The AsilAh shoes CAse sTudy

Corporate GovernanCe and SuCCeSSion planninG in Family BuSineSS

© 2013. international Finance Corporation 2121 Pennsylvania Avenue. NW. Washington. dC 20433. All rights reserved.

The findings, interpretations, and conclusions expressed in this publication should not be attributed in any manner to the international Finance Corporation, to its affiliated organiza-tions, or to members of its board of executive directors or the countires they represent. The international Finance Corporation does not guarantee the data included in this publication and accepts no responsibility for any consequence of their use.

The material in this work is protected by copyright. Copying and/or transmitting portions or all of this work may be a violation of applicable law. The international Finance Corporation encourages dessemination of this work and hereby grants permission to the user of this work to copy portions for their personal, noncommercial use, without any right to resell, redistrib-ute, or create deivative works there from. Any other copying or use of this work requires the express written permission of the international Finance Corporation.

For permission to photocopy or reprint, please send a request with complete information to: The International Finance Corporation c/o the World Bank Permissions desk office of the Publisher 1818 h street, NW Washington, dC 20433 Fax: +1 202-522-2422

All queries on rights and licenses including subsidiary rights should be addressed to: The International Finance Corporation c/o the World Bank Permissions desk office of the Publisher 1818 h street, NW Washington, dC 20433 Fax: +1 202-522-2422

The AsilAh shoesCAse sTudy

CorPorATe GoverNANCe ANd suCCessioN Pl ANNiNG iN FAMily BusiNess

Module Topic Activityintroduction introducing the story of Asilah,

its history and current overview, as well as its industry.

Familiarize yourself with Asilah.

"Part 1 Module 1 Corporate Governance"

introduction to the case study and review of how corporate governance can play a role in newly established small and medium sized businesses.

discuss the importance of cor-porate governance to small and medium sized businesses.

"Part 1 Module 2 Corporate Governance organizational structure and Corporate Governance"

The need to implement and evolve organizational structures in accordance with Corporate Governance.

examine how organizational structures in the management should be created in accordance to Corporate Governance framework to improve business processes.

"Part 1 Module 3 Corporate Governance impact on stakeholders"

Key stakeholders in a business. identify the key stakeholders in the business and how Corporate Governance impacts each of them. Analyse the changing role of the business owners in a growing enterprise such as Asilah shoes.

"Part 2 Module 1 Corporate Governance Frame-work and structure evolution of Governance Framework"

"Building blocks of a viable gov-ernance framework Changes in the management structure of the firm"

"discuss the importance of developing a effective and suit-able governance frame work for the long viability of a small business. determine how the evolution of the governance framework con-tributes towards the changing roles of the original owners and a more empowered manage-ment"

"Part 2 Module 2 Corporate Governance Frame-work and structure evolution of systems"

"improvement of Processes value addition to procedures of the firm and better implementa-tion of checks and balances"

"discuss how firms change their daily operating processes to implement an evolving and pro-gressing governance framework. Focus on the key enhance-ments that a good governance framework brings to a small and medium enterprise and com-ment on the value addition to the business overall. "

"Part 2 Module 3 Corporate Governance Frame-work and structure Board of directors"

"role of Board of directors limitations and effectiveness of Board of directors importance of having indepen-dent directors on the Board of directors"

"describe the advantages and disadvantages of having a Board of directors in a family busi-ness. determine key challenges that a Board faces when the owner is the major shareholder of the firm and the Ceo as well. debate the importance of separating the Ceo and chair-man role. Focus on the key reasons why all boards should have at least one independent member (with authority) and how that can add value to the firm and its business in terms of good governance policies."

"Part 3 Module 1 succession Planning"

importance of succession Plan-ning.

"discuss the importance of having suitable succession plan-ning policies in place to ensure continuity of business. examine the key steps to ef-fective succession planning and provide your input on any essential processes that must be incorporated."

"Part 3 Module 2 succession Planning value and Beliefs"

Family values and Beliefs. "Assess the importance of beliefs and values when determining succession planning policies. Can succession planning be ef-fective in such a scenario? evaluate the importance of religious beliefs (such as islamic sharia laws) and any potential conflicts with western business practices."

"Part 3 Module 3 succession Planning successor development and associated challenges"

reasons for failure of succession planning.

"discuss primary reasons of failure of succession planning. determine significant areas of consideration when evaluating suitability of a successor and policies that must be incor-porated in effective successor development."

[ 7 ]

Asilah Shoes is a great example of successful family run enterprises in a developing country. From a single, rented outlet in the 1970s, the brand has developed into one of the largest selling ladies’ footwear and retail networks in the country, trending in over twenty-five cities with seventy-five outlets. With a commitment to development, Asilah Shoes plans on expanding both locally and

internationally in the coming months.

The case study1 has been divided into three sections: 1. Corporate Governance 2. Corporate Governance Framework and structure 3. succession Planning

1 The events and characters depicted in this case study are all fictional. The situations, however, are com-mon to founder/family-owned companies. These are based on the International Finance Corporation’s Corporate Governance Progression Matrices.

[ 8 ]

History From a humble beginning that took root in a small rented outlet in the 1970s, to becoming a leading ladies’ footwear brand with the largest retail network in the country, Asilah shoes has come a long way. With an impressive 75 outlets in over 25 cities, Asilah plans on expanding further in the coming years. over time, Asilah has captured the imagination of women who consider footwear an essential part of their apparel. This phenomenal success is as much due to the vision of its founder – sohail Abassi, as to the enterprising spirit of his children, the acumen of its sales and marketing professionals and, in no less measure, to the unique craftsmanship of its masterful designers and skilled artisans.

Beginning in 1970, a young and industrious sohail borrowed rs. 500 from a friend to start a small business

which involved purchasing shoes from local vendors and selling them at a marginal profit to his customers.

it was a simple plan: he would buy small amounts of stock from a few trusted vendors and sell at a marginal mark-up of between 5 and 10 percent, giving him an edge over the more established retailers of footwear in the area. sohail would periodically survey prices of different footwear at various shops and ensure that his product was of similar quality but less expensive – building goodwill and a loyal clientele as a result.

since his business was a small operation, he had to keep a constant tab on his cash flow. he set up credit terms with his suppliers and paid them within the specified period, which varied from vendor to vendor. he had to pay the

rent for his shop and other business expenses from his limited cash inflows so he came up with a unique regiment of paying on a weekly basis(instead of a monthly basis) to ensure that he never had current liabilities exceeding his cash balance.

For an individual with no formal education or training, sohail has been described by his sons and business associates as a ‘man of wisdom’, ‘intellectually curious’, and ‘philosophical’. These traits helped in setting the foundation for the success story that was to become Asilah.

sohail’s keen sense of business acumen and instinct inculcated some of the most innovative strategies of its time for the local market. he was a pioneer at his level, implementing the low-profit, high volume strategy that has made many companies, like Wal-Mart in the united states, giants of their industry

The name Asilah, means ‘pure’ and of a ‘noble origin’ in Arabic. sohail chose Asilah as the name of his company because it was in line with his beliefs, faith and vision of what his business should represent.

Sohail’s innovative strategies included:

[ 9 ]

1. Fixed Pricing in an era and market where ‘negotiat-ing’ on price was considered the norm and customers did not expect to pay the listed price, sohail introduced the concept of a ‘fixed price’. it was a challenging strategy, especially for someone who had just started a small scale business that depended entirely on customer satisfaction for the success of his enterprise. however, by regularly surveying the market and keeping tabs on prices, sohail ensured that he provided his customers with the best possible value.

