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THINKING ALOUD (BusinessLaw) FAMILY BUSINESS : Corporate Governance

Updated on December 23, 2016

“Good corporate governance is about 'intellectual honesty' and not just sticking to rules and regulations, capital flowed towards companies that practiced this type of good governance.“

— Mervyn King,Chairman: King Reports, Corporate Watchdog, Johannesburg Stock Exchange
CORPORATE GOVERNANCE:  Corporate Punishment
CORPORATE GOVERNANCE: Corporate Punishment | Source


Today’s Business Mentor

Writer: Chén Róng

Who is the boss of the Chief Executive Officer (CEO) of a company?

A company with good corporate governance makes the CEO answerable to a Board of Directors. This may be the case with some public listed companies. The Board is essentially the boss of the CEO, hiring and firing him and reining him in from highly risky ventures that could hurt everybody, not least its shareholders. When indiscretion of a CEO reins in a family-owned business, the fortune of every family member goes down with him

Nevertheless, family business is emotive and for the Asians, culture may dictate that the founding father will always remain the boss running the Board and the business. Under such a circumstance, it becomes impossible for the board to police him. For many family-owned enterprises, the founding father was the person who gave the family wealth and influence, so accepted as best equipped to run the business for good. This may not be the case with every family-owned business. It is rare quality for business brilliance to shine indefinitely when the business world around the CEO is changing so rapidly, requiring new ideas and different ways to approach competitive challenges. At times a long-serving dictator may lose sight of reality and over-estimate his own competence to the chagrin of family members.

Shakespeare's play portrayed Julius Caesar as a hero respected by his people when in command of his legions. Julius Caesar led them to victory and glory. When he tried ruling Rome as a dictator, it became a crushing weight on human liberty that none of his countryman could bear. People generally want to be led, not controlled to the point when a country goes down with it.

In the context of a family-owned business, family members may suffer financially and emotionally for many years over a business that down-shifted and on the brink of bankruptcy. It happened to one powerful family-owned business in Asia. The once powerful patriarch struggled for the past five years trying to keep the business afloat. Perhaps the complexity of today's corporate mergers and acquisitions (M&As) is too much to bear; M&As now run into hundreds of millions and sometimes, billions in borrowed funds. When pride separates the head from heart, things can go seriously wrong indeed. It led to an acquisition of cyclical assets at sky high prices; and when these shipping assets were marked to market in a serious economic downturn, the company was in default of loans borrowed to the hilt. The current environment of low freight rates and high fuel prices and economic forecast of slow, low business growth may be the straw that breaks the company's back.

It pays to learn good corporate governance from Shakespeare, the playwright and business mentor.



Little English-Chinese Dictionary

  • upset the apple cart = zào chéng má fán, pò huài mǒu rén de jì huà

  • big ticket expenditures = áng guì de dōng xī

  • gazing anxiously until one's eyes are completely worn out =

    wàng chuān qiū shuǐ

  • business sea change = guǎng fàn de yè wù zhuǎi xíng

  • caught unawares = jì jīng yà yòu méi yǒu zhǔn bèi hǎo

  • kiss many frogs to find the prince =

    xǔ duō cháng shì, cái néng zhǎo dào hé shì de hé zuò huǒ bàn。

  • the Brics countries = bā xī,é luó sī,yìn dù, zhōng guó hé nán fēi

The writer makes no warranty of any kind with respect to the subject matter included herein or the completeness or accuracy of this article which is merely an expression of his own opinion. The writer is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Without limiting the above the writer shall have no responsibility for any act or omission on his part. Readers should take specific advice from qualified professionals when dealing with specific situations.

A Romancing Relationship
A Romancing Relationship | Source

Corporate Governance: Office Romance

Writer: Chén Róng

Employees having affairs in the workplace could be fired. That was then. It used to be culturally taboo in traditional Asian companies for bosses to permit their office premises used as breeding grounds for adulterous activities, giving them and their company a bad name.

Such unwritten rules on office romances are now less strict in a modern working environment. There are still companies that strictly prohibit office romance but equally there are employers who are indifferent on the issue.

