The Impact of Family Business Ethics on Corporate Governance - Case Study Example

THE IMPACT OF FAMILY BUSINESS ETHICS ON CORPORATE GOVERNANCE; CASE STUDY AL-GHURAIR GROUP AT UNITED ARAB EMIRATES Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 29TH February 2012 ABSTRACT Family owned businesses are predominant in the contemporary world, and they continue to play a fundamental role in the economic growth of their respective nations. In addition, they bring long-term stability, show commitment to the local communities, and undertake responsibilities that they feel as owners. However, little research has been conducted in regard to the family business ethics and the eventual effect on corporate governance. Most of the recent literature focuses on the wrangles that confront the family businesses and their corollaries on the performance of the business. This phenomenon makes the backdrop of this paper, which is purely focuses on issues of ethics in family business in their efforts to attain and maintain a favorable niche in the market. This paper will primarily focus on The Al Ghurair Group which is an example of a successful family business in Dubai, undertaking diverse operations in the region, including real estates and investments. The study examines the ethics in this institution and the eventual impacts on the corporate governance. The finding from this study will be instrumental in making generalization about this imperative sector, as well as proposing interventions that can be implemented in the efforts to overcome any challenges that can be hampering the effective practice of ethics in family businesses. Keywords: Family business ethics, cooperate governance, Arab culture TABLE OF CONTENTS Abstract…………………………………………………………………………..Pg. 2 1.1: Introduction………………………………………………………………………Pg. 4 1.2: Rationale of the study…………………………………………………………..Pg. 5 1.3: Thesis questions………………………………………………………………...Pg. 6 1.4: Literature review………………………………………………………………....Pg. 7 1.4.1: Definition of concepts………………………………………………...Pg. 7 1.4.2: Characteristics of family businesses………………………………..Pg. 7 1.4.3: Inter-relationship between family business ethics and corporate governance……………………………………………………….Pg. 8 1.5: Research Design/Methodology………………………………………………..Pg. 9 1.6: Timeframe………………………………………………………………………...Pg.10 1.7: Expected findings……………………………………………………………….Pg. 10 1.8: Conclusion……………………………………………………………………….Pg. 11 References……………………………………………………………………….Pg. 12 1.1: Introduction Family business can basically be perceived as organizations where two or more extended family members exert influence on the direction of the business through the exercise of kinship ties, management roles, or ownership rights (Tagiuri & Davies, 1996, p. 199). Family businesses vary in size whereby despite most of them being small, some are relatively large while others are giants in their respective industries (ibid). The Al Ghurair Group website (2012) has details of the origin and impact of the company on the economy of Dubai. It infers that Al Ghurair Group is a main business group which has immense contribution to the economy of Dubai and the entire UAE. This group which is family owned and managed has been in business for over 40 years with extensive experience in retail, industry and manufacturing. Al Ghurair Group operates eight strategic business units that form the imperative part of three main lines of businesses namely, real estate and shopping, manufacturing (packaging solutions and metals) and investments (Al Ghurair Group website, 2012). Regardless of the size, family businesses undertake a paramount role by contributing to the national economy, for instance, in the United States, they contribute about 40% of the gross national product (GDP) and half of the national employment (Beckhard & Dyer, cited in Tagiuri & Davies, 1996). However, despite the fundamental role played by these institutions on the national economic growth, there has been insufficient research on the ethical issues embedded therein and their impact on the governance of these corporations. This fact is supported by Tagiuri & Davies (1996) who infer that most writings on these organizations appear in the business and trade press. Nevertheless, the general focus of these writings is either on a particular family or on a specific issue, such as the son’s entry into the company or the rivalry between relatives who are in a joint venture. The basic aim of the proposed research is to explore the nature of family business ethics in the case study institution and their impact on the overall corporate governance. In addition, the research will examine how this institution has ensured that its entrepreneurial activities have continued overtime. The extent to which the family business ethics, the purpose and vision of this institution have been transferred overtime will also be analyzed in relation to how this has translated into entrepreneurship across diverse management structures and amid intense competition in the industry. 