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Posted: February 4th, 2020

Examining Family Business Corporate Governance

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This dissertation sets out a study of the family business’s corporate governance, addressing the relationship between the owners and the management. Family businesses constitute a wide spectrum of enterprises, from small family owned and managed companies to a large internationally operating family controlled corporations. There are several definitions illustrates the family owned businesses, however the majority agree that Nebauer & Lank definition illustrate the family business in a simple way and puts it as ‘ A firm can be regarded as a family business if a given family holds the voting control of the firm’ (Nebauer & Lank, 1998).

This dissertation argues that, given the duality of the economic and non-economic goals family firms pursue and the complexity of the stakeholders structure, family firms need governance structure that matches the complexity of their constitutes stakeholders. According to that a better research and empirical understanding as how family firms are governed is needed. In this study the focus will be on assessing the level of understanding of the corporate governance concept overall and the codes provided by the Capital Market Authority (CMA), the Capital Market Authority in Oman focusing on strengthen the family owned business by incentives them to go public. The CMA is just recently in the process to create a corporate governance to help the Family business to be prepared to do so. In this study, the focus will be to create an understating and help to create a better code to help the family business sustain in the future. On the other hand there will be an evaluation of the agency theory and how the family owners acceptance of this model. Furthermore a research by McKinsey quarterly shows that 95 per cent fails to succeed the generation due to the lacking of succession planning and roles defining, therefore the dissertation will be evaluating the practice and preparation if any on how the existing owner prepare company’s succession planning rules and codes to handover their responsibilities to their successors.

In this study the focus will be on the family businesses in Sultanate of Oman, a country in the Arabian Gulf with a fledgling capital market. Oman has made significant efforts to improves the level of corporate governance, particularly in the listed companies and now the capital market would like to expand its corporate governance codes to the family owned businesses to strengthen the chances of the sustainability of its growth.

Aims And Objective

This dissertation will focus on the unique corporate governance challenges that any family business faces and propose structures and practices that can mitigate these challenges and ensure the viability of the business. The detailed objectives that guide the dissertation process are:

  • To review and analyze relevant theoretical, and other, streams of literature that focus on corporate governance and family business
  • Analyzing the practice of the existing code of corporate governance that applied by the CMA and if it fit to be implemented in the family business companies.
  • Asses the ownership structure and polices in the companies and testing the theory of the ownership and control separation.
  • Asses the long term planning by the company owners and how the successor is been appointed.
  • To assess the significance, reliability, and validity of the results; to discuss the theoretical, empirical, and practical implications of the findings; to assess the limitations
  • The impact of corporate governance in family businesses performance.

Scope of the dissertation

The present study addresses the governance of family firms, focusing on the nature of various governance mechanisms and how they affect firm performance. Family businesses provide a fruitful research context to study corporate governance due to lack of governance research in the area and the distinctive characteristics of family firms. The family business context, especially, enables the study of how aspects of formal and social control vary according to characteristics of ownership structure.

Research Approaches and method

The methods to gather the required data will be a qualitative, where the participations will be selected based on their history and age of the company in practice. The research will be analyzing their policies and corporate governance practice. Interviews will be placed with the owners and senior managers of the companies to get all the data required for the findings and results.

Structure of the dissertation

Chapter 1: Introduction

This chapter included the background of the study, the aim, purpose of the study, research questions and limitation of the study and it will present the structural framework of the study.

Chapter 2: Literature Review

This chapter will review the historical perspective, theories and related studies of corporate governance, family business and related theories to corporate governance. This chapter will include the secondary data which will be used in discussing the findings.

Chapter 3: Methodology

Chapter describes the methodology and procedures that were used to carry out this study. Furthermore, this chapter will review the population and participants of the study, instruments and data collection procedures.

Chapter 4: Results and Findings

This chapter will present the data and findings related to the research questions

Chapter 5: Data Analysis and Discussion

This chapter presents the data analysis and the discussion of the finding.

