Transformation of Family Business into Public Corporation

Mr. Seri Ghanem

Birzeit University

P. O. Box 14 Birzeit, Ramallah, Palestine

2009-2010

Abstract:
This study aimed to identify the requirements for transformation of family businesses into Public Corporation. The study explained the effects and benefits of transformation of family businesses into Public Corporation. Also the study identifies difficulties and obstacles facing the process of transformation. A case study were conducted of Anabtawi Group to identify the effectiveness and importance of transforming family-owned businesses into public shareholding companies, to produce a set of results which we mention: A family company is each company that is under the control of one family through the full ownership of the company or ownership of the number of shares that give control of the strategic decisions of the company. Most family businesses do not continue to the third generation as a result of the lack of thoughtful strategic future planning for the management of these companies and the determination of their ownership. The founder's death and a dispute over power and ownership mainly lead to the expiration of family businesses. The escalation of commercial competition is a result of the market expansion and the increase of supply on the international level, which is no longer limited to the local or Gulf level. The diversity of the methods is restructuring the family businesses depending on their capital and the nature of their activity.

Introduction:
The companies are the mainstay of the economy of the countries. The strength of the countries economy and prosperity is measured in view of the strength and the stability of their companies. Considering the origin of the vast majority of companies around the world, they are family businesses. This case is more obvious in the Arab countries because the family links and relationships are very solid between members of the Arab families to the extent that they extend to the workplace. The family businesses are the majority of the private sector in the economies of Arab countries. The extended and the complex branches of the Arab represent one of the key variables in the economic and social systems in the Arab countries. In this regards, the size of the family plays a role in achieving multiple customs, traditions and trends to the individuals. With the increasing number of family companies in the Arab world and the great deal of organizational success, some of these companies achieved a great success while others failed and disappeared. (John Ward 2004, p. 11-12) The family businesses are a phenomenon that imposed itself on the agenda of the economists and the politicians in the Arab world generally and in Palestine particularly (Samer Khwereh, 2010). The family businesses are more than 98% of the private sector in Palestine. Given the size of the contribution of these companies in the domestic product, their prosperity and stability necessarily reflect positively or negatively on the local economy especially since the statistics indicate that they employ more than 45% of the total workforce (the Palestinian Bureau of Statistics, 2009 ). This indicates the real threat to the national economy in the event of an interruption or decline in the performance of these companies. Despite the distinction of the family businesses and enterprises in Palestine, they face many challenges and a number of them disappeared due to their inability to compete with other products. Most of these companies also offer services, they are nonproductive, they do not have factories or important operating ports and they rely mainly on agencies, distribution or investment. The specialists criticize this type of companies because their policy of employment does not depend on the efficiency; there is no spirit of teamwork among the staff in addition to the problems resulting from the death of adults and non-entrustment of authority to succeeding generations. (Samer Khwereh, 2010)

Problem of the study:

Many family businesses in Palestine succeeded and their prosperity and growth increased dramatically. Therefore, they became an economic power which has the greatest impact on the Palestinian domestic economy so much that they became the most important sources of income for many workers. However, these companies face internal and external obstacles. The problem of this study clearly seeks to identify each of: first, the interior constraints and difficulties in terms of the organizational strategies that correspond with the stages of companies growth and with the development of their capabilities and the variables of their environment; second, the external constraints and difficulties imposed by the nature of the changes of international market in terms of open markets, liberalization of trade from all restrictions, increased facilities of importing operations, and resulted currents of globalization.

Objectives of the study:

This study aimed mainly to identify the requirements for transformation of family businesses into public corporation. The study will explore:

The effects and benefits of transformation of family businesses into public corporation. The difficulties and obstacles facing the process of transformation. The causes that limit the transformation of successful family companies into public corporation.

Importance of the study:

Family businesses are the foundation stone for the investment and the business of the private sector in the world. They assimilate large numbers of employment, provide the market with large quantities of products, and hold a great deal of national savings. Therefore, we must seek to identify the importance of transforming these family businesses into public corporation.

