RIYADH: The lack of proper governance policies to regulate the professional relationship between partners in a family business is the primary reason for disputes in such companies, according to Talal Al-Ajlan, the CEO of the National Center for Family Businesses.
He said that the most common cause of friction is when a family member interferes with the way a business is being run by the executive directors entrusted with the task. Most often, the person interfering with the management of the company holds shares in the business and so has a vested interest. As a result, disputes arise between executives and the shareholders infringing on their’ management powers.
“Family businesses in the Kingdom encounter various challenges similar to the ones that family businesses in other parts of the world face,” said Al-Ajlan. “Social and family relationships can be impacted by the disputes that arise within family businesses.
“These disputes arise because there is no clear governance policy regulating the relationship between the owners and executive management. Another cause of disputes is nepotism: The person in charge assigns power to a relative and not to the most qualified person.”
Sometimes, family members step in and try to take over the running of a business even though they lack the experience to do so, Al-Ajlan said, because they have equity shares or other interests in the enterprise. Such interference usually leads to disputes.
He added that such disputes are inevitable in the absence of a strict governance policy that clearly sets out the powers granted to owners and to management. It is imperative, therefore, that a robust policy is in place.
The selling of shares is another common cause of disputes in family businesses, especially when one or more shareholders want to dispose of their shares but there is no clear-cut and fair mechanism to do so. Some disagreements escalate, Al-Ajlan said, and end up in the courts. In some cases, the business collapses or is split into smaller entities that might find it harder to survive in the long term.
The NCFB was launched in 2019 in recognition of the fact that family businesses are the main driver of the Kingdom’s economy in general and its private sector
in particular. It aims to support the sustainable development of such companies.
A study by the center found that in 2017, 538,000 businesses in the Saudi Arabia were family owned, which was 63 percent of the total number. The research also revealed that they contributed SR810 billion to the country’s GDP that year, representing 66 percent of the private sector’s total contribution. Al-Ajlan said these figures illustrate the vital role family businesses play in boosting the nation’s economy.
“The NCFB aims to promote the importance of family businesses and help them apply the best governance standards,” said Al-Ajlan. “The center also aims to familiarize family businesses with the concept of sustainability and raise their awareness of having set plans for future generations.”
In 2018, the Ministry of Commerce issued guidelines for regulating the relationships between the owners of family businesses to help reduce the number of disputes. Al-Ajlan said that the NCFB is planning to launch initiatives in the near future to raise awareness of the importance of good governance.
The center is also creating programs that will to help to ease the transition when one generation takes over a business from another, achieve sustainability, and improve governance standards to ensure a family business survives and thrives in the long term.
Ensuring the stability of family businesses has a positive effect on the national economy in terms of economic development and job creation, Al-Ajlan said. They also play a pivotal role in attracting foreign investment, he added, through the formation of successful international partnerships.
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