The family-Owned model is a dominant form of business around the world. This form of business can be classified as; sole traders, partnerships, private limited companies, and public companies. The ownership of the family-owned business can be divided into four types: governing owners; active owners; investing owners and passive owners. Traditionally, the founders of the business and their first generation may be operating and governing owners. The investing and passive owners have their interests to the extent of economic return. The family owned firms usually have a concentrated ownership structure and governing owners with controlling shares actively participate in the day-to-day affairs of the company.
The family ownership in the UK is of limited significance because of dispersed ownership structure. In continental Europe, most of the listed companies have single voting block of shares. The average size of family-ownership blocks in the Europe is 26% in Austria, 27% in Germany, and 20% in Italy while only 5% in the UK. In the beginning of 20th century, the British corporations had strong families domination which declined in last quarter of the century due to emergence of strong capital markets, legal protection to minority investors, sharp increase in institutional-ownership, and majority companies mergers into corporate grouping. The intervention of institutional investors and strong role of capital markets led to the disapproval of dual-class shares which created the principle of equal treatment to all shareholders. The institutional investors and financial sector prevented the UK to adopt European continental corporate structure with dual-class share, pyramids, take-over defenses which led to the production of City Code on Take-Over and Mergers. Resultantly, equity-finance was the main reason of the dilution of family holding in the UK.
The family ownership is a dominant form of business in Asian corporate market. The weak legal system, less protection of property rights, industrial-feudalism, corruption, political and bureaucratic nepotism, and weak enforcement of law are main causes of concentrated ownership in the hand of business families. The majority of the companies are controlled by family-members with weak monitoring mechanism. The corporate framework of most part of the Asia based on common-law principles. Recently, the major developing economies of the Asia upgraded their corporate laws. They formulated the codes on corporate governance following the UK approach relating to composition of board and its responsibility, transparency and disclosure, shareholders and stakeholders rights, and audit and internal control systems. The compliance of these codes is not encouraging because half of the listed companies in Asian markets are family-owned companies which want to continue family control with weaker board governance mechanism.
The overseas Chinese and the chaebol groups in South Korea are two main types of family-owned companies. The Chinese business people, who are doing their business, outside the mainland China, mostly in South-East Asia, are described Oversees Chinese. Their boards of directors play supportive role and the real powers exist to the management. The head of family and family members hold key positions on management. The large companies delegate powers to their subsidiary companies which have owner-managers or family oriented management domination. These companies are paternalistic in management system with close family control by keeping equity-stake within the family. After 2nd World War, the government offered loans on attractive terms to family-owned firms to revive its economy which led to develop the chaebol groups in South Korea. The chaebol groups listed in stock exchanges but they are controlled by family-dominated insider board which led to the employees protest and social unrest. Resultantly, the S.K.'s government reduced the powers of chaebol groups by limited sale of companies in the groups.
In family-owned corporations the ownership and control structure is one and same with less chance of agency problems because family members themselves manage and direct the company. But this governance system leads to minority shareholders oppression. The formal agreement among shareholders, which determines the rights and duties of shareholders participation in the company affairs, can be utilized to resolve the minority oppression problems. Although the management takes a long-term view of the success of the company rather than short term but family-members take different course of action (due to family differences and diverse views) that can affect the normal business operation and future interests. The remote generations of business founders face succession problems which lead the lengthy litigation and have detrimental effect on the business. It is submitted that effective corporate governance system, consisting of family council, board of directors including professional outside directors, clear division of responsibilities among all actors of company and succession planning, is important to avoid the corporate governance problems and for smooth functioning of business.
Compliance to specific corporate governance measures is important for the success and survival of family-owned companies in the international competitive capital market. The compliance of the corporate governance code also provides effective benefits for them at the levels of management efficiency and corporate performance, sound business reputation and sustainability, market access, better performance, investors confidence, transparency and corporate control, and separation between ownership and control. Azevedo and Behr suggested the action plan for the effective improvement of corporate governance in family owned companies: (i) formulation of corporate governance policy through autonomous document relating to role, remuneration and composition of board of directors; (ii) appointment of corporate secretary who will acts as a communication channel between company and shareholders; (iii) appointment of professional CEO and Chairman, at least one of them should be professional and non-family member; (iv) Formation of Family Council, by providing suitable forum for family members to discuss and communicate business issues to keep family voice united.
Corporate governance is getting lot of attention in business and corporate circles not only in Pakistan and India but around the world. In India, numbers of listed companies are family promoted and managed. Approximately one-third of the Sensex companies having family ownership which are controlled and managed by the families. However, the corporate governance situation requires serious consideration of corporate community and public authorities regarding corporate issues. The family elders or promoters have complete control in the day-to-day management and run the enterprises as their private property even when their holding is low in comparison with outside holdings. Several companies of previous era were managed by the principles of the nations leaders like Mahatma Gandhi and others who were also closely associated with the freedom struggle. Independence of non-executive directors and their role in promoting corporate governance in Indian corporate sector are important issues that need to be looked at. The promoters and directors of family-owned corporations should have responsible behaviour in governing affairs of the companies because they have a fiduciary duty to shareholders to ensure future health of the company through sound governance. The fiduciary duty is consist of duty of legitimacy, upholding accountability, openness and probity, trust and loyalty, duty of care, duty of critical review and independent thought, strategy and policy formulation, protecting minority owners interests and duty of corporate responsibility. The performance of fiduciary duty is an integral part of corporate governance that is seems to be missing in family-owned corporations.
Conclusion
Voluntarily and gradually change shall come in corporate sector that should be acceptable to the business-community and companies boards. They should take positive and practical measures for the creation of an independent mindset in corporate-market. The public authorities/regulator should take steps to create awareness among corporations and board of directors, shareholders and public at large to make them understand to the role of good governance. The improvement in performance is necessary than conformance to legal frame-work as well as eagerness to avoid legal liability. Everyone should understand that good governance practices in all kind of corporations including family-owned companies are essential for global investors to attract the foreign investment which will be helpful to the Nation in accelerating the economic growth.