In a recent commentary on governance in family firms, a leading executive search consultancy argued, ‘Corporate governance is a critical enabling factor
for the development of family-owned businesses.’
In your opinion, does that comment accurately reflect the significance of corporate governance to large family firms anxious to develop internationally or does the comment exaggerate the significance of corporate governance?
As in a recent commentary on governance within family-owned businesses, a leading consultancy that searches for executive had argued that corporate governance is a critical enabling factor for the development of family-owned businesses. This report provides a deep insight into the given statement and whether the comment reflects accurately upon the significance of corporate governance to large family-based firms eager to develop internationally or it exaggerates the significance of corporate governance.
The concept of corporate governance is at times misinterpreted as the key domain of big organizations with increased shares traded as per the global stock exchange. The need for effective corporate governance is quite more significant for small family-based businesses. One of the key strategic benefits of a family business is that of its bloodline. Family businesses, when run by few family members who are knit together firmly, can actually progress faster than any other bureaucracies can. These are the backbone of several economies across the globe, and their sustainability is crucial for the increased economic growth. Most of the biggest corporations around the world had begun and run by family dynasties. In fact some of the largest public-listed firms are family-owned. As per the statistics, around 70% of businesses within GCC are family-owned or even controlled. Hence, they play key roles in the economic development apart from own business contributions to create an environment of investment that is safe, open, transparent, and safe.
Effective governance refers to the concept of generating a sense of direction, values of working of living, and well structured policies that direct organizational members the right behavior and attitude to be executed at situations or certain circumstances. Some of the policies that form part of corporate governance are recruitment policies, promotion policies, emergency policies, and debt policies. The principles of corporate governance bring together the right individuation at right time to discuss the right things. The world of family business gives a joint mixture of business, ownership and family concerns which charge up the entire system of environments emotionally to plan as well as sole organizational issues. In such systems, one must manage problems in and across three groups that overlap: the business, the family, and the ownership group. Such overlap often causes difference in perspectives amidst individuals based on their location in all three circles. Perspectives may vary among those family shareholders who are not employed within the business and that of those relative owners working within the business. for effective management of the business, ownership as well as family concerns need effective communication as well as decision-making in and across the family, the ownership, and the business groups.
Ever-increasing goals as well as globalization have developed more challenges for businesses that are family-oriented. As per researches it has been identified that corporate governance acts as an enabling factor towards the development of family-businesses. Thorough practice of effective governance allows these businesses to develop robust business processes as well as prepare themselves for the future expansion. The concept of corporate governance creates the basic foundation for businesses that are family-based to act more accountably and be more transparent to their operations. This would lead to good opportunities for sustainable growth, enhanced performance and profitability. All GCC family firms are increasingly becoming aware of the rising significance of corporate governance; however for still some business firms, the concern is not yet the priority. As business ownership shifts from one generation to another, the potential drivers for improving governance as well as transparency are related to the objective to develop as well as pass on a healthy as well as efficient business firm to the successive generation.
As stated in the statement, research evidences exist is favor of the given statement that corporate governance acts as a crucial enabling factor for development of family-businesses. The statement can be greatly complied with as with the increase in growth as well as globalization, several challenges have been imposed for family-oriented businesses and most of these challenges can be managed with adoption of sound as well as effective structures of corporate governance. With the expansion of family-business, the relationship amidst the business owners, managers, and employees gets more complex. For managing all the concerning issues, an effective corporate governance system must be in place with right policies for managing all complexities. Corporate governance develops a potential organizational structure which clarifies objectives, report lines, and also delegate responsibilities. It even draws a line midst the ownership and that of the management and separate direction of policies from regular operations of the firm. Successful business firms are the outcome of the hard work as well as dedication for years. Also there is a need to ensure that leadership transition may not disrupt the growth of the firm. For passing the success to the next generation, concept of corporate governance must be made an integral part of the culture of the family business so as to ensure distinct policies to select the right member from the family to take over. The corporate governance would provide distinct guidelines to employ family or non-family members along with promotion of employees based on performance that is vital to incorporate business sustainability.
An effective governance system enables resolution of conflicts in the family set up, thus enabling the family members to emphasis upon important business issues. This often leads to an open process of decision-making which ensures impartiality. The tool of corporate governance prevents tension and also raises the firm business reputation. The following corporate governance principles are to be followed within the family-business:
Hence, corporate governance strengthens as well as clarifies the functionalities of family members while enhancing the overall competitiveness. Transparency of responsibilities as well as proper functioning of all corporate organs is in the interest of owners, stakeholders, and the whole business firm. It is quite important that within family business, the roles as well as responsibilities of the owners, executives are distinct and approved. Family-based businesses use the tool of corporate governance in a particular manner. Here, mutually-agreed practices of corporate governance as an effective tool to develop as well as control business activities. The owners are usually aware of their roles and impacts. Corporate governance of family businesses that is defined clearly creates additional value to operations of external stakeholders like that of financial or investment processes.
The importance of corporate governance within the family businesses can be supported further with some highlights upon the significance of the concept in such business undertakings. The structures as well as institutions of all family governance need some level of formalization so as to function effectively. When family adopt policies upon the approach of the family towards business as well as to govern the business, the members would formalize all efforts with documents which will differ based upon ownership business stage. It has been identified from research that family businesses recognize the lack of governance structure of a family which may be one of the greatest causes of conflict, specifically in terms of succession. Successful businesses are the outcome of years of hard work as well as dedication. Corporate governance must be a part of the culture of the family business so that successful businesses are passed on from one generation to another. This is specifically significant in case of owner-managed firms whereby owner-manager must define his future engagement into the daily operations of the business, whether to pass on the business to family member or a partner, or even exit through public listing. The concept of family ownership is often regarded as an opportunity or even a threat, based upon various factors. The ownership of the family member as well as commitment towards business can be referred to as adding of value, only if the firm along with the controlling members can respond to the various concerns of the community of investors. Shareholders as well as creditors often may intervene with distrust upon the family-managed firms, due to the risk which such family may abuse the rights of other shareholders. It is a common idea that investors would scrutinize those firms with care prior to investing into it. From the perspective of an investor, the key issue is to develop the perfect corporate governance factors and conditions so as to couple the positive aspects of family ownership along with assurances about the fact that the investments of the investors would be suitably and favorably recognized as well as addressed.
