Posted on August 9, 2019
Family owned businesses (FOBs) are critical engines of social and economic development in Lebanon and the MENA region. They account for more than 95% of all registered Micro, Small and Medium-Sized Enterprises (MSMEs) in the country and the region. The fact that only 5% of them survive the transition from the second to the third generation is a critical concern. The root cause of many of these FOBs failures can be traced back to ineffective governance.
While governance covers a broad remit, the central role of the Board will be our focus. Boards in Lebanon and the region face five typical challenges that limit their ability to ensure trans-generational survival.
Berytech is well positioned to offer board advisory services to FOBs in Lebanon and help them strengthen their governance foundation and develop an appropriate action plan to address the challenges below.
Many FOB Boards have informally evolved over time as their businesses have scaled and as younger family members have grown to take on leadership positions. Often there is no formal communication on the charter of the board nor any structured training for what the individual Directors role and responsibilities are.
To further complicate matters, FOB Boards are faced by a unique challenge: whether to put family first or the business first. What happens when, for example, the family wants bigger dividends, but the business needs greater funding for operations and growth? How does the Board respond to conflicts of interest if a family member starts a competing business for example? Historically, clarity on the Boards role, responsibilities and accountabilities were not necessary as the Board had time to be all things to all stakeholders.
However, as the complexity of business operations has grown – both in terms of industry participation, geographic footprint and competitive dynamics – and as the expectations of a growing family has also increased, there is no way for an FOB Board to be effective without the clarity of purpose and the focus of objectives. To address these complexities, FOBs are increasingly segregating family governance from business governance.
Many FOB Boards are comprised solely of family members who have grown up within – and along with – their businesses. As their businesses have enjoyed success, they have taken on greater leadership positions culminating in a role on the Board. While this not only ensures a trusted individual with a vested interest in the long-term success of the business, it also provides someone with a proven and intimate operational knowledge.
An additional complication for FOBs is handling the transition from a family-only board to one that includes independent Directors. Ensuring the exiting family Directors have an alternative role – such as a Director on the Investment or HR committee or on a family entity such as the Family foundation – is critical for maintaining commitment and family unity.
A Board has limited time to get behind the financials and truly understand the critical drivers of business value and to effectively challenge management in order to make insightful and impactful decisions. This requires each Board member to play their role and bring their specific attributes to drive a productive dialogue. Ineffective Board dynamics – both between Board members and between the Board and management – severely limit value add impact. Poor Board dynamics in regional FOBs typically stem from common behaviors:
Effective Board dynamics are critical – as with any team, the better its participants work together and are able to leverage their specific skills and experiences, the better the impact on business outcomes. It is the Chairman’s responsibility to ensure authentic and constructive debate that ensures clarity, accountability and, ultimately, results.
The responsibility for productive Board meetings lies with the Chairman whose primary function is to ensure the right agenda is set, dialogue in the Board is focused, rigorous and constructive, and accountability for action is established. However, this relies on Board members ensuring they are up-to-date on the agenda topics and on management to provide insight and transparency. If a common fact base of issues is understood prior to the meeting, Board time can be more effectively spent on assessing options and aligning with management on the optimal way forward. Without this understanding, Board time will, at best, be wasted on bringing Directors up to the same level or, at worst, end with frustrating indecision that delays progress and action.
With Board meeting dates for the year usually scheduled in advance, Directors should easily be able to set aside regular blocks of time to review materials, prepare questions and submit requests for additional information or clarifications. This should really be the base expectation of any credible Director whether they are family members or independent.
Decision-making in regional FOBs can be very complex. The benefits of the FOB model – a patient long-term approach to the deployment of capital together with an entrepreneurial mindset – drives a different decision-making approach to a Board driven by a short-term focus on quarterly earnings. This approach has resulted in decisions to enter new industries or geographies driven as much by family reasons as commercial. A new business can be born from the passion of one of the family members and, if they are able to convince the patriarch, the new venture can easily raise funding. As the rationale to enter a new sector is often not wholly commercial, the decision for FOBs to exit out of businesses – many of which may have the emotional attachment of been started by parents or even grand-parents – is also not just driven by numbers. Consequently, an FOB can carry loss making entities for years and years. Every Board the hockey stick turnaround (a short period of continuing decline followed by a sudden and prolonged upturn in performance) is promised and unfortunately almost every subsequent Board the hockey stick is revised further out.
An effective Board will not hesitate to make dispassionate decisions driven by cold hard facts. Family harmony and unity is not best served by turning a blind eye to underperformance of assets with emotional attachment. It is best served by maintaining a healthy portfolio of cash generating businesses that will serve the social and economic needs of family members. By taking a strategic view, the Board can maximize shareholder value by addressing assets before they enter the Business Model.
A common complaint of FOB Boards is the lack of certainty that decisions made at the Board will flow though to management actions in day to day operations. Board frustration is palpable when management does not reflect the urgency or priority the Board expects. Even with the best will in the world, the Board cannot be everywhere and know everything that is happening in its businesses. Equally, the company secretary is often nothing more than a note taker who checks-in just before Board papers are due for an update that it cut-and-pasted into the pack.
This can lead to a breakdown in trust which is only compounded by micro-management that only creates a burdensome bottleneck that chokes decision making and paralyzes the businesses. Establishing a clear hierarchy of support structures under the Board is essential for driving follow through and execution. The Board must provide clear direction and oversight but must also give accountability to the relevant support structure.
All Family-Owned Businesses harbor the dream of translating the success of the patriarch into a truly sustainable trans-generational business. The benefits of the FOB model – an entrepreneurial mindset coupled with a patient approach to deploying capital – can only become sustainable by ensuring the appropriate discipline and governance is instituted. As the Board has a central role to play in this, it must dispatch the typical challenges that create inertia and friction in the execution of its objective: facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.
About the author
Constantin Salameh is Senior Coach and Investment Advisor with Berytech, providing financial and management advisory services to several companies in Lebanon. He has a 35-year track record in funding, developing and transforming corporations, SMEs and startups across the world.
He was previously CEO of HP Financial Services in EMEA and Asia Pacific and the CEO of global investment groups such as Safinvest, AMS Group and Al-Ghurair Investments. He joined Stanford’s Graduate School of Business SEED Program in 2015 and provides advisory services to social SMEs in both East and West Africa.
He has invested in several high potential and high social impact startups and SMEs in Africa, Lebanon and Europe, while providing them with mentoring, advisory and coaching services to scale effectively with a solid governance foundation. He sits on the board of more than 15 companies – active in the EMEA region in the healthcare, technology, renewable energy, FMCG, pharmaceuticals and FinTech sectors.
Constantin holds engineering degrees from King’s College London and MIT, together with an MBA from Stanford’s Graduate School of Business with a focus on international finance.