Yasser Akkaoui Founder, Capital Concept Corporate Governance Advisors February 22, 2009 Why is CG Important and How Can it Serve the Interests of Family-Owned Business

DEFINING CORPORATE GOVERNANCE NO ONE WAY to define CG. A list of different definitions: –CG is the system by which business corporations are directed and controlled. –CG is about corporate fairness, transparency and accountability. –OECD 2004 principles of CG: “CG involves a set of relationships between a company’s management, the board, shareholders and stakeholders. CG gives the structure through which the objectives of the company are set, how they are reached and how they are monitored.”

The Principles of CG 5 MAIN AREAS: - The rights of shareholders. - The equitable treatment of shareholders. - The role of stakeholders. - Disclosure and transparency. - The responsibilities of the board. Key Elements: - Strong commitment to CG reforms - Good board practices - Appropriate Control environment & processes - Strong regime of disclosure & transparency - Protection of (minority) shareholder rights

WHY IS CG Beneficial? CG ATTRACTS INVESTORS. It pays to have good CG - 84% of global institutional investors pay premium for shares of a well-governed company PAVE THE WAY FOR FUTURE GROWTH AND DIVERSIFICATION, AND FREE SMEs from dependence on high interest loans BANKS WILL GRANT MORE ATTRACTIVE LOANS to FOEs applying CG principles Good CG leads to better internal controls, increased accountability and increased profitability Frees the owner operator from operational duties, prevents sources of disputes CG IS GOOD FOR THE SOCIETY & ECONOMY AT LARGE.

FOEs in the MENA Region FOEs constitute the majority of companies in the MENA region. Regulatory, monitoring, and enforcement mechanisms are often weak. Necessary to develop CG principles that are specific to FOEs

Benefits of CG for FOEs in MENA I- Micro Benefits Improving the quality of Board governance; Enhance overall performance. Increase access to diverse forms of capital; Separate family conflicts that interfere with the family business Promote transparency, accountability within the family  Long-term benefit: Sustainable growth of company.

Benefits of CG for SMEs in MENA I- Macro Benefits Modernization of MENA corporate sectors; Attract sources of investment to the region; Less political risk and dependence (esp. oil and gas) /economic performance.  Economic and Social reforms can happen.

STRENGTHS & CHALLENGES OF FOEs STRENGTHS: –Long-term view in decision-making –Desire to build a business for future generations –Commitment of family management to their company –All this gives them a clear identity in an increasingly faceless corporate world

STRENGTHS & CHALLENGES OF FOEs CHALLENGES: –Need to separate the family relationships and corporate relationships. Family firms are closed natured, lack independence and objectivity. –Need to separate financial relationships and accounts –Informality of governance policies. Reducing family influence over board decisions. –Lack of internal controls –Problem for family firms: Managing corporate growth and increasing number of shareholders

MAIN ISSUES TO IMPROVE CG IN FOES 1)Succession Planning 2)Family versus non-family employment and promotion 3)Equitable treatment of non-management family shareholders 4) Equitable treatment of non-family shareholders 5)Board meetings, Management meetings, Family meetings and Shareholders meetings 6)Family shareholding retention and voting as the family grows

POSSIBLE SOLUTIONS FOR FOEs Create a real Board of Directors –Performing classic functions of a Board Oversight of management Strategic direction –Bringing in independent, outside Board members is even more important for family companies An outside, objective perspective Independent resolution of conflicts of interest Important arbitrator on family governance issues, such as employment issues Solicit outside expertise from either consultants or auditors to assist family firms in the transition to a modern management style.

POSSIBLE SOLUTIONS FOR FOEs Create a Family Charter (family protocol) with clear policies –Formalization of informal practices and conventions –Addresses issues of family institutions, institutions of the company, management of the company, shareholding, employment of family members and so forth) Create a Family Council or Family meetings

Concluding Thoughts: All successful companies are successful in the same way, all unsuccessful companies are unsuccessful in different ways. Source: Adapted from Anna Karenina, Leo Tolstoy