In case of family businesses, the governance is often a complicated aspect than that of non-family businesses due to the central role of the family which owns as well as typically heads the business. Therefore, governance is the most important requisite in case of family businesses. In such businesses or other forms of enterprises involving family investment funds or foundations, the key issue is the lack of effective governance. It has been identified through researches that all those businesses that successfully improved governance reaped lasting benefits.
With respect to the corporate governance in business firms, an aspect that is to be highlighted here is that the absence of proper sound governance is not confined to small firms only. Even in case of large firms, the family business may lead to painful turmoil while dismissing the family chairman. Such dismissal may seem abrupt to him and family allies. Effective governance in family businesses adds basic ingredients for such businesses to operate in the following manner:
It may be intensely argued upon that application of effective governance principles would reduce the issues related to information asymmetry, and render less risk to towards investment into the business as corporate governance has been a global acceptance and considered a legal system as well as sound approaches based on which organizations are directed as well as controlled, thereby emphasizing upon the internal as well as external structures with the intention to monitor the actions of management for mitigating the risks imposed by the misdeeds of corporate superiors. The measures of corporate governance which family businesses may adopt will vary, based upon the stage to control the ownership of the family. This may often highlight the demerits of corporate governance. For large family firms that aim at expanding internationally, the corporate governance would act as an effective mechanism to deal with numerous problems nationally and internationally. From the above study, it is clear that corporate governance is an important aspect for any business firm, be in family businesses or non-family businesses.
The comment which has been made that corporate governance is a critical enabling factor for the development of family-owned businesses thus accurately reflect the significance of corporate governance to large business firm that aim at developing internationally. When a business firm conducts all its operations and deliverances in a controlled manner with the advent of corporate governance, the extent of the success of the firm becomes higher. Thorough practice of effective governance allows these businesses to develop robust business processes as well as prepare themselves for the future expansion. The concept of corporate governance creates the basic foundation for businesses that are family-based to act more accountably and be more transparent to their operations. This would lead to good opportunities for sustainable growth, enhanced performance and profitability. With the entering of the Middle East into a new growth phase as well as integration in a close manner with the world economy, firms that are family-oriented and have been ignoring corporate governance are likely to lose competitive advantage in the near future. Family-based firms are some of the most successful firms across the globe; however these must incorporate corporate governance at a high standard, and best practices of international level should be applied to domestic as well as regional firms for competing with several multinationals that enter the market. Some of the key benefits include improved access to opportunities and also attracting foreign investment as well as potential talent.
References
Arcot, Sridhar and Valentina Giulia Bruno, ‘Do Standard Corporate Governance Practices Matter In Family Firms?’ SSRN Journal
Aguilera, Ruth V. and Rafel Crespi-Cladera, ‘Firm Family Firms: Current Debates Of Corporate Governance In Family Firms’ (2012) 3 Journal of Family Business Strategy
Arora, Nikhil and Jyoti P. Gupta, ‘Do Family-Held Firms Have Weak Corporate Governance?’SSRN Journal
Carney, Michael, ‘Corporate Governance And Competitive Advantage In Family-Controlled Firms’ (2005) 29 Entrepreneurship Theory and Practice
Chen, En-Te, Stephen Gray and John Nowland, ‘Family Representatives In Family Firms’ (2012) 21 Corporate Governance: An International Review
Chen, Yugang, Wenjing Li and Karen Jingrong Lin, ‘Cumulative Voting: Investor Protection Or Antitakeover? Evidence From Family Firms In China’ [2014] Corporate Governance: An International Review
Cucculelli, Marco and Francesco Marchionne, ‘Market Opportunities And Owner Identity: Are Family Firms Different?’ (2012) 18 Journal of Corporate Finance
Fu, Liang, Ran Lu-Andrews and Yin Yu, ‘Liquidity And Corporate Governance: Evidence From Family Firms’ SSRN Journal
Gonzalez, Maximiliano et al, ‘Corporate Governance Mechanisms In Family Firms: Evidence From CEO Turnovers’ SSRN Journal
Isakov, Dušan and Jean-Philippe Weisskopf, ‘Pay-Out Policies In Founding Family Firms’ [2015]Journal of Corporate Finance
Latrous, Imen and Samir Trabelsi, ‘Do Family Firms Use More Or Less Debt?’ (2012) 3 IJCG
Matias Gama, Ana Paula and Jorge Manuel Mendes Galvão, ‘Performance, Valuation And Capital Structure: Survey Of Family Firms’ (2012) 12 Corporate Governance: The international journal of business in society
Matias Gama, Ana Paula and Cecília Rodrigues, ‘The Governanceâ€ÂPerformance Relations In Publicly Listed Family Controlled Firms: An Empirical Analysis’ (2013) 13 Corporate Governance: The international journal of business in society
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Spanos, Loukas J., ‘Corporate Governance Rating Of Family Firms At The Athens Exchange Market’ (2008) 34 Managerial Finance
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Tsatsoulis, Ektor, ‘Corporate Governance And Corporate Social Responsibility In Family Owned Firms: A Case Study Of A Greek Shipping Company’ SSRN Journal.
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