Sustaining Legacies: The Crucial Role of Corporate Governance in Family Business Succession

 By Vineetha Mathew, Senior Advisor Programmes

Introduction

In the GCC, family businesses represent more than 50 percent of the local private sector economy. According to the PwC Family Business Succession Planning Report 2024, many family businesses were established 60 to 70 years ago and have significantly contributed to the local GDP and workforce. Currently, many of these businesses are undergoinga generational change, with trillions of dollars expected to change hands from one generation to the next. While many family business owners would like to see their business transferred to the next generation, it is estimated that 70 percent will not survive to the second generation, and 90 percent will not make it to the third generation (Harvard Business Review, “Why Family Businesses Don’t Survive to the Second Generation”). Furthermore, the PwC Middle East Family Business Survey 2023 highlights that 74 percent of family businesses in the Middle East expect to grow in the next two years by focusing on diversification, digital transformation, sustainability, and strengthening their governance practices. Given this context, it is imperative to handle the generational transition effectively, with succession planning and corporate governance becoming cornerstones of this process.

Since its launch in 2017, the Pearl Initiative’s Governance in Family Firms Programme has adopted a comprehensive, multi-faceted approach to supporting family firms in addressing governance issues. By fostering dialogue among stakeholders, hosting engaging convenings, and conducting research on emerging trends and best practices, the programme has become a vital resource for family businesses in the Gulf region.  Collaborating and partnering with several family businesses and offices throughout the Gulf region over the years has helped the programme gain critical insights into the unique challenges faced by family businesses in the region, including succession planning, lack of diverse and formal governance structures, preparing the next generation for leadership and management roles, and building and communicating trust.

Looking ahead, the Governance in Family Firms Programme will remain dedicated to addressing critical issues within family businesses, focusing on the succession planning journey and the integration of NextGen leadership. The programme aims to disseminate knowledge resources and facilitate discussions by engaging multi-generational family business owners. Additionally, it will continue to expand the body of regional research and knowledge on governance specific to the region’s family firms, further supporting their success during generational transitions.

In line with these goals, the programme recently partnered with Lansberg Gersick Advisors, Middle East, to host a session on June 26, 2024, titled “The Role of Corporate Governance and Mentorship in Succession Planning for Family Firms.”

Exploring the Three-Circle Model

In this session led by LGA’s lead advisors for the region, Dr. Basma Al Zamil, a member of the Zamil Family in Saudi Arabia, and Mr. Bob Kohli from the UAE, the spotlight was on the importance of good governance in effective succession planning for family businesses.

The discussion began by exploring the Three-Circle Model of the Family Business System developed at Harvard Business School by Renato Tagiuri and John Davis in 1978. The Three Circle Model provides a comprehensive framework for understanding the intricate dynamics that characterise family businesses. The model describes three interdependent and overlapping groups: family, business, and ownership, that comprise the family business system.  It highlights the importance of recognising and managing the distinct yet interconnected constituencies within family enterprises. Each circle represents unique desires, interests, and viewpoints, emphasizing the necessity of understanding and effectively managing their overlaps.

The seven different spaces within these circles correspond to distinct interest groups, each with its own legitimate perspectives, goals, and dynamics. This complexity underscores the need for robust governance systems to address the issues associated with family, ownership, and business. Effective governance within family enterprises requires addressing the unique challenges faced by these diverse groups, which adds to the complexity.

By navigating the intricate relationships and interests within family businesses through the lens of the Three-Circle Model, enterprises can foster harmony and build a foundation for sustainable success across generations. Recognising and respecting the unique roles and perspectives within these circles is critical to achieving balanced and effective governance, particularly when planning for succession. This approach helps family businesses maintain cohesion and ensure long-term sustainability. In family enterprises, governance and succession planning play a pivotal role in ensuring a seamless transition of leadership from generation to generation and safeguarding legacy. As families and businesses evolve and grow, their governance culture and systems must adapt accordingly.

The Seven Foundational Pillars of Governance Culture

The session then delved into the seven foundational pillars that most successful global family firms have in their governance culture. The speakers shared valuable insights and experiences on each of the seven foundational pillars, which are as follows:

1. Values and Purpose: Values and Purpose are the DNA of the Family Enterprise. Shared values and purpose keep everyone committed and aligned, and when written down, they become the culture of both family and enterprise.
2. Vision: A family enterprise vision is essential for motivating and aligning family members. It clarifies what we want to achieve in the future and defines shared goals and aspirations.

3. Structures: Structures define how a family business organises itself to accomplish a shared vision. They also support establishing tailored governance frameworks reflecting the family’s unique characteristics and future ambitions. However, structures also need to evolve to accommodate the family’s growth and changing dynamics.

4. Processes: Processes describe how structures work and how structures with robust processes ensure consistent and transparent decision-making.

