Corporate Governance in Family Businesses in Serbia

Corporate Governance in Family Businesses in Serbia

CORPORATE GOVERNANCE IN FAMILY BUSINESSES IN SERBIA PhD Katarina Djulic, Faculty of Economics, Finance and Administration, [email protected] edu. rs MSc Tanja Kuzman, Faculty of Economics, Finance and Administration PhD Katarina Djulic is Assistant Professor at FEFA on subjects of Corporate Finance and Corporate Governance. She also works as Senior Consultant in KPMG Serbia. She worked as an Associate Operations Officer at the International Finance Corporation, World Bank Group, on the Corporate Governance Program. She holds a Bachelor of Law from the University of Belgrade, a Master of Law (LL.

M. ) from Northwestern University, a Master in Public Policy from Harvard University JFK School of Government, and a PhD degree from the University of Belgrade Faculty of Economics. Prior to joining IFC, Ms Djulic worked as a legal adviser to firms in Belgrade and New York and afterwards at the Ministry of Finance, first as an adviser to the Minister and then as an Assistant Minister in charge of the Financial System Division. She also worked for European Bank for Reconstruction and Development in London in Office of General Council.

PhD Djulic was a member of Board of Directors in DDOR, Novi Sad, a member of Supervisory Board in Jubanka, Beograd and Chairwoman of Supervisory Board in Central Securities Depositary and Clearing House, Republic of Serbia. MSc Tanja Kuzman is Teaching Assistant at Faculty of Economics, Finance and Administration. She teaches Corporate Governance and Corporate Finance. She is also Advisor for Corporate Governance and Corporate Finance in Chamber of Commerce and Industry of Serbia, Executive Director of the Institute at Faculty of Economics, Finance and Administration and a Member of the Board of Directors of Alumni FEFA.

She holds University of Sheffield Masters Degree with Distinction in Banking and Finance, where she was proclaimed as one of the best students, and a BA from the Faculty of Economics, Finance and Administration. She was awarded with two HEAD’s list certificates for outstanding academic achievement of the University of Sheffield and in February 2011 she started her PhD studies in Finance. From September 2009 to December 2011 she worked as Coordinator of the National Competitiveness Council of the Republic of Serbia and Junior Advisor for Economy and Finance in the Office of the Deputy Prime Minister for European Integration.

In July 2011 she has spent a month working for European Commission, Directorate General for Economic and Financial Affairs in Brussels, on the issues related to the financial stability and financial institutions of the European Union. She has finished training on European Negotiations organized by Centre des etudes europeennes de l’ENA from Strasbourg. Abstract Family businesses constitute the world’s oldest and most dominant form of business organizations. In many countries, including Serbia, family businesses play the key role in the economy growth and workforce employment.

Yet many of them fail to be sustainable in the long-term often due to some specific governance challenges (family business succession, professionalization of the management etc. ). In Serbia, it has recently been recognized that family businesses need more institutional support in the area of corporate governance. The corporate governance scorecard (questionnaire on key aspects of corporate governance) for family businesses in Serbia was developed as part of cooperation between the Chamber of Commerce and Industry and the IFC.

This paper presents the results of the scorecard used in assessing corporate governance in seven family businesses in Serbia. Analyses of the results represent a unique case study that provides an overview of the quality of corporate governance in family-owned companies in Serbia. It shows that the state of corporate governance in family businesses on the Serbian market has a lot of distance to go to reach best practice. All companies recognize the fundamental importance of family governance to their business. However, they lack knowledge and guidance on how to systematically deal with governance challenges.

Key words: family businesses, corporate governance, scorecard, board of directors, transparency, controlling environment. Paper classification: Case study. INTRODUCTION Family businesses are one of the oldest and most common forms of business organizations, drivers of economic growth and economic development, representing a large percentage of the total number of companies in the world. Family businesses in most countries in the world account for over 70% of the total number of businesses and have very significant impact on economic growth and employment. For example, in the U.

