The Impact of Family Governance on Family Business Succession in Saudi Arabia - Essay Example

The Impact of Family Governance on Family Business Succession in Saudi Arabia The Impact of Family Governance on Family Business Succession in Saudi Arabia Approximately over 85% of the Saudi Arabian businesses are either family controlled or family owned. Family businesses serve as the backbone of the Saudi’s economy, contributing to about 27% of the Kingdom’s GDP. Such family businesses hold a firm and strong foundation for the economy and continue to play significant roles in the Kingdom’s development. Particularly, this is essential since family businesses within the Kingdom are the central conglomerates involved within the diversified economic sectors, which aid in the generation of fundamental employment opportunities.iBoth economic and social impacts of family businesses are positive and diverse since lots of these businesses have multiple locations or multi-business activities including manufacturing, automotive, retail, construction, as well as real estate investments.ii A number of these families conduct or perform synergistic operations, which enable them to actively involve or participate in development projects, thereby shaping the entire Arabian region into a booming business hub. Saudi Arabia has a flourishing economy that has managed to survive the worldwide financial crises, and it continues to thrive under the support by healthy government expenditures on mega projects including infrastructural developments, education and health, as well as science and technology.iii This concludes to an optimistic perception that in the next few decades, Saudi’s economy will be on a growth path and rather stable through the power of family-controlled businesses and/or corporations.iv Family businesses collaborate across multiple professional lines of services that combine their global experience with their local knowledge in order to offer quality products and services, become competitive, follow the right track of continuity, and become successful. Whether strategic, governance, or operational innovation, family businesses work along their set principles, which help them articulate their organizational visions hence achieve their goals. Unfortunately, conflict may arise from any number of diverse causes- from personal to professional. Such business conflicts may range from disagreements on future direction and strategy, to remuneration and personal performance of individual family members.v However, the consequences may be minimal and temporary, or simply disrupt what could otherwise be a considered as a perfectly healthy business. In Saudi Arabia, some disputes end up in courts leading to the freezing up of the entire business’ assets until the cases are solved. In order to overcome such troubles and avoid such unresolved conflicts- whether perceived or real, Saudi’s family businesses work together towards achieving transparency and fairness through establishing several mechanisms that they can use in solving their internal conflicts.vi As well, family businesses are increasingly creating mechanisms of formal conflict resolutions, which provide forums where family members involved in a dispute are able to air their differences and successfully solve the issues in an amicable manner.vii Generally, family firms serve as the backbone of the entire Gulf Region economy, generating as estimate of 80% of the region’s non-oil GPD. More than half of the region’s family businesses are presently owned, managed and controlled by the second generation. As a result, estimates reveal that a staggering $1 trillion of assets will soon be handed over to the 3rd generation of the Gulf Region’s family businesses in the next one or two decades. However, the global statistics suggest that only about 16% of the family businesses linger to generate value beyond the third generations. The potential for value destruction minus proactive action in thereby huge.viii It is thereby clear that guaranteeing the successful continuity and health of family businesses will remain the central factor for growth within the Gulf region. Family owned or controlled businesses in Saudi Arabia generally view the corporate or family governance as the best business practices and a number of families recognize the value of such controls.ixNonetheless, most of such businesses do not consider governance as a vital factor for their success. As a result, lots of the family businesses within the Arabian region have not yet adopted the contemporary global corporate culture. Particularly, they appear to be so reluctant to give up boardroom control and begin complying with the stringent prerequisites of transparency and governance. Family businesses are not only the most un swerving job creators, but also play essential roles amongst the Saudi’s communities and spearhead lots of innovations. Their growth and sustainability is thereby of paramount importance to the entire Gulf Region.x Family governance Most of the Arabian family businesses or firms have developed some kind of governance procedures, but only a few of them have a formalized structure that is robust enough to changes, such as generational transitions. Every family business is unique on its own, so it is vital for the governance frameworks to be flexible. Nevertheless, some common and intrinsically similar challenges still hold for a number of family businesses.xi Strong governance is thereby the key to ensuring their long-term success and survival. In a research report published in 2013, “Family Matters: Governance Practices in GCC Family Firms,” the Pearl Initiative reveals that the Arabian family business owners believe that corporate governance is becoming a principle factor that would serve to ensure the long-term health of companies, improve transparency, and access both talent and capital.xii Many of them now believe that an improved governance is bound to enhance international competitiveness and professionalism. The most vital issue now lies in the rigorous implementation of such governance practices. Over the past decade, Saudi Arabian family businesses have not only come accept the need to adopt the corporate governance practices, but also embrace the corporate policies. As individual businesses begin the implementation of robust business models, the subsequent stage in the adoption process is to share the best practices with colleagues. Best-practice sharing encourages other family business owners to adopt higher standards, thereby making good sense of business for all stakeholders within a given region or market. This is particularly vital since it means the adoption of locally-relevant and best practices that hold a real and practical application within the Saudi regions. It is a belief that good corporate governance, basing on the values of transparency and accountability, will create a sound business sense and is quite fundamental to nurturing future