2. Low Margin/High Volume sohail believed that to run his busi-ness successfully, especially since his manufacturers were all outside vendors, he would have to provide good quality products at lowest possible prices. The key to his business model was to sell a high volume of products and keeping only a small margin for himself. it was a difficult and risky decision because he did not have a large capital base supporting his business nor was he able to launch advertising campaigns to promote his business. he understood well that competing on prices was the only way for him to attract customers and maintaining a high volume was the only leverage he had over his vendors to keep working with him – he could not afford to lose either.

Sohail’s innovative strategies included:

[ 10 ]

3. Vendor Relationship At a very early stage of his business, sohail understood that maintaining constant and healthy contact with your vendors was of key importance. Not only did this ensure that the vendors would do their best to supply a great product in the shortest pos-sible time, it also kept the vendors updated on Asilah’s customers’ preferences as sohail was in the habit of keeping a close check on the popular items.

Asilah acknowledges the fact that they were lucky to have responsible / scrupulous vendors at the start of their business, for without the right quality workmanship, the business would not have enjoyed the popularity that it enjoys today. even now, when there are over 250 vendors, Asilah owners keep a close relationship with their vendors, for they are an integral part of the business.

4. Return Policy sohail introduced the 30-day return policy that was unheard of in this region at the time. he gave his customers the freedom to return their purchased shoes with no questions asked. This was a revolutionary customer service tactic that enhanced the customer’s trust and confidence in Asilah. sohail knew that in the long run, he would gain the trust of his customers and build a loyal clientele.

[ 11 ]

uNeXPeCTed ChAlleNGeseveral businesses in developing countries, even to this day, face unexpected difficulties following early success. These are often related to political, ethnic and (sometimes) criminal elements.

sohail faced an unfortunate situation when a local business rival tried to force him out of his newly established shop. The rival planned on using the court of law to muscle sohail out because his business had good customer traffic and goodwill. A lawsuit was initiated against sohail’s shop and due to the non-receipt of notices from the court, sohail was unaware of the proceedings against him, leading to no measures taken to defend the action. With just one day before a default decision was going to be announced against sohail, he became aware of this lawsuit through a lucky exchange with one of the clerks at the court. it was then, with his limited funds and knowledge of the legal system, he went to court the very next day, hired a lawyer and began to defend himself against this case.

legal, and sometimes, unfair barriers to entry are prevalent in several industries. This means that new entrants, be they small or large players, have to deal with these barriers if they wish to succeed.

[ 12 ]

Asilah eventually did win the above-mentioned case though it took several years and a tedious climb all the way up to the highest courts of the country. At that point, sohail’s two eldest sons had already joined the business and sohail himself had delegated the day-to-day affairs to them. The timely involvement of his sons gave him the much needed support with the business.

however, the legal battles did drain sohail and his sons emotionally and they decided that it was time to look beyond the one shop and think about expanding the business to other loca-tions. it would appear that challenges such as this only strengthened their resolve to expand their business.

Thinking Point!1. As a founder of a small start-up business, what would you do if you were presented with a similar unjustified legal issue?

2. how could good governance practices at various levels help to prevent such instances?

[ 13 ]

CurreNT overvieW

The Asilah of today is a successful and well established business. The company’s product range is attractively packaged and is targeted at the middle to upper middle income groups. The

Directors believe that the company is well positioned to grow and expand its business given a good management team, a committed group of suppliers and the demand for its products.

The company achieved sales of over 4.0 billion for the year ended December 2011 and expects to top the 10.0 billion mark by the year 2015.

[ 14 ]

Nullam ullamcorper vestibulum lacus a volutpat Otatur modis ni totam nim faccuptas”

TiMeliNe oF iMPorTANT develoPMeNTs AT AsilAh

ANNuAl sAles

[ 15 ]

The net profitability margins have ranged between 30 to 35 percent in the past, which com-pares favorably to the other major players in the market.

KEY P&L ITEMS AS % OF SALES FOR THE PERIOD ENDED DECEMBER 2011

[ 16 ]

The footwear industry has progressed dramatically in the last decade in this developing country. With the composition of female population increasing to more than half of the total population and

changing socio-economic factors, there has been a boom for local shoe retailers, catering to the needs of fashion conscious women.

It is very important that a company such as Asilah maintains a pricing strategy that is in line with what its target clientele can afford. Asilah could also consider moving into other market segments

of the footwear market by developing low and high end products.

FooTWeAr iNdusTry

Previously retailers like Asilah shoes, Martell, Trainer, Buksh, and Textra, among others, en-joyed a healthy oligopoly in the market as there were virtually no alternatives available. Now due to diminishing trade barriers and an influx of cheap shoes from China to most of the world’s markets, the local shoe retailers are facing challenges.

poSitioninG BaSed on ‘StrenGth oF retail network’ within direCt Competition

poSitioninG BaSed on ‘perCeption oF Brand’ within direCt Competition

Asilah enjoys a huge competitive edge within the market segment it caters to. This advantage comes from their retail network that spans over 25 cities, providing a distinct advantage in terms of distribution of the product range.Although Asilah holds a very small share of the total market, estimated by the directors at only 5%, there is tremendous potential to grow.

[ 18 ]

Corporate Governance refers to the structures and processes for the direction and control of companies. It concerns the relationships among the management, Board of Directors, controlling

shareholders, minority shareholders and other stakeholders. Good Corporate Governance contributes to sustainable economic development by enhancing the performance of companies and

increasing their access to outside capital.1

1 www.ifc.org

CorPorATe GoverNANCe

This section will aim to explain to the readers how businesses should aim to implement strong Corporate Governance policies and how to effectively deal with potential challenges in this process by tracking Asilah’s progress in this area.

Corporate Governance deals extensively with the implementation of sustainable company policies that promote growth and transparency in the firm. it also aims to address and improve the working re-lationship between stakeholders, while protecting their rights. The stakeholders include sharehold-ers, customers, management, employees, suppliers and vendors. From the very onset of his career as a businessman, sohail understood the importance of protecting the interests of all the stakeholders, along with maintaining methodical and enduring relations with suppliers as well as the customers. he was aware that without the support of his customers and suppliers, Asilah would not survive.

[ 19 ]

orGanizational StruCture and Corporate GovernanCe

Organizational structure entails:• Definingtherolesandresponsibilitiesofemployees,• Facilitating the accomplishment of corporate as well as employee goals and objectives, and• Clearlyidentifyingreportinglines.

An organizational structure consists of five core components1: 1. The division of labor: how are the tasks are divided within the company. 2. The delegation of authority: What are the levels of authority within the company?3. Coordination of efforts: how are the efforts and tasks coordinated among the employees?4. span of Control: how is the control over the tasks’ performance exercised?5. Communication channels: how is the information flow is set up?

1 IFC Toolkit Part III Executive Bodies

the need For Corporate GovernanCe in a GrowinG BuSineSS

sohail and Jalal often thought about the need to have the right governance structures in place during the rapid growth of the business, as they believed that this would ensure their success as well as the long term viability of the business.

