Reference no: EM133041838
Case Study: Family Business Governance
Introduction
Establishment of a family Board Board Re-structuring
One fine morning on the December 13, 2017, sitting in their restaurant "Le Taj Mahal" in Bordeaux, France, Imran Chaudhry and his younger brother, Kamran Chaudhry, were musing over the growth options for their Pak-French restaurant business. In France, the Chaudhry family owned four Pakistani restaurants - Taj Mahal, Punjab, Rajwal Restaurant and Le Maharajah. Both of the family elders were confronted with the issue of grooming their new generation and finally handing over the business to them. The potential successors had different plans to consolidate and govern the rapidly expanding business. One of the tentative successors, Salman Chaudhry, challenged the corporate governance practices of the four-decade-old Pakistani family business in France. He had plans to manage the expanding family business through a structured boardroom.
When Salman joined the family business, he was motivated to apply the corporate governance practices of French hotels and restaurants in his family business. Therefore, he decided to give a presentation about the establishment of a family board to achieve growth objectives in the restaurant industry. A meeting of all the stakeholders in the family was convened. Imran Chaudhry, Kamran Chaudhry, Saif Chaudhry and two management executives, Kaleem Khan and Mobeen Khan, attended the meeting. After a detailed presentation, the family members decided to follow modern corporate governance practices and to formally introduce a board to their family business. Imran assumed the role of chairman of the board. As a successful entrepreneur, he was already volunteering his services as adviser for management of a few restaurants. He also chaired the audit committees for all of his four restaurants and other Indian restaurants in and around Paris and Bordeaux. Kamran Chaudhry became the non-executive director of the board. He took this position as he wanted to observe the new professional board members in day-to-day operations. He was asked to sit on various board committees, including the audit, executive hiring and remuneration committees, as an observer. Saif Chaudhry was serving his family business since his childhood. He became the executive director, while he dreamt of becoming CEO of the company. He was already serving as managing director of two restaurants and dealing with the hiring of technical staff for all restaurants. Mobeen Khan was given the role of company secretary. Kaleem Khan also joined the board as a financial expert and also hoped to become a CFO (chief financial officer) at some stage. He was working as manager-finance under the supervision of Mobeen Khan. This was the initial governance structure of the family board. Board committees like the audit committee, executive hiring and remuneration committee with centralized control of family members were officially introduced.
Sensing that a few family members were not satisfied with the composition of the board, it was decided to convene another meeting with the aim to restructure the board. The agenda of the meeting was to discuss the restructuring of the board by clarifying the roles of each family member. Salman claimed, "All firms have started to make their boards more independent and powerful than ever before". While presenting a model, he argued that "we can note that within the family boardroom model, initially some family-owned enterprises felt the need to have a board to satisfy the legal compliance requirements. However, ultimately, the family-owned firm needs to have a quasi-independent board for higher level for sustainable growth". Saif Chaudhry, who was well experienced with Bordeaux restaurants, said, "Salman, as per your claim, the contemporary circumstances demand the firm's governance model to move to the highest ring for survival and sustainability of the business. Well! but what is the problem, when family members are enough to deal with the business and can run the restaurant very well?" He added, "family secrets must not be learnt by outsiders". Salman replied to Saif by saying that, "it is now time to come out of operation's mindset"; "we need to broaden our business vision, so that we may be able to create new growth histories". Moreover, "the common tasks of the corporate board include advising, monitoring, strategizing and networking". Salman further added, "Normally, moving outside the ring helps in achieving the better boardroom structure. This would help firms for long-term survival in the market. Although a compliance/insider board structure may work for a family enterprise, as the firm grows, advisory board members, executive director(s), and management can improve the firm's governance for family-owned business like ours. This requires an inner circle board/quasi-independent board." The Chaudhry brothers approved the idea of hiring independent board members and technical experts.
