This document discusses corporate governance challenges in family businesses. It notes that while family businesses can outperform non-family counterparts, introducing proper governance is difficult. Key challenges include complex relationship layers between family and management, ensuring fairness for minority shareholders, developing succession plans, resistance to change, and subjective communication. The document suggests separating ownership, control and management; establishing separate family and company boards; training future leaders; and decentralizing transparent decision-making to improve governance in family firms.

1. Insights into Comparative
Corporate Governance of Family
Businesses
By:
Omar Qaise, MBA

2. Disclaimer:
The information in this work should be used for educational and
knowledge purposes only.
The disclosure of this work is an effort of the author to help MBA students
and managers/business people interested in business academic topics to
enriching their knowledge or help them in their everyday management
practices.
The author is not responsible for any copying or plagiarism that may result
out of it, nor for any third party use of this information nor for any action
taken by any user of this work.

3. 1- Introduction:
Family-owned businesses are very successful. A recent study [1] indicated that
about 42 companies listed, as family owned businesses on the London Stock
Exchange had a better performance of about 40 % than their non-family rivals by
in the period of examined (1999-2005). However, this success is only achievable
when the interests of management and shareholders are aligned. Family-owned
companies over the long term perform better than others [2]; this is cemented
by the superior returns and higher profitability than fragmented-shareholders
structure companies. The factors that lead to this success include commitment
and focused strategy in the market. Also due to the harmony and alignment
between senior management, employees, and investors with their interests and
objectives. The culture developed in family-owned business creates also a type of
emotional connection between the company members. However, as companies
grow and become difficult to manage in a fierce competitive market, introducing
corporate governance in family-owned business becomes challenging.
2- Challenges of Family Business
Governance:
Family owned business may be seen as threat or an opportunity, and that varies
according to many elements. The family commitment and ownership of the
business may be seen as adding value, provided that the company and the family
can address the concerns of the clients and investors.
There is along history of family-owned corporates running into bad practices of
abusing the shareholders’ rights. This leads investors to examine with great care
such companies to assess the associated risk before taking the plunge and
investing.
Problems like poor transparency, absence of accountability and fairness
principles, and high concentration of ownership can result in ignoring minority
shareholder rights. It is important to have the right corporate governance
conditions because this is the key to provide assurances to investors and
increase the probability of a successful and sustainable business.
The following points represents some of the main issues that face family-owned
business corporate governance:
1- Relationship Management Layer

4. One of the main challenges in family business governance is that the
owning/controlling family has an additional relationship layer in the company
structure. Shareholders see this as adding complexity to how to understand the
various connections and relationships between the family members. These roles
include one or more of the following: Family member owners, directors,
managers, employees, extended family members as shareholders, or family
members who combine all those roles together.
Usually, the founders in the first generation manage the family-owned business
(or sometimes in the in the second). These businesses often face the challenge of
filling management positions by attracting good specialists and talent. This gets
more difficult when trying to retain such qualified professionals. A well-
functioning management team requires careful crafting of the relationship
between external professionals and family managers because this what leads the
company to success. The same applies to the relations between non-family
investors and the family shareholders. It is the primary role of non-family
external investors to set up the family business’ governance. The views of these
parties are becoming close due to the globalization of the economy and the
appearance of global investors.
2- Fairness
Of course, the first thing that comes to people’s mind when talking about family-
owned businesses is that family members get to keep the greatest shares of the
company, even if that means stepping into other minor shareholders rights.
Despite the fact that there are measures and tools to control this type of
behavior. The problem extends to the fact that family-owned business do not
adopt best practices in the labor market to preserve their minor shareholders
rights and benefits. For example, some companies were offering employees low
wages, below the market price and employing young people to avoid high costs.
These companies were also avoiding worker unions and their guidelines in
salary and benefits distribution. Pressure could mount in these companies to
follow work union guidelines; some employees (especially the new ones) could
organize themselves and join work unions. They may succeed or fail to reach the
required legal number.
3- Succession Plan:
Succession plan are two simple words but can be very difficult to achieve
successfully in a family-owned business, let alone in a normal business. This is
similar to succession plan problems in political societies: when the leader dies,
the next generation may pull in different directions and everything may fall
apart. It can happen that the founder/leader possess the necessary skills and
motivation that his family successors may not share. This can lead to disastrous
results if direct succession is planned. The leader should realize the organization
is bigger than the individual. It has its own processes, plans, and people and it
lives independently from individual family members.