Chapter 6: Conclusion

In this chapter, the researcher will present a summary of the study and the findings, conclusion and recommendation.

The structural framework of the dissertation is illustrated in Figure 1.


Literature Review


A growing number of studies have been done on the family business ownership and management separation or combination in the past few years and what is the linkage between the performance and these two elements. In this chapter we will be presenting the theories and the studies that are related to it and selecting a frame work that will be the base of the evolution of the practice we examine in the family businesses.

Family Owned Business

Family enterprises or family owned businesses represent the oldest form of businesses in the world. The family owned businesses constitutes more than 70 percent of all business in most of the third world countries and in some developed countries (IFC, 2009). In the IFC research ‘Family Businesses Corporate Handbook’ shows that family owned businesses are the higher contributor in any country growth in terms of economic development and employment. In Spain, for example, about 75 percent of the businesses are family-owned and contribute to 65 percent of the country’s GNP on average. Correspondingly, family businesses contribute to about 60 percent of the cumulative GNP in Latin America (IFC, 2009). in addition to, accordingly to recent researches that 95% percent of employment in the Middle East and especially in the Arabian Gulf Peninsula is in the family owned businesses.

There are several definitions that explains the family business corporations, the IFC define it as ‘a company where the voting majority is in the hands of the controlling family; including the founder(s) who intend to pass the business on to their descendants’, in another words is ‘A business actively owned and/or managed by more than one member of the same family’. There are two systems that control the family businesses; which are the family system, and the management system, the two system overlap due to the dual roles that any family member take, like a family member may be a manger or an employee in the business and here where the conflict arise. The family system is based on emotional, love and care. The family system is based on the relationship in the family and they take most of these values to the business. Where in the business system is the professional values are the edge of the decision. (Managment Resources, 2010)

To define a family business need to understand the environment from one to another, here are list of family business definitions that made by researcher past the year that cover the family business from different view but reserving the concept.

Table Family business Definitions

A company is considered a family business when it has been closely identified with at least two generations of a family and when this link has had a mutual influence on company policy and on the interests and objectives of the family. (Donnelley, [1964] 1988: 428).

Controlling ownership rested in the hands of an individual or of the members of a single family. (Barnes &Hershon, 1976: 106).

Organizations where one or more extended family members influence the direction of the business through the exercise on kinship ties, management roles, or ownership rights. (Tagiuri &Davis, [1982] 1996: 199).

It is the interaction between the two sets of organization, family and business, that establishes the basic character of the family business and defines its uniqueness. (Davis, 1983: 47).

What is usually meant by .family business….is either the occurrence or the anticipation that a younger family member has or will assume control of the business from an elder. (Churchill &Hatten, 1987: 52).

We define a family business as one that will be passed on for the family.s next generation to manage and control. (Ward, 1987: 252).

A business in which the members of a family have legal control over ownership. (Lansberg et al., 1988:2).

A family business is defined here as an organization whose major operating decisions and plans for leadership succession are influenced by family members serving in management or on the board. (Handler,1989b: 262).

Firms in which one family holds the majority of the shares and controls management. (Donckels &Fröhlich,1991: 149).

A business where a single family owns the majority of stock and has total control. Family members also form part of the management and make the most important decisions concerning the business. (Gallo &Sveen, 1991: 181).

A business firm may be considered a family business to the extent that its ownership and management are concentrated within a family unit, and to the extent its members strive to achieve, maintain, and/or increase intraorganizational family-based relatedness. (Litz, 1995: 78).

A business governed and/or managed on a sustainable, potentially cross-generational, basis to shape and perhaps pursue the formal or implicit vision of the business held by members of the same family or a small number of families. (Sharma et al., 1997: 2).

A family enterprise is a proprietorship, partnership, corporation or any form of business association where the voting control is in the hands of a given family. (Neubauer &Lank, 1998: 8).

