Family affairs: Key to sustainabl­e family-run businesses is institutio­nalization

Dünya Executive - - BUSINESS BY LAW - VEFA RESAT MORAL, MANAGING PARTNER, MORAL LAW FIRM [email protected] .AV.TR

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.

Governance

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.”

Relationsh­ips

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.

Council

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.

Constituti­on

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.

Shareholde­rs

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.

The board

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.

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