Corporate Governance in Family Owned Organizations - Paper Example for Free Use

The Need for the Dissertation Topic

This dissertation aims at understanding the need of corporate governance to regulate the family business in the Gulf Cooperation Council member countries. The dissertation uses an example of the Maltese Family Act and how it has promoted the regulation and accountability of the family based businesses in Malta. The dissertation compares the corporate business environment for the family-owned businesses in the two contexts and how the gap can be filled through the creation of the family business regulation policies. The absence of the family business regulation in the GCC countries has significantly reduced the sustainability of family businesses in the long term. On the other hand, in Malta, legislation has improved corporate governance in Malta which has improved corporate governance in the family owned businesses which has improved the stability and structure of the businesses.

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Tax Regulation in GCC and Malta

In Gulf Cooperative Council countries tax regulation on family businesses has not implemented any family business tax regulations. Due to the lack of tax obligations, many GCC countries family-based businesses have been failing due to lack of transparency and accountability. In most cases, tax regulations enable business organizations to develop better accounting records to pay taxes which promotes better management and accountability (Zahra, 2017). Due to lack of any regulations in the family business sector in GCC countries, most of the businesses have been failing due to lack of transition records and management especially when the owner passes away. As such, countries such as Malta has established the Family Business Act has promoted transparency and accountability and transparency in family businesses which has significantly improved the overall corporate governance of the family businesses in Malta (Zahra, 2017). In Malta, just like in most of the GCC countries many businesses are owned by families and contribute significantly to the overall country`s gross domestic product. Since Malta joined the European Union in 2004, the country has attracted many global family businesses in the country due to the growth of credibility in the country. The family business Act in Malta has significantly contributed to the long-term continuity of family businesses unlike in GCC countries which have continuity challenges due to lack of transparency and accountability. In this case, the new legislation governing the family businesses aims at improving the family business transition from one generation to another which has significantly reduced the long-term sustainability of the businesses (Al-Faryan & Dockery, 2017). The act seeks to resolve the perennial corporate governance management challenge that faces the family businesses due to lack of internal organization structures that limits successful transition of the businesses in GCC countries. On the other hand, in Malta, the Family Business Act will significantly improve internal organization for easy business transfer from one generation to another which ensures business continuity (Zahra, 2017).

Job Insecurity

Gulf Cooperation Countries despite having many family-owned businesses there is no legislation regarding the governance and management of the family-owned organizations. Due to the lack of such legislation, employees and investors are the most affected in such cases due to the lack of business continuity from one generation to another. As a result, many workers are forced to become jobless and also lose their pension benefits due to the lack of succession measures which mostly leads to the collapse of many family-owned businesses in the GCC countries. Unlike the GCC countries, in Malta which is the first European Union country to pioneer in family business regulation has established the Family Business Act which will significantly ensure the smooth transition of the family-owned business from one generation to another which assures the employees of their job security and continuity even after the demise of the owners. Due to this regulation, the family-owned businesses can retain highly talented employees because they are not afraid of losing their source of income and accrued benefits during business ownership and management transition. For instance, the Saudi Binladin Group failed due to transition conflicts and 100,000 Binladin workers were affected which shows how employees can be affected due to the lack of clear transition regulations. The employees are more productive and hard working in Malta, and there is high professionalism in the family-owned businesses compared to GCC countries where management transition lacks any regulation, and most organizations are not able to survive more than one generation due to poor management and ownership conflicts. Other countries such as India and Pakistan have also enacted regulations which aim at regulating family businesses due to their important role in the economy.

Family Conflicts during Business Management Transition

The business transition period and process in the family-owned businesses play a significant role in the overall success and continuity of the family-owned businesses. The family-owned businesses run through generational management, and family conflicts occasionally rise regarding management and sharing of the organization gains. In such cases, GCC countries do not have any legislation that can provide guidance on how such conflicts can be resolved. This results in time-consuming family conflicts which affect the function and operations of the family-owned businesses. In GCC countries such as Saudi Arabia, the family-owned businesses are large and employ a very high number of the country employees. Conflicts such as transition management conflicts and profit sharing conflicts threaten the employment of a very high number of the people in Saudi Arabia and also has negative impacts on the country gross domestic product due to interrupted production. The recent conflict between the Al-Gosaibi family company and the Al-Sanae family company shows the need of family-owned business legislation to help in resolving such family conflicts promptly to reduce the conflicts negative impact on the employees and the investors.

In the case of Al-Sanae and Al-Gosaibi family business conflict, the major conflict was due to the theft of 10 billion US dollars which Al-Gosaibi family business alleged was stolen by the husband of a daughter who comes from the Al-Sanae family. In such a case, it is evident that there is no accountability and transparency in GCC family-owned businesses which have a significant negative effect on the trust of the capital lending organizations such as foreign banks which will avoid investing in the family-owned businesses due to incompetent leadership and poor accountability. If tax regulations were in place in Saudi Arabia covering the family businesses the case of fraud such as the one that rocked the Al-Gosaibi family against Al-Sanae could not exist which could increase trust and faith in the family-owned businesses and attract more foreign investors in the GCC countries (Al-Sanea). Family owned business legislation should be constituted in the GCC countries such as Saudi Arabia to restore the trust of the foreign investors who would like to invest in the country family-owned businesses, but they are pushed away by the lack of transparency in the family-owned businesses (Al-Faryan & Dockery, 2017).

Corporate governance in Family Owned Organizations for Continuity

Corporate governance plays a significant role in the overall business management and stability. In GCC member countries, corporate governance as a management tool has been neglected due to the lack of policies that can be used to improve professionalism in the management of the family businesses. Continuity plays a significant role in the overall success of the family-owned businesses and the overall economy because of the high number of the family businesses especially in Saudi Arabia. From such a perspective, family-owned businesses in GCC countries are limited regarding continuity due to the absence of a law that can be used to increase transparency and management transition. In Malta, the family business act has played a significant role towards the overall continuity of the family businesses due to the existing legal framework that can be used to address cases of fraud and management conflicts (Zahra, 2017). Further, the family business act in Malta has introduced a framework through which the organizations can easily obtain finance investment in the future which is key to the growth and sustainability of the family-owned businesses (Zahra, 2017). Therefore, GCC countries such as Saudi Arabia can use the legislative approach to improve the internal organization and management of the family-owned businesses which will increase the businesses transition and governance. A family business oriented regulation can ensure that disputes are adequately resolved, and more foreign and local investors are able to invest in the country`s family owned business to increase the economic output as well as offer sustainable employment to the people (Bindabel et al., 2017).