economic growth, prompting job creation, and enhancing a suitable development across the Saudi Arabian Kingdom. However, running a company or business with family members may sometimes appear to be a much complex affair since the intertwining family versus business dimensions may stir up a number of challenges with delicate nature.xiiiWhile maintaining a perilous balance between increasing business performance and strengthening family relationships, business families face very complex decision-making processes, thereby requiring thorough structuring in order to remain relevant and successful across generations to come.xivDespite the fact that the Middle-East players still hold insufficient access to information regarding the good practice in terms of family business governance and their shapes and success commonly unknown, it does not mean that good governance practices are not in place. Delving a little deeper into family and corporate governance structures of successful multi-generational family businesses, there is an extra need to explore how they establish central structures, what type of challenges they face, and how sincere do they value the impact of their systems?xv Answering the above questions will help in understanding the corporate and family governance systems, and how the systems help in sustaining their growth over decades, making an important progress in dissemination of good practices for the benefit of regional developments.xvi For a successful governance of family conglomerates, there are distinct concerns that must be taken into consideration. These priority concerns include: (i) managing the transition of ownership, as well as management control from one generation to the other. This factor opt to remain the central focus for all family businesses. (ii) Developing a fair and transparent structures that successfully integrate or incorporate the young generations into the corporate system. This should serve as the primary concern for all family businesses. (iii) Another priority concern is the cautious balance between the family interests and business interest. Failure or lack of this balance may lead the business into conflicts, which may later result to the failure of the entire business.xvii(iv) Finally, all family participants must work towards gaining sufficient business experience, which ensures that the governance systems are not set on fire, requiring the consistent development and input from each individual. This concern also ensures the adaptability to the prerequisites for every family business. There is a Three Circle Model that illustrates how the three major components of family business (family, ownership, and management) interact with each other and how the three components meet at the centre, implying that at various stages the family business, management, ownership, and family come together for a sole role. Management circle and ownership circle are common to every corporate business.xviii However, the family component is only unique to the family businesses since it is the component that distinguishes it from the other non-family counterparts. In several family businesses, the family component pervades the ownership and management components of the business, making it the most essential component, even if it does not serve as the major component in the general operations of the family business. Nonetheless, it is quite easy to witness how the three components interact to create ownership, management, and family challenges, as well as witnessing how the components interact to provide unique opportunities for the family members.xix A number of advantages are commonly tied to family businesses including stable business leadership, far-sightedness by of business, high level of loyalty and commitment, flexibility and great focus, as well as stronger customer relationships.xx Nonetheless, everything that has advantages must also hold some drawbacks. Therefore, there are also a number of demerits associated to family businesses. These include possibility of conflicts among family members or relatives, nepotism, succession disputes or issues, and possibly or strong opposition to corporate governance which may in turn lead to lack of transparency and fairness.xxi In a structured approach of governing a family business, families may involve other advisors in order to come up with proper governance strategies.xxii Typically, the process of governing a family business would involve three steps or stages, which may hold certain amount of overlap. The first process or stage involves “fact finding and due diligence.” Here, family members come together and jointly identify their business priorities, including their primary and secondary business goals, as well as the specific or possible risks to the business.xxiiiThe findings can then be summarized into in form of a report or in a different suitable form that will serve as a reference for the steps formulated. The second step involves the definition of policies. The family members make decision on the general and most appropriate approach that would be likely and most suitable for the achievement of business goals. This stage also involves the mitigation of risks identified in the first stage. It will entail the analysis and development of ways of resolving the identified risks, as well as the typical issues that characterize or describe the family business basing on what they identified as the specific factors of success for their business. By the end of this stage, the family should be able to formulate the fundamental policies and decisions that will ensure the anticipated future success of the business. Whether achieved through the preparatory work performed by the advisors, or through the working sessions between the family members (with or without advisors), the overall decisions for the business at this stage remains for the family members involved.xxivFinally, the third stage involves the development of the final structure. Here, the results from the previous two steps are used to provide the basis for the development and implementation of the most appropriate corporate and tax structure. Even though the Saudi’s legal system might have not established corporate solutions yet, the corporate governance of family businesses exists almost everywhere else worldwide.xxv A lot of caution should be underway during the management of the implementation process, particularly wherever a unanimous consent of every family member is obligatory.xxvi This will certainly conceal the entire family from any blackmail by an individual member. Family Business Succession Regarding the ownership succession and leadership succession in family businesses, several critical questions opt to be answered. These questions include: (i) do the next generation want or deserve to be the future owners of the existing enterprises? (ii) How will the young generation get prepared to become responsible owners of the