S. family businesses create 59% of new jobs, while their share in the GNP is 50%, and they represent nearly 90% of all businesses (Kuratko and Hodgetts, 2004). Family businesses in Spain and Latin America produce, respectively, 75% and 60% of the GDP (Network for Family Enterprise, 2008). Poutziouris (2000) also notes that in addition to economic growth and employment, family businesses build entrepreneurial spirit and enable knowledge transfer between generations as well as development of a sense of loyalty, long-term commitment and corporate independence.

Therefore it is considered that the creation, growth and sustainability of family businesses is crucial for the development of national economy. According to data of the KPMG Canadian Centre for family business in next 20 years 15 trillion dollars of wealth in the world will be transferred from one generation to another. The same source also points out that 70% of family businesses do not survive the transition to the second generation, 90% do not survive the transition to the third generation, and 95% of family businesses do not plan succession.

Other sources confirm these findings indicating that only 5-15% of the family businesses continue to exist in the third generation of the successors of the founder (Davis and Harveston, 1998; Neubauer and Lank, 1998; Poutziouris, 2000, Ibrahim and Dumas, 2001; Grassi and Giarmarco, 2012 ). The reasons for the unsustainability of family businesses are sometimes exactly the same as the reasons for all other businesses. Management processes, informality and lack of discipline are the most common weaknesses of family businesses (IFC, 2008). In the process of managing the family usiness, unlike other businesses, feelings and family problems can be involved complicating in that way the management process. On the other hand, the lack of procedures and informality in the conduct of business, can lead to inefficiencies and conflicts, while lack of planning in terms of succession, property management and absence of policies for the employment of family members leads in most cases to the failure of the family business. All the above mentioned reasons for the failures of family businesses stem from various weaknesses in Corporate Governance (hereinafter: CG) practices employed in family businesses.

Therefore, several researchers have investigated the relationship between the level of CG and family businesses as to determine whether these two variables are positively or negatively correlated. In their study Cheung et al (2010) have found that quality of CG appears very significant for family businesses. They have shown that good CG practices in family businesses are linked to higher stock returns and lower unsystematic risks (Cheung et al, 2010). Results of their study for family businesses are consistent with findings of Renders et al (2010) who found a positive correlation between CG practices and company performance.

Furthermore, Renders et al (2010) have proven that higher CG ratings lead towards improved operating performance and higher market values of companies. These positive effects of CG ratings on market values of companies have also been recorded in emerging and transition countries (Gary and Gonzales, 2008; Khanchel El Mehdi, 2007; Black et al, 2006; Durnev and Kim, 2005; Black, 2001). Notwithstanding, Cheung et al (2010) and Geksen and Oktem (2009) find that family businesses have poor CG practices.

Cheung et al (2010) explain that family businesses, which in most cases have concentrated ownership structure, are associated with low level of CG. Furthermore, their finding indicates a concerning fact that family businesses improve their CG practices slower than their peers (Cheung et al, 2010). Geksen and Oktem (2009) also find that practices which prevail in family businesses strongly contradict the recommendations of the CG codes of best practices. When it comes to Serbia the picture is more or less the same as in all developing countries.

We have large number of family businesses which went from being an entrepreneurial project to holding structures, now with several hundreds of employees. Family businesses in Serbia perceive CG as something abstract, fleeting, something that is hard to define and measure, and hence there is the conviction that CG does not bring concrete, tangible and quick benefits. Better business results which follow concerted CG efforts are nearly never exclusively linked to improved CG mechanisms as from stances of family businesses in Serbia.

At best, they are ready to admit that CG can contribute to moderately improved business results. Despite this perception, the goal of the authors was to investigate the level of CG in family businesses in Serbia in order to be able to recognize the main weakness/problems and provide recommendations which could solve them. This paper presents the findings of analysis of CG practice in 8 Serbian family businesses that responded to the invitation for assessing CG practice using the scorecard methodology.

The scorecard was developed by the Chamber of Commerce and Industry of Serbia (CCIS) as part of the Program for Improving CG, with the support of the IFC and with participation of one of the co-authors of this paper. The scorecard consists of questions that are systematically organized into CG areas that reflect the basic principles of good corporate governance. Based on the scorecard the CG rating in Serbia can be created and even though it is quite hard to produce a quantitative evaluation of CG the scorecard can still be a valid indicator of good or bad CG practices. The paper is divided in three additional sections.

