Family affairs: Key to sustainable family-run businesses is institutionalization
Family-owned businesses are crucially important to a healthy economy not only in Turkey but around the world.
They play a substantial role in increasing economic stability, as well as being the keystone of an economy; in Turkey, they contribute nearly 75 percent to gross national product and account for 85 percent of employment in the country.
The durability of family businesses is based on the principle of sustainability, but the number of companies that are successfully handed onto the next family generation is on a global level.
While there is no official research into the number of family businesses that fail in Turkey, except for a few academic studies and audit firm analyses, it can be seen that the numeric data are far behind the F ar East, in parallel with the world.
Is generational sustainability possible for family-owned companies? The answer to that question is yes if the correct steps toward what is called “internalized institutionalization” are taken - in other words, by adopting the best governance practices of the corporate world.
What follows is a brief outline of the issues surrounding corporate governance in family companies based on our accumulated experience.
Institutionalization signifies establishing a uniform system driven by an accountable and trans- parent management approach. This situation must be examined in two distinct parts: “institutionalization of the company” and “institutionalization of family relationships.” The sum of these two factors forms the concept of “internalized institutionalization.”
Primarily, a good family-company relationship is highly important. Like any healthy family, a family business needs a balance of love, respect, tolerance, empathy and distance. For family businesses with good relations, the best practices mentioned below are only instruments to enable the continuance of the company.
The key to defining good relationships among individuals is the constitution of family councils in which all members are participants. Unlike a board of directors, which is the basis of a company, the most important feature of a family council is openness and participation. However, the purpose of a family council is to create a platform of consultation and not to manage the company.
The fundamental reason for the disappearance of a family business is the absence of a plan and a defined process for the transition of assets and companies to the next generation. Within this context, the significance of organizing a family constitution is a major factor in a family that internalizes institutionalization.
Basically, a family constitution includes a mission, the share proportion of the company and assets, the transfer or alteration of duties, the education of family members, rules and conditions of family members’ participation in the company’s management, a business vision, where the family wants to be in the future, election criteria of board members by the company, performance measurement and the management of family properties.
The shareholders’ agreement is also a part of the family constitution. It regulates the relationship among shareholders in more detail and more strictly. Generally, the shareholders’ agreement places restrictions on the transfer of shares owned by shareholders in the company, such as the preemption right, the right of share buy-back and call option, management rights and decision-making mechanisms, competition restrictions and other rights and obligations of the shareholders related to the company.
In addition to the mechanisms that aim to determine the relationship among the family members by written rules, it is worth emphasizing the importance of the board of directors, which is the principle unit of a company.
According to the Turkish Commercial Code, the duties and responsibilities of the board are considerable. It is essential for the continuity of the company that the board must not be overwhelmed, or undermined, by the emotional bonds among family members. It is also important to remember that the mechanisms mentioned herein are not limited and that very different policies can be determined in compliance with the characteristics of the family and the company.
Path to sustainability
The remedy to the short lifespan of a so many family businesses and the formidable challenges they face is internalized institutionalization and the role corporate governance provides to meet this aim. Principally, in order for corporate governance to be implemented, as required throughout the whole of the family business, the current situation of the company, the appropriate solutions and the actions to be taken must be determined realistically and these actions implemented properly.
Finally, it is crucial that everyone implements such solutions and actions with the required degree of diligence. There is no doubt that family businesses must have a durable, reliable and sustainable structure, as a result of the actions mentioned above when taken properly, and the determination the legal and strategic path to be followed, as well as implementation of these without compromise.