Family businesses share some common characteristics, largely due to the interacting and overlapping domains of family, ownership and management (Tagiuri & Davis, 1982). Family firms have a complex stakeholder structure that involves family members, top management, and a board of directors. Family members, who are often significant owners, usually play multiple roles in managing and governing the firm (Tagiuri & Davis, 1982). This involvement promotes loyalty and also commitment to long-term value creation (Dyer & Handler, 1994) and reduces problems that arise from separation of ownership and control, as experienced in large, public corporations (Jensen, 1989). Also, family businesses may enjoy a competitive advantage due, for example, to remaining entrepreneurial in character and having a strong sense of responsibility to society (Neubauer & Lank, 1998), fast verbal and nonverbal communication, aided by a shared identity and common language of families (Gersick, Davis, McCollom Hampton & Landsberg, 1997), family members. Business expertise gained during early childhood onward (Kets De Vries, 1996), and a strong organizational culture contributing to external adaptation and internal integration (Schein, 1983). However, the family’s involvement in governing the firm may induce a focus on business and non-business goals, possibly leading to inefficiency (Schulze, Lubatkin, Dino & Buchholtz, 2001). If the owner family is not regularly informed about the company’s affairs, differing visions of the company’s future may develop between management and the family. The resulting feuds between family factions may distract management’s attention from value-creating activities and so reduce their commitment to strategic decisions. Owner-managers also may act opportunistically by satisfying their own needs at the expense of the company’s performance and long-term survival. Entrenched owner-managers may not share their powers with others, especially not with the company’s board.

Furthermore the common characters of all family businesses are illustrated in the diagram below.


The individual represent the family members who are directly involved in daily bases with the operation, the family symbolizes the whole family where in some family businesses called the family counsel and the management dimension represents the family managers and non-family managers.

McKinsey quarterly stated in the report ‘keeping the family in business’ that only 5 percent will continue to create shareholders value after the third generation. Moreover; the IFC also mentioned in the family business hand book, while the third generation takes over; 95 percent of all family businesses will not survive the ownership around. These consequences might be a result to the lack of commitment and proper business education of handling the business demands. In addition, the survival of family firms is often challenged by dictatorial rule, resistance to change, lack of professionalism in management capabilities, confusion in family and business roles, rivalry and enlarged human emotions among family members, conflicts between interests of the family and the business, and a low rate of investment in business development (Donnelley, 1964; Gersick et al., 1997; Kets De Vries, 1993).

All the definitions are focusing on the shareholders and their power in voting and management and these two points are actually the core strength and weaknesses of any family business. However there are other dimensions that a family business can be measured of its strength and weaknesses like:

  • Culture
  • Ownership and governance
  • Succession planning
  • Family involvement

This dissertation will be reflected somehow in the culture dimension due to the strength of the factor here in the Arabian Gulf Countries and Oman. Different researcher came up with different definitions of the family business; however, the definitions imply six themes for clarifying the boundaries of the domain of family business: (1) ownership, (2) management, (3) generational transfer, (4) the family’s intention to continue as a family business, (5) family goals, and (6) interaction between the family and business. These themes are similar to those found in the extant literature. For example, Handler (1989a) categorized family business definitions under four headings: ownership and management, interdependent subsystems, generational transfer, and multiple conditions.

The extant literature on family business research has largely neglected the definition of the family itself. By modifying Winter.s, Fitzgerald, Heck, Haynes & Danes (1998) definition of the family, the present study defines it as a kinship group of people related by blood or marriage or comparable relationship. This definition allows a multigenerational view of an extended family.