After sohail’s separation from the day-to-day activities, Malik and Jalal, the older sons, be-came responsible for the majority of the business expansion and vision of the company, though they have always made it a point to keep Karim and saleem, their younger brothers, actively involved in the strategic aspects of the business. Today, Asilah is under the capable leadership of sohail’s four sons who have taken over the following roles:

Name Position HeldMalik sohail Managing director

Jalal sohail director, sales and Marketing

Karim sohail director, human resource and Administration

saleem sohail director, Planning and Purchasing

[ 20 ]

until his death in 2010, sohail never disengaged himself completely from Asilah and stayed on as a mentor to his sons and as a valued advisor to the business. All his sons were required to complete their education and work in the business at the same time. sohail wanted his sons and his employees to have a comprehensive idea of how to operate an Asilah shop and how to interact with the customers. several of the new ventures undertaken by Asilah over the last 20 years can still be attributed directly to sohail’s vision. eventually, all four brothers were brought in the business as a team and currently, they each own a 25% share in the business and head their respective departments. Both Karim and saleem had to complete their education and work in the shops as regular employees until they were offered the directorial role. Both younger brothers, at their respective times of entry, were asked about their area of interest and were granted their roles in the company as per their preferences and skill set. responsibilities were not simply handed over because they were family. everyone was expected to prove their mettle and commitment to the company. every new family member who wanted to join the business had to work just like any other employee in individual shops and put in 10 to 12 hour daily shifts. each of them was required to go through the regular employee training program.

evolution oF the orGanizational StruCture

Malik joined the business in 1984 after graduating from college, as sohail was preparing to handover the reigns to his sons. Jalal joined in 1986 and shouldered substantial responsibility. initially, as with every small business, both Malik and Jalal shared several of the operational activities of the business and were running the finance, sales, marketing, procurement and ac-counts, amongst several other functions, themselves. however, Jalal was always interested in the product development area and eventually decided to focus exclusively on sales and market-ing. Malik, in his memoirs, states that he had an overwhelming desire to expand the business and prove his mettle.

When Malik and Jalal officially took over from their father, there was never any documenta-tion signed to show as much. it was just assumed that the sons will manage the day-to-day activities and sohail will be part of the business as he saw fit. Asilah continued to be owned by sohail and no thought was given to any legal formalities that may have been necessary to ensure a smooth transition to the sons.

When the two brothers took over, they thought seriously about what they were setting out to achieve. Asilah’s Mission statement is crafted as:

To consistently delight our customers with excellent customer service and a range of innovative and high quality footwear and accessories. As a result of our highly satisfied and loyal customer

base, we will deliver value to all of our stakeholders.

[ 21 ]

Asilah’s vision is:

The brothers acknowledge that it was not until they received assistance from business advisors that they were able to articulate their vision in a simple, concise and inspirational manner.

To become the Number One Brand for footwear and accessories in the region, while pursuing international

expansion opportunities.

A study published in the euro Journals1, Jones, (2003) found a direct link between share price and good Corporate Governance practice and thus concluded, “There have been links between levels of Corporate Governance and share price performance. it always comes back to the question of the extent to which good Corporate Governance and share holder activism affect a company’s share price.”

The same journal notes a survey conducted by Coombes and Watson, (2000) of 200 institu-tional investors across the globe and found that investors say they would pay more for the shares of good governed companies. in a Global investor opinion survey conducted by McKinsey (McKinsey investor opinion study, 2002), more than 50% of the investors are of the opinion that Corporate Governance is equally or more important for a business. More than 70% of the investors are ready to pay a premium for a well governed company. 78% respondents say Corporate Governance increases long-term shareholder value. For 56% of the respondents governance factors appear to be, at least, if not more important than financial issues in stock selection. in another similar survey carried out by iCrA among domestic fund managers, close to 84% respondents said as more important or as important of Corporate Governance vis-à-vis financial numbers/growth prospects. Close to 85% respondents said they will pay a higher premium for good Corporate Governance companies. (Corporate Governance rating by iCrA ltd., 2004)

1 http://www.eurojournals.com/IRJFE_41_01.pdf

since Asilah is not a publicly traded company, they have not witnessed their Corporate Gov-ernance policies translate into a higher share price but, of course, the net profit which is es-sentially the driver of enterprise (and therefore stock value) has improved substantially since Asilah’s adherence to high quality and structured corporate governance policies.

Thinking Point!Businesses in developing countries generally do not plan for the transfer of business from owners to management in a structured manner, often failing to create formal manage-ment structures.

[ 22 ]

1. Why are owners of small businesses or family owned enterprises (Foe) reluctant to create proper management structures?

2. Assuming a small business or Foe wants to create a formal structure, what would be some of the major challenges they would face in doing so, internally and externally?

3. how would you explain to a business the benefits of a formal management structure and how would you link it to increased profitability and better management?

As Asilah’s customer base grew, so did the number of shops – until they reached the magical number of 4! it was then that the owners realized that there were no more brothers left to run one shop each. For the first time, Malik had to consider the possibility of involving someone other than a principal family member to run their next shop.

earlier, Karim had put forth the idea of setting up an office where all four brothers could sit to-gether and strategize. This was rejected by Malik and Jalal because, at the time, they believed that only direct customer interaction would keep them ahead of their competition. There was also the matter of not having adequate control and leaving their shops unmonitored and open to possible mismanagement by the employees.

This was Asilah’s first realization of the need to have a Corporate Governance framework in place, although, subconsciously, Asilah’s owners always knew they needed to have a much more structured process to grow their business – they were not familiar with more formal aspects of Corporate Governance as yet. Asilah also understood the need to implement suitable and competent managerial structures and have written agreements with suppliers, employees and the like, whereby the roles and responsibilities were clearly documented.

[ 23 ]

Discussion Questions

Put yourself in Karim’s shoes and knowing what you know about Corporate Governance and organizational structures; try to explain to Malik and Jalal why it is essential to make a move towards implementing some policies that do not require the constant presence of the brothers at each of the shops.

1) What benefits could a business such as theirs expect from a formal organizational structure? how will you reassure them regarding their perceived lack of interaction with the customers and vendors if they are not present in the shops at all times?

2) how would you allay their fears that they will lose control of their business if they are not present all the time?

3) do you think the long-term benefits of such a structure, including the establishment of an office exceed the short-term costs? in your opinion, would the proposed structure and the establishment of an office contribute to the long-term viability of the business?

4) if you were a shareholder in this business, how would you evaluate these steps?

5) how can you develop governance policies and procedures that protect the interests of your vendors?

[ 24 ]

Transition to a Management structure:

New venture

during the year 2003, Karim was finally able to convince his brothers to establish a corporate office. As expected, ‘letting go’ of the shops, a gradual process, resulted in the four directors being able to spend far more time assessing ways to expand their business and engaging in the strategic planning aspects. The process of working ‘on’ the business, as opposed to working ‘in’ the business was one that would take some getting used to. The four shops were left in the hands of one supervisor and one cashier each with regular visits from the brothers. during these visits, stock counts and cash control were the main focus.

initially, the elder brothers were quite apprehensive about leaving their shops and sitting in a distant office but with the passage of time, they realized that the shops continued to operate well and their fears began to subside.

Key Developments:

Now that things were running smoothly in the shops and their initial fears had been success-fully allayed, it was decided to bring more structure to the time spent in the office. The broth-ers started out by having regular ‘brainstorming’ sessions on an informal basis. some essential points that came to light out of those discussions were:

1) regular meetings with all the vendors would take place at the office instead of the shops. As a result, the number of vendors visiting also increased.

2) it was decided that over the next three years, the number of shops would be increased to thirty.

3) it was deemed essential to venture out of their current city into other major markets of the country.

one of the key developments that came about from these brainstorming sessions was the decision to open shop in the Capital city. This being the first time that Asilah had considered moving out of its city of inception, hence significant planning was needed.

[ 25 ]

Asilah’s progress was gradual, as expected. They did not immediately go into the market to hire a top-notch accountant, HR manager, IT leader or a Retail expert. They tested out some people, mostly friends or friends of friends. They negotiated on salaries and minimized their risks at all possible levels by:• paying the minimum possible competitive salary in the market, • vetting the potential employee’s background through background checks,• giving the new employee all possible incentives to maintain loyalty, and• seeking employees with similar values to those of Asilah.Their aim now was to delegate as much operational work as possible but back then, it was one of the most difficult things to ‘let go’.

