Family businesses account for a large share of economic activity in the Kingdom, and many began with a single founder who made every decision personally. As the business grows and the second and third generations join, new questions arise: Who decides? Who works in the company and who is simply an owner? How are profits distributed? Governance is the structured answer to these questions before they turn into disputes.
Why Does a Family Business Need Governance?
The absence of written rules does not mean the absence of rules; it means each person understands them in their own way. The greatest threat to family businesses is not competition but the blurring of family relationships with business relationships. Good governance separates three overlapping circles: the family, ownership and management, and defines the rights and responsibilities of each.
The Family Charter: The Starting Point
The Companies Law allows partners in a family company to agree on a family charter governing their relationship with the company. The charter is a document the family writes itself with the help of an adviser, and it typically covers:
- The family's vision and values, and what it wants from the company in the long term.
- Conditions for employing family members and the criteria for evaluating and promoting them.
- The policy on profit distribution and reinvestment.
- Rules on selling or transferring shares, and pre-emption rights among family members.
- A mechanism for resolving disputes before resorting to the courts.
Councils and Committees Suited to the Company's Size
Not every family business needs a complex structure. What matters most is that roles are clear. Common tools include:
- A family council: a forum for family members to discuss family matters related to the company, away from day-to-day management.
- A board of directors or managers: responsible for oversight and strategic decisions, ideally including one or more independent members from outside the family.
- A delegation of authority matrix: setting out who may approve spending, contracting and hiring, and when a decision must go back to the board or the partners.
Succession Planning
One of the most difficult moments for a family business is the transfer of leadership from the founder. Early planning turns this moment from a crisis into a natural stage, by defining the criteria for selecting the next leader, preparing candidates from within or outside the family, and documenting the arrangements in the articles of association or bylaws and the family charter in line with the Companies Law.
Common Mistakes
- Writing a family charter that is inconsistent with the company's articles of association or bylaws.
- Postponing governance until a dispute arises, when agreement becomes harder.
- Copying a ready-made template from another company that does not reflect the family and its business.
- Failing to review the arrangements periodically as the number of partners and generations changes.
Family governance is an investment in both the continuity of the company and the unity of the family. If you are considering this step, our firm would be pleased to help you assess your current position and build a structure that suits you.