From the writer's perspective, office romance raises some governance issues -- the need for rules that would ensure every employee understands the consequences of certain actions and their social and legal implications. On the surface, office romance seems innocuous. Intimate encounters between persons in a relationship usually have their acts together at some hidden corners, perhaps in office pantries. In modern central business districts, secluded car-parks are some of the ideal locations where adulterous activities take place. Another convenient location is the stair-landings of high-rise office building, thought to be safe because people use elevators and escalators to move between floors. It is not always the case. No secret is safe. On one such occasion the writer knows, romancing couples were caught in the act by colleagues on such rarely trodden paths. Someone leaked the adulterous relationship to the betrayed spouse, the result: animosity and breakdown of co-operation between staff-members. The office became an uncomfortable work environment.

Clear Rules including whistle-blowing guidelines

Office Manual should include rules for dealing with adulterous situations. A written warning may be served but if the affair continues, dismissal of the employees concerned should be made mandatory. Whistle-blowers on office affairs should be commended. But care must be taken not to condone employees using a whistle-blowing rule for spreading of salacious gossips. What is needed should be a detailed whistle-blowing guidelines; and any employee may blow the whistle on an office affair if the relationship breaches one of these written standards. Actionable wrongs will include unethical conduct, conflicts of interests and improper behavour of those having affairs. These standards and suitable others may pave legitimate avenues for complaints against office romance. The Chief Executive Officer and the Human Resources Manager are the ones to determine the types of guidelines suitable for their own organisation.

Does an employer need also to be harsh on cupid romances taking place in at work? Are these incidences less troublesome to an organisation than covert and open affairs? Undoubtedly, there are happy ending stories of office romance. But employers should never ignore the negative outcomes of such relationships. Workplace romances may lead to allegations of favouritism at work, creating hostility and distorting communication among employees. This will undermine the professionalism of important decisions. Employers should, therefore, stay wary of the impact such liaisons can have on business and productivity. When relationships break down, they will lead to other serious consequences.

Relationship breakdown and legal issues

Tension between the two persons involved after a breakup might affect work, other co-workers and clients in the process. An office romance that ends unhappily can have a rejected person making allegation of sexual harassment against the employee he was once involved with. The organisation concerned is unlikely to be able to steer clear of police investigations and probable legal suit that may entail. A senior manager who ends an affair with his junior might go about making life unbearable resulting in her resignation and making claims for constructive dismissal.

None of these examples bode well for an employer as the incidents could result in legal dispute which also harms the employer's good name.

Guidelines and whistle-blowing rules on office romance are essential whether or not the relationship is an adulterous one. Certain companies in Europe and USA made it mandatory for employees found in a love relationship to sign romance contracts. The purpose is to make romancing couples confirm that their close liaison was a result of mutual consent. And when the relationship ends, both parties are to agree resolving disputes amicably with no accusation of sexual misconduct. The objective is for the company to steer away from trouble in the event of a relationship breaking up. In many cases, the employees concerned may be spared dismissal, demotion or transfer to another division or associate firm of the organisation.

Whether a contractual type arrangement is a better option for an organisation will depend on its own corporate philosophy. One thing is certain -- guidelines are essential for good corporate governance of the company.


Appointment of INDIES

Indies is the short form for independent directors.

Indies has now entered into management books and corporate governance articles as a word itself. An indie is independent of management of a company as he/she protects minority shareholders from dominant shareholders.

In many commercial organisations, the founder still runs the business and owns a majority stake in the company. He wields great power as the person who negotiates and signs all contracts, transfers cash and other assets, and gives corporate guarantees to secure transactions.

But there is a flaw in this arrangement: major shareholders have voting rights during elections for indies. The writer considers it more a gloss over to make the company look good to investors who are considering putting money into the business. People who are thinking of investing in private firms (or even public listed companies) have to look beyond what appears good corporate governance practice in the target establishment.

Read other stories:


Corporate Governance

WRITER: Chén Róng

Ten years ago, the concept of corporate governance was probably alien to many people in the business world. Today, the term has become a staple of everyday business language to mean the framework of rules, relationships, systems and processes within a company, and within such framework that those in authority should exercise and control the business entity.

But corporate governance rules are for multinational companies (MNCs) only? Are we hearing you saying so?

Think again.

With exception of family-controlled Korean chaebols and Japan's keiretsu conglomerates, the reason smaller family businesses think they may not need it is: the corporate governance rules one reads in business magazines have in mind companies listed on various stock exchanges. These rules or codes are designed primarily to protect the interests of the general public (retail investors) rather than institutional investors who have qualified professional managers to advise them on investment risks. Opinions may differ but young family members returning home from elite business schools may not rush to adopt these rules wholesale. Their misguided enthusiasm is likely upset the apple-cart of established norms; customary practices cemented since the early days of the founding grandparents. Without the cooperation of family members and employees who served the business for decades, the application of such one-size-fits-all governance code will not succeed.