Hypotheses of the study:

The process of transformation of family companies into public corporation is one of the most important tools and options that seek to maintain the continuity, the development and the growth of the performance of these companies.

Methodology of the study:

This study relies on the descriptive approach which is based on the review and analysis of the previous anthologies, magazines, studies, interviews and the research on the subject of the study.

Terminology of the study:

Family Business: It is the establishment in which one family controls the voting power. It focuses on the importance of strategic decisions in the institution or the company and the decision makers. (Amr, 2004) Public corporation: A company that consists of a number of people who subscribe with tradable shares. They are only responsible for the company's obligations to the extent of the nominal value of the subscribed shares (Toamah Shamry, 1999)

Literature Review Introduction:

Family businesses form the backbone of the economies of countries around the world. Apart from the numbers and percentages that demonstrate the economic power of these companies, the majority of the estimates and statistics agree that the family businesses constitute a high proportion of the listed companies

worldwide, contribute strongly to the GDP, and they are considered a key ingredient in the economic structure of the world. The international economic variables and the requirements of the current modern globalization prescribe the open markets, the liberalization of trade restrictions, and the affiliation of the countries to the WTO. Therefore, the family businesses are sooner or later at risk of a serious threat to its integrity and continuity. As a result, it is necessary to work on the development of these companies in various forms. The most important way is turning them to other forms of joint stock companies so as to raise their capacity to face growing challenges arising from these variables as well as to protect them from stalling and collapse The situation in Palestine is not much different from the regional and global mainstream since the family businesses are the main backbone and the basic component of the economy. Considering the reality of the family businesses in Palestine, they are the main source of the investments and the work of the private sector since they hold large numbers of workers, provide the market with large quantities of products and goods, and hold a great deal of national savings. According to numbers and statistics of the Ministry of National Economy in 2009, the number of Palestinian family businesses is more than six thousand companies and institutions which employ approximately 45% of the total workforce. These businesses represent more than 98% from a total number of companies in Palestinian territories. About 92% of them are small sized and employ less than ten employees whereas the large family companies account for 6%. (Journal of the Palestinian Capital Market, 2009) Nonetheless, it is obvious that successful family businesses do not show an interest in that, and do not wish to become joint stock companies or any other forms. On the contrary, some joint stock companies show desire to switch to other forms.

Definition of family business:

Family businesses means, "The companies that are owned and operated by family which gained fame from the same company or vice versa, and historically belong to one person - the founder." The family companies are not included within the specific legal categories in the Commercial Companies Law. They are subjected to the control of a single family which own and manage them and thus dominated by family nature. These companies are simply established and have low capital. (Nada Al-Hazmi, 2007)

Features and characteristics of family companies:

Despite the different legal categories of the family businesses, they have the characteristics and features of a family company including centralized management that leads to the ease of making
decisions regarding the company's activities and allows for daring untraditional decisions that are often useful for the company from a strategic point. They also have lower administrative costs since the family members are usually involved in the administration of the company. There is an avoidance of the application of the requirements of disclosure and transparency which are required from the joint stock corporations. A broad scope of self-censorship is within the company due to the lack of commitment to informal family relations leading to the speedy transfer of informal information. The driving force of the head of the family, the company's founder, to develop his company propels him to search for all the requirements of development and modernization due to the link of management with ownership in order to achieve gains and benefits. The workers in the family company have a sense of affiliation to the family and have a strong commitment to the objectives of the organization. This enthusiasm and commitment move to the working group of non-family members, and therefore strongly focus the work in the service of the company. In a family company the family and social climate is negatively or positively influenced by labor relations within the company, whether between family members or employees of non-family members. There is also flexibility in the exercise of work in terms of working

hours and wages. This usually appears in small family businesses where the work duties are not unequivocally specified in the company. In addition, there are a number of family workers who refuse to receive money from the company for their work since they look at the company's work as a family duty and action. (Amr Zeidan, 2002).

