As it proved with the Nuqul Group, separating ownership from management can help a family business thrive.
By Elisa Oddone
Family-owned businesses make up 90 percent of the companies in our region. But as important an economic driver as they are, most of them unfortunately close down or split into smaller firms by the third generation of managers.
Initially, family-run businesses’ light use of bureaucracy gives them leverage in solving business problems. Problems arise later, however, when the company tries to grow and expand using the same informal power structure it started with. Bereft of solid corporate governance, thorough management of wealth, succession planning, and guidelines for the employment of family and non-family executives, family-run companies might simply go out of business.
But could switching from family management to just ownership really improve the longevity of these companies?
Some Jordanian family-run firms managed to make this leap to great effect. The Nuqul Group, which began as a small trading company in 1952, separated management from ownership a decade ago, when the family members in charge no longer felt they could cope with the daily drill of running a company with thousands of employees and operations spread across multiple international markets and sectors.
During a roundtable discussion on family-run businesses in Amman last month, Nuqul Group Vice Chairman Ghassan Nuqul said bringing in outside help proved vital for his group’s long-term success. “A typical self-made entrepreneur does not normally pay much attention to the company’s structure, and all authority resides with him. So while we were witnessing swift growth, projects got delayed, reaching a bottleneck. We needed to transform the business from being family run into an institution in every sense,” he said.
At the expense of becoming formal and institutional, he said growing family businesses should embrace a more bureaucratic and scientific structure, combined with the entrepreneurial feeling that triggered the initial company’s expansion, but which could no longer be its only drive. But the difficulty lay in trying to preserve the entrepreneurial spirit with which the company was born during this institutionalization process.
Once the family decides to separate management from ownership and move to the board level, the company can start attracting top-tier professionals who would not join the firm otherwise, as the family control would be seen as a limit to their managerial ambitions. “If you are a top-notch professional craving to join a very profitable organization and you know that the father, his two sons, and the third generation are still in the management, you will simply not jump on board. There would be boundaries to what you could reach,” Nuqul said.
Establishing clear corporate governance and ensuring that shareholders are freed from executive and administrative duties will both help prevent conflicts that might arise internally, and grant a smooth transition of ownership within the family.
Institutionalization, innovation, and ethics are further elements that bolster the chances of a family-run business’ survival.
Banks are also more comfortable when it comes to granting loans to companies with solid corporate governance and outsourced management, rather than a family business, which can often lack a clear internal structure.
Nuqul urged SME owners to separate management from ownership, split business finances from family ones, create a formal board to include family members, clarify duties, responsibilities, and authorities of family members, and define a clear strategy for future investment.
Still, regardless of the clear benefits that can be reaped, he admitted taking the decision to split can by a tough one for any family business. “There is no right time to separate ownership from management as entrepreneurs usually keep postponing this decision. But what I regret most in my career is not having done that before. If one looks at our results, bottom line, top line, expansion, and growth they have all exponentially improved since we separated management from ownership,” he said.