Corporate Governance key to success of family businesses - MTI

HEMAS, MAS, Ceylon Biscuits and Brandix are among the most successful Sri Lankan companies, not just in terms of market domination and profitability but also in terms of corporate governance and social responsibility. These are family businesses that have been transformed into corporate entities.

A key feature of their successful transformation is the concerted efforts on Corporate Governance and Social Responsibility, which have been internationally recognised.

Family businesses are an integral part in the Business World. Some have developed to levels of conquering

 the global stage, whilst others continue to grow within their markets.

These companies possessed the leadership, vision, determination and the vigour to succeed. Nonetheless, the pondering question is whether these forms of companies could successfully continue as they have done previously.

The answer would be ‘yes’ - if corporate governance did not emerge to the platform to transform the corporate world and with it the community we live in.

Corporate governance is considered the central pillar of the corporate structure. The Asian financial - crisis and failures of corporations such as Enron sent shock waves across corporate board - rooms that laws in place to regulate the operations of boards will be strengthened. This is because investor confidence fell to a significant low.

However, international governments understanding the gravity of the problem enacted numerous laws, regulations and codes to combat the proliferation of loss in investor confidence.

As a result, investor confidence began an upward trend as the boards of directors’ were under greater scrutiny and investor protection laws were seriously considered by respective institutions.

Despite the development of such laws, regulations and codes governing companies, a very important cluster within the corporate structure - Family Owned Businesses (FOB) were left to compete in the international market with limited assistance toward re-structuring their framework on corporate governance.

Like any other forms of business, family businesses also require strong leadership, motivation and an organised management structure. The competition faced by FOB lead to an issue in continuity.

Furthermore, FOB are to a large extent unable to attract inward foreign direct investment, as opposed, to non-FOBs were able to attract foreign direct investment. This situation is even prevalent today, especially in the Asian region.

In Asia, FOB have been integral in promoting economic development. For instance in countries such as South Korea and Indonesia FOB have been extremely influential in driving the economic success, especially prior to the Asian financial crisis.

In the Middle East family companies account for 75% of business in the region which is estimated at US $ 500 billion. However, the structure of internal corporate governance has been weak. As a result, these companies have been unable to fully maximise their potential.

Due to this the Middle East Family Owned Businesses Forum has been created with the assistance of expert external consultants to develop corporate governance. During a recent discussion with a leading CEO in Sri Lanka, it was mentioned that the company which is a FOB, was achieving great heights in the national and international markets.

In accordance with MTI Consulting research and other international findings family businesses when re-structuring the internal workings of corporate governance have experienced problems in relation to best practices for board procedures, ownership, succession, independency of directors, compensation and board-family relations.

Furthermore, areas for concern include incentives, disclosure, equality and investment.

However, proper advisory and assistance have enabled a number of large family companies to successfully overcome such problems. For example, in the Gulf region family businesses are undergoing a rigorous process of streamlining their structure on corporate governance in order to enhance the company’s competitiveness in North America and Europe.

This process has brought about a significant improvement in competing in developed regions across the World. In tracing the background to family businesses, most owners seem to underestimate the psychological aspect. In the first generation one person would be at the helm, therefore decision-making and managing the business would be in the hands of that person.

In the second generation the decision-making of the company would be in the hands of siblings. In the third generation cousins would be involved at the helm.

As a result, the psychological aspect at the helm has gone through a number of transformations, which in-turn might cause adverse consequences on the business. In light of the above it would be vitally important for FOB to independently structure corporate governance to avoid unwanted business and even family related tensions.

From a holistic point of view reforming the structure on corporate governance within family companies seems a growing necessity. As discussed the reforming process would generate a number of important benefits to the company and the community at large.

Therefore, in conclusion the future seems to show a requirement for companies to abide ethically by following principles of good corporate governance within the national and global corporate system.

MTI is a leading multinational consultancy company with its Head quarters in Bahrain and operating in Dubai, Abu Dhabi, India, Pakistan, Bangladesh, Malaysia and Sri Lanka. Further MTI operates through alliances in a number of countries in Europe, North and South America.

MTI Consultancy under the leadership and guidance of CEO Hilmy Cader has been instrumental in handling over 275 cross-industry projects across 33 countries, five continents since its inception ten years ago.

(The article has been conceptualised by the Project Manager and Senior Business Analyst of the Legal and Governance Unit Yatila Wijemanne)