The importance of separating ownership from administration in family businesses:

Separating the ownership of capital from the management leads to the continuation of all kinds of family businesses. The directors of the family company continue its operations without mixing with the owners of the capital, and consequently avoid the negative impact of the disagreement of the family business owners on the continued activity of the company. The role of the capital owners of the family business is limited to setting the financial and administrative rules and regulations, marketing policy and the plans for company development and expansion of its activities. Accordingly, each family company should choose a director who has the necessary expertise and confidence, and grant him the full powers in view of the financial and marketing rules that are established by the partners. It is sometimes difficult to convince the partners in family businesses to separate ownership from administration, and to appoint a director with full powers under the supervision of partners. However, this is the method of modern economic thought which leads to the continuation of family businesses, where the efficient administration stay away from the intervention of the partners in the management with the performance of the company. In addition, the partners have the right to dismiss the third party director, when they decide that he is not valid to run the company. (Study of the Chamber of Commerce and Industry, 1990)

The challenges faced by family businesses:

Family businesses face many risks which can be summarized in the internal challenges that result from the fact that the partners are from the same family who have social relationships as well as working relationships, resulting in challenges and difficulties of a particular kind that are not usually faced by other companies. The decisions emanated by the family companies are centralized and they are restricted to the family members only. Although this characteristic has the advantage of the speed of completion of the work, it may lead to the rigidity of organizational thought and the weakness of the emergence of new ideas that contribute to the development of the company especially if the company does not retain external consultants but only holds family meetings. The most important challenges faced by family businesses is the problem of transformation of the presidency after the death of the founder and the accompanying division of his legacy, the change of the pattern of the family ownership and the power struggle and management. The founder, the head of the family, is usually one person who establishes the company and the business reputation and he is the first generation of the company. He introduces his sons to run the company and they all try to work within the established principles of the company to develop it and introduce some new ideas.

The emergence of second generation leads to the increasing number of family members and different points of view which may lead to the termination of the company. (Mustafa Abu Bakar, 2005). The challenges of the local environment, including: the countries are heading at present for privatization, the great reliance on the private sector even in the service sector, the application of new economic systems and the transition to market economy in some Arab countries The challenges of the age of globalization, including: the world at the moment is a small village as a result of the information revolution and telecommunications. Therefore, businesses do not only enter competition with local companies but also with global companies, especially with the emergence of international open market. As a result, they have to keep up with every change and update in the world and the face the international economic blocs. (Nada Al-Hazmi, 2007)

The effects and advantages of transformation of family businesses to public corporation:

There are many benefits and advantages that can result from the transformation of family-owned companies into public corporation. These advantages benefit the family businesses in particular and the national economy in general.

First: The Family Business:

The ready availability of funds for the company which give it the ability to finance its expansion plans and investment projects at low cost. And the family business is acquiring of new human capabilities and competencies. Also, public corporation is supplying solid capital that is capable of implementing large-scale projects. Then, Joint Stock Company has been improving the financial, productive and administrative capacity of the company which makes it able to increase its competitiveness in domestic and foreign markets. The most important effect of transformation of family businesses to public corporation is protecting the company from collapse and disappearance after an absence of the first generation of the founders and the transfer of ownership to heirs. Furthermore, the advantage of transformation of family business is getting rid of the signs of weakness and favoritism that may appear in the management of family businesses. Finally, the transformations of family businesses are having the incentives and privileges granted by the government to public corporation.

Second: The national economy:

The effect of transformation of family businesses to public corporation is development of national economy through expanding the base of public corporation, thereby expanding the ownership base and diversification of activities, which lead to increased revenue and gross domestic product for the country. Also, the advantage of transformation of family business is revitalizing the performance of the stock market through the entry of new companies which contribute to the revitalization of the primary market and contribute to attracting domestic and foreign investment for the private sector or the small investors. The advantage of transformation of family business is generating economic entities capable of carrying out large-scale projects. The advantage of transformation of family business is stability of the labor market by maintaining the continuity of the rights of employees of the company in addition to providing new job opportunities. Finally, effect of transformation of family businesses to public corporation is reducing unemployment by providing new jobs to accommodate a great deal of national employment. (Mohammad Al-Jilani, 2007)