The introduction is followed by a presentation of the methodology used in assessing corporate governance practice. In second part, results of the assessment of CG in family businesses in Serbia are presented. In conclusion, closing considerations followed by recommendations for further CG improvements in family businesses in Serbia are noted. METHODOLOGY The CG scorecard for family businesses in Serbia, developed as part of cooperation between the Chamber of Commerce and Industry of Serbia and IFC, is a questionnaire whose questions are systematically presented under headings that reflect the basic principles of good CG.

Responses to questions generate a score that is expressed as a percentage and indicates what percentage of best practice was applied by a given family business in a particular CG area. The main goal of the scorecard approach is to enable companies to easily assess their own CG practices, to allow investors to determine their preference regarding the level of CG which companies need to have in order to be considered as possible investment and to enable comparison across countries and industries (Bassen, 2004; Strenger, 2004).

The scorecard is divided into the following five areas of corporate governance: 1) commitment to good CG practices; 2) board of directors; 3) supervision, control and independent audit operations; 4) transparency and disclosure; 5) owners; Each of these areas has a relative importance expressed in percentages in relation to the total of 100%. In view of the fact that each area is significant in its own way and has a different contribution to governance, their relative importance differs accordingly.

A relatively greater weight is carried by two areas for which experience shows that they represent vital points of good CG in a company –company commitment to CG principles and supervision, control and independent audit operations. As a result these two areas are weighted with 25%, board of directors and owners are weighted with 20%, while transparency and disclosure is weighted with 10% in the final score. In each of the specified areas there is up to eight questions that reflect recommended practice for realizing principles to which a particular area is dedicated.

Answers to those questions are graded with marks from 1 to 10, where each mark is related to certain percentage of the mark for that specific area. A total result of around 50% means that a company has implemented CG practices as required by relevant legislation. In order to achieve a score of over 50%, a company needs to go beyond the requirements of statutory regulations. Finally, a particular quality of the scorecard is that it takes account not just of the overall score, but also of the scores of individual CG areas, which gives a test company a clear indication of the areas in which its CG practices lag behind the company average.

The CCIS and the IFC, with participation of both authors in the process, have conducted an assessment of CG practices in 8 family businesses in Serbia. Family businesses were guaranteed confidentiality in respect of scoring and results, with a view to ensuring objectivity and realistic assessment of current status. ASSESSMENT RESULTS Commitment to good CG practices As first area in the scorecard it consists of questions which provide a general sense of the level of CG practices employed by the family business.

The scorecard for this area seek to establish: (i) the existence of a CG code (whether developed in-house or whether an existing code has been adopted), (ii) to what extent the company’s internal corporate documents reflect the CG principles, (iii) whether implementation of CG principles is discussed in company (if yes, how often and on which level), and (iv) do principles of CG and corporate social responsibility take into account the interests of various stakeholders, thus preventing conflicts.

The figure below summarizes the scores of family businesses for this area (companies are designated by letters to ensure confidentiality of results). [pic] Chart 1: Commitment to good CG practices. CG Codes are not present in six out of eight family businesses, implying that those companies have not developed their own codes and have not adopted the existing codes of CCIS or Belgrade Stock Exchange. Despite that fact, owners and higher management have shown a great level of consciousness regarding the importance of CG and further improvements they need to make in CG area.

When it comes to conversations about CG and succession process in most cases owners and family members talk about those issues from time to time and except family members involved in family business management others lack the interest or they are rather passive in the whole process. Internal documents exist in all companies but they usually satisfy the minimum requirements prescribed by law and do not encompass the CG best practices and principles. Most of internal acts exist formally due to legal requirement but they are not implemented in conduct of family business.

Furthermore, owners and higher management have clear strategy for future development of family business, but that strategy in not formalized in the form of document. Due to that fact family members adhere to goals mentioned and set through formal or informal conversations between family members and higher management. Although poorly implemented in practice, family businesses show a clear vision of how their business should be organized and in which direction should be developed. All family businesses recognize the importance of corporate social responsibility.

