A roadmap for family businesses

We heard a lot, in the past couple of years, about the need to separate ownership from management in order to substantially improve the ailing public sector. However, we have not heard the same talk about the private sector, which in my opinion is extremely important. Syria has committed itself to adopt the market economy and to put its bets on the private sector to become the main engine of economic growth. Everyone can see that the low of investments has picked up tremendously over the past six months and the demand for young Syrians to ill new jobs is increasing. We all know that the private sector is facing major challenges:

Increased competition from regional and world players brought by liberalization of the Syrian economy.

High cost of most Syrian private companies because of their small size.

Lack of highly skilled managerial resources.

Lack of longterm financial support. Converting private family companies into institutions that are professionally man-aged can place these companies in a position to meet and resolve all the above challenges. To become competitive, private firms must:

Attract skilled people to its management ranks.

Attract capital from investors and financial institutions.

Merge small companies to achieve economy of scale and distribute fixed costs over a larger production base. All these initiatives will materialize when the firm becomes a business institution free from the complete control of one family or one person, thus guaranteeing its continuity irrespective of the presence or absence of its founder or head of family. In order to convert family businesses into professionally run institutions, we need to understand the forces affecting family business. As we see, each circle of power has a structure and a plan that protects its own interests. If each individual connected with the firm abides by the rules of his own circle, there will be no conflict with other people’s rights and responsibilities. For example, a family member who is also a shareholder of the company does not have the right to interfere in the management of the company. He cannot circulate freely on the company premises giving orders to employees and asking them to provide him with business information. Instead, he can exercise his rights through the Family Council and the Shareholders Meetings. Strategy formulation is not the direct responsibility of the family, but the Family Council presents its own suggestions to the Board of Directors and indirectly influences the setting up of strategy. Also, a family member who is an employee of the company but not a shareholder is at the intersection between Family and Business, and must abide by the rules of this position. In order to eliminate chaos, it is important that problems arising in each power circle are resolved within the same circle, through its own organization structure, and not transferred to another circle.Let us discuss in brief the three power centers:

Ownership

1. Structure The owners exercise their power through two organization structures: Shareholders Meetings and Board of Directors.

Shareholders Meetings These have two major purposes:

a. Discussing financial results presented by the management.

Election of a new Board of Directors.

b. Board of Directors and Advisors : This is usually composed of 5-8 persons. Its main purpose is:

c. Making policies to protect the interests of shareholders.

d. Formulating and monitoring company strategy.

e. Deciding on dividends, debts and executive salaries.

f. Advising top management.

Defining criteria for family members who want to be directors, stressing busi-ness experience instead of seniority or status in the family.

Filling top management positions and following up their personal development in co-operation with the Family Council.

 

Few companies can afford to hire top-level skilled professional mangers to ill all the gaps in the controlling owner’s experience and therefore appointing a Board of Directors can be a good solution. The Board might be composed of: 2-3 family representatives 4-5 non-family directors. The non-family directors should have the following qualifications:

They should be experienced, successful and independent outsiders (not friends). They should have no conflict of interest (for example not company suppliers). They should have skills that complement those of the owner-manager as well as each other’s. Preferably, they should be familiar with the industry related to the company.

Be knowledgeable in how to give advice. Per year, the Board should hold 4-6 meetings, lasting ½-1 day each, and 2 days re-treat. However, if the idea of forming a Board, with the majority of its members from outside the family, is too drastic and re-mote from the thinking of the owners, then another solution could be the formation of a Board of Advisors from outside the business. They will not have decision-making powers but only play an advisory role to the Board of Directors.

Plans The Board creates four plans:

a. Strategic Plan: defining the roadmap for the coming 5 years.

b. Management Development Plan: cover ing the training programs and the career path of the key executives.

c. Continuity Plan: identifying the replace-ment of each executive in case of promotion or absence.

d. Contingency Plan: to cover emergencies.

