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Does family business need good governance?

According to a 2011 census, there were almost 90,000 entities registered in Mongolia, 60 percent of which are now actively operating and account for 75 percent of GDP, as well as 70 percent of the workforce. If we assume that most companies are owned by one family and the rest are owned by two or more, it could be said that approximately 60,000 families have their own businesses. In highly developed countries, such as the United States and Germany, family businesses also make up more than 50 percent of both the economy and workforce.
Today, the first of family businesses in Mongolia are struggling to make a difficult transition to the second generation. A study carried out by Harvard University suggests that 70 percent of family businesses last for one generation and 23 percent of them disappear during the second generation. What makes family businesses survive for many generations, just as they were envisioned by their founders? The only answer to this question is good governance implemented, step by step, as family businesses expand.

WHAT IS GOOD GOVERNANCE IN FAMILY BUSINESSES?

It is observed, in the relatively successful Mongolian family businesses today, that the decision-making power resides solely with the founder (the owner), and their executive management consists of his family members, such as spouses and children depending on their skill set. It is rare to see a board of directors in Mongolian family businesses. The few businesses that have a board of directors mostly appoint family members and only one or two associates, who are experienced, have good networks, and have or had a senior position in the government, as board members. The non-family board members have the role of an advisor. Family members are usually appointed vice presidents, while the owner is selected as the chairman. There are also positions such as president and chief executive director. However, Mongolian family businesses are solely managed by a single person in reality.
Mongolian family businesses that have expanded greatly and whose annual turnover and workforce size have become influential within their respective industries are facing the need to learn more about good governance and implement it wisely. This need can be seen by the internal conflicts and disputes that have recently risen between shareholders of renowned companies. The lack of information about internal conflicts within in a business owned by a single family does not mean that there are no conflicts.
Good governance in family businesses means that the business is not dependent on a single family member and is viable for the long term, despite the absence of an influential member. If there is such long-term sustainability, it means that the family business has developed into an institution with strengthened management. A company that exercises good governance usually has a clear long-term vision, mid-term goals, and short-term objectives. Teams and divisions within such company are fully aware of their own responsibilities and have an organizational culture that aligns itself with self-sustainability.
Those companies with good governance have planners, executives, supervisors, and facilitators who carry out their duties. Family businesses that have good governance clearly define the differences between shareholders, executive management, and family members, and follow their internal rules and procedures as if they were laws. The board of directors ensures the continuous development of the business over many generations by carrying out risk management and leading in a strategic direction.
It is advantageous to include external experts in the board of directors of a family business. When a chief executive officer is appointed, the scope of work, including their responsibilities, goals, and remunerations, have to be formally issued even if it is the founder of the business. The internal rules and procedures within such a board of directors of a family business clearly define the percentage of shares owned by each shareholder, the rights of inheritance of each family member, and the age limit of family members who can serve as executive management.

FAMILY BUSINESSES WITH GOOD GOVERNANCE ARE HIGHLY PROFITABLE IN THE LONG RUN

A. Cheaper to raise capital
Companies with good governance have fewer operational risks, competent independent audits, experts working in executive management, and a good sense of social responsibility. Therefore, there are no difficulties when acquiring bank loans. Because changes to the ownership of a company, including when the top management gets replaced by the next generation, are predictable and are carried out without risks, it does not reduce the chance of getting a long-term loan. Furthermore, when the operations of a company are transparent and clear to the eyes of lenders, it is easier to attract additional capital when necessary. When a company with good governance offers its shares for sale on a stock exchange, the initial prices can be set high because the history of good governance comes with confidence from investors. Also, the shares attract new investors.
B. Lower operating costs
Owing to good organizational culture and high ethical standards, businesses with good governance have relatively lower turnover of their skilled workforce as their employees get more competent and errors decrease gradually over time. It allows for reduced costs and increased productivity. When an owner is replaced unexpectedly, the transition process happens in a calm, fast manner, according to the rules and procedures firmly placed in a company with good governance. Such events do not cause sudden changes to business operations. When there is an unexpected event within a company that does not have good governance, an internal conflict arises between family members, causing a very costly affair due to court proceedings and affecting business operations heavily.
In order to set the amount of dividends given to shareholders and remunerations awarded to executive management, company rules must clearly define what percentage of revenue will be distributed as dividends, what portion goes to executive management, and how much is to be retained by the business for recapitalization. This way, the expectations of stakeholders can be managed.
C. Increased sales
Businesses with good governance have a long-term vision and keep their operations sustainable. Their target markets are clear, thus, their marketing is efficient. Also, their business operations are not affected by the owner’s emotional state and behavior. Therefore, the owner does not influence the morale of employees, allowing them to feel that they are doing the job for themselves. The websites of such companies post the names and photos of their board members and executive management. It creates more trust among customers and positively influences long-term relationships. Also, all kinds of assurances in companies with good governance offer a competitive advantage.
Good governance in family businesses is a strong tool for creating sustainable operations and improving immunity against recessions. Establishing good governance in Mongolian family businesses does also align with our national interest.

Translated by B.AMAR

Short URL: http://ubpost.mongolnews.mn/?p=10339

Posted by on Jun 29 2014. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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