Reasons that prevent the transformation of successful family businesses into public corporation:

The small size of private companies in general if they are considered as companies rather than groups. The unwillingness to share profits with others as to lose name or control of the company. The unwillingness of submission to censorship since the joint stock company is fully controlled by the Public Authority for Capital Market. The unwillingness to disclose the company secrets since the general authority asks the joint stock companies for the full public disclosure of their financial statements on a regular basis, as well as the disclosure of material information and anticipated emergency events which are expected to have a significant impact on stock prices and investors decisions. Additional legal procedures governing the establishment and the capital increase of public corporation comparing to other types of companies Huge legal responsibilities of the Members of the Board of Directors towards the other shareholders of the company, which entails the commitment of the members with knowledge, awareness and understanding of legislative and legal environment in which the company operates. Availability of funding sources in addition to incentive banking facilities obtained by the family businesses from local banks. For example, the interest rate on loans for family businesses may be less than those provided for the joint stock companies as well as the speedy provision of loan with less guarantees. The bank may rely on the strength of the company, its success and its family name. (Public Authority for Capital Market, 2002)

Mechanism of transformation of family businesses to public corporation:

The process of turning the family business into a joint stock company achieves a complete change in the structure of the company. The legal form of the company turns into public corporation where it offers its shares in the capital market for subscription by the public investors. There are many aspects to be considered before allowing the family company to become public corporation so as to ensure the achievement of the objectives of the transformation process, including: focus on the successful large or medium-sized family businesses with a promising future as they will be more able to achieve the objectives of the transformation, forbidding the transformation of vulnerable or troubled family businesses as they constitute a burden on the stock market, graduation of the process of transformation to public corporation, especially for family businesses that do not take the form of a limited liability company or closed public corporation by first becoming a limited liability company or closed public corporation. The process of transformation of family companies into public corporation requires a clear mechanism that would help to shift properly and successfully. We pose our concept of the mechanism of transformation of family companies (especially companies that do not take the form of a limited liability company or closed Joint Stock Company) to public corporation. We therefore suggest the process of gradual transformation. We believe that the transformation process should go through several stages as follows:

Stage I: the transformation from individual or family project to a limited liability company:
This stage is the first step towards becoming public corporation where the shares of each member of the family in the company are transformed into shares after the confinement of its capital. The absolute

preference is given to the partners in the company during the process of transforming or selling the private shares, and thus the ownership remains in the family company. This stage aims at giving the intermediate family companies the chance of transformation because the capital requirements of establishing a company with limited liability is the least comparing with closed or public corporation. It also aims at preparing the family members in terms of their ability to deal with the quota system and then the shareholding system. The large family companies which have a weight in the market can skip this stage and transform directly to a closed joint stock companies. It is not advised to move directly to public corporation before ensuring the company's performance after the shift to the new legal form.

Stage II: the transformation from a limited liability company to a closed public corporation:
This is the second step towards transformation into public corporation. However, it can be considered as a first step for the large family companies. The company also remains the ownership of the family where the shares can not be converted or sold outside the group owner of the company except in accordance with limited options. The shift from the quota system in the capital to the stock system is carried out with this new legal form. This contributes significantly to the process of preparing the family members in terms of their ability to deal with the shareholding system as well as getting used to part of the laws implemented in public corporation.

Stage III: The transformation from closed joint stock to public corporation:
This is the final step of the process of transition where the company's shares are posed to the public subscription after they are listed in the stock market for trading and then the sale and transfer of shares are completed freely. The family can retain control of the company through retaining the majority of the shares. The family businesses that do not take the form of closed joint stock company can preferably move directly to the public joint stock companies only after showing some measure of success in a reasonable period in the status of closed public corporation. This mechanism aims at providing an opportunity for the greatest number of family businesses, especially the medium-sized, to shift into joint stock companies. It also aims at the gradual preparation of family business owners to get used to systems, procedures and rules of joint stock companies. On the other hand, the gradual transformation of the company from one form to another largely contributes to ensuring the success of the transformation process and achieving the goals behind them. (Mohammad Al-Jlelatie, 2007)