Family

1. Structure Family Council The family exercises its power through the Family Council. It discusses family values, needs and expectations from the company. Its main purpose is:

a. Educating family members about the rights and responsibilities that come with business ownership and management. This means understanding the limits of each member in accordance with the circle he belongs to.

b. Giving family members, who are not in the business or ownership circles, a chance to be heard and to receive information about the business, the family and the ownership.

c. Providing the forum to create a family plan.

d. Defining policies and rules to be discussed and approved by the Board of Directors. Among the rules that must be clarified are:

Rules for hiring members of the family. Rules for hiring wives and husbands. Rules for dismissing a family member

from his job.

Salaries, fringe benefits (loans), dividends, pension, promotion. Professional career development. Selection of future leaders. Relations with suppliers. Transfer of ownership.

Methods of evaluating who receives shares; who votes shares; who gives agreement to buy/sell; and restrictions on transfer of shares.

e. Establishing a family code: How to treat one another. How to give support to the family.

How to resolve conflicts (arbitration, mediation). Relation between Family Council and Board of Directors.

Rules for meetings of the Council: responsibility for preparation, location, agenda.

f. Organizing activities to have fun together, vacations, celebration etc. The Council should meet quarterly and it is preferable not to have the company’s leader as the council’s head.

2. Plan The Family Plan should cover the following:

Training programs. Code of conduct of the family members. Process of resolving disputes. Fun programs.

Business

1. Structure

Management Development Team This is composed of 4-6 executives of the company. The team is responsible for anticipating and planning the development of talent for key managerial roles in the future, with special attention to family members. Regarding family managers, the team needs to be guided by the policies and goals of the owning family, as articulated by the Family Council. Decisions about the roles that must be reserved for family members, the access that members of different family branches should have to executive jobs, the criteria for company leadership that are most important to family members and the timing of transitions are all legitimate decisions for the family to make. On the other hand, if the team is to do its work well, it cannot be captured by family politics. The team’s yardstick must be its view of what the business needs. Once the family has made its basic philosophy clear, the team needs to be insulated from family members’ attempts to influence the application of those rules to specific individuals. Owners should not lobby for certain high-visibility jobs to go to their offspring.

Initiatives will materialize when the firm becomes an institution free from the complete control of one family

Family senior managers should not be permitted to promote their own children unilaterally, especially if that action violates the agreed-upon review process. As soon as the team’s assessments are controlled by a senior manager, the credibility of the whole process is destroyed. When the actions of the family, the board and the management development team are not in alignment, it is up to the owner-manager to engage in a process of reconsideration, negotiation and information sharing that leads to compromise and consensus. This issue is a perfect example of how each of the three circles has a role to play, distinct but interrelated, in creating the unique character of the business.

1. Plan The plan is the team’s projection of the company’s executive staffing needs in the future, and the career paths of key family and non-family managers to ill those needs. This involves identifying the critical jobs in the company and the current ages and career aspirations of all the managers in those jobs. It then projects a timetable of when positions will or should be vacant in the future, and who will be in line to ill them. Most important, the plan specifies the learning path that identified management candidates, including next-generation family members, will follow to become prepared for roles in the forth-coming stages of the business.

Coordination

All of the above-mentioned Structures and Plans will fail if there is inadequate coordination among them. There are three primary coordinating processes: integration through the oversight of the senior leader, integration through overlapping membership and integration through structured direct communication among the groups. The senior family member, owner-manager, who sits in the center sector of the three-circle model, can be an effective coordinator. As anywhere else, information is power in family businesses. Good co-ordination and communication can make each of these structures provide the maximum service to the business and to the family.

Conclusion

When we define the roles (rights and responsibilities), structures and rules that protect the interests of each power base we can create the professional business institution instead of the one-man show. Highly qualified individuals will not join a company that does not offer long term growth and personal promotion. Nepotism discourages the performance of people and limits their loyalty. In addition, outside investors would be more interested in participating in the capital of a professional organization which will safeguard their investments. Finally, mergers between companies be-come easier if they are converted to institutions because it eliminates the problem of which owner will manage the combined company and therefore solves the ego problem.