• Christiane

Kickoff - Event: Challenges of Governance in Family Businesses! Jeddah, April 15.

Updated: Jan 2



“Good governance is like a life insurance: you want it early on in place, you hope you never use it, but if you do, it is there to guide the process."

Family Business Partners held an event on April 15 in Jeddah addressing the several challenges that families face:

  • Addressing family dynamics so that they don’t get in the way of developing effective governance

  • Building effective governance strategies for successful M&A transactions

  • Finding and implementing effective director and executive placement strategies

  • Using independent directors as a tool to overcome challenges

We welcomed four wonderful experts who offered great pieces of advice:

  • Maya Prabhu, J.P. Morgan

  • Wassim Karkabi: Stanton Chase

  • David Hunt: Lynwood Consulting

  • Ziad Awad: Awad Capital

Thank you, for making this event special.


Based on a fictitious case study[1] around The Falcon Holding - a family business in trouble, the audience discussed governance challenges that family businesses face and voted for a solution.

In the case study, very typical challenges were addressed: dealing with family dynamics and conflicts, making use of external advice and deciding whether to sell the business or hire an external team.

In many families, especially larger ones, tensions, if not conflicts arise when big decisions need to be made.


Maya Prabhu from J.P. Morgan addressed strategies to understand and manage family dynamics:

A quick and simple way to make decisions is by voting. However, in families, voting can be deeply divisive as it would be clear that some people didn’t buy into the decision. Emotions can surface that often run back very deep around favouritism and cliques within the family. A preferred way to make good decisions, is to achieve consensus. Consensus indicates broad based support for the decision. Yet, it can take time to achieve. It is better if the family has created a family strategy for their wealth and family business including how they wish to make decisions and alignment on their long term vision before they have to make such a monumental decision as presented in the case study – which is whether to sell their business or not.

To create an aligned family strategy is a process that involves several stages – firstly understanding what does each individual family member want? What are his or her motivations, aspirations? Try to surface these. And then building their shared vision and strategy through many discussions of easy and difficult issues. Some families use facilitators for this process, while others call family meetings which they chair themselves. A neutral facilitator / family member can ensure that everyone has a say and can create a constructive framework for discussions which results in stronger buy in. Ultimately, talking through the areas of disagreement and creating alignment is beneficial long term.

The whole paradox with a family business is that there is a structural challenge. A family (which is an emotional entity) is entwined with a business that needs to be rational! When the head of the family makes decisions, it is hard for them and people around them to separate if they are making the decision as a family member or as CEO of the business.

Most families find it difficult to deal with the family emotions (which are normal and present even in very close families) and so just deal with the business. The emotions and dynamics sit beneath the surface and cannot be eliminated; they can be managed through a process of open discussions.


In the views of David Hunt, Lynwood Consulting, (an independent advisor and board member), an independent can create immense value. It can both facilitate the decision-making process, as well as point to outside solutions that would otherwise be overlooked.

An independent view from an advisor or a board member can be daunting for a family: after all, the family will need to open themselves, at least partially.

True independent directors can ensure the board discusses the right topics (less inward and backward, more outward and forward), and help to probe deep vs shallow thinking: based on deeper analysis, often, further options surface than initially assumed. They typically have a more neutral view on pros and cons, incl. risks. A family that has never included an independent advisor into the decision making, might feel uncomfortable initially. However, they could test the concept by establishing an independent board member into a sub-company and only after trust is build, add him or her to the main family board.

In the case study, the family had to decide to sell the business or to hire an external management team.


Selling a business should never be the first choice for a family, unless it is very well thought off and the family is well aligned and prepared to make this sort of personal decision. Ziad Awad from Awad Capital recommends selling the business only if owners are really clear they want out, not just because the business is not performing. In the latter case, a turnaround advisor or manager could be hired, or portfolio corrections can be made instead to either improve it prior to a sale or to keep it after all.

Families need to align on their interest and resolve conflicts prior to a sale. Some members might want to sell – a part sale might be an option for divided interests as well as to de-risk by diversifying the family fortune – others don’t. Transactions fail due to misalignments and emotional attachments.