5. Policies: Policies consist of all agreements that regulate relationships between the family and the enterprise. Clear policies guide the family’s relationship with the business, encompassing areas like succession planning, investment, inclusivity, and crisis management.

6. Leadership: Family businesses need different kinds of leaders at various stages of growth and transition. It is important that businesses identify, nurture, and prepare current and future business leaders, ensuring that they have the necessary attitude, skills, and support to advance the family enterprise.

7. Education: It is the cornerstone of sustainable family enterprise continuity. Continuous education for family members is essential for maintaining governance standards and preparing the next generation for leadership roles.

The seven drivers collectively create a robust governance framework. The first two drivers, values, and purpose, establish the family’s identity and vision, providing a foundation for governance. The following three drivers, structures, processes, and policies create a governance culture, ensuring that decision-making is consistent and aligned with the family’s values. The final two drivers, leadership, and education, focus on developing current and future leaders, ensuring the family’s continuity and success.

Building a Legacy: The Intricacies of Family Governance

When we delve deeply into each of the pillars, it is apparent that it is a long and intricate process. Defining these drivers requires consistent dialogue and engagement with various family members and cannot be driven by one member of the family enterprise. For instance, defining values may take several discussions as family members from different backgrounds and perspectives come together to articulate what unites them. Effective governance isn’t just about structures and documents. It is about creating a culture where family members can work together harmoniously and make decisions collaboratively and transparently. Family members often have diverse views based on their roles, involvement, experience, and generation. Managing this diverse range of people and views requires structured and regular meetings to facilitate impartial discussions and to manage conflict. Building a robust governance structure takes time, and it is crucial that family businesses invest time in this process to build a foundation of mutual understanding and shared vision. A well-defined governance structure can adapt to changes, ensuring the family’s business remains resilient and competitive.

While the process of establishing governance in a family business is complex and time-consuming, it is essential for the longevity and health of the family and the business. By investing in this process, families can create a robust governance framework that supports harmonious relationships and effective, transparent decision-making. By continually evolving their frameworks and fostering a culture of inclusivity and transparency, family businesses can navigate complexities and thrive across generations. By focusing on these seven key pillars, families can create a robust framework that supports their shared values, vision, and aspirations, ensuring their long-term success and continuity.

Through its mission, the Pearl Initiative is dedicated to supporting family businesses through the complex process of governance and succession. By providing tailored guidance and research insights, and facilitating valuable dialogues, the Governance in Family Firms programme aims to effectively support family firms in addressing governance and succession planning challenges. The programme actively engages with family businesses in the Gulf region to support them in adapting corporate governance practices that suit their evolving needs and growth trajectories, ultimately contributing to their sustained success. Drawing on our extensive experience and insights gained from working with family businesses across the region, we offer the following key recommendations for businesses looking to build robust governance frameworks that align with their core values, vision, and growth aspirations:

• Formalise and clearly articulate and document the family’s core values and vision. This foundational step helps align business practices and governance structures with the family’s shared aspirations.
• Develop clear, actionable succession plans that are regularly reviewed and adapted as the business and family dynamics evolve. This ensures a seamless transition of leadership and reduce potential conflicts.
• Engage and prepare the next generation early to take on leadership roles. Providing mentorship, leadership training, and opportunities to lead initiatives within the business can help prepare them for future roles.
• Create governance structures that align with the family’s core values, purpose, and vision. Establish and continuously refine governance structures that reflect the family’s values, purpose, and vision, ensuring they remain flexible to adapt to growth and changing dynamics
• Foster a Culture of Open Communication between family members across generations to consider diverse viewpoints and manage conflicts.
• Invest in the continuous education of family members, particularly the next generation, to ensure they are equipped with the necessary skills, knowledge, and understanding of business and governance practices.
• Continuously assess the effectiveness of governance practices and make necessary adjustments to ensure they remain aligned with the family’s evolving needs and the business’s growth trajectory.
• Establish formal processes for decision-making that promote consistency and transparency. These processes should be designed to handle the complexities and unique dynamics of a family business.
• Create and enforce policies that regulate the family’s relationship with the business. These should cover areas such as succession planning, investments, inclusivity, and crisis management.
• Encourage Inclusive Governance Practices by including diverse family members’ perspectives This inclusivity helps in making well-rounded decisions and maintaining family unity.
• As the family business grows, adapt governance frameworks to reflect new challenges and opportunities. This proactive approach helps in maintaining governance effectiveness and business resilience.

By implementing these recommendations and continuously assessing and reflecting on their practices, family businesses can better navigate the complexities of governance and succession planning. Adopting these practices will not only support family businesses to preserve their legacy but will also enhance the business’s potential and resilience for generations to come.

To learn more about the Pearl Initiative’s Governance in Family Business Programme please refer to the following link:

https://www.pearlinitiative.org/programmes/governance-in-family-firms/