In light of the many challenges facing family businesses, governance in family businesses emerges as a strategic tool to ensure sustainability and overcome crises. It establishes clear rules for management and ownership, helps reduce conflicts, and enhances transparency.

Keep reading to discover how governance can make a decisive difference in the success and continuity of your family business.

Definition of Governance in Family Businesses

Governance in family businesses can be defined as the set of rules and procedures by which a family business is directed and controlled, distributing authority and management among family members.

This definition of governance in family businesses also includes various mechanisms to regulate the rights and responsibilities between family owners, as well as between the family, shareholders, and stakeholders.

The ultimate goal is to achieve sustainable growth, strengthen transparency, and minimize conflicts among family members who own the business.

 

The Importance of Governance in Family Businesses

Family businesses constitute a large portion of companies in many countries. Implementing governance within these businesses contributes to

 

• Business sustainability: By developing clear and long-term succession plans, family businesses can ensure a smooth leadership transition across generations.

 

• Transparency and accountability: Governance offers clear rules for accountability, thereby reducing both financial and family-related disputes.

 

• Building trust: Governance enhances trust between management and all stakeholders, including investors, customers, and employees.

 

• Improved decision-making: It provides structured and informed decision-making processes based on accurate information.

 

Given the importance of governance in family businesses, it becomes crucial to invest in systems that not only protect the legacy but also promote growth and harmony across generations.

 

At Eamak Management Consulting, we help you design a governance system tailored to your family business that promotes transparency and sustainability. Contact us now for a free initial consultation.

 

The Impact of Governance on the Continuity of Family Businesses

Governance plays a crucial role in enhancing the continuity of family businesses. Its influence can be observed in the following ways:

 

• It ensures smooth generational transitions and minimizes internal disputes that may arise from overlapping family relationships and business interests.

 

• Governance provides clear frameworks for decision-making, enhances transparency, and maintains a balance between the interests of the family and those of the business.

 

• It instills accountability principles, thereby improving performance efficiency and earning the trust of investors and external partners.

 

Given the impact of governance on the continuity of family businesses, it’s no surprise that a study by the International Finance Corporation (IFC) confirmed that family businesses that implement corporate governance principles enjoy greater longevity and adaptability to economic challenges.

Additionally, the PwC Family Business Survey 2021 reported that 84% of family businesses with effective governance mechanisms were more prepared to face crises compared to those lacking a clear organizational structure.

Governance in Family Businesses in Saudi Arabia

Governance in family businesses in Saudi Arabia  is receiving growing attention in Saudi Arabia, especially in light of Vision 2030, which aims to strengthen the sustainability and growth of the private sector.

Family businesses are a major component of the Saudi economy, contributing significantly to GDP and providing employment opportunities for thousands of citizens.

For this reason, various governmental entities—such as the Ministry of Commerce and the Capital Market Authority—have worked to develop regulatory frameworks specific to family business governance. These aim to enhance transparency, ensure continuity across generations, and reduce risks arising from family disputes.

In 2020, the Ministry of Commerce issued the Family Business Governance Guideline, which outlines best practices for managing family businesses. The Capital Market Authority also launched an initiative to support governance in private companies, including family businesses, to prepare them for public offerings and entry into financial markets.

A study by KPMG Saudi Arabia found that family businesses that adopt clear governance systems are more capable of expanding and growing locally and globally.

Moreover, the PwC Middle East Family Business Survey 2021 revealed that 60% of Saudi family businesses had already begun implementing governance practices to ensure smooth leadership succession.

Family Business Governance and the Family Charter

The family charter can be defined as a document that includes a set of core values and principles—both at the family and business levels—as well as a collection of rules and regulations that serve as a reference for maintaining company stability and sustainability across generations.

 

Family business governance and the family charter reduce disputes and enable management to achieve business goals while also considering the financial, social, and ethical interests of family members.

The family charter outlines rules and boundaries that professionally separate management, family, and ownership, minimizing overlap between them.

Importance of the Family Charter

• Conflict prevention and resolution: Provides a framework for managing and resolving disputes.

 

• Growth and sustainability: Governance and the family charter support sustainability through clear rules for conflict resolution, decision-making, and succession planning.

 

• Succession planning: A key element of the charter that ensures a smooth transition of leadership across generations.

 

• Transparency and accountability: Enhances internal family transparency and builds credibility with external stakeholders.

 

Key Components of the Family Charter

• Vision and mission: Defines long-term goals and the values that guide the company.

 

• Ownership and roles structure: Clarifies the distribution of responsibilities and ownership within the family business.

 

• Conflict resolution mechanisms: Provides a framework to address and resolve disputes within the family or business.

 

• Decision-making process: Specifies how decisions are made and who is involved.

 

• Succession planning: Ensures continuity in leadership and operations across generations.

 

If you are looking to develop a professional family charter that ensures business continuity and minimizes disputes, the Eamak team offers full support from planning to execution.

 

The Family Business Governance Bylaw

 

The Family Business Governance Bylaw issued by the Saudi Ministry of Commerce in 2020 represents a significant step toward organizing the environment of family businesses and ensuring their long-term sustainability.

The bylaw aims to help family businesses establish a clear framework for managing operations, enhancing transparency, and outlining decision-making processes. It emphasizes the organization of management and ownership transitions across generations.

Key provisions of the bylaw include:

 

• The importance of establishing a family council and drafting a written family charter.

 

• Defining policies that regulate the relationship between the family and the business.

 

• Encouraging the appointment of independent board members.

 

• Promoting disclosure in line with global best practices in governance.

 

This bylaw is advisory and applies to all types of family businesses, including sole proprietorships, limited liability companies, partnerships, or joint stock companies, provided they are owned by one or more families.

 

Governance of Family-Owned Joint Stock Companies

Governance of family-owned joint stock companies is part of the broader corporate governance framework issued by the Saudi Capital Market Authority, applicable to all listed joint stock companies, including family-owned ones.

This regulation aims to strengthen transparency, ensure fairness among shareholders, regulate the board of directors, and define its responsibilities precisely.

 

Key elements of the regulation include

• Formation of an effective, independent, and competent board of directors.

 

• Full disclosure and transparency regarding financial operations and key decisions.

 

• Protection of shareholders’ rights, including voting rights and access to information.

 

• Policies related to conflicts of interest and dealings with related parties.

 

• Regulation of general assembly meetings and annual reports.

 

For family-owned joint stock companies, this regulation helps define relationships within the family and prevents personal interests from overshadowing the business interest. This promotes company stability and enhances investor confidence.

In summary, every family-owned joint stock company must comply with the regulations set by the Capital Market Authority, while other non-listed family businesses follow the Ministry of Commerce’s advisory bylaw.

Conclusion

Governance in family businesses is the cornerstone of building resilient, multi-generational companies. It ensures a balance between family interests and business success, enhances transparency and accountability, and reduces potential conflicts.

With the evolving business landscape, implementing effective governance has become essential for any family business aspiring to grow and sustain itself.

Are you aiming to implement effective governance in your family business?

 

At Eamak Management Consulting Company, we leverage over 20 years of experience to help you build a governance system tailored to your company and designed to enhance performance.

Book your consultation now with Eamak experts and start building an integrated governance system for your family business.

By :Fatma Abu El ala