For the new generation, and business generation.
Family businesses, traditionally have been built on a strong foundation of trust, traditions, relationship dynamics and overall expectations within the community. However, there is an accelerated level of change that we observe within these factors with a generational transition. This makes it critical for businesses to establish and manage a framework that manages the rules of engagement for sustainable growth.
One of the things I have observed as a trusted advisor in the market is that, for the business strategies and the family’s expectations to be achieved over the long term, it is vital to establish a robust governance framework as is the case for any enterprise. While the governance framework should essentially protect the business and the normal and predictable challenges that family involvement brings; it should also provide clarity and direction on formalizing ownership structures, authority and processes, succession plans, and even external influence on the business via executive hires and independent boards.
I personally believe that, the benefits that a strong governance framework brings to the future of an organization, far outweighs the challenges of developing and managing it. I have worked extensively with the future generations within family businesses who are keen on taking on the reins of their family businesses, whereby I have noticed the significant difference in the expectations, vision and strategies, making it almost mission critical for the business to establish their governance structures.
Governance at its most basic is about awareness, education and set of pre-established rules about how things will be managed, implemented and monitored. We believe that this should be a core part of the business strategy, and should be applied consistently across the business and be made applicable to all the stakeholders of the enterprise, right from the directors to shareholders, managers and employees.
In the case of family businesses, organizations should typically consider two sets of separate but clearly interlinked rules, where we reflect on how the family will:
1. Behave and relate to the business, i.e. a Family Constitution
2. Behave and relate in the business – the Corporate Governance Framework which typically covers the Articles of Association, Board and Board Committee Charters and an effective Authority Matrix.
In my experience, I have come across a lot of family business owners who believe that their organization is built on a level of trust and informality by the founding member(s), and feel that they do not require a formal structure of governance like normal enterprises. However, if the business needs to grow, and employ more people, including other family members, they will need to consider a level of structure to help the business ‘scale up’, and also deal with internal family dynamics effectively.
Governance structures can help ensure there are clear rules around the different ways family can participate and be recognized as members of the family and the business.
To be completely transparent, while governance structures minimize the potential for disputes between owners, they cannot guarantee a conflict-free environment. So, it makes it more important for the governance framework to pre-determine and include structured mechanisms for voicing grievance and more importantly resolving them without the need to drag the family members and their reputation through lengthy legal battles in the future of the business.
I believe that, an effective base governance plan should at least cover four categories – management, income, control and equity – with each family considering the significant breakdown and structures that focus on each of these areas.
Family governance is a real area of concern with the new generation of leaders transitioning into their roles. In the latest GCC Family Business survey conducted, almost 20% of the respondents said that they were either ‘not confident’ or ‘concerned’ with their businesses’ prospects over the next 12 months. With over a fifth of respondents stating that they will be transferring ownership of the business in the next 12 months, it is essential that good governance and effective succession plans are developed and implemented. By having confidence in how the business will be managed in the future, the current leadership can focus on creating a sustainable business with a long-term outlook.
The importance of governance is further reinforced by the recent issuance of the new Corporate Governance guidelines by the Ministry of Industry, Commerce and Tourism (MOICT) which encourages all shareholding companies (non CBB licensees), including family businesses to apply the guidelines to the extent possible. The new guidelines operates on the comply or explain principle.
I am fortunate to be one of the few individuals working with a professional service firm celebrating its 50th year in the market, and lucky to have quite a few clients who were originally small family businesses, who have grown with our firm to become key market players in the Kingdom. In a region where the business market is dominated by Family Businesses, it is great to witness that strong business and family governance has been a critical success factor to some of these major family businesses.
© 2020 KPMG Fakhro, a Bahrain partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss entity. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.