It was one thing to delegate everything, but quite another for us to find new ways of adding value to the business”, recalls Jalal.

Developing Systems:

While still in its infancy, Asilah’s directors (who still did not have any high level managers in their company and relied on each other for the strategic and operational decisions) began to devise a marketing, finance/accounting, auditing and systems management strategy, as they could not be physically present to monitor details.

THE ‘LETTING GO’ SCENARIO:

Most business owners have a major concern about “letting go” as they feel that the staff will never be able to operate the business the way they did. Asilah brothers had to deal with the same issues but there was no other option.

As a first step towards better gover-nance and establishing a more formal framework, the business decided to adopt the corporate structure. The owners felt that adopting a corporate constitution as opposed to the part-nership structure would give them the benefit, among others, of ensur-ing the continuity of business in the event of the sudden death of one of the brothers.

Malik sohail was formally appoint-ed as the Managing director of the business with the associated respon-sibility of all aspects of the company’s operations. Jalal, Karim and saleem were also selected as directors within their respective areas, responsible for the performance and deliverables within their departments.

[ 26 ]

Transition to a Management structure:

in 2004, they started hiring professionals and gradually started to develop their retail, in-formation Technology, Accounts/Finance, distribution & Planning and human resource departments. Today, after eight years of steady increase in revenue, number of shops, network and geographic domains, these departments, with initially 1 or 2 people, if even that, have evolved into full-fledge working units:

Today, Asilah’s organizational chart has all the essential departments of a well run organi-zation. The chart above shows the current structure of the organization where all of the 13 departments report to the Managing director, including the departments headed by other 3 directors / brothers. The Managing director reports to the Board of directors, as does the independent internal Audit department. The 10 head of departments (hods) also report to the Managing director.

[ 27 ]

Generally the following criteria should be satisfied when hiring a Head of Department1:

• To enjoy the trust of the shareholders, directors, other managers and employees of the company;

• To own the ability to relate the interests of all shareholders and to make well-reasoned decisions;

• To possess the professional expertise and education to be an effective general manager;

• To possess business experience, knowledge of national economic, political, legal and social issues, as well as trends and knowledge of the market, products and competitors, and

• To have the ability to translate knowledge and experience into practical solutions that can be applied to the company.

1 IFC Toolkit – Part II Family Board of Directors

[ 28 ]

With the new Organizational structure in place, the Directors decided to formalize the Board of Directors. In the early stages, it was proposed that Malik Sohail assume the role of the Chairman of the Board. It was a big step for the once one-man business to consider

the creation of such formal structures and would take getting used to.

CorPorATe GoverNANCe FrAMeWorK ANd

sTruCTure

This section explains the benefits of implementing optimal corporate governance frameworks and board structures that are suitable and relevant for organizations, citing Asilah as an example.

Following the establishment of formal organizational structures for better corporate governance at Asilah, the directors decided that they

could be prevented from properly executing their fiduciary duties due to limitations in the internal Audit and Financial reporting systems at their com-pany. These two areas became the focus in establish-ing a Governance Framework at Asilah, leading to the establishment of several relevant departments, as explained in the previous section. The directors had indicated that they were not satis-fied with the timing, accuracy or reliability of ac-counting data being produced, making it difficult to make informed decisions. The following additional points are relevant:

[ 29 ]

•The directors felt that previously they had limited knowledge of the financial position of the business at any given point.•They also wanted to ensure that payments to suppliers were made accurately and responsibly. Given the large number of cheques being signed on a daily basis and the fact that at times the supporting documentation with the request for payment was not provided, the directors were concerned about payments not being genuine in some cases.

After reviewing these critical issues, the following immediate control measures were recom-mended by external consultants and implemented by Asilah:

•establish a regular reporting system to ensure the directors remain fully aware of the finan-cial position at all times.•The reporting system to consist of:• Weekly reporting system • Monthly reporting Package • The Accounting team’s work to be reviewed by a senior Accounting person to ensure reliability and accuracy.

internal audit

Before Asilah considered Corporate Governance, it had a small internal audit team which did not have a strategic role within the company but would only focus on stock control/move-ments.

With the implementation of more structured policies, the internal Audit function became more sophisticated. it incorporated the following strategies:

•A comprehensive scope of works / charter for the internal Audit department was developed.

•The reporting lines for internal audit were defined to ensure that it reports only to the Board of directors.

•Given the lack of in-house expertise, the function was outsourced to a professional firm.

The internal Audit function also started to cover the following areas:

•system of internal control – documentation and Testing

•review of fixed assets

•review of payroll

•review of supplier payments

•inventory Management systems – review and Testing

[ 30 ]

It is important to realize that recommendations to improve the internal audit or finance departments were occasionally met with resistance from within the department and also by the Directors themselves.

Therefore, the need to promote the understanding of the Corporate Governance framework to both employees and owners is crucial by the personnel responsible for the implementation of these policies at any organization. This leads us to the discussion of how should the individual responsible for implementing this governance framework go about it.

The Corporate Governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among dif-ferent supervisory, regulatory and enforcement authorities1.

1 OECD, Principles of Corporate Governance, 2004.

[ 31 ]

aSilah’S Corporate GovernanCe Framework iS entrenChed in itS Core valueS:

[ 32 ]

The responsibilities of the Board1

1 OECD, Principles of Corporate Governance, 2004.

[ 33 ]

Corporate Governance Checklist:

As the business grew, responsibilities of the departments were increasingly borne by the head of departments. Currently, according to Asilah’s management, more than 70% of the opera-tional decision-making is handled by the senior management and the directors have become much more focused on devising the business strategy. The delegation of the day to day duties has enabled them to look strategically at their business and its future.

[ 34 ]

Discussion Questions

Put yourself in Malik’s situation: you have far-reaching control of the business and everyone, including your three younger brothers, look up to you for leadership and vision. At present, you are considering setting up a Board and while several benefits have been explained to you, many concerns have also cropped up. Consider how you would justify, to yourself and to your family, the following concerns:

1) Would the family members resent the loss of control in operational matters that is likely to result with the involvement of a professional management team? how would you deal with this resentment?

2) how would you cope with the new role of Chairman of the Group? Will you be able to stand back and let the Managers manage? What other challenges will you face in the new role?

3) Who will assume the Chairmanship after you? how should that decision be made?

4) Will there be a smooth transition to the next generation? What steps could the business take now to ensure that it continues well into the next generation?

[ 35 ]

With the increasing responsibilities and demands on the board and its members, establish-ment of the board’s committees is considered to be a tool that assists the board to deal with challenging business environment and increase the board’s efficiency. smaller in size (and therefore more mobile) and composed of specialists in particular areas of expertise, specialized committees are able to add real value to the companies by:

•Providing assurance that importantboardduties arebeing rigorouslydischarged andaninformed feedback is provided to the board;•Exercisinganopportunitytohandleagreaternumberofcomplexbusinessissues;•DevelopingandusingspecificexpertiseintheBoard’soperations.

Although the board is able to delegate some of its functions to committees, the board’s ul-timate power and responsibility cannot be delegated or reduced with the formation of the committees.

Board Committees

Companies, depending on their size, objectives, legal form and particular business culture may form either permanent committees, or standing committees or ad hoc committees. The Table on the next page provides illustrates the difference between standing and ad hoc com-mittees.

Types of Board Committees

[ 36 ]

Standing Committees Ad hoc Committees

Status/Duration • Permanent. • Established for ongoing major activities.

• Temporary. For short-term activities.• Formed to accomplish a specific goal and then dissolved.

