The corporate governance is conventionally regarded as applicable in the domain of public corporations and family firms have long been excluded from the good governance debate However, the fact that only 15 per cent of family-owned businesses survive until the third generation indicates that governance is also a crucial issue for family businesses.

What causes family firms to fail the test of time?

Families are no different than any other institutions, even countries. They require values, codes of justice, fair play, and support for the weaker members of the family. They require a mechanism for redressing grievances and having open and candid discussions.

Briefly, problems within a business family can be summarized as: Very few families understand that their assets comprise three forms of capital: human, intellectual, and financial. Even fewer families understand that without preservation of their human and intellectual capital, they cannot preserve their financial capital; unfortunately, families often concentrate solely on financial capital. Many families fail to understand that preserving wealth is a dynamic process. Each generation must maintain the wealth-generating spirit of the first founding generation.

Families often fail to measure properly the time frame for successful wealth creation. Planning the use of the family’s human and intellectual capital is too focused on the short term and on individuals rather than wealth creation mechanisms. The lifespan for a family business should instead be measured by generations, and long-term planning is essential. Families must also understand that fundamental issues of wealth preservation and good governance are qualitative, not quantitative. Most families measure success based on the size of their financial balance sheets. But, without a qualitative assessment of human and intellectual capital, the family balance sheet is incomplete and ineffective in measuring whether a family is achieving its wealth preservation goals. Family wealth includes human behavior, teamwork, and understanding

There is a growing need of a reform package in the form of fiscal, monetary and other measures to bring the real sector companies including the manufacturing, hydropower, trading, etc into the Nepal’s securities market.

The real sector having private and family owned ownership should be provided the opportunity through tax holidays and exemptions as attractions. Recently, the financial sectors hold about 90 per cent share of the number of listed companies and the transactions held. Out of 172 listed companies with NEPSE, about 150 companies constitute the financial sector. The real sector should follow the financial sector but in NEPSE it is the opposite

The real sector companies have a prime role for the uniform and sustainable development of a country and capital market as well. But, Nepalese capital market is highly concentrated on the banking and financial sector companies and the number of actively traded real sector companies is very low. The operating process and decision making process of industrial and production sectors companies in Nepal are still not very transparent. To convert private companies to public limited and make them transparent, and list themselves at the stock exchange, they should be provided income tax exemption up to 2%-3%. Moreover, if they can be classified as Group “A” companies at stock exchange then such tax exemption should be 5%. A provision should be made for public companies to get loans at lower rate (at least 1% lower) than others. Public companies should be awarded which implement the best standard of accounting and auditing principles. The recent provision by the SEBON regarding the IPO requirements of 15 per cent will provide some headway in this direction.

The objective of a system of family governance must be to align the aspirations of each individual family member with the goals of the family as a whole. Enhancing synergies between individual and family objectives encourages the long-term preservation of the family’s wealth: its human, intellectual, and financial capital.

A family’s wealth consists primarily of human and intellectual capital; financial capital is secondary. Financial capital alone cannot provide long-term wealth preservation. What a family’s financial capital can provide is a means to promote the growth of its human and intellectual capital. Without intellectual capital, even with all the money in the world, under-educated family members will not make optimal decisions. Therefore, the development of human and intellectual capital contributes to growth of financial capital.

An explicit and voluntary statement of the family’s values and goals is necessary to create a system of governance through which those family principles can be practiced. It ultimately allows for more effective wealth preservation. Each successive generation must reaffirm its commitment to this system of governance, including a process for settling family disputes.

Singh is CEO, NEPSE

source: The Himalayan times (2010),"Nepalese securities market Need to attract real sector companies ",The Himalayan times, 25 October 2010