Hiring technical expert, Boardroom politics, and CEO duality issues
Stephane Saussier was introduced as a family business expert. The Board decided to hire Saussier as an advisory member. Based on feedback from Saussier on business policy, corporate strategy, CEO succession and the CEO duality issue, there was a need to adopt governance practices in the family business to avoid conflicts of interest and family politics. The nomination committee held its meeting to hire a new CEO with the aim of dealing with issues related to monitoring and control. The executive directors, also part of the nomination committee of the family board, were asked to introduce potential candidates for the post of CEO. The board established a quorum, which included the chairman (Imran), a non-executive director (Kamran), two executive directors (Saif and Salman) and an independent director (Ste´phane Saussier) to attend the board meeting. Three candidates - Hazem Arab, Ste´phane Borraz and Mobeen Khan - were introduced to the executive selection committee. In the four-hour-long meeting to select a new CEO, two board members, Kamran and Saif, voted in favor of Mobeen Khan, while the other two directors, including the independent director Saussier, voted in favor of Ste´phane Borraz. The chairman of the board noted that the boardroom was becoming politicized, as Saif and his father, Kamran, were continuously voting as a group against the chairman and his son. For example, in earlier board meetings the decision to hire a senior manager, the CFO, was not taken, as the chairman of the board did not exercise veto power. Similarly, a strategic decision about opening a new branch had been pending for the past few months. However, this time the chairman of the board used his veto power to take the final decision in favor of Ste´phane Borraz. This decision hurt Mobeen Khan, and he put forth his resignation. The chairman did not accept Mobeen's resignation and decided to take him on the corporate board by increasing the board size from five to six members without observing any due process for hiring a director. The chairman then asked the newly hired CEO to present his proposals for business growth in the next few months. Later on, Borraz presented two growth options. The first option was to acquire more land to grow in Muslim-populated areas of France, such as Marseille and Toulouse. This option was quite expensive and meant entering new locations. However, the second option was to start a cruise-based hotel within the Bordeaux. The cruise would have 20-30 double rooms, available for rent, and two dining halls, one indoor, while the other was outside on the roof. Each dining hall had a capacity of 30-40 chairs. Hence, the moderate level of investment in the cruise was required to make it useful for dual purposes, that is, hotel and restaurant. In this board meeting, once again two members, Kamran and Saif, voted in favor of option one, that is, to open new branches of Restaurant Le Taj Mahal in Marseille or Toulouse, while the other two directors, Salman and Saussier, voted in favor of option two, that is, launching a cruise at the river Garonne in Bordeaux. Although the CEO explained that opting for a related diversified strategy can result in better options, two of the board members did not buy his argument because they considered him as a party to Ste´phane Saussier and Salman. The chairman was now really concerned about this continued conflict and emerging family politics within the corporate board. He was smelling the noxious smell of family egos, which were looking higher as compared with organizational interest. This was because the executives did not decide with team spirit like the hiring of a French CEO and an independent director and advisory members. So the board was divided. This time, the chairman did not want to use the vetopower. He left the board meeting in the middle, commenting, "I need consensus decision for firm's growth in the best interest of our emerging family firm not the dirty family politics. You all are here to work in the best interest of the organization. We gave blood to this business and worked days and nights to get restaurants at this respectable and profitable position". Suddenly his eyes were full of tears. He further added, "I let you know one thing. United we may survive in this land of opportunities, but divided we may fall as this French market is merciless. They will consume us as Curry-Pakoro like we never existed".
(Source: Extracted from article published by Saleem, I., Khalid, F. and Nadeem, M. (2019), "Family business governance: what's wrong? What's right? What's next?", Emerald Emerging Markets Case Studies, Vol. 9 No. 1.)
Case Study questions:
1. Using the case study, explain clearly the reasons for establishing and later restructuring the company's Board of Directors.
2. Explain what is CEO duality and further discuss how the presence of CEO duality may contribute to strategic control issues in a family-owned company. Please use the case study to support your answer.
3. Draw up the organizational structure of a family-owned company mentioned in the case study. Label the diagram clearly by indicating positions, names of position holder, and showing the relationship between the Board of Directors, executive management and business owners. (Note: use the information given in the case study).