Regulatory framework

• Stipulated by the company’s internal documents.• Have to be approved by shareholders meeting.

• No specific provisions in the company’s documents are required.• Can be created by the board.

Examples • Audit Committee.• Nomination and Remuneration Committee.• Strategic Planning Committee, CG Committee.

• To Consider takeover of buyout offer.• To investigate and advise on the appro-priate response to allegations of serious misconduct against the corporation or its senior officers.• To evaluate corporate restructuring; to negotiate refinancing, etc.

Function The members study problems within an assigned area and provide specialized assistance and advice to the board of directors.

The number and types of the committees depends on the needs of the organization. A large number of committees can be hard to manage and may lead to a fragmentation of the board. Generally, committees have to be established as the need arises, starting with the most critical ones and then gradually establishing others according to needs of the organization

in order to make committees effective it is essential that the committees have:• clearobjectives,• expertiseandcohesivenessasateamtocompletetheassignedtasks,• strongleadership;• timelyaccesstoaccurateinformation,and• powertoeffectivelydischargetheduties.

standing Committees and Ad hoc Committees.

how to make effective Board Committees

[ 37 ]

As for the standing committees, additional recommendations should be followed to make them effective:•Developandadoptacommitteecharter,whichstatesthepurposeofacommittee,describesits authorities, duties and responsibilities, composition and membership requirements, and reporting lines. depending on the company size and the authority delegated to the specific committee, the charter may range from a simple statement of purpose to more elaborated doc-ument, describing in details its working procedures. it is essential that all committee members fully understand their roles and responsibilities and act in the accordance with the prescribed procedures. The Charter should be periodically reviewed by the entire board. Company share-holders have to have access to the charter at their request.•Developanannualcommitteeworkplan,whichspecifiesthegoalsofthecommittee,howthose goals would be achieved, and the timeframe to complete the goals.

Benefits of the Board

With the developed organizational structure and a Board, Asilah has experienced tangible and far-reaching benefits in the shape of increased revenue, market share, brand presence, good governance and freedom to expand to other areas without feeling the lack of knowledge or the ability to do so. These developments have translated into rapid physical expansion on the ground in terms of the size and number of outlets, for the management of Asilah is now capable of replicating successful procedures of setting up and running new operations on a consistent basis.

While several benefits emerged after setting up the Board, some of the key achievements/activities include:Board Meetings are held every month. The heads of departments (hods) are required to be present for part of the meeting. The hods highlight the performance of their departments in the previous month and discuss their goals, tasks and objectives for the upcoming month. 20% of the time is spent discussing the past performance and 80% of the meeting revolves around what is going to take place in the upcoming month. These meetings are formal with mandatory attendance. Minutes are taken and reconciled with the previous month’s targets. Asilah hired a secretary for the board that overlooked the administrative aspects of the Board Meetings, in accordance with good governance policies. One-on-One Meetings are held every week between the hod and the director to whom he or she is reporting. This exercise helps in maintaining close contact between the hod and director and to deal with any performance related issues promptly.

[ 38 ]

Benefits of the Board

Real-Time Inventory Management:during the Board Meetings, inventory management was a recurring issue. it had far-reaching consequences from delays in production to lost sales due to the stock running short or out. The development of an inventory Management Program was listed as a key priority by the Board. A team consisting of senior managers, was tasked to undertake this project. The team was able to come up with a suitable system, which was implemented across the organization.

Asilah now has a real-time inventory tracking software that keeps the Planning and Procure-ment departments fully updated on their current stocks in various stores. The software has also established a direct link between the Asilah team and their vendors, reducing manage-ment issues considerably.

Product Diversification one of the key functions of the Board discussions was to seek additional sources of revenue. once it became clear that Asilah cannot stay in the same market niche and economic strata, the Board decided it was time to move into other segments of the market and introduce new products. improvement in Asilah’s systems in the marketing and planning departments allowed the company to foray into the upper and lower segments of the market which it is currently servic-ing. This move promises to open further avenues of expansion, while consolidating Asilah’s hold on the existing business.

Employee RewardsThe Board recognized the importance of having a well managed and staffed human re-sources (hr) department and allocated resources to ensure this was done.With the introduction of proper hr systems, Asilah has been able to better reward its employ-ees (especially those who outperform their peers and their own sales and performance targets) through bonus programs, provident funds, and performance appraisals. in addition, it has developed a worker-friendly environment with lunch and game rooms, medical benefits and an overall environment conducive to employee betterment. As the various hods provided evidence of increased efficiency and performance of their em-ployees, this was recognized through incentives and bonus schemes.

The directors believe that giving more control to management has resulted in the company’s growth at an exponential pace, while at the same time; it has afforded them the time to im-prove the image, presence and quality of the Asilah brand.

To ascertain how much control has been relinquished in the past six years, consider this ex-ample: in 2006, the Managing director personally reviewed and decided each and every vendor pay-ment and overlooked all cash vouchers. Gradually, over time, the Finance team with the help

[ 39 ]

of the hod started introducing processes where all vendors were paid four times a month at specific times. Today, the Managing director’s role is limited only to signing the cheques.

similarly, all departments are gradually taking control over the operational activities and the directors are becoming more comfortable with giving up control. The directors continue to visit their shops and work at the office every day.

The delegation of responsibilities to a group of qualified managers has resulted in Asilah’s phenomenal growth of an average of 10 stores a year over the last 6 years. in contrast, Asilah’s largest and direct competitor has added a total of 3 stores during that same 6 year period (be-cause its owners have been unable or unwilling to utilize their manager’s expertise and have kept control of the daily operations).

independent direCtorS

According to iFC, the purpose of identifying and appointing independent directors is to en-sure that the Board includes directors who can effectively exercise their best judgment for the exclusive benefit of the Company, judgment that is not clouded by real or perceived conflicts of interest. iFC expects that in each case where a director is identified as ‘independent’ the Board of directors will affirmatively determine that such director meets the requirements established by the Board and is otherwise free of material relations with the Company’s man-agement, controllers, or others that might reasonably be expected to interfere with the inde-pendent exercise of his/her best judgment for the exclusive interest of the Company.

‘independent director’ means a director who: •HasnotbeenemployedbytheCompanyoritsRelatedPartiesinthepastfiveyears;•Isnot,andisnotaffiliatedwithacompanythatisanadvisororconsultanttotheCompanyor its related Parties; •IsnotaffiliatedwithasignificantcustomerorsupplieroftheCompanyoritsRelatedParties;•HasnopersonalservicecontractswiththeCompany,itsRelatedParties,oritsseniorman-agement; • Isnotaffiliatedwithanon-profitorganization that receives significant funding fromtheCompany or its related Parties, and•Isnotamemberoftheimmediatefamilyofanindividualwhois,orhasbeenduringthepastfive years, employed by the Company or its related Parties as an executive officer.

Asilah currently has one independent director on their Board, although it is not clear how much, if any, influence the individual has in the decision-making process.

[ 40 ]

Discussion Questions

Asilah currently has one independent director on their Board, although it is not clear how much, if any, influence the individual has in the decision-making process.

it was a big step for the family to appoint an “outsider” to the Board, however, the different perspective, objectivity and experience of the independent director has added real value to the Board.

1. if you are the independent director on the Board of Asilah, how would you make your opinion matter, considering you do not have any direct power to implement and are sitting in a board room where everyone except you is family? Would this limit your ability to perform effectively?

2. list the key advantages of having an independent director on a Board. Are there any dis-advantages?

3. What steps can be taken to ensure that an independent director’s opinion is carefully con-sidered in the decision making process?