Therefore they pay more attention to local communities in which they undertake their operations but their corporate social responsibility in most cases boils down just to the philanthropic activities. In conclusion we can state that in family businesses in Serbia there is the absence of CG codes, that business strategies are not formalized in the form of documents, that internal documents fulfill legally determined norms but do not encompass the CG best practices and principles, that owners and higher management attach a high level of importance to CG and that family businesses in Serbia undertake large number of philanthropic activities.

Board of directors In assessing the functioning of the board of directors questions in this section try to give a snapshot of practices regarding the management of family businesses and the role of the owner in them. In this CG area family businesses are asked whether there is a clear demarcation between operational and strategic/supervisory level in the company, is there a ormal board of directors or some other body which is responsible for the formulation of the strategy and supervision of the management, if there is a board of directors is there an internal act on the functioning of the board which defines needed competencies of the members of the board of directors and their responsibilities, is the function of the general manager and president of the board of directors clearly separated, how compensation of the members of the board is determined, is there a process of evaluation of effectiveness and quality of the work carried out by the board, whether the board establishes committees which could contribute to the quality of their work, is there the annual plan of board of directors meetings and whether members of the board of directors get the materials for the meeting in advance. [pic] Chart 2: Board of directors. In all of the tested companies there is the absence of Board of directors. Members of the families often have management functions and are directly involved in the operational management of the business.

On the other hand, they are usually the ones determining the strategic path of future development of the family business implying in that way that there is no clear distinction between operational and strategic/supervisory level. In most cases owners convenes meetings when he assesses the need for doing so and only in two family businesses there is clear and established dynamics of these meetings. Only in one of the tested companies owner of the family business is not as the same time a director and there is no overlapping of responsibilities and in just two companies owner sees themselves as president of the board of directors in future. Three of the tested companies have family meetings during which they discuss performance of the family business, family issues which can influence the business and its future development.

When it comes to the professional management, in only two of the companies tested, managing of the company is undertaken by family members and externally hired professionals which proves the low level of consciousness and the need for professionalization of the management. In most of the family businesses there is no established and formalized reward system. Absence of reward system is also a potential problem, because it reduces the possibility of objective and adequately rewarding or punishing of employees. The commonly established practice in tested companies shows that owners usually determine the rewards, its level and they make assessment of the effectiveness of the management. Even though the test has shown that owners of family businesses have aversion for professionalization of the management they feel reluctant in hiring external experts and consultants from time to time.

Based on the results of the scorecard we can conclude that in family businesses there is no formally established board of directors and that there is no clear distinction between operational and strategic/supervisory roles. Supervision, control and independent audit operations In this area the questions concern internal controls, internal audit function, external audit and reporting mechanisms in the company. Seeking to determine whether the company has any kind of internal supervision system in place, the scorecard focuses on functions rather than on formal bodies. It tries to gauge comprehensiveness, sophistication and effectiveness of the existing system. The area has a 25% weight in the final grade.

Two groups of questions focus on the system of internal controls – Has the company formalized its procedures? If yes, who is in charge of development of such a system? Have the owners formally discussed risks and have they analyzed the existing procedures and the company’s modus operandi in light of the identified risks? How does the company ensure that it is compliant with relevant laws and regulations? The next two groups of questions relate to the internal audit function – Does it exist in any form? Is it formalized? What kind of resources does it have at its disposal? Is it independent from the management? The third group of questions relates to the external audit and tries to capture the company’s experience with external auditors in the ast couple of years – Does the company have an external auditor? Who is the external auditor of the company? Has the external auditor ever issued a qualified opinion? The last question relates to the supervisory level of the company (the board if it exists or the owner(s)) and seeks to define to what extent and in which way the management communicates with the company’s supervisory bodies. [pic] Graph 3: Supervision, control and independent audit operations. In the tested companies, internal controls are either altogether absent or they have been introduced in response to customers’ or regulatory demands without any prior analysis of internal risks in the company.