Family Business in Oman

According to the family firm institute (FFI) the around the 75% of Oman’s private companies are family owned, with their firms creating 70% of the country employment. There are 12 top families who are controlling around 75% of the contribution over all in Oman. The family owned business also control 90% of commercial activity according to Tharawat (Fortunes) Magazine. Oman is a part of the GCC Region where in the region is estimated that family businesses worth more than 1 trillion dollar, that is ready to be handled to the next generation. All family owned business share same characteristics as mentioned above, even the strengths and the weakness are similar to some extant in all family businesses. However, the family business can be categorized to two categories:

  • Listed family businesses
  • Non-listed family business

The listed family businesses are set to fulfill the listed companies corporate governance code as per the CMA regulation, but the non-listed are not treated that way; what’s so ever the size or the operations are. The CMA in Oman are concentrating nowadays to establish an attractive market and safe to all sizes of family businesses, ‘the CMA is concentrating on converting the family closed family business to go public by Initial Public Offering(IPO) offering them a less strict rules and requirements to commence the IPO’ as the Head corporate governance Center declared.

Furthermore there are different points that might affect the operation of any family businesses such as:

family relations affect the assignment of the management

family indirectly runs the company

‘major family influence/dominance’ of the management (in terms of strategic decisions)

‘significant proportion’ of the enterprises’ senior management

‘most important decision’ made by the family

‘family control’ of the management of the enterprise

at least 2 generations having had control over the enterprise

These points might be strengthen the family business in the initial stages of the operations but there must be some kind of governance or policies on whom can make a decisions and how is not.

Corporate Governance

Corporate governance is a topic that has been a subject of significant debate since 2001 Enron’s and other US companies crashed. Some analyst say lack of corporate governance was the main reason behind the crash (International Swaps and Derivatives Association, 2002). The international Swaps and Derivatives Association highlight that the failure was due to interests that extended certain managers at the expense of the shareholders. While the United States’ capital market where busy analyzing the reasons behind the crash of Enron and World Com, Sultanate of Oman has also experienced its share of corporate trouble affecting not only large companies such as Rice Mills SAOG and Oman National Investment Company Holding SOAG but also dozens of smaller companies, which have had to turn to the government for assistance (Dry, 2003). The year 2002 was the birth of the new corporate governance standards from the Capital Market Authority (CMA), but it was only covering the list companies in the Muscat Security Market only. Since then the CMA focused on upgrading this standards and code and refine it to be in a worldwide acceptable standards and to include the best practice for the companies. The standards have been modernized since 2002 on the listed companies and the closed shared ones but nothing was mentioned on the family business side. In 2009 the CMA established the corporate governance center to help the companies implement the codes of corporate governance and to regulate the practice and monitor it, in addition to create a new standards to fit the family businesses practice. Till today the CMA and the Center did not establish a full concept on how they can produce a set of codes to be acceptable to the share holders of these businesses due to the lack of information on the family owned businesses in Oman.

Theoretical framework related to Corporate Governance.

The corporate governance model did not came from one framework or a certain theories, but I was built up on different practices and theories which results of different frameworks that today any economic system can customized to suit the needs to regulate the market.

There are certain theories that been always associated with corporate governance practice which is set out the relation between the principle (shareholder) and the agent (management):

  • The agency theory
  • Stewardship Theory
  • Stakeholder theory

The agency Theory

Agency theory having its roots in economic theory was exposited by Alchian and Demsetz (1972) and further developed by Jensen and Meckling (1976). Agency theory is defined as ‘the relationship between the principals, such as shareholders and agents such as the company executives and managers’. Agency theory argues that in the modern corporation, in which share ownership is widely held, managerial actions depart from those required to maximize shareholder returns (Berle and Means 1932; Pratt and Zeckhauser 1985). Since Jensen and Meckling (1976) proposed a theory of the firm (Agency Theory) based upon conflicts of interest between various contracting parties – shareholders, company managers and debt holders – a vast literature has been developed in explaining both aspects of these conflicts. Jensen and Meckling (1976) further specified the existence of ‘agency costs’ which arise owing to the conflicts either between managers and shareholders (agency costs of equity) or between shareholders and debtholders (agency costs of debt). Financial markets capture these agency costs as a value loss to shareholders.