4. how can Asilah ensure that the views of the independent director are taken seriously?

[ 41 ]

vendor Management

human resource development

The rapid expansion of Asilah’s stores has outpaced the number of store and area managers it can train, creating a void, as there are not enough qualified people to fill the available posi-tions. Just as in the case of the vendors, Asilah is seeking a development program to help train its present and future employees to take up greater responsibilities.

Cash Flow Management

While Asilah has come a long way in managing their daily and short-term operating working capital requirements, they still face a challenge when it comes to effective capital expenditure and long-term operating working capital requirements. Cash flow issues can be linked to Asi-lah’s rapid expansion and the no debt policy which restricts the flow of liquidity in times when expansion exceeds revenue intakes.

law and order

The law and order situation in the country has been a challenge for Asilah and has prevented them from expanding into several key urban and rural areas. This has especially affected their potential sales in mega markets that are roiled by political upheavals, as well as other large markets with huge populations but undeveloped infrastructures. The board has strived to pinpoint key areas within these regions that it can venture into.

The Board has identified several key areas that need improvement to ensure optimal perfor-mance of Asilah as an organization.

one of the main issues that Asilah faces is that while it has improved its processes through the implementation of Corporate Governance strategies, several of its vendors are still working without any formal framework, making it increasingly difficult to deal with them.

The management of Asilah has considered instituting a ‘vendor development Program,’ all expenses paid, but has not been able to retain a suitable firm to deliver this service to its ven-dors.

challenges anD issues

[ 42 ]

Discussion Questions

1. how would you evaluate the performance of the Asilah Board as an independent observer? do you think that having a Board has helped Asilah?

2. What improvements and further actions would you suggest the Board implement to extend its effectiveness?

3. What challenges does a Board face when the Chief executive and Chairman of the Board is the same person? how does conflict of interest arise in such situations?

4. how important is a board chairperson’s ability to listen and reconcile other members’ opin-ions in running a successful Board?

5. What is your opinion on the optimal Board size? how could this be determined effectively? should there be a minimum or maximum number?

6. As described in the study, highlight some of the key areas where you feel the Board’s pres-ence resulted in good decision making. What could have been done more effectively?

7. how do you believe the roles of the Board versus the management should evolve in Asilah’s case? What is the ideal division of responsibilities?

[ 43 ]

A major building and cementing block of Asilah’s success is its’ family-oriented approach. While they are progressive enough to implement several Corporate Governance features, their commitment to their family and the next generation is unquestionable. This leads us to the final

section of our case study: Succession Planning.

aDDitional Discussion Questions

one of the key reasons for creating Boards around the world is risk management - Conduct-ing regular meetings results in several issues being discussed openly, many of which can be resolved through mutual cooperation. As the Board is pertinent to risk management:

1. What is the Board’s role in evaluating and managing risks?

2. should the Board be concerned with managing risks in the first place?

3. What checks and balances can be implemented to verify the effectiveness of risk manage-ment strategies of the Board?

4. Can risk management committees help in such situations? how would you describe the role of these committees?

[ 44 ]

Succession planning is the process of identifying and developing people within an organization to fill key business leadership positions in the future. Succession planning increases the availability of experienced and capable personnel who are prepared to assume managerial/strategic roles as

they become available.

suCCessioN PlANNiNG

There are two types of succession:

1. ownership succession: ownership succession relates to the person who will take over as the equity holder of the business. This form of succession is most relevant in family-owned businesses such as Asilah.

2. Management succession: Management succession primarily relates to the person who will take over the operations and day-to-day activities of the business.

Both types of successions should be coordinated with the corporate strategy/vision.

in family-owned businesses, both types of successions would go together, as most businesses are run and owned by family members.

[ 45 ]

The Four steps to succession Planning

A 1999 McKinsey survey found: “More than one-third of family-owned businesses

worldwide breakup through bankruptcy or sale after the founder dies, and 70% do so by the

third generation.”

Succession Planning is important because: 1. Ineffective succession puts the future of the business in jeopardy.2. Succession is a critical issue.3. Relationships are often destroyed due to lack of planning.4. Succession is not just about transition of ownership/ management.5. Part of the succession process involves ensuring the business is in a healthy state.6. Succession takes time to plan and implement so the sooner a company starts working on it, the better it is.

[ 46 ]

While the directors were mindful of the importance of succession planning and grooming the next generation to work in the business, they did not know where to start. Concerned by re-ports of many family businesses splitting up following the death of the founder, with the next of kin locked in legal battles, they were determined to avoid a similar fate. it was by chance that they came to know about a succession Planning Workshop being held in one of the local universities and decided to attend. The workshop convinced them to actively start working on their succession plan and groom the next generation for the future ahead.

As a matter of policy, Asilah only allows for the direct descendants of the four directors to be equity owners in the company. Therefore, the successors have to be chosen and groomed from within the immediate families.

At the onset of their succession Planning discussions, they decided to utilize the services and expertise of an international consultant to guide them through the whole process. one of the key recommendations by the consultant was for Asilah to document their family values.

Asilah and succession Planning

Thinking Point!Businesses in developing countries generally do not plan for the transfer of business to the next generation in a structured manner, often failing to create formal documentation that would facilitate the survival of the business in case of the sudden death or illness of the founder.

1. What complications could have arisen for the sons in the event of sohail’s untimely demise, while he still legally owned the business?

2. Are there any cultural reasons in your country for the reluctance to formally handover the business to the next generation?

3. Why do you think so many business owners ignore the importance of appointing suc-cessors?

[ 47 ]

values and Beliefs

Bill of rights

each family member:

•Hastherighttobegivenanopportunitytoworkinthebusinessprovidedhe/shehastheskills and the desire to do so.

•Willreceiveasalarybasedonhis/herlevelofresponsibilityandperformance

•IsgrantedtheopportunityofworkingoutsideofAsilahiftheywishtodoso.

•Hastherighttoownsharesinthebusiness,notwithstandinghis/herdecisiontoworkout-side of the business.

•Hastherighttoreceiveincomebasedonshareholdinginthebusiness.

•Hastherighttoreceiveinformationaboutthebusinessanditsactivities.

•Hastherighttoseekclarificationaboutanymajorbusinessdecisions.

•ThebusinesswillalwaysbeconductedinaccordancewithourIslamicbeliefsandvalues.

•Asilahwillalwaysactinanethicalmannerinalltheirdealingswithcustomers,vendorsandemployees.

•AllAsilahstakeholderswillbetreatedwithrespect.

•Toshowcompassionandhumilityinalldealings.

•TosharetherewardsfromthesuccessofthebusinesswithAsilah’sstaff.

•Tocontributeafixedamountofthesalesforpublicwelfare.

•Asilahconsidersthe‘family’tobeafundamentalpartofoursuccess.

•Togrowthebusinessinacontrolledandprofitablemanner.

•Topassonthewealthcreatedbythebusinesstothenextgeneration.

•Todevelopandnurturetheyoungergenerationinawaythattheyareequippedtomakeacontribution to both, the business and the family.

•Toalwayspromotestaffmembers(includingfamily)onthebasisofmeritandabilities.

[ 48 ]

Bill of responsibilities

individuals of the family must:

•Upholdthevalues,reputationandtraditionsofthefamily.

•Actasthetrusteesofthebusinessandfamilyassets.

•Safeguardtheinterestsofthefamily,alwaysgivingprioritytofamilyasopposedtopersonalself interests.

•Mentor,coachandguidetheyoungermembersof the family inrelationto thebusiness,family and other issues.

•Dealwithallmatterstoprotectthefamilybusiness,aswouldberequiredintheeventofafamily member leaving the business.