business? (iii) Who should lead the family enterprises? And (iv) Must the leader necessarily be a family member? In their endeavours to answer these questions, a number of research find out that the young generation might not admit that they have insufficient knowledge concerning how they can be successful shareholders, or what rights and responsibilities do such privileges bring.xxvii As well, next generation family members are commonly unclear on how to earn their positions in the business. The solution to such challenges for the young generation solely remains to be the establishment or formulation of a governance policy such as developing a bespoke program for the next generation to learn more about the family values and vision for the business enterprise.xxviiiAnother strategic governance policy is the specification of the criteria through which the future leaders will be chosen. This necessitates the designing of an independent assessment process for selection of talents in order to encourage fairness and transparency. Family business succession is the method by which the possession and management of a business are transitioned to the next generation of family members. Such transitions may sometimes include all family assets as part of the entire process. Typically, family members play a role of control in both ownership succession as well as management succession. As a result, the effective management and integration of the family components will serve as the determining factors on the success of the succession process.xxix Commonly, the succession process of family businesses is governed by the technical components that are typically operated between the incumbent owners and their trusted advisors, such as their lawyers or accountants. In such circumstances, even though the impact of the family components may be put into considerations, it may not may not actively get integrated into the entire process. In other circumstances, wherever there is an attempt to incorporate the family component into the succession process, it is always the succession process itself or the lack of process formalities that inhibits the achievement of desired outcomes.xxx As a recommendation, there needs to be a refrain from the old fashioned or traditional approach to the business succession to the modern customized approach to family business successions.xxxi In family conglomerates, succession can be achieved in two distinct ways: by transfer of managerial responsibilities and transfer of ownership. In this context, we assume that the family business’ owners would be unwilling to relinquish both managerial responsibilities and ownership at the same time.xxxiiOn the contrary, the process of family business succession normally begins from a partial relinquishment of the managerial responsibilities, but the actual or complete succession actually occur as soon as the incumbent CEO (Chief Executive Officer) relinquishes his/her duties to the other family member who assumes the responsibilities henceforth. Succession is thereby perceived both as a process and as an event. An indicator of a complete and successful transmission of a family business is thereby a timely bestowal of managerial responsibilities, including the ultimate assumption of the position of the CEO.xxxiii Even though the handover of ownership is not the criteria of succession, it is commonly associated with lots of successions. In order to accomplish a smooth change, the founder or incumbent member is able to strengthen the shareholding position of their successor, thereby suggesting that the treatment of the heirs opt to be fair rather than being equal. In this context, the share equity should only be applied, sold, or gifted to the member(s) responsible for running the business. External assets of the business, such as real estates should always go to inactive heirs. Reasoning along this line, the transferred portion of ownership from the founder or incumbent CEO to the successor can serve as an indicator of smoothness and effectiveness of transition.xxxivHowever, even if the ownership has successfully been transferred, tension is bound to arise supposing one or more of the CEO position contenders remain within the management team.xxxvIn such a scenario, tension is a sign that indicates that the successor has not yet secured a complete legitimacy within the family business, and that the business performance in the long run is likely to be negative due to the persistent rivalry. On the other hand, an incomplete transfer of ownership during succession may be an indicator of reluctance by the incumbent owner to let go. Such reluctance may arise from a sense of insecurity, such that supposing a post-succession financial program for the incumbent family member exists, it may reduce the owner’s confidence in her/his successor. Succession Planning Whether by choice or by fate, there comes a day when a family’s business must be passed to the next generation. In actuality, it can be quite hard to plan with absolute certainty and punctuality. The resulting uncertainty thereby leads late or untimely succession planning by family businesses. However, most of the contemporary family businesses have an average age of above 60 years and are almost reaching their third generation of family leadership. In order to avoid the possible inconveniences in family business succession, it is advisable to integrate the succession planning into both business governance and family governance structures.xxxviThis strategy will make the leadership succession a formal discussion just a simple discussion around the dinner table during the time of urgent needs. Several family business successions are planned for over four-to-five-year period. That period may be long enough for a technical process, but too short when considering all the transition’s adverse strategic and emotional aspects. Succession plans should thereby be integrated into the general business strategy, with careful credentials lent to all process aspects, including the forward-looking strategies and interim transition plans. One of the most fundamental factors determining the continuity of a family business is based on whether the business succession is planned or not, or on how well it is planned. The need for succession planning emphasizes on the necessity of candid or open communication via a formal or informal family meetings all through the succession planning process. Such communications opt to extend beyond the incumbent and successor in order to establish an all-inclusive participation of the key stakeholders. Nevertheless, many business founders usually have difficulties in giving out what they have already established. Succession planning is thereby commonly in a direct conflict with the needs of the entrepreneur, for control, meaning and power.xxxvii For instance, studies conducted by the Harvard University in 2002 revealed that approximately 49% of educated entrepreneurs do not have