Family business governance is a vital topic that is receiving increasing attention around the world. Family business governance is a regulatory framework that aims to ensure a balanced relationship between the various parties involved in the company, such as founders, family, and investors.

Continue reading the article to learn more about family business governance.

The importance of family business governance

Family businesses play a vital role in the economy, representing a large percentage of companies around the world, contributing to job creation and economic stability. However, the nature of these businesses makes them vulnerable to many challenges, such as conflicts of interest, unclear management structure, and difficulty separating ownership and management.

Therefore, family business governance comes as a regulatory tool that aims to enhance transparency, achieve sustainability, and ensure the continuity of family businesses across generations.

Family business governance is not limited to applying legal and administrative standards, but extends to establishing regulatory frameworks that help manage relationships between family members, prevent internal conflicts, and ensure that decisions are made based on professional standards, not just family standards.

Important statistics about family businesses worldwide

Studies show the importance of family business governance and its significant impact on the economy, including:

Family businesses represent more than 70% of companies in the world, and contribute about 60%-80% of the GDP in many countries.

Only about 30% of family businesses make it to the second generation, while a very small percentage (about 12%) continue to the third generation.

The lack of clear governance of family businesses leads to their disintegration or sale to an external party, as 60% of family business collapses are due to disputes within the family itself and not for financial or economic reasons.

In Saudi Arabia, family businesses represent a large proportion of the private sector, contributing about 50% of non-oil GDP, which reinforces the need for strong governance systems to maintain their continuity.

Evolution of family business governance systems

Until recent decades, there was no specific regulatory framework for the governance of family businesses in many countries, but as their importance in the economy has increased, governments and regulatory bodies have begun to develop clear standards for their governance.

In Saudi Arabia, the Companies Law issued in 1437 AH did not include any specific provisions for family businesses, but with the issuance of the new Companies Law in 1443 AH, it became possible to conclude a family charter to regulate ownership, management, and employment within family businesses, which enhances their continuity and prevents internal disputes.

In 2018, the Ministry of Commerce also issued a guiding charter for family businesses, which sets the foundations for defining the family’s roles in the company and clearly distributing powers and responsibilities.

Globally, some countries have strict family business governance systems, including:

• A code of governance for family businesses, which defines roles and responsibilities within the company.
• Enforce the appointment of independent advisory boards to make recommendations and limit the impact of ill-considered family decisions.
• Establish strict criteria for separating management from ownership, so that family members are not solely responsible for running the company without outside expertise.

Challenges of family business governance

Despite the great benefits of governance, family businesses face several challenges when trying to implement it, the most prominent of which are:

Conflict of interest between family members

One of the biggest challenges is that some family members may pursue their own personal interests rather than the interests of the company, leading to internal conflicts that affect strategic decision-making.

Poor separation of ownership and management

Family business owners are often the managers themselves, making it difficult to hold them accountable for their decisions and making it difficult to achieve the principles of transparency and accountability.

Resistance to change and governance implementation

Many family owners of companies view governance as interference in their decisions and see it as reducing the family's influence within the company, which makes them reluctant to adopt modern governance systems.

Challenges of Planning for Intergenerational Leadership Transition

Many family businesses do not have a clear plan for the transition of leadership to the next generation, which can lead to problems when the founders retire or die. Without clear planning, disagreements can arise over who will take over, which can lead to the breakup of the company.

Reliable Systems for Governance of Family Businesses

To address the above challenges, there are a number of systems that can be relied upon to achieve effective family business governance, such as:

Family Charter System

It is a written agreement that sets clear rules on how the company is run, explains the role of each family member, how profits are distributed, and how strategic decisions are made.

Forming an independent family council

He is responsible for resolving disputes between family members, monitoring the performance of the Board of Directors, and ensuring that governance rules are applied fairly.

Appointing professional managers from outside the family

To achieve a higher level of transparency, family businesses can appoint professional executives from outside the family, which reduces bias and ensures that decisions are made based on competence rather than family relationships.

Application of disclosure and transparency standards

This requires publishing financial reports regularly, clearly defining the ownership structure, and disclosing major decisions to ensure there are no conflicts of interest between family members and other shareholders.

Using Technology to Enhance Governance

Digital transformation in family business management can facilitate the process of implementing governance, as modern electronic systems such as:

Doc Suite SystemThis system helps organize documents and communication between family members and subsidiaries, helping to reduce tensions and duplication of decisions.

SystemsERP (Enterprise Resource Planning):like systemsSAP or Oracle that can efficiently manage the day to day operations of the organization.

Performance Management System: It helps in monitoring the progress of work, achieving goals and evaluating performance within the company.

With the rapid developments in the business environment, it has become necessary to adopt strong systems of governance for family businesses that ensure their sustainability across generations. Implementing effective governance does not only mean adhering to laws, but also includes setting clear ownership policies, defining roles and responsibilities, and providing a regulatory environment that reduces internal conflicts.

If family businesses can achieve this, they will not only ensure their continuity, but will also become more competitive in the market, attract investors, and achieve sustainable success in the long term.

The importance of family business governance in the local and global economy

Family businesses are not just small economic entities, but extend to include huge companies that affect the local and global economy. They constitute a large percentage of the gross domestic product in many countries, and contribute to the employment of large numbers of workers.

For example, in some countries, family businesses contribute up to 70% of GDP, reflecting their importance in promoting economic growth and stability.

Family businesses are relatively stable compared to companies owned by multinational investors, because decisions are often made based on a long-term vision rather than focusing only on short-term profits. This helps reduce economic fluctuations and ensure business continuity even during crises.

There are many family businesses that started small and then expanded to become global brands, such as Al-Futtaim Group in the UAE and Abdul Latif Jameel Group in Saudi Arabia. These companies succeeded because they adopted the principles of family business governance that helped them move from one generation to the next smoothly, without being affected by family disputes or ill-considered decisions.

Reliable Systems for Governance of Family Businesses

To ensure the success of family businesses, there are many systems and laws that can help implement governance effectively, including:

Saudi Companies Law (1443 AH)

In the new amendments to the Companies Law in Saudi Arabia, family businesses have been recognized and a clear legal framework has been established for their governance, which helps reduce disputes and ensure their sustainability. Article 11 of the law allows for the establishment of a “family charter” that regulates family ownership, management, and work policies.

Guiding Charter for Governance of Family Businesses in Saudi Arabia (2018)

This charter was issued by the Saudi Ministry of Commerce, and it provides a set of guidelines that family businesses can adopt to organize their work and ensure their continuity. It focuses on establishing a family council, defining employment policies, and mechanisms for exiting the company.

Global Governance Standards

There are international standards that family businesses can benefit from, such as the OECD Governance Principles (OECD), which emphasizes transparency, independence, separation of ownership and management, and ensuring the rights of all shareholders.

How can governance be implemented effectively in family businesses?

To implement governance effectively, some important steps must be followed:

• Establish a family council with representatives from family members to discuss family issues away from day-to-day management decisions.
• Establish clear policies for hiring family members, so that they are hired based on professional criteria and not just on kinship.
• Separating ownership from management by appointing professional managers who are not related to the family to ensure professional management.
• Preparing a binding family charter that defines profit distribution policies, exit mechanisms from the company, and the organization of family ownership.
• Commitment to transparency and accountability through publishing regular financial reports and implementing internal and external control mechanisms.

Governance of family businesses is not just an option, but has become a necessity to ensure the sustainability of these companies across generations. Applying governance principles helps enhance transparency, reduce conflicts, and ensure the stability and growth of the company in the long term. With the development of systems and legislation, it has become easy today to apply these principles effectively, which makes family businesses able to compete in local and global markets.