Mills Trading: Governance Issues in a Family Business

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Table of Contents

Mills Trading: General Information and Governance Configuration
Governance Configurations
Conclusion
References

Mills Trading: General Information and Governance Configuration

Mills Trading L.L.C. (MTL) is a part of the Mills Group. The main business of the Group is connected to providing the markets and hypermarkets of the UAE, Qatar, Bahrain, and Oman with various agricultural and camping supplies and equipment (Mills Trading, 2015). The MTL itself was founded in 1996 when its parent company transferred to Dubai in order to contribute to its economic development and enjoy the opportunities of the fast-developing commercial center. MTL began as an organization that was busy with the “wholesale trade of agricultural equipment and supplies” (Mills Trading, 2015, para. 1).

The offers of the company have diversified since then, which allowed it to grow rapidly. Today, Mills Trading L.L.C. (2010) suggests various products that are connected to outdoor activities, including camping and gardening. Other product categories include various barbeque-related goods, outdoor furniture, coolers, and even sliders and trampolines for children and youngsters. The mission of Mills Trading L.L.C. (2010) is to innovate its products and inspire its customers by encouraging them to explore the outdoors space.

MLT (just like the Group) is a family-run business. This type of business has to face many challenges, and a number of them are connected to the company’s governance. In this paper, these challenges are described, and the recommendations for the governance possibilities are made.

Governance Configurations

Structure and Design of Governance Bodies. Membership

The governance of family firms has been attracting the interest of theoretical management science for years. It has been established that their management type is supposed to be distinct from that of nonfamily firms (Nordqvist, Sharma, & Chirico, 2014). According to Nordqvist et al. (2014), the governing bodies’ type depends on the nature of the family businesses that can be different. The specific feature of this kind of business is its hybrid nature: it is both a family system and a business system. As a result, its special characteristic is the possibility of family meetings that are rather informal. This kind of governance is convenient and simple; it improves the ties between the members and allows them to stay in touch. As an upgrade of this form of management, family councils are introduced: they are more formal and are more common for big firms.

To address the issues that are connected to legal actions, to discuss strategy or the legitimization of nonfamily members, to evaluate performance and carry out other monitoring activities, the board of directors is most often used (Nordqvist et al., 2014, p. 195). Apart from that, the less formal types of governing are often used in small and young companies. Given the fact that the MTL is not very young and, according to Mills Trading L.L.C. (2010), has grown three times since its diversification, it appears more logical for it to move towards most formal forms of governance. At the same time, the family-related business issues that define the relationships of the family and the business could be better suited to the less formal governance forms. In general, since family business is a hybrid entity, balancing the various forms of governance seems to be advisable in case all the related processes are legitimized properly.

A significant membership issue that has been introduced in the past years is the involvement of women in family businesses (Karatas-Ozkan, Erdogan, & Nicolopoulou, 2011). In the modern world, the potential of women and their talents are acknowledged, and women tend to get involved in businesses. According to Karatas-Ozkan (2011), their contribution to family businesses is significant, and their motivation is very high, but their specific needs and challenges (in particular, the problem of invisibility) require attention. In other words, women need to be supported when they enter the family business. In this case, they will ensure the improvement of the company’s performance, which MTL needs to take into account.

Executive Compensation and Motivation

The issue of executive compensation is frequently controversial. Still, it is well-known that executive compensation tends to improve the motivation if not the loyalty of the board members (Nordqvist et al., 2014). Motivating active members, who significantly contribute to the business, is of great importance. Still, it is necessary to find a balance between what is reasonable and what is ethical to avoid family feuds that can result from the sense of dishonesty. The study of Cheng, Lin, and Wei (2014) demonstrate that unjustified, excessive executive compensation is more likely to occur in family businesses with poor governance. Therefore, excessive compensation may be considered to be a signal of governance problems. MTL needs to monitor this aspect and make sure that it is just to all the people involved.