5. 4- Resistance to Change:
Shifts in market, technology, and regulations require a degree of flexibility and
change. These shifts if not addressed internally in the company strategy, policy, and
structure can have fata effects on the business. It is a bit challenging to introduce
change in a family owned business compared to a non-family business. This is due to
the fact that family members and leaders have followed certain processes and
practices over many years and these methods proved to be successful. Unless the
family is open to external consulting and opinions, it will be hard to convince the
members who have their own rules to change them and their way of thinking.
5- Communication:
Communication can be subjective instead of begin objective among family members
and other shareholders, or even among themselves. Because the family ties,
relationships, and emotions are involved in the communication, this can lead to
conflicts or miscommunication in the organization.
3- Suggestions to Improve Governance
in Family-Owned Businesses:
There are multiple benefits of family ownership and companies focus on these
and supplementing them with corporate governance structures and processes to
foster growth and enhance their competitiveness in the market. However, when
implementing these rules, companies face challenges. Any solution to solve these
issues should take into account the mechanisms to:
1- Separation among control, ownership, and management
2- Set up boundaries between family and company’s account, even
physically by setting up separate offices.
3- Prepare succession plans by fostering the skills and knowledge by
training them to be responsible business leaders.
The decision-making processes are different. It is one thing to decide on a family
matter and another thing to decide on a business related issue. More often, the
two things overlap creating mistrust among investors and shareholders.
Therefore it is important to have family board that is in complete separation in
its function from the board of directors and shareholders of the company. It is
true that not all governance solutions will succeed 100% in achieving their goals,
but instituting the decision making process is still important. Discussions related
to family issues (like how much equity should ach member receive), should be
handled in the family board. Conflicts arise among family owners who are
managing the business and those who are passive receiving only benefits such as
dividends. Those have limit access to information and control over the company,

6. and this creates mistrust that could spill into the board of directors. Ensuring a
separate and protected board of directors and management teams is the key to
keeping peace in the company.
Since some external family members have different interests and agendas, open
communication between them and the family board is essential to resolve
conflicts. For example, many family-owned businesses set up special committees
or liquidity funds to redeem passive family members shares if they want to, and
also to control the redemption process.
In case there are external investors, how can governance guarantee that those
investors are treated fairly? They may have different roles and visions and may
not align with the family owners about certain topics. Moreover, they have
limited access to company information, less than the management and non-
management family members. A good solution here is to reinforce the role of the
board of directors to mediate the flow of information between external investors
and management. Having independent directors in the board that do belong to
neither the family nor the management can be very helpful. These directors will
have a good oversight on all shareholders and can ensure transparent treatment
of everyone.
We have mentioned that drafting a succession plan in a family-owned business
could be challenging. However by following these steps in the governance
process, the risk of failure could be minimized:
1- By analyzing the company structure and comparing roles and
responsibilities with similar companies, a clear view of senior
management distribution is identified.
2- Based on current and future business operation needs, a new structure
can be designed with the targeted senior management roles clearly
defined.
3- A comparison between the new structure and the existing one could
reveal where senior management skills and expertise lie.
4- Change of senior management according to the new plan.
5- Decision making process should not be tied to managers connected to
family members but rather it should be based on roles and
responsibilities. Decentralization of the decision-making process on many
levels is required.
6- Human Resources policies of family employment should be very clear and
transparent; it should be also communicated to all business family
members.
7- Training and development of family members who will take over senior
management in the future is important
8- Incentive plans to mangers should be transparent and awarded according
to their performance, not their private ties to family members.

7. 4- Conclusion:
Family-owned businesses could be very successful and lucrative to investors due
to many factors, such as long-term focus on business strategy, alignment
between management and different shareholder, and the core-activities focus.
However, there are many challenges associated with implementing successful
corporate governance in these companies that make investors, and managers,
and employees skeptic about these businesses. However when these challenges
are addressed correctly, then governance become as effective as in a non-family
business and all shareholders can reap the benefits of the family-owned
business.
References:
[1] POUTZIOURIS, P. Z. (2004). Views of family companies on venture capital:
empirical evidence from the UK small to medium-size enterprising economy.
Family Business Review, 14, n. 3, pp. 277-291
[2] Credit Suisse Family Index, 2010.