•Clearly articulate theirwishes regarding business and family assets in the event of theirdeath.

•Ensurethatfamilydisputes/issuesareresolvedinternallywiththeguidanceoftheFamilyelders.

•AlwaysrespectandembracethedecisionsoftheFamilyelders,andalwaysplacetheinterestsof the family first.

[ 49 ]

Successor Development refers to the selection and training of suitable personnel for future leadership roles in an organization. It is the key part to any succession planning and requires:• Time & effort• A structured approach • Deliberate planning

Successor Development at Asilah:Malik and Jalal have four sons and four daughters respectively. Hammad and Uzair are the two older sons of Malik who have already joined the business.

It is important to note that keeping successor development in mind, neither Hammad nor Uzair were automatically accepted into the business. • They had to train and work 8-10 hours a day for several months as ‘trainees’, just like any other employee at Asilah.• Both are working under ‘professional’ managers who are also their direct supervisors.• Neither sits on the Board of Directors. • Neither has any equity in the company at this time and work as paid employees.

The directors believe this training is crucial for the development of the younger generation, who are expected to be familiar with all aspects of the business, industry and the family before being entrusted with a senior position at Asilah.

[ 50 ]

Continuation of the Business

tranSFer oF ShareS

death

Focused on the need to have continuity in the business, Asilah has devised a comprehensive shareholders agreement to facilitate the succession planning process.

The shareholders agreement was developed with the assistance of specialist consultants and lawyers and in-depth discussions between the directors, the younger generation and their spouses. The discussions brought forth some difficult and uncomfortable matters and it be-came apparent that while the Board of directors was serving a useful purpose, there was a need to create another body to deal exclusively with ‘family’ issues. The consultant put the concept of a family council forward, and this recommendation was discussed and agreed by the entire family. Further details regarding the family council will be presented in the later paragraphs.

The shareholders agreement was drafted and finalized and required consideration of the fol-lowing key areas:

•Transferofsharesintheeventofthedeathofafamilymember:howwillthesharesbetrans-ferred and to whom?

•Optiontoredeemthesharesinthebusiness:wouldthatbepossible,ifashareholder’sfamilywishes to leave the business following their death?

•Valuationmodel:howwouldthesharesbevalued?

voluntary exit

•Thevaluationguidelines,intheeventofsomeonewishingtoexitthebusiness:TheBoardofdirectors could appoint an expert to arrive at a valuation

•Paymenttimelinefromwhensomeoneleavesthefirm

[ 51 ]

Continuation of BusinessForCed exit

prolonGed illneSS

•Whatcourseofactionshouldbetaken?

dividend poliCieS

•TheBoardofDirectorstodeterminetheproportionofdividendstobepaidouteachyear

•Activevs.non-activeshareholders

o dividend pool for non-active shareholders to be determined after payment of bo nuses and/or salaries to working shareholders and directors.

o What should be the difference in dividends paid to active vs. non-active shareholders?

reStraint oF trade

•Director/shareholderleavingthebusinesscannotcompetewithAsilahShoes

•Asilahbrandnamecannotbeusedbydepartingdirectors

•Adepartingshareholdercannotworkwithacompetitor

•ProtectionofdesignsandotherIP

A key aspect of the shareholders Agreement is the provision which requires all disputes to be resolved through internal mediation and if that fails, through arbitration. The ultimate objective being that the family should not have to resort to the court system to resolve disputes.

•Cansomeonebeforcedtoexitthebusiness?

•Non-performingdirectors:cantheybeforcedtoleavetheirposition?

in addition, creation of the family council is ex-pected to help in clarifying a lot of potential issues that might occur in the future, especially when ex-tended families come into play and members from outside the family are introduced, primarily through marriages, and want to be involved in the business. Asilah was determined to always maintain cordial family relations and to put ‘family’ before business. The family council was considered a key manifesta-tion of this value.

[ 52 ]

Continuation of BusinessThe Family Council to consist of:

entry into Family Business

•Age/Qualifications

•Workexperience

•CareerPath/DevelopmentPlan

•SalaryLevel

•Otherrelativesandtheirinvolvement,e.g.in-laws,wives,husbands,etc.

•Trainingandeducationrequiredpriortojoiningthebusiness

exit from Family Business

•RighttoworkatAsilah

•Righttoownshares–evenifsomeonechoosesnottoworkinthebusiness

•Valuationofshareholding,ifsomeonedecidestoleavethebusiness

•Timelineforpayments

•Restrictionsoncompetingwiththefamilybusiness

•Terminationofemploymentintheeventofnon-performance:whatstepsshouldbe taken?

•FamilyElder(AppointedbyBOD)

•YoungerGenerationRepresentative(nominatedbythefamily)

•FamilyMember–Wife(nominatedbythefamily)

•FamilyMember(nominatedbythefamilyelder)

Following the appointment of the council, they will be asked to report / provide input on the following matters:

[ 53 ]

Continuation of Businessright to receive dividends

•Active versusNon-Active Shareholders: how should the distribution of profits be carried out?

• Income Requirements: how much is required for the family and how it should be paid?

succession issues

• ImpactofdeathofachosenFamilyElder;mechanismfortransferringshareholding and other assets. how and when should this occur?

•Processfortransitionofownership:couldthisbeinitiatedduringthelifetimeofthe older generation?

•Allocationofshares:menversuswomen

dispute resolution

•Processforresolvingdisputes

o Who should have the final say?

o Arbitration

o What are the most likely areas for disputes and how to minimize them?

Family values

•Howtoensurevaluesaremaintained?

•AmendmentstotheFamilyconstitution,ApprovaloftheCouncilwillberequired

[ 54 ]

distribution of Wealth under shariah law

in understanding the effect of distribution in the trust, one needs to have a preliminary knowledge of Fara’id or force heir ship rulings on asset distribution as defined prominently in theQuranverses4:11-12.

The rationale of why the male offspring receives more than the female is that in traditional Muslim culture, males are heavily entrusted with and are responsible for the females in the family. islam encourages mutual understanding or consensus among heirs, which should be considered as the primary means of resolution in the distribution process, and only when such consensus is not successful, should Fara’id be reverted to.

TheFara’id distribution formula is unique in that it is predetermined in theQuran.Thebeneficiaries entitled include heirs from blood relations like – brothers, sisters, father and chil-dren; and by marriage, i.e. spouse. Thus, adopted children, in-laws and grandchildren are not directly entitled to this portion.

For better understanding, consider the following example.

The husband dies leaving a wife, a son, a daughter and his parents. After deduction of legacies and debt, the distribution is as follows:

1. Wife: one eighth

2. Father: one sixth

3. Mother: one sixth

4. The balance is divided among the children based on ratio of son to daughter 2:1 - son: two-thirds and daughter: one-third

Asilah’s policy states that the supremacy of islamic laws and principles is of the utmost impor-tance to the company’s value system.

The following excerpt from Islamic Succession Planning1 explains the concept:

1 By Dr Angelo Venardos, Executive Director of Heritage Trust Group, Singapore and Dr Aimi Zulhazmi Abdul Rashid, CEO of Bank Islam Trust Company (Labuan) Ltd* (01/11/2010) (http://www.ifcreview.com/restricted.aspx?articleId=2093&areaId=58)

[ 55 ]

Where there are only female offspring and no surviving male heirs, the daughters are entitled to only two-thirds of the balance, with the remainder going to the father of the deceased or siblings of the deceased (in order of priority). Where there is only one daughter, she is entitled to a maximum of one-half of the balance, with the rest going to the father of the deceased or siblings of the deceased (in order of priority).

