expensive credit facilities, the call for greater transparency and, in some countries, greater regulation. While family businesses may not be able to affect factors that are, in most part, beyond their control, such businesses could improve their chances of weathering the storm by improving corporate governance.
What is Corporate Governance?
Corporate governance, in general terms, refers to structures, policies, plans and regulations that dictate how the management of an entity will function. The various tools used in order to ensure that an entity is effectively managed should, ideally, also make the board of directors of the entity accountable in a meaningful manner to its shareholders. The objectives of having a corporate governance structure are simple: increase management accountability, increased transparency, increased disclosure - which will (or should) ultimately lead to greater investor and lender confidence, increased access to external capital and expertise, and increased performance which should result in more robust companies.
Why is corporate governance important from a family business perspective?
Family businesses tend to be run by a single person or group of persons. The family concerned can appoint managers from within the family or can appoint external managers, and can unilaterally discharge such managers when and if it suits them. This means that the family, as sole or controlling shareholder, can also ultimately control management and essentially run the business. This merger of ownership and management often does not bode well for those holding a minority interest in the family business or help in attracting and retaining the best external managers. In order to manage growth, preserve family harmony, emphasise fairness, ensure that the family business is passed on to the next generation and for all the reasons highlighted above, corporate governance is critical to all family businesses.
One size fits all?
No two family businesses are the same and, therefore, the corporate governance structure that is required for a family business will be unique to that business and will work only for that family. For example, a first-generation family business may only need a small, informal advisory board rather than a board of directors while a third-generation family may need a supervisory board representing each constituency within the family and a working committee to decide on policy. It is important that the structure that is implemented is monitored to ensure that any changes that may be required over time are adopted in a timely manner.
Getting started...
As a first step, a family business should be carrying out a
"health check" on itself, i.e. an exercise of analyzing
the processes, systems, policies and regulations that it has in
place, to gain an understanding of the corporate governance model,
if any, with which it is aligned. This process has to be carried
out in an honest fashion; for example, if the founder of the
business has appointed managers but the control of the business is
retained by the founder and the managers have no say in
decision-making, then this should be acknowledged.
Family businesses should also consult the Corporate Governance
Code for small and medium enterprises that has been issued by the
Mohammed Bin Rashid Establishment for SME Development and produced
by Hawkamah. The Code is available
here.
Once the health check has been completed, it is essential to understand whether the family business has, formally or informally, adopted means of achieving the objectives of a corporate governance structure (accountability, disclosure, transparency) to exist and function effectively. If not, then third party advisors should be retained to review the position and provide recommendations in accordance with prevailing best practices.
As advisors, law firms design corporate structures that are bespoke to the circumstances of each client. We do not believe that offering an "off the shelf" solution would be appropriate or helpful and, in proposing solutions, we would take into account all the issues that are unique to the relevant family. Having worked closely with a number of families in the region, we understand the complexity involved in structuring family businesses and appreciate that special arrangements need to be made across the Middle East region.
Every successful business will have governance processes and procedures in place (without such procedures always being called as such); such processes and procedures can always be improved and while we should never simply adopt a model without customising it, there are lessons to be learnt from outside the family and the business, lessons which will hopefully improve the efficiency and profitability of the business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.