The tested companies that operate in regulated industries (food production, medical supplies, transportation) and that are export-oriented received relatively higher scores since there is a large number of international industrial standards in these industries/markets that allow companies to adopt these standards routinely rather than to develop independently in-house internal control systems. Although these standards represent a type of internal control system, an internal control system should not be reduced to their implementation. In order for an internal control system to fulfill its purpose, it must be implemented in an adequate control environment and be based on a company-specific and comprehensive risk analysis and assessment. None of the tested companies has any form of internal audit function and the entire supervision is performed by the owner personally and, sometimes, the employed members of the family.

This monitoring style lacks a structured approach and a supporting system. Supervision is performed either continuously, which is extremely cumbersome keeping in mind operational responsibilities of the owner, or on an ad hoc basis. Often, the owner does not have sufficient technical knowledge to supervise all the business processes in the company and as a consequence he focuses on the business areas where he feels comfortable resulting in considerable supervisory “blind spots”. Supervision further suffers as the business expands since at certain point in time, the owner’s physical capacity becomes limitation for an effective supervision. Finally, since the owner often operationally anages the company, he effectively supervises himself which is far from good practice. The external audit function seems to be understood inadequately. The companies still perceive external audit primarily as an expense so the function is introduced only if it is legally required. It often happens that the owner does not have any direct communication with the external auditor. The contact person for the external auditor is, in the majority of cases, the head of accounting (whose work is verified by the auditor). Where the function exists, the auditors, as a rule, are small, local businesses that issue unqualified opinions. Their mandates are automatically extended for the period of 3 – 4 years.

Transparency and disclosure Although a great majority of family businesses in Serbia are small and medium non–listed companies, some of them are rather big and require a solid organizational structure, some have extensive international business operations, and others seek significant external funding (from banks primarily but also from individual investors and private equity funds). Due to these considerations, the scorecard has a part that relates to transparency and disclosure. However, since the scorecard primarily focuses on non-listed companies, this CG area has relatively smaller significance and it contributes only 10% to the final grade.

In this domain the scorecard seeks to determine whether the company has a reporting policy (formalized or not), whether it uses its website for publishing relevant information and, finally, whether all relevant information is also released in English (which allows a company to reach a far broader investor and/or client base). After this, the scorecard focuses on specific types of information which practice indicates to be of greatest interest to stakeholders. Thus it seeks to determine whether the company releases in timely manner: (i) its financial statements, (ii) its management report, (iii) materially significant information, (iv) biographical information of all members of management i. e. family members that are involved in business, and (v) related party transactions. [pic] Graph 4: Transparency and disclosure.

The poor results presented in chart 4 are not surprising since, as already mentioned, the tested companies are mostly small and medium family businesses. In addition, there are no legal requirements for non-listed businesses regarding transparent business operations. Thus, the research confirms once again the assumption that companies in Serbia, as a rule, tend to fulfill only the legally prescribed minimum. Some companies have decently informative websites but they contain only marketing information relevant for customers. The companies that export have also websites in foreign languages. No single company in the tested group has a structured approach to information disclosure. Some of the tested companies do have monthly or quarterly bulletins that are distributed to their customers.

Financial statements, as a rule, are not public and if some financial information is available on the company website, it is out of date. Only one company in the tested sample regularly prepares an annual report because it participates in international tenders and this exercise helps it present its business efficiently to a more sophisticated business community. A majority of the interviewed owners stated that they would like to keep their business within the family and that they did not plan an IPO. Finally, most of the tested businesses engage in related party transactions but, as expected, these transactions are not regulated neither are they transparent.

The research indicates that Serbian companies are still not adequately motivated to publish information and still continue to misunderstand the importance of transparency in business. Owners The last CG area of the scorecard deals with owners. This part of the scorecard focuses on key issues of family governance and has a 20% weight in the final grade. The scorecard tries to determine if there is any formal document which spells out family business guiding principles such as “family protocol”, “family business rules” etc. Formally establishing these rules could result in the most important piece of work achieved by the family business in managing its family component and the process of succession. The econd group of questions tries to determine quality, effectiveness and timing of communication between family members that are actively involved in the business ant those members that pursue other interests and thus are not familiar with the day-to-day state of the family business. The purpose of this communication is to provide a forum that allows all the family to learn more about the family business and to provide them with an opportunity to express their views on family issues that impact the business as well as business issues that impact the family. The third group of questions enquires about the family grooming plan. The grooming plan outlines the most important business skills required by successors to effectively manage the family business at the transition date. The scorecard tries to determine how the family prepares the next generation for management succession and if it has a formalized grooming plan.