For an islamic trust, the distribution of the trust is not subject to Fara’id, if it is made ir-revocable during its creation. This is due to the fact that the transfer of ownership is made during the settler’s lifetime (including to the trustee as the legal owner). Waqf and hibah are examples of irrevocable instruments of trust. on the other hand, a revocable trust, according to shari’a principles, is subject to Fara’id rules.

Asilah has implemented the shari’a interpretation in its shareholder agreements. Thus ensur-ing all future sharing of profits and business equity from Asilah is conducted in accordance with the laws of islam.

The inclusion of shari’a principles was a cause for concern for Jalal who has four daughters and no male heirs. he felt that at the time of distribution, his remaining share would be divided amongst other members of the family. however, through mutual agreement the brothers have devised strategies and policies to ensure equitable treatment of all directors and their successors.

[ 56 ]

how will succession Planning work at Asilah?

With the exception of hammad and uzair, the children of the four directors are still in their teens or even younger, and so will not be joining the business any time soon. under normal circumstances, Jalal (who only has daughters), Karim and saleem (who have children below the ages of 10) should have been exceedingly worried, for hammad and uzair could take control of the business before their own children can finish school. so why are they not con-cerned?

The answer is very simple. They have meshed together strong ethical and family values with concrete succession planning and governance strategies. every successor knows what he or she is entitled to and what they need to do to find their niche in the organization. each one of them will be dealt with impartially and based on their efforts and loyalty to the business, rewarded suitably.

When asked if any of the successors were “forced” into the business, their response was a unanimous “No”. however, they did have a feeling of family loyalty and duty. They have all grown up watching their fathers take pride in working for the family business, which led them to believe that it was logical for them to expand the business of their fathers and grandfather.

The story ends where it started.

each of the successors needs to decide how he or she will prove his/her mettle in the business, while keeping true to the family tradition and values. sohail is still fresh in the memories of the older generation. For them, their father was as a man with a vision, authority, grace and character.

Needless to say, having in place the cornerstones of business – Corporate Governance, and succession Planning – makes the transition of power easier for the future successors. in other words, the Asilah successors have an edge over some of their fellow heirs who are in line to takeover other large family businesses. in the absence of formal procedures and planning, it is unlikely that these heirs will be fully prepared to take the reins, should they find themselves in charge of their family business – be that sudden or gradual.

[ 57 ]

Discussion Questions

1. What is your opinion of Asilah’s succession planning approach? Will it help in the protec-tion of the business and ensure its long-term survival?

2. how will the Family Council contribute to the business? What are your views on the makeup of the family council?

3. do you feel the younger generation will easily accept the values and beliefs of the family? how can the senior members of the family ensure acceptance and adherence to the family values?

4. how do you see the difference between the role of the Board and the Family Council? Can you identify any areas where there is an overlap?

5. What are the risks to a family business if they do not plan their succession formally?

6. Why do you think succession Planning fails in so many firms/businesses in developing countries? identify the key reasons for this failure and propose strategies to improve this situ-ation.

7. if you were to implement succession Planning in your business, how you would go about the process?

[ 58 ]

viSion and miSSion oF the Company

•responsible for developing the vision and mission of the company, along with other stake-holders

reSponSiBilitieS

•development and implementation of the business plan each year

•Meeting financial targets and delivering sustainable profit results

•responsible for developing, reviewing and achieving budgets

•Formulating strategic and long-term plans

•stewardship of company’s finances

BuSineSS plan

FinanCial manaGement

•developing and promoting the culture of the company

•Arrange monthly meetings of directors and report on performance; receive reports from other directors on the same

Culture oF aSilah

anneXuRe a

Malik SohailManaging DirectorReports to: The Board of Directors

Overall Objective:

To manage all aspects of the company and to ensure that the objectives of the stakeholders are achieved

[ 59 ]

CommuniCation

•ensuring open and clear communication between all the stakeholders of the company

•information security

•Back-up and disaster recovery plans

•Point of sales system working effectively

•integrated stock management system

•utilizing iT to streamline business processes

•overall responsibility to ensure a high standard of service to the company’s clients

•setting quality standards for all the products

•Working closely with the members of the staff to ensure a high degree of client satisfaction

inFormation teChnoloGy

ServiCe delivery

•ensure open and clear communication between Family Council and Board of directors

Family CounCil

Performance Assessment to be based on:

Achieving the annual business plan targets in the areas of:

•sales (in conjunction with other directors)

•Net Profit

•Net Asset position

•human resource

•Marketing

•expansion plans (increasing the number of stores locally and internationally)

•iT management (including KPis)

[ 60 ]

viSion and miSSion oF the Company

•responsible for developing and implementing the marketing program for the company

•responsible for achieving sales targets on a company-wide basis

•Carrying out strategic analysis and keeping abreast of competitors

•reviewing strategic policies in comparison to competitors

•in conjunction with Planning & Purchasing introduce new product range and fresh items

•ensure service delivery benchmarks are consistent across the stores

•Manage the ‘mystery shopping team’

•ensure that the appearance and layout of stores is consistent

•Management of inventory levels in collaboration with production

•liaison with Planning & Purchasing to ensure that output and quality are in line with cus-tomer preferences

•develop customer service standards (morning clinic format)

•develop monitoring process

•Commence staff training initiatives/system

reSponSiBilitieS

•Promoting the Asilah brand

•Actively seek repeat business from clients, with the aim of increasing our market share

•look for networking opportunities to promote the Asilah name

BuSineSS development

Jalal SohailDirector, Sales & MarketingReports to: The Managing Director

[ 61 ]

•liaison with the Planning & Purchasing to seek out opportunities to expand product range

•establish and maintain client relationship management system

•exploring local and international markets for potential growth

•introducing new products in conjunction with Planning & Purchasing to enhance sales level

•develop and implement the r&d department

•seek and manage international suppliers

•develop new designs with Planning & Purchasing to keep up with current trends

•Franchising the brand, as an option to expand the business

•explore new sub-branding opportunities

Performance Assessment to be based on:

Achieving the annual business plan targets in the areas of:

•Sales

•ProductLines

•Marketshare

•BrandDevelopment

•Expansion

•CustomerService

•CRM–numberofloyaltycardholders

expanSion planS

[ 62 ]

human reSourCeS

•overseeing all aspects of the company’s hr systems and procedures, including training and coaching of staff; reward structure; and performance assessment – quarterly reviews

•setting up a plan for the hr department

•ensuring that the recruitment is carried out in accordance with company policies – develop and implement standard policies and processes for staff recruitment

•organize and co-ordinate the recruitment and selection of new staff

•retaining of key employees / staff

•Minimizing employee turnover (track and manage attrition)

•Managing staffing issues and staff working shifts on an ongoing basis

•Personal development planning for the staff – link to quarterly reviews

•resolving day-to-day issues of key personnel

•develop and implement Asilah’s Training institution

•Training shop managers in customer service on a quarterly basis

•ensuring the practice of Asilah’s culture and values by all the employees

•developing incentive based remuneration structure

•design and implement staff appraisal systems

•implement successor development program for young family members, desirous of joining the business

•develop career paths for key staff members

•streamline systems and processes for efficiency and effectiveness

reSponSiBilitieS

Karim SohailDirector, Human Resource & AdministrationReports to: The Managing Director

[ 63 ]

•develop and implement KPis for all staff, linking them both to the company’s strategy and operations

•establish and maintain client relationship management system

•develop a reporting system for directors and all heads of departments

•Managing all administrative matters of the company

•Manage the Procurement department; implement strategic sourcing policies and processes

•Maintenance of all shops/office buildings

•Manage set-up/layout of all new outlets

•Manage all ‘non-product’ vendors (i.e. professional service providