Most family businesses play a key and vital role in the economic growth, where they constitute more than 70 percent of the proportion of companies in many countries in the world. In Spain, for example, about 75 percent of the companies owned by families, which range in size from small to medium enterprises, which eventually, contribute 65 percent of gross domestic product. And this is almost the same to most of the Middle East companies, where they constitute more than 80 percent according to the recent study made by (PWC).
The persistence and durability of this type of companies are limited to a very short time, especially after the departure of its founder, and this is what leads to the loss of economic activity, which would have been grew if well protected to reach the corporate giants level that were originally family businesses, such as Wal-Mart in the United States, L’Oréal in France, Siemens in Germany and Hyundai Motor Co. in Japan and many more.
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 backed up to the direction, control and execution. Therein lies the need to separate between these three pillars, 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.
In a study carried out by the (FNB) shows that 95 percent of family businesses disappear after a second or third generation, and perhaps the main reason for this collapse is due to the lack of effective governance system.
Many family business owners train their children (the second generation) to continue after them, but in most cases, the conflict of interest between the royal family members of these companies, may lead to destruction and collapse 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 in the other hand, 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. Governance system is as a set of legal, financial and economic rules, applied within a practical framework being respected and followed by instructions and directions of the company’s trustees with full commitment to perform all required business activities from accounting to auditing and controlling, from purchasing to marketing and selling, and from studying to evaluating and forecasting and so on. This ensures to raise higher performance at all activity level, and to reduce all negative impact caused by self-interest, thereby limiting ego tendencies that may exist within the family business.
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. Here we ensure in our opinion and as presented to start following the steps included in the corporate governance system in order to avoid business dissolution and family disintegration after the father’s absence.