1.2:Rationale of the study There are several reasons behind conducting this study. To begin with, this study aims at updating the existing literature on the nature of family business ethics and their subsequent impact on the practice of corporate governance. This is founded on the background that there has been inadequate focus on this phenomenon in the recent past, primarily among the family businesses in the UAE. A study like this is therefore not only useful in analyzing the level of ethics in family businesses but also for generating a comprehensive understanding of their impacts on corporate governance. Moreover, it is a profound effort towards proposing ideal interventions that can be formulated and implemented in the quest to surmount any inherent challenges that can be manifest in the attempts to promote family business ethics. Another reason why this study is important is to determine and gauge why family business ethics are fundamental in the efforts towards the achievement of sustainable competitive advantage. This is because positive ethics can be decisive in determining the attainability and sustainability of the cherished business favorable niche in the industry while negative business ethics can have diabolical impacts on the performance, competitiveness and eventual growth of the business. 1.3: Thesis questions The thesis questions will be instrumental in the research being able to successful fulfill its objectives. The following questions will be utilized What are the constituents of effective family business ethics in Al Ghurair Group and the entire UAE? What are the diverse business ethics that are evident in the operations of the case study institution? How do positive family business ethics impact on the efforts towards exemplary performance of the business? What are the challenges that confront family businesses in their pursuit of positive business ethics? Which ideal interventions can be implemented in order to promote the practice of ethics in family businesses? 1.4: Literature review 1.4.1: Definition of concepts As mentioned in the preceding discourse, family business basically infers to businesses in which a family has influence. According to European Commission (2009), there is a general agreement that a definition of family business has to incorporate three vital elements: the family, the business and ownership. Moreover, ethics in business are viewed to go beyond virtue, integrity, or character by involving the application of what is morally right and truthful at the time of an ethical dilemma (Lewis, cited in Mahfuz, 2011, p. 217). Therefore, it is apparent that family business ethics denotes the utility of what is morally right in a business where a family has influence. On the other hand, Gregory (2002) defined corporate governance as that blend of law, regulation, and appropriate voluntary private sector practices which enables the corporation to attract financial and human capital, perform efficiently, and thereby perpetuate itself by generating long-term economic value for its shareholders, while respecting the interests of stakeholders and the community as a whole. 1.4.2: Characteristics of family businesses Despite the size, location or economic mass, family businesses exhibit certain peculiar characteristics that differentiate them from the entities that are publicly owned. Austrian Institute for SME research (2008) determined some of these distinct characteristics in family businesses as summarized below. There is a strong interrelationship between the family and the business. In this case, the family in (formally, but also informally) at the core of the company. In addition, family businesses are principally focused on the firm’s long-term sustainability rather than the realization of short-term profits and on realizing generational changes in ownership and management (Austrian Institute for SME research, 2008). Another characteristic is founded on the dominance of management from within the family. Consequently, there is high prevalence of paternalism and nepotism in these firms which happens concurrently with the existence of emotional and informal decision making (ibid). Social and cultural capital is also transferred when the firm is passed on to the succeeding generation, as well as the financial assets. The prior tenets are best exemplified by value systems like the importance of respect, modesty, honesty and credibility (ibid). Austrian Institute for SME research (2008) determines that this has led to specific emphasis being placed on the personal commitment of the family members within the enterprise and on the other hand, on the firm’s engagement in corporate social responsibility activities at the local level. Lastly, family funds and bank loans are the chief sources in the family firms’ capitalization. In this regard, there is intensive reinvestment of profits in the company and unlike in public owned entities, the owners of family businesses are more patient in terms of returns for their investments (Austrian Institute for SME research, 2008). 1.4.3: Inter-relationship between family business ethics and corporate governance Sullivan&Shkolnikov (2006) cite that the area that is driving the development of corporate governance and business ethics codes is the notion of social responsibility or corporate citizenship, which is the preferred tem in the business fraternity. This entails building a decision making mechanism that takes into account not only the internal operating procedures of the business but also the impact of corporate behavior on its stakeholders –employees, investors and community at large (Sullivan&Shkolnikov, 2006). 1.5: Research Design/Methodology In the philosophical context, this study will be interpretivist. This is founded on the assumption that it is only through the subjective interpretation of and intervention in the reality of the family business ethics can that reality be comprehensively understood. Inductive research approach will be put to utility in this research. This is because it is founded on observations and analysis of the family business ethics in the The Al Ghurair Group towards making broader generalization about their impacts on corporate governance in the entire family businesses in the UAE. This study will also use the case study research strategy in an attempt to describe relationships between family business ethics and corporate governance that exist in reality in The Al Ghurair Group. This will be primary in the generalization of the phenomenon in the entire UAE. In terms of the time horizons, the study is projected to take one and a half years which will be ample for data collection, analysis and presentation. Questionnaires will be used as the primary data collection tool. A survey questionnaire will be designed which will entail structured and unstructured questions due to both the nature of data being collected and also the case study research design. In addition, in-depth interviews will be conducted which will aid in the collection of qualitative data. This will necessitate designing intensive interview schedules. Data analysis will entail examining the collected data in order to elicit viable inference and provide practical recommendations. Several analysis methods such as graphs, pictorials, percentages will be used to analyze the data collected from the questionnaires. 1.6: Timeframe As previously mentioned, the study will take one and a half years, March 2012 - August 2013. All the tasks are broken down in the following Gantt chart. Task March – April, 2012 May-August, 2012 Sept- Dec, 2012 Jan-Feb, 2013 March-June, 2013 July-August, 2013 Planning Data collection Data analysis Conclusion & Recommendations Amendment & Revision Presentation 1.7: Expected findings The study is expected to elicit diverse findings in regard to the impact of family business ethics on corporate governance. Firstly, family ethics are expected to be a motive determinant on the level of business ethics in The Al Ghurair Group. These family ethics include integrity, honesty, modesty etc. These family ethics which influence the ethics in family business are likely to be chiefly founded on the Islamic ethics and Arab culture which are predominant in Dubai and the entire United Arab Emirates. In addition, the practice of ethics in these family businesses, whether positive or negative, is bound to have impacts on the nature of corporate governance in the entire region. These findings will be pivotal in the improvement of the level of ethics in the different family businesses as well as eliciting interventions that can be implemented to surmount any inherent challenges that can be evident in the level of ethics in these institutions. 1.8: Conclusion Family businesses are widespread all over the world, cutting across major sectors in the economy of different nations and play an imperative role in the economic growth and advancement of these countries. However, these businesses ought to be founded on positive business ethics in order to promote corporate governance. Family businesses possess some peculiar characteristics which make them distinct when juxtaposed with public owned entities. These characteristics are mostly founded on ownership, source of funds etc. In the United Arab Emirates, the ethics in family businesses are mostly based on the Arab culture which is prevalent in this region. The findings of this study will be prudent in improving the ethics in family businesses, not only in The Al Ghurair Group in Dubai but also in the wider United Arab Emirates. REFERENCES Al Ghurair Group 2012, Al Ghurair Group, viewed 29 February 2012, . Austrian Institute for SME research, 2008, Overview of Family Business Relevant Issues Contract No. 30-CE-0164021/00-5- Final Report, (Mandl, I), Austrian Institute for SME research, Austria. Gregory HJ 2002, Comparative Matrix of Corporate Governance Codes Relevant to the European Union and Its Member States, Weil, Gotshal & Manges LLP, London. Mahfuz, J 2011, ‘Ethical Decision Making and its Relationship with Organizational Justice’, International Journal of Academic Research, vol. 3, no. 4, pp. 215 – 220. Sullivan JD &Shkolnikov A 2006, Business Ethics: The Essential Component of Corporate Governance, Center for International Private Enterprise, Washington Tagiuri, R & Davies J 1996, ‘Bivalent Attributes of the Family Firm’, Family Business Review, vol. 9, no. 2, pp. 199-208 Read More