Legal viewpoint: Family companies need corporate governance

By Dr AbdelGadir Warsama, Legal Counsel

Dr AbdelGadir Warsama, Legl Counsel
Asia 728x90

Family companies exist in Bahrain and Gulf Countries since long time and they took tremendous efforts to boost trade and related corporate issues. Those companies mostly started from zero, when established by older generations, but the founders were great, of exceptional determination that took the business to prominent future. Some of such companies, are doing remarkable work, good achievements from generation to generation. However, this legacy does not exist all through, due to the fact that many family companies diminish from the second or third generation.

There are many legal and corporate issues that could result in making certain obstacles in the pathway of family companies. However, some of the obstacles may arise for cultural or social reasons associated to the way of life in the region. This could happen in every part of the globe, the Gulf is not an exception by all means.       

Apart from above instance, we believe that many family companies are lacking corporate governance rules. There is no clear segregation between the owners of the business and the business itself. They are all the same in one unit, the natural entity is not severed from the juristic entity. This could be one of the setbacks facing family companies and lead to their diminishment. Corporate governance rules are essential for any corporate activity otherwise the process will be damaged and the whole system will reach a non-operating stage.

Founders of family companies are required to establish and put in action a clear-cut corporate governance rules that are to be observed and monitored by family members involved in the affairs of the company. The main concept emerging from application of the corporate rules relates to clear demarcation between the affairs of the company and the affairs of the family from other end. No mixture or blending at all between the two affairs and each family member must understand and adhere to this concept. A built-in operational system within the family is required. This non-mixture includes, among other things, financial matters and related administrative affairs while marinating the juristic entity process.

The company budget must always be different from the wallet budget and vice versa, etc. Also, family companies must have clear strategy, proper planning, standard accounting practices, different managerial levels including a Board and executive body. The role of each must be clear and in order, however, they must support each other as observed in check-and-balance concept.

The head(s) of the company must excel in giving good examples to younger generations and must plant family ego, values and traditions looking for good future harvest or, otherwise, deep roots in the tree of the family to face strong winds for survival. Nowadays, there is a legal requirement of injecting new ideas and brains by appointing good reliable independent outsiders in the Boards \ executives to play an independent active role in the affairs of the company, future plans and all other affairs for prosperous future.

Clear succession plans in family companies is required and should be carefully arranged otherwise setbacks could happen and could lead to the end of the life of the company in very short span. Succession policy is not that difficult affair, however, it could cause a real headache and unnecessary havoc for the whole process and future prospects. Succession strategy in family companies will ultimately lead to trustful continuity among present and future generations. To achieve this goal, things must be put in action in consultation with advisors. Family companies could be very strong or, in the other extreme, could be very fragile. In both cases, special intensive care is needed to go through for existence. Following legal corporate methods and solid corporate governance rules will yield in healthy and long-life family companies that will serve family members and the community wherein they are existing. Thus both ends will benefit.