The fourth group of questions asks if the family has developed an employment policy for family members. It’s understandable that the senior generation would like to have all their children involved in the family business. However, allowing children a safe employment haven just because they have no better alternative, can cause major problems. Thus, having criteria that outline what is required and expected from the family members who wish to be employed in the family business is crucial. The fifth and sixth groups of questions try to determine if the family members have any formal form of communication which would allow them to manage the key family component separately from managing business operations.

The purpose of this forum is to lay out agreed ground rules and objectives for the firm and to discuss major issues (like succession) while minimizing the threat that conflicts in the family could jeopardize the business. [pic] Graph 5: Owners. The tested companies scored the highest in this CG area. The primary reason for such a good result is great commitment of the first generation to prepare the second generation for the future transition. Although only one of the interviewed owners is familiar with basic CG mechanisms that family businesses have at disposal for managing ownership and management succession, all of them expressed great readiness to learn and to apply these mechanisms in their businesses.

In fact, all the interviewed owners have been trying to find ways to manage these challenges and all of them expressed a great concern regarding succession process in their businesses. Now, there might be some research bias since the tested businesses volunteered to engage in the CG testing and all were attending a workshop on CG organized by CCIS. It is probably true that a random sample would yield lower scores in this CG area as it would in Commitment to good CG practices. Still, we believe that a succession threat is looming over the first generation of Serbian entrepreneurs and that all of them are experiencing problems due to a lack of the entrepreneurial tradition in Serbia and a lack of CG knowledge.

None of the businesses had any form of family protocol neither did they have any formal for gathering family members involved in business to discuss family issues that affect the business and to prevent conflicts. Further none of the businesses had a formal channel of communication between the family members involved in business and those that are not but they all claim that communication is regular and intensive. The grooming plan is, as a rule, somehow implemented in practice but it is not formal neither does it lay out ground rules for the second generation aspiring to join the family business. Finally, no formal family employment policy exists in any firm but there are certain guiding principals that are clear to both family and non-family employees alike in almost all businesses.

We can conclude that the research has indicated (i) a great need for raising awareness among Serbian first generation entrepreneurs on CG issues and mechanisms; (ii) an avoidance of the first generation to formalize the ground rules assuming that this formalization would lead to family conflicts and that it might destabilize both the family and the business; (iii) a fear that the upcoming ownership and management succession will not be performed smoothly and successfully; and (iv) an honest commitment of the family businesses to implement good CG mechanisms if it would help them overcome governance obstacles. CONCLUSION Serbia has a relatively short entrepreneurial history. Serious attempts to establish a family business could be linked primarily to the post-Milosevic period, i. e. after 2000. This research is providing a scan showing where the first generations of Serbian entrepreneurs, i. e. the first generation of owners of Serbian family businesses is today from the governance point of view and what kind of family governance challenges they face. As it was already mentioned, there is a certain bias which should be taken into account when interpreting the scores of the tested businesses.

All of the tested businesses attended a workshop organized by CCIS for family businesses, they were present when the scorecard was launched and they applied to participate in a pilot CG testing voluntarily. This indicates that these businesses will most likely show greater commitment to CG and a deeper understanding of the family governance issues relatively to an average family-owned firm in Serbia. This also explains relatively higher scores in the CG areas Commitment to good CG practices and Owners. Still, we believe that the results obtained from this pilot testing are a good approximation of general state of affairs in Serbian family-owned businesses.

Specifically, most of the family businesses in Serbia will sooner rather than later face serious succession challenges. Most of them still avoid putting these issues formally on the agenda, but there are triggers that will or have already forced them to do so. These triggers might be results of some positive or some negative circumstances. “Positive” triggers include: age and retirement plans of the first generation owners and/or CEO; a boom in the economy or the firm’s industrial sector which could lead to a rapid expansion of business; an external take-over initiative coming from a strategic partner; a need for a significant external funding to finance the rapidly growing business etc.

On the other hand, typical “negative” triggers would be: health problems and physical and/or physiological exhaustion of the first generation owner/CEO; marriage problems of the first generation owners or their children; financial problems; a significant loss of the market share; conflicts among the owners and/or their heirs etc. The testing confirmed that the interviewed owners had serious doubts that the management and ownership succession could occur smoothly i. e. without seriously destabilizing the family business. What are obstacles that prevent the Serbian family owners from tackling the succession challenges more successfully? According to the testing and the interviews, there are three major challenges that need to be resolved. First, there is a substantial lack of CG knowledge among owners of family businesses in Serbia.

CG is usually perceived as an expensive exercise created primarily for listed companies. Most of the interviewed owners were not aware that a significant body of research in CG refers to family businesses only. Second, tackling succession presses some emotional and financial concerns of the first generation. Often, the founder of the firm, who belongs to the first generation, has invested emotionally a lot in the family firm. He feels that the family firm is a great part of his life and his legacy for the generations to come. From the financial point of view, the greatest assets of the founder(s) have, as a rule, been invested in the family business and they are quite illiquid.

Lacking any reasonable diversification, the founder is exposed to a serious financial risk. Without a clear exit strategy and a meaningful succession plan, the founder creates a void in the governance and ownership systems which present a great burden for the heirs. The results have also shown that most of the interviewed owners lack time, capacity and knowledge to successfully resolve these issues. Relatively higher scores in the CG area that relates to Supervision and control mechanisms could be explained by an obvious need to professionalize the firm and to decentralize the management. Most of the businesses are economically healthy and have had a rapid expansion of business that outgrew its respective organizational structure.

The owners show the greatest readiness to implement practical supervision CG mechanisms since they expect that these mechanisms would increase effectiveness of their control over the business and the “outside” managers and thus reduce a burden which they barely handle. However, we have to emphasize that better supervision, although of a great value, cannot substitute for unresolved succession issues. Poor management and ownership succession would almost certainly lead to a collapse of the family business in the next generation despite good internal controls, internal audit function or any other form of internal and/or external supervision. Low scores in the CG area that relates to Board indicate that most of the businesses have not separated the supervisory and strategic level on one hand and the operational level on the other.

This leads to a common situation that even in rather big family-owned businesses in Serbia that employ more than 1000 employees, we still have so-called one-man show and the key man risk. This risk scatters away investors and leaves these businesses without substantial external funding. It is rather common that many rapidly developing Serbian businesses finance their investments form short-term lending since banks refuse to carry governance risks over an extended period of time. This lack of good professionals at the helm of their companies, most of the interviewed owners explain with a lack of qualified managers to whom they could entrust the family business.

Finally, the lowest score in transparency area is somewhat expected. As already mentioned, these businesses are not listed and there are no legal rules that would insist on greater transparency for bigger, closed companies. While this is understandable, it also indicates that the Serbian businesses do not see any value in transparency per se which begs further investigation. Our assumption is that in very non-transparent, public and private sectors in Serbia too much of transparency is perceived as an unnecessary exposure to both the government tax authorities and competitors. The businesses are convinced that transparency would only lead to vulnerability without bringing any other value-added.

Scorecard results imply that in family businesses in Serbia CG is on a low level, that there is a huge space for improvements and even quick wins which can significantly contribute to the business operational functioning as well as contribute to its overall performance. The authors will continue to further employ the scorecard and assess the CG level in family businesses as to create a solid basis for scientific conclusions in the area, but as well to see whether improvements through time will be made. LITERATURE Black, B. (2001) The corporate governance behavior and market value of Russian firms. Emerging Markets Review, 2, p. 89–108. Black, B. , Jang, H. and Kim, W. (2006) Does corporate governance predict firms’ market values? Evidence from Korea.

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