RELEVANCE AND IMPORTANCE OF CORPORATE GOVERNANCE IN FAMILY OWNED BUSINESSES

Topics: Corporate governance, Corporation, Governance Pages: 6 (2062 words) Published: February 18, 2015
BUSINESS ETHICS AND CORPORATE GOVERNANCE

Assignment on
RELEVANCE AND IMPORTANCE OF CORPORATE GOVERNANCE IN FAMILY OWNED BUSINESSES

BY

Abhijith Sudesh Gujaran
FSB 2013003061

Family-Owned Businesses
Family-owned businesses are the spine of many economies around the globe and their sustainability is crucial to global economic growth. Many of the world’s greatest corporations were started and are still run by family lines. In fact, some of the largest publicly listed companies are family-owned, including one-third of Fortune 500 companies. Family Businesses play a vital role in economic development – not only through their business contributions but also by creating an investment environment that is open, safe, secure and transparent. A number of family businesses began as entrepreneurial projects 50 to 60 years ago and have over the years diversified their interests and created a number of successful conglomerates. These businesses are considered relatively young and will undergo a generational change over the next five to ten years, having reached a stage where a more structured governance process is necessary. Specific studies over the last couple of years have shown that family firms are more dominant in the Middle East and North Africa region compared to other regions. Two key factors contribute to their growth and subsequent power of family owned businesses. 1. Cultural preferences- To first pursue business within the family and only then consider outsiders 2. Solid political connections

Family-owned firms face a distinctive set of challenges that are entrenched in an organizational structure that thwarts these enterprises from attracting and retaining high quality human capital, obtaining lower cost debt and equity capital, and ensuring long term competitiveness and sustainability. The recent growth in family-owned enterprises has created a demand for tools which will help these companies be more competitive. Corporate governance practices provide a means for ensuring sustained company performance and embedding the values of accountability and transparency in organizations. Challenges faced by Family-Owned Businesses

1. Centralized and prejudiced by tradition instead of good management practices 2. No documented plan
3. Hiring family members who are not qualified or lack the skills and abilities for the organization and lack of ability to fire them when it is clear they do not contribute to organizational growth 4. Absence of unambiguous policies and business norms for family members 5. Lack of outside opinions and diversity on how to operate the business 6. Dividends, salaries, benefits and compensation for non-participating family members are not clearly defined and justified 7. Roles and responsibilities are not clearly defined

8. Long term planning to cover the necessities and realities of older family business members when they leave the company 9. Family problems will affect the business. Divorce, separations, health or financial problems also create difficult political situations for the family members 10. Most family organizations do not have a plan for handing the power to the next generation, leading to great political conflicts and divisions 11. No knowledge of the worth of the business, and the factors that make it valuable or decrease its value 12. Decisions are made day-to-day in response to problems. No long-term planning or strategic planning 13. Provoked by role confusion, emotions (envy, fear, and anger), political divisions or other relationship problems

Why Corporate Governance is Crucial for Family Firms
Increasing growth and globalization has brought many challenges for family-owned businesses. Corporate governance is a critical enabling factor for the development of such businesses. Practicing good governance enables these businesses to establish robust business processes and prepare for future expansion. Corporate governance lays the foundation for family firms to be more...
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