Some examples of successful family businesses in Palestine: 1. Company of Al-Juneidi: Al-Juneidi Company for dairy products and food was founded in 1982 in Hebron, Palestine. Al-Juneidi Company adopted a quality system for its products as well as the modernity and its methods which became evident in the product quality and the overall performance. It was interested in meeting the desires of its customers in the production of dairy products and many foods which commensurate with the public taste of the Palestinian consumers and subject to the regulations of public health and food safety. Today, Al-Juneidi Company for dairy and food is the first and leading company in Palestine. Its sales include a large number of food products, such as dairy, salads or snack foods, which are the pride of the Palestinian national industries. The production capacity in the main production lines amount to approximately (70,000 liters) of fresh milk per day, (10 tons) of fresh salads and (5 tones) of Al-Juneidi
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Tahini (with red mark). All of these products are produced on an area of modern buildings which meet all regulations and standards of product safety, public health and occupational safety and meet the environmental requirements of the dairy plants and foodstuffs. These facilities include the general administration of the company, all the different production lines, the supporting company services including the engineering and technical departments, laboratories of quality, refrigeration facilities and huge storage. Al-Juneidi Company for dairy products and food employs more than 250 workers and staff from the various Palestinian areas. The product is delivered on a daily basis to all points of sale in different parts of the country with a large distribution network which is equipped with all standards of quality control and refrigeration to ensure product safety and access to major distribution centers and sub branches in the various areas of Palestine.

Goals Of Al- Juneidi Company Al-Juneidi Company has many and various goals, including securing dairy products and food stuff to the Palestinian customers permanently and continuously so as to live without foreign products. There is also the Conservation and development of animals as an economic source of income for the homeland and the citizen. The company serves as an employment and development of the technical human capabilities and workforce so as to reduce the rate of general unemployment in the Palestinian areas and contribute to building a generation which is able to keep pace with the technological and vocational development at home. It also aids in the development of scientific research and comprehensive quality with regard to dairy products and foodstuffs. The company also helps in the development of supplementary Palestinian industries with regard to dairy and food industry such as plastic, paper and cardboard industries.... etc through the adoption of their products as part of the supplementary materials in the process of industry.

2. Company of Akram Sbitany and Sons: Since the company was founded in 1962 by Mr. Akram Issa Sbitany, it persisted in becoming among the leading companies in the areas of import and marketing and providing the maintenance services for electrical and electronic devices.
The company has 16 branches and 76 authorized agent for the sale of devices which are distributed throughout the West Bank, Gaza and Jerusalem. The company seeks the best for achieving the best for customers. It is characterized by the maintenance department which seeks to achieve the highest levels of speed and accuracy in the maintenance of the devices in all areas of Palestine.

Case Study: Anabtawi Group for Development and Investment

An interview was conducted with Engineer Ziad Anabtawi, the Director-General of Anabtawi Group for Development and Investment where he was questioned about turning the family business to a joint stock company as follows:

Q 1: When was the beginning of the establishment of the company?

The beginning was in 1963 after the return of the late Haj Subhi Anabtawi from abroad, where he founded the Anabtawi Company for general trading. It initially started with a limited number of staff and dealt mainly

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with food and consumer goods in a small market size for a set of subsidiary agencies for some distinctive and important products.

Q2: What are the additions and the work that were introduced on the nature of work this company by the second generation?
The diversity and the branching of work have encouraged the establishment of different companies where each is responsible for a specific field. For instance, there are the Near East for Industry and Commerce which specializes in vegetable oils and olive oil, the Near East for Distribution which distributes global imported brands of consumer goods and food, Anabtawi for Trade which is the parent company, "Alpha Trans" which is a logistics company in Jerusalem, and Anabtawi Union which deals with the investment of the group. Additionally, there are investments and contributions in many major national economic institutions in Palestine such as the insurance sector.