  • Governance Code-all-kinds

The use of a layered form of governance code was prevalent during the earlier days. No two family-owned businesses are the same. Each family has its own unique practices to suit their special circumstances even when uninitiated outsiders mused over them. The writer came to know of one such family business with an unusual setup. The patriarch was named executive chairman of the company. The sons were appointed to the positions of managing director and executive director. Both siblings were supported by their own followers, and the two camps appeared at loggerheads in policy matters. In truth these were sham conflicts deployed to mask their true intention at implementing checks and balances. The brothers cleverly side-stepped high expense items or unjust wage increases which could cause the company serious cash-flow problems. There were talks that both wrote off their gambling debts with company funds and the Chairman was in the dark about the matter, or was he? Although this family holding company has an unconventional corporate structure, the subsidiaries in related businesses had professional managers who run them profitably with their own set of governance codes.

The family business could have shared a place of prominence among high peerage achievers. If they had implemented a cohesive corporate governance code, although one uniquely based on its own special circumstances, their growth story could have been phenomenal. The directors talked about a possible future listing, but their hope remains elusive; a hope that befits the Chinese saying: gazing anxiously until one's eyes got worn out. Although this is not a recommended corporate structure, every family business no matter how unorthodox or unique, should not find excuses not to start up a governance code of its own.

  • Whys and Wherefores for the Codes?

With globalisation and increased competition, family businesses are now facing challenges not seen a decade ago: crisis of financial institutions causing more expensive credit facilities, greater regulations in some countries and hence the need for greater transparency.

In its simplified form, corporate governance may be defined as referring to business structures and their policies, rules and plans regulating how the family business should function. The methods used to ascertain that an entity is effectively managed should, ideally, also make its board of directors accountable for its action in a meaningful way to all shareholders. The Corporate governance objectives are:

· increase management accountability for its actions and decisions,

· greater transparency in business dealings such as the cleaning out payment of bribes and shadowy deals

· better disclosure of commercial and credit risks - which should lead to enhanced stakeholders (lenders, creditors and shareholders) confidence; lead to better access and performance resulting in more robust family businesses.

An off the shelf approach to corporate government structure may not be the best form for a small family business. Many Asian founder-managed businesses have their chairman serving as its chief executive officer -- and it is one such complexity that makes it necessary to take into account all similar issues that are unique to the relevant family. It is not such a bad thing that the founder-chairman, holding the biggest stake in the company, also serves as its CEO -- a practice abhors by corporate governance code for listed entities. In the writer's opinion, an ideal corporate governance model is not the same thing as good management, although the former acts as a catalyst for corporate excellence. In family business, good management has everything to do with the founder-CEO's vested interests in the company in which he has majority share. In most instances, such vested interests are precisely the driving force toward profitability, risk takings and good management. It is true that such vested interest conflicts with his duty to be fair and equitable to minority shareholders. Corporate governance experts will condemn this view: smaller shareholders, riding on the good fortune of the founder-CEO, should consider selling their minority stakes if they cannot trust that they would get a fair deal. You cannot have the cake and eat it, so the saying goes.

So far, we discussed corporate governance in the context of a small family business. But when the enterprise grows into a conglomerate, the same code will need revision and it may not be prudent for the same person to hold both positions of CEO and chairman of the group of companies.

  • The Way Forward

It is not unusual to find a family business funding its operation, inventory and capital requirements with equity, interest-free loans from relatives and cash-flow generated from the business itself. It is rare if ever the owner-manager, working day and night to build up his business, would put time into planning for obsolesces; an end of a limited shelf life which he finds himself unprepared for. A trader, who did a flourishing business supplying imported Indonesian coal to households for use as cooking fuel, never thought his trade would end abruptly when town gas became a convenient and readily available alternative. History keeps repeating itself. The coal trader never thought he, too, would suffer the same fate as the Malaysian firewood importers of the 1950s; the sea change comes like a tsunami that can bring complete devastation to a family business caught unawares.