The agency theory argues that an agency relationship exists when shareholders (principals) hire managers (agents) as the decision makers of the corporations. The agency problems arise because managers will not solely act to maximize the shareholders’ wealth; they may protect their own interests or seek the goal of maximizing companies’ growth instead of earnings while making decisions. Jensen and Meckling (1976) suggested that the inefficiency may be reduced as managerial incentives to take value maximizing decisions increased. Agency costs are arising from divergence of interests between shareholders and company managers. ‘Agency costs’ are defined by Jensen and Meckling as the sum of monitoring costs, bonding costs and residual loss.

(1) Monitoring Costs

Monitoring costs are expenditures paid by the principal to measure, observe and control an agent’s behavior. The economic impact of asymmetric information also results in various corporate agency problems. Firm managers (insiders) know more about their firm than shareholders and debt financiers (outsiders). When outsiders are unable to judge over the firm’s performance, they tend to qualify a firm’s performance as moderate. A result of this asymmetric information is that shares of a firm with a great performance are undervalued and vice versa. More specifically, information asymmetries between shareholders or bondholders and corporate executive management creates the necessity of monitoring (costs) and complications for the structuring of financial contracts. They may include the costs of preparing reliable accounting information and audits, writing executive compensation contracts and even ultimately the cost of replacing managers.

Denis, Denis, and Sarin (1997) contended that effective monitoring is restricted to certain groups or individuals. Such monitors must have the necessary expertise and incentives to fully monitor manager. In addition, such monitors must provide a credible threat to management’s control of the company.

(2) Bonding Costs

To minimize monitoring costs, managers tend to set up the principles or structures and try to act in shareholder’s best interests. The costs of establishing and adhering to these systems are known as bonding costs. They may include the costs of additional information disclosures to shareholders, but management will obviously also have the benefit of preparing these themselves. Agents will stop incurring bonding costs when the marginal reduction in monitoring equals the marginal increase in bonding costs.

As suggested by the agency theory, the optimal bonding contract should aim to entice managers into making all decisions that are in the shareholder’s best interests. However, since managers cannot be made to do everything that shareholders would wish, bonding provides a means of making managers do some of the things that shareholders would like by writing a less than perfect contract.

(3) Residual Loss

Despite monitoring and bonding, the interest of managers and shareholders are still unlikely to be fully aligned. Therefore, there are still agency losses arising from conflicts of interest. These are known as residual loss, which represent a trade-off between overly constraining management and enforcing contractual mechanisms designed to reduce agency problems.

There are some other types of agency costs as following:

(4) Agency Costs of Debt

There are three groups of participants in a firm, suppliers of equity, debt suppliers and firm managers. It is logical that they would try to achieve their goals with different measures. Suppliers of equity, or shareholders, are interested in high dividend ratio’s and high share prices. Debt suppliers, on the other hand, are interested in interest and debt repayments, whereas firm managers would be focused on their financial remuneration. These conflicts of interest give rise to opportunity costs (whereby best strategies are often not adopted) and real costs (e.g., inspection costs). These costs decrease the market value of a firm.

Kim and Sorensen (1986) investigated the presence of agency costs and their relation to debt policies of corporations. It is found that firms with higher insiders (managers) ownership have greater debt ratios than firms with lower insider ownership, which may be explained by the agency costs of debt or the agency costs of equity.

(5) Agency Costs of Free Cash Flow

The free cash flow theory presumes that there are enormous conflicts of interest between shareholders and stakeholders. This implies that managers’ decisions do not always maximize the value of a firm (Jensen, 1986).

Jensen (1986) also emphasized the continuous agency conflicts between top managers and shareholders. These conflicts are especially severe in firms with ‘large’ free cash flows. A free cash flow is the balance of money a company is left with when all projects are financed. If top managers hold more cash than profitable investment opportunities, they may overspend money on organization inefficiencies or invest it in projects with net present value (NPV) less than zero. The logic has it that higher debt levels reduces free cash flows and consequently increases the value of the company.


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