Challenges of Family Businesses

According to Nordqvist et al. (2014), the core of the governance of a company consists of the elements of authority, legitimacy, and incentives. Clear authority improves the efficiency of the governance and the company since it corresponds to precise rules. The effect of clear legitimacy also consists of improved efficiency that results from the acceptance of the authority. The role of incentives is obvious: they reduce turnover intentions. It is evident that the elements are crucial for a company’s sustainability. Still, in family businesses, a number of challenges threaten these elements of sustainability and stability.

Family Dynamics Challenge

Family dynamics, to put it simply, is the relationships between the family members. The specifics of family businesses have some advantages, but the possible adverse effect on family relationships is an apparent disadvantage that threatens the sustainability of authority and legitimacy. The conflicts need to be settled timely, and the ties between family members need to be improved to resolve the issue. Similarly, board membership and ownership definition can regulate the problems and help to avoid a family feud (Nordqvist et al., 2014). This challenge is also connected to the issue of professionalization: the latter can become a solution to the problem, but it has its disadvantages.

Ownership Challenge

One of the important family business challenges consists in the fact that the owner becomes dispersed with time. Indeed, as new generations enter governance, the authority needs to be reestablished and relegitimized to improve coordination and efficiency. Three typical solutions to the problem exist: there can be one most influential owner, a small number of equally powerful ones, or a large number of equally powerful ones (Nordqvist et al., 2014). In other words, depending on the needs of the company and the relationships inside the family, its members can be granted a certain amount of legitimate authority. This issue is very personal and should be discussed within the family. Still, a recommendation for MTL can be provided: the form of ownership can be changed depending on the current situation. In other words, to define a proper form, the family needs to analyze a situation and come to a conclusion that allows avoiding threats (for example, the threat of feuds).

Governance and Professionalization Challenge

Professionalization is a common strategy of management reforming that is used by family businesses. Professionalization happens when “founding families render their control rights to nonfamily managers” (Lien & Li, 2013, p. 352). According to Lien and Li (2013), various studies demonstrate that such reorganization improves the productivity of the company, especially in developing economies. It happens because professionalization makes the threat of family conflicts less possible. At the same time, professionalization has its own threats; in particular, the threat of the conflict between the professional and the family members. Apart from that, there is always a chance of mismanagement and the company that attempts professionalization needs to take this fact into account.

According to Lien and Li (2013), and especially successful strategy of professionalization consists of incorporating “nonfamily management into the effective family control” (p. 359). In other words, the family authority must not become weaker; instead, it needs to be complemented by professional management to ensure the proper reactions to business challenges. Indeed, the main advantage of professionalization lies in the fact that it prevents the degeneration of family relationships. However, giving up control over the family business is a rather controversial choice. The advice of Lien and Li (2013) allows combining the advantages of professionalization and family control. This idea appears to be most useful for MLT. Indeed, when admitting a professional to take control over the company, it is most advisable to incorporate this new element into family governance, making sure that the possible threats of this kind of reorganization are eased.

Conclusion

As follows from the information presented above, the form of a family business offers specific challenges and opportunities to MLT. Modern research provides answers to almost any question, but the mentioned recommendations need to be considered by the family and possibly practiced in the environment of MLT. In this case, it will become apparent if they are truly applicable to this particular organization and if it can benefit from suggested activities and guidelines.

References

Cheng, M., Lin, B., & Wei, M. (2014). Executive compensation in family firms: The effect of multiple family members. Journal of Corporate Finance, 32, 238–257. Web.

Karatas-Ozkan, M., Erdogan, A., & Nicolopoulou, K. (2011). Women in Turkish family businesses: Drivers, contributions and challenges. International Journal Of Cross Cultural Management, 11(2), 203-219. Web.

Lien, Y., & Li, S. (2013). Professionalization of Family Business and Performance Effect. Family Business Review, 27(4), 346-364. Web.

Mills Trading L.L.C. (2010). Services. Web.

Mills Trading. (2015). Web.

Nordqvist, M., Sharma, P., & Chirico, F. (2014). Family Firm Heterogeneity and Governance: A Configuration Approach. Journal of Small Business Management, 52(2), 192-209. Web.

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