The concept of corporate governance was invented after the recent economic crisis that led to the bankruptcy of several European and American companies. This new concept is an integrated system based on the construction of three main pillars of direction, control and execution. There lies the need to separate these three pillars from each other, which is somewhat difficult to achieve within family businesses. As a matter of fact, in family businesses, the founder rules all of these three pillars at the same time, and this is what threatens the business to collapse after the absence of this “mastermind”. And here lies the big challenge for the founders in deciding how to achieve sustainability of their companies by ensuring their successors can succeed in developing what they have established.
Many family business owners train their children (the second generation) to continue after them, but in most cases, the conflict of interest between the family members of these companies, may lead to destruction and collapse of what they have inherited. Modern studies, show that most of the problems encountered by the family businesses have come from a family members and not from the company itself, they most often mix family matters with company affairs, which creates conflicts, especially in the decision making, which will eventually produce negative impact on the company’s activity and prosperity.
In a study prepared by IFC, it was found that some of the existing weaknesses in this type of companies are due to the lack of discipline, administrative and strategic decisions, which limit the progress and success. These constraints can be only avoided through the application of a proper governance system, which should be structured at the core of the business operating system from top to bottom, in order to overcome the obstacles and challenges faced.
This governance system is the secured spot that separates ownership from administration and builds a strong and healthy relationship between the family members and their businesses by dealing with it as a separate entity that has its own rights and duties.
Least and not last, we find that the reasons behind the collapse and the disappearance of the family business after the second or third generation, is due to the failure of separating family interest from company interest as a result of not implementing a strong governance system.
Source: Mhanna, Mohamad, March 10, 2017, http://corgovinstitute.com/governance-family-business/