Equally, whatever effort an owner-manager initially put in to build transparency and corporate governance, it may wane if it is not supported and notched on by an external stakeholder, such as a specialist commercial bank. In other words, a family business should learn to live with a bank loan although the interest costs need be factored in as a business expense. As lender for particular business-type, a specialist banker will want to know more about the family business; it wants operational transparency and processes to be installed as safeguards for the loan tranches. Lenders want to know more about the partners and customers of banking clients and their financial history. The bank may call for an external audit report in addition to the company's long serving auditor. It is almost a certainty a lender will require a feasibility study report for every project loan proposed. Finally, one other prerequisite - a personal guarantee - may not go down well with some businesses. Lenders do not conduct spot checks on their customers. To allay its suspicion that business owner does not mix his personal expenses with those of the company, an assurance in the form of a personal guarantee is the best safeguard for the bank concerned..

Why have someone always looking over my back? You may ask. There is a long-term reward for the business that preserves the discipline and pays the price demanded by this external stakeholder. Unless an enterprise depends solely on its domestic customers to grow its business, companies will need to expand out to regional markets. Unlike China, most countries have small domestic markets. Even China - a country with a growing wealthy domestic market - cannot do away with growing its export sector. Small developing countries like those of the Asean states may still have to heavily rely on exports, and to partner other businesses with natural resources to find overseas markets. This is the time the helping hand of financial institutions will be needed. Paradoxically, the general impression is one that banks generally do not care what clients do with their borrowed money; loans businesses deployed for purposes other than the one proposed. There are many stories of bank loans wrongly deployed for property speculation in Asian but this is a different governance issue..

During the recent years of real estate boom in Asia, business loans were known to have fuel the property markets with impunity. There is more to this allegation. It is unfair to reiterate the overused cliché that a banker presents you with a free umbrella when the sun shines, and takes it back when it rains. The truth is: every bank values those clients with the necessary discipline in ensuring loans fund specified projects. Come a credit crunch, banks look at those wayward clients and, in numerous instances, have their umbrellas taken away when unauthorized real estate ventures appear shaky when property prices fall. If your business sticks closely to corporate governance guidelines even when your banker is not looking over your shoulder, you have nothing to worry about. Your business stands to gain much during times of a global financial crisis when cash flow gets critical because of delayed debtor payments; it is also a period when negotiating for bank financing is hard and loan terms are harsh.

  • A fairy tale finale

Everyone loves a story with a fairy-tale ending - a story of a poor girl who marries prince charming and they live in a castle happily after. In the business world, while luck counts, such a chance marital bliss is hard to come by without a match-maker, old fashioned as it may sound. Let's face it, if a business has to kiss many frogs to find the prince, chances are, it will cost the company dearly financially and in lost opportunities -- bankruptcy may not be remotely unthinkable. Your banker is the best marriage match maker.

Banks are often seen sponsoring business exploratory trips for exporter-clients. If you have a precinct report card, a reference given by your banker is worth more than a thousand words in your glossy brochure. Moreover, such fact finding trips will enable you to see a lot more of importers business profile. You have opportunity to ask questions and get responses to question asked by other fellow visiting members. With the help of the bank, you have a good rating of creditworthiness of importers, as not all deals are finalized using irrevocable letters of credit. Bank may also offer help when conducting research on the local business climate and operating environment, legal and tax structure, restriction on foreign companies, foreign exchange, and etcetera.

A major attraction of good corporate governance and transparency is: it is a big step toward listing on a major stock exchange. This is not to say that listing an initial public offering of shares is the pen-ultimate for all family businesses; it does offer an important new source of funding for business expansion. Remaining a private company has its charm and freedom in strategic decision making. A public company may be obliged pay dividends to its shareholders while a private one has no such obligations as it may choose to plough back profits into its business instead. There are also many other advantages I will not discuss in this article. For family businesses, the dream of an eventual listing on a major stock exchange remains a coveted price that comes with prestige. More important is that funds needed for overseas expansion into new markets (the Brics countries) when old ones (countries in Europe) start to fall by the way-sides. It can be challenging to find the needed funds for major joint venture projects if family businesses continue to run it as a private enterprise. Whether or not such dreamed projects come true, it pays to chart a corporate governance course by working closely with a banking partner for more financing support as you grow your business locally and regionally.


………….. E N D ……………….

Hubpages do not support words written in the Chinese Language. Readers can get a free online English-Chinese translation from GOOGLE TRANSLATE OR

Appended below: ChénRóng’s Little English-Chinese Dictionary for a more precise translation of select English phrases from the article.


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