plans of retiring while about 23% are not sure of when they would retire or whether they would retire after 65 of age or not. Even though the studies showed that the founders or the incumbent CEOs generally assumed or had the desires that their sons or daughters would someday take over the business’ management, they rarely had formal plans in place for their successors to assume eventually their responsibilities. In several cases, business founders failed to plan for their successions since they simply ignored the need to explicitly groom or choose a successor. Retirement is thereby commonly perceived as to be a threat to the incumbent business owners since it represents a “physical” change or cease from the continuity of their daily routine. Thus, there appears to be a contradicting phenomenon through which the founder seems to hold the desire to witness the business prosper after him/her, but refutes to acknowledge the endpoint of his/her career, thereby ignoring the need to plan for it. Perhaps, this is the dynamic that accounts for the statics that lots of family businesses will rarely survive to the second or third generations. Another hindering factor is that succession planning process is commonly complicated, lengthy, emotionally challenging and expensive. For instance, a complex estate and succession plan may cost as much as $150,000. For a number of family businesses, this amount constitutes a substantial portion of investment, which must be economically justifiable. Corporate Governance Corporate governance in terms of the organization of management and control of a company targeting the balance of interests between the involved stakeholders, has been continuously attracting more interest in both theoretical and practical areas over the past decade. In this context, corporate governance denotes the organization of strategic leadership as well as control of the business and family. Its central target is to balance the varying interests between the groups of involved stakeholders.xxxviii Through the means of business system’s extension around the family systems, the business system remains spotlighted by the regulations of corporate governance. One of the commonly involved stakeholder groups is the family component of the business.xxxix As well, family members are given priority during recruitments at the most sensitive positions. Other relatives may be given a significant consideration after all family members have been recruited. The internal distribution and essential structures thereby aim at ensuring the responsibility and predictability of the acting persons. These are to be applied equally to the family members, in addition to other people undertaking special tasks within the management context. Corporate governance thereby in family businesses thereby comprises the classical business governance, as well as the family governance as an integral fragment. Family firms are always unique since a family serves as the apex of the business’ governance institution.xlIn consequence, the most vital voice in the governance process does not necessarily come from an individual. It emanates from a group of persons connected by blood or marriage relations. In effect, the allocation of business powers within the family, institutions of family governance, interaction between stakeholders and other family members, as well as the family’s relational characteristics, such as age, size, and talent are likely to hold a determining impact on the business’ outcome.xli Communication within the Business People communicate for a variety of purposes, some of which include sharing ideas and dreams, discussion of family and business plans and their executions, as well as to review performance and operations. Communication flaws may thereby hurt other individuals’ ego. More negatively, the non-repetitive incidents and decisions are often not shared amongst all family members early enough until the issue arrives at the breaking point. In various scenarios, decisions are made or shared on an adhoc basis minus involving all the key stakeholders. They are however informed later on. The key communication challenges to the family businesses thereby include goal-confusion-driven communications, insecurity-driven communication challenges, and ego driven communication challenges.xlii Some of these challenges result due to the assumptions made concerning other members’ behaviours. A number of family businesses suffer from the effects of poor or lack of communication as family members tend to assume the effective communication for granted, their abilities for high quality, but little do they realize that these abilities could dynamically be improved or hindered by external business forces. This is simply because as people grow over years, their abilities, nature and intensity of their relationships also changes. For instance, as business’ complexity increases or as it expands, the platforms used by the family members to communicate also changes, thereby directly or indirectly affecting the need for consultation and decision-making. In order to overcome the communication challenges, family members thereby collectively upon a set of codes of conduct in terms of communication. For instance, no matter the situation of other events and commitments, all key members of the family business are obliged to attend a meeting. In this context, communication and information flow from seniors to juniors and vice versa normally occur during family business meetings. Considering the modern (advanced) communication technologies through mobile phones and other platforms, for example, emails and social websites, some of the family communications are performed either informally or formally through such platforms, both from seniors to juniors and from juniors to seniors. Nevertheless, this has to be a value agreed upon and accepted to be used by all members since it can be drafted by a few but agreed or conducted by every member. In some cases, the communication may only involve information sharing while in others, it may only involve decision making. This denotes that every family member opt to know all the family and business information to be shared, discussed, and collectively presided upon by all. Consequently, there is constantly a formal communication between the business and its employees and vice versa. The most common information shared between business and employees include employee evaluation, standard operation procedures, employee feedback tools, clear governance organization, job competency models, job description, employee assessment, performance expectations, as well as the business’ vision, mission, and values.xliii References Abar, J. &Biekpe, N. (2007). Corporate governance, ownership structure, and performance of SMEs in Ghana: Implications for financing opportunities.Corporate Governance, 7(3): pp. 288-300. Agrawal, A. &Knoeber, C.R. (1996). 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