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Family businesses not into “financial wizardry”

Family businesses not into “financial wizardry”

If there’s any business that will survive the credit crisis, it’s a family business. Professor Ludo Van der Heyden, INSEAD, explains why.

December 14, 2008 7:39 by

In the GCC, there is a tradition of keeping quiet, especially about family affairs and finances. The culture of transparency is not as popular as it ought to be, especially among family businesses. It is no wonder, then, that family businesses are regarded with suspicion; as out-dated corporations with poor corporate governance practices and inaccurate annual accounts. How is the average investor to know otherwise? The numbers are well guarded.

However, according to Professor Ludo Van der Heyden, a specialist on family businesses at INSEAD – one of the world’s leading business schools – and author of “Why Fairness Matters,” the credit crisis has exposed the strengths of family businesses:

“I actually think that the credit crunch is not a family business issue. I think family businesses will come out of the crisis as flowers and roses. Why? The first reason is that families don’t like credit. They like equity. They don’t like heavy borrowing. They don’t have much debt.

“Secondly, family businesses like to understand what they are investing in, so they don’t like these family financial instruments that are in trouble today. So, I think that private firms and family firms will come out of the crisis just fine.

“Financial wizardry is not something families like to do,” he adds.

Family businesses rely heavily on family capital, which may influence how corporate governance is practiced. If family members who are shareholders in a family business, but have little or nothing to do with the management of the company, then it is likely that the company will have good corporate governance. If, however, a family investor also holds a managerial position, then there’s a potential for conflicts. “The conflicts themselves are not the problem,” explains the professor. It’s the fact that the conflicts may not be resolved because of conflicts of interest. And then you might have difficulties with corporate governance.”

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