Family-Owned Businesses 101: Governance, Succession & Non-Family Members

Wasseem Suleiman

Managing Partner
Oak Kapital

Family-Owned Businesses 101: Governance, Succession & Non-Family Members

Success Story of a UAQ Free Zone Start-up client.

In most economies, the majority of businesses are family-owned, hence, family-owned businesses are the biggest contributor to any country’s GDP, and they represent an essential source for creating jobs in the market. However, family-owned businesses face serious challenges in their operational structure and growth path. These challenges, as per global statistics, cause 70% of family businesses to not last into a second generation. Moreover, only 12% of family businesses make it to the third generation and just 3% of family businesses lasts into a fourth generation.  With a new generation in the family, new members will be engaged in the business and new ideas will be introduced to develop and grow the business. While the fresh and new perspective of the new generation represents a healthy element to the operations of the business, a good governance and a well-organized thought process are required to ensure smooth operations and a successful transition.

The main areas that family-owned businesses should focus on are:

Good Governance 
Good governance is important in any business; however, it is essential in family businesses because, with no governance, family members who are engaged in the business will act as shareholders rather than focusing on the responsibilities of the role that each member is assuming in the business. Family businesses with no governance fail in building an institutional structure and environment which, in most cases, lead to not being able to grow the business. It should be noted that establishing good governance at the Founder generation phase is much easier than establishing it at the next generation phase. 

Aspiration and values
In any family business, the aspiration and values of the business must be set by the family members. These values need to be communicated in board meetings, family gatherings and company events. Each family has its vision for its business which could be linked to the family background, culture or interests. In some cases, these values could force the shareholders to make hard decisions that may not be commercially viable, yet, it is essential to stand by your values as this is what creates your heritage and identity. 

In a dynamic and fast-changing global market, the new generation in the family should be allowed to add to or modify some of these values; however, this can only be done within the general direction of the overall set values by the Founder and the first generation of the family. 

Succession planning
The new generation needs to be trained and prepared to join the family business at an early stage. Not all members of the family have an interest in being part of the family business. Those should not be forced to join the business as they will not perform well or engage in the business’s overall vision.  

The new generation members who would like to join the business need to have a clear path in the business like any other employee. Some families prefer to have the new generation members work for companies outside the family business for a few years before joining the family business to learn the basic corporate skills in an environment where they don’t have any privileges. Other families allow the new members to start working for the family business immediately after they graduate, however, they keep them under the supervision of non-family members to train, guide and coach them until they are ready to manage a department, a function or even a subsidiary. Family businesses are advised to have a family members’ committee separated from the Board of Directors to discuss non-operational matters related to the future and sustainability of the company. 

Succession is a very delicate process that needs to be designed in a way that ensures a smooth transition and continuous appraisal of the family members’ performance in their assigned roles.   

Non-family members in leadership roles 
Successful family businesses attract talent and leadership from outside the family who can bring expertise and skills that are not available to the family members. Non-family member leaders should be allowed to take decisions within the set guidelines of the company without having the family members intervene in their decisions. High performers’ non-family members must be seen as great assets to the family business and not as a threat that could take the attention away from the family members. Family businesses that do not retain and nurture the ‘starts’ non-family member’s employees’, struggle in achieving their goals and aspiration. A warm family atmosphere should be created in family businesses for better engagement by non-family members in order to achieve a great outcome for the business. 

Many family businesses were able to create empires that lasted into multi-generational successful businesses by having a clear vision set by the Founder generation, good governance, well-designed succession planning and solid values.

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