Transactions also fail because at the point of signature, the governance has not been setup to allow for a smooth and fast close. No family can decide with equal voting for 35 members (as in the case study). Agreements need to be in place to whom authorities are delegated.


Instead of selling the business, the family might decide to hire a manager. Wassim Karkabi from Stanton Chase points out that hiring the right management team depends on the situation the company is in: growth, consolidation, turnaround or transformation. Each phase requires a different skillset. The family is well advised to understand the phase the business is in and what qualifications it needs at each level.

The family will also need to understand that a new CEO will not be able to do it alone. The CEO needs a team to complement his weaker areas. Equally important is to understand that the employee base has been working with a certain “programming”. To turn a company around, this programming needs to change. If there is no change, the CEO will not have a chance.

Families hiring external teams also need clearly set expectations from the outset what authorities the CEO will receive to avoid surprises and misalignments. When selecting candidates, the family setup should be considered. A CEO who performed great in an international listed company, does not necessarily perform equally great in a family setup - quite the contrary in some cases.

A good governance helps the family with a process in becoming clear and aligned on above. Governance doesn’t need to be a strict set of rules but can be considered as guidelines to ensure the legacy.


Q&A:

How can the educational gap between family members be tackled?

There are two answers: 1. Any shareholder should have a basic knowledge about the business and the industry. This is a responsibility that no one should delegate and if this is too much commitment, he or she should be better advised to opt out. 2. However, it would not be expected from all shareholders to make deep business decisions. A good governance practice may be to implement family representatives in a family council that feedback information to their family branches. Or a board of director is formed for the business or other indirect forms.


How can next gen members prepare?

Transitioning wealth and the family business from one to the next generation can surface insecurities, conflicts. Often unconsciously, the patriarch may have fears to let go and therefore not discuss plans for the future. Being clear on everyone’s motivations and aspirations and addressing them helps. It helps if the company shall pass on to the next generation (in a management and /or ownership capacity), the earlier the path is agreed upon, the more transparent and secure for all.

If younger family members want to stay away from the business, that should be honored, they can still be shareholders. However, if they do want to enter the business, a clear pathway must be designed. Parachuting them into senior positions, without preparation for both themselves as well as the organization is a recipe for failure. Development programs, outside experience, mentorship or other forms are appropriate. An independent advisor can contribute to a next generation preparation plan by acting as mentor.

If younger family members want to stay away from the business, that should be honored, they can still be shareholders. However, if they do want to enter the business, a clear pathway must be designed. Parachuting them into senior positions, without preparation for both themselves as well as the organization is a recipe for failure. Development programs, outside experience, mentorship or other forms are appropriate. An independent advisor can contribute to a next generation preparation plan by acting as mentor.


Not everyone wants to be involved.

Governance helps to develop policies and procedures for family members wishing to join the business and also clear pathways for those that choose to opt out of the business and involvement with stewarding the family’s assets. This does not mean that they are opting out of the family. They can still be loved and valued members of the family. A good family governance framework, discussed early on, and developed through an inclusive process builds comfort and can help prevent conflict.


What are local case studies for setting up good governance?

Al Futtaim separated the business. That is an interesting case for two very different forms of governance originating from one family business.

Some more Middle East case studies can be found here as well as in our "Interesting Read" blog post.


Summary:

Governance for family businesses requires an alignment of the family members interests and a process of achieving this.

Once it is established, governance is an enabler to move with speed and into one agreed direction. Good governance is like a life insurance: you want it early on in place, you hope you never use it, but if you do, it is there to guide the process.


[1] The case was developed by: Dr. Christiane Schloderer, Growth Partners, Dr. Florian Schloderer, Lecturer Insead Business School Abu Dhabi, has co-developed GulfCom, a change management simulation and prepared his family’s business for sale as 3rd generation family member), Professor Dr. Alexander Fliaster, Chair in Innovation Management at the University of Bamberg (Germany) and Visiting Professor at IIM Bangalore, uses video cases frequently in his teaching of students and executives.

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