Q 3: What are the most important accomplishments of the Group over the past forty years? What is the role of the board of directors?
We proudly achieved many accomplishments: from one car of distribution to a convoy of modern cars and trucks, from marketing the production of others to marketing our products, and from contracting with subsidiary agencies to contracting with leading global companies to distribute their products in the Palestinian market, registered trademarks.

Q 4: Did you follow the scientific method in the administration of the Group. What are the scientific means that you use?
One of the most important technologies adopted by the Group in the management of their work is the performance indicators (KPI's) which help the company take the right decisions in a timely manner. The groups decisions are based on facts, figures and reports analysis. The Group relies on the operations approach in the management and the achievement of the goals without focusing on the target itself by setting strategic goals for the group which companies achieve through the use of special tools.

Q 5: After all this, can you describe your group as an influencing group in the national economy? Why?
Yes, we are working hard in the Anabtawi Group to support and develop the Palestinian economy through investment in the agricultural sector through olive oil which is the backbone of the national economy. We are also working to open foreign markets for the national products which benefit our economy. We also support the economy through the investment in many national companies and the provision of required financial and administrative support. In addition, our group, through its various companies, reduces unemployment by accommodating hundreds of workers and employees and supports the community with professional and high efficient cadres.

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Q 6: From your point of view, what are usually the reasons of the expiration and transformation of a company?
Expiration is often caused by a dispute between family members or their inability to achieve the objevtives. The transformation is caused by the introduction of a new partner or a shareholder from outside the family in order to increase the capital, to achieve expansion by starting projects or other business for the company, or to incorporate it in the stock market in general.

Q 7: Do you fear that you will become of the companies that collapsed due to intense competition, globalization, international trade laws, and the pressures of the barriers of the occupation? Why?
Yes, we are able to develop and move ahead despite all the challenges. However, it is important to transform the company into a joint stock company which plays a main role in maintaining its continuity and development. Obviously the family company can get a transformation with easy conditions which support the company growth through bank loans. The company can also take advantage of joint stock companies especially the possibility of raising the capital to increase the fixed and common assets, and enhance the capacity of facing the crises and difficulties as a result of the availability of expertise, managerial competencies and responsibilities distribution.

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Results:
A family company is each company that is under the control of one family through the full ownership of the company or ownership of the number of shares that give it the control of the strategic decisions of the company. It was also found that most family businesses do not continue to the third generation as a result of the lack of thoughtful strategic future planning for the management of these companies and the determination of their ownership. In a family company the founder's death and a dispute over power and ownership mainly lead to the expiration of family businesses. There is an escalation of commercial competition as a result of the market expansion and the increase of supply on the international level, which is no longer limited to the local or Gulf level. Also, the diversity of the methods of restructuring the family businesses depend on their capital and the nature of their activity. It was also found that the transformation of the large family businesses to public corporation is the best way of restructuring them. There is also the unwillingness to carry out the disclosure of company secrets since the General Authority requires the companies to contribute to the public full disclosure of their financial statements on a regular basis, as well as the disclosure of material information and the predicted emergency events that which are expected to have a significant impact on stock prices and investors decisions. Family companies need additional legal procedures that govern public corporation at the establishment or when working on the capital increase compared to other types of companies.

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Recommendations:
Each family company must find the best ways to ensure its survival through the restructuring of the company's management, through incorporating with another company or through switching to another legal form that commensurate with the type of its activity and size of its capital. The transformation into public corporation is generally the best way to keep the family businesses with large capital and large scale projects. Family businesses must also take into account the gradual process of transformation into public corporation to ensure their continuity and resilience to the new changes. In addition, the competent government agencies need to develop awareness campaigns and to give greater advantages to the joint stock companies to encourage the transformation of the huge family companies. Obviously, a number of Kuwaiti family companies control most of the state enterprises and have many varied activities in all fields. However, they are either limited liability companies or closed joint stock companies. Those companies lack the unique features of the public corporation, including: o o o Lack of transparency in their management and transactions. Lack of their specific and explicit value as in stocks. Lack of contribution in the redistribution of wealth because they are not subjected to tax and they do not allow investors to participate in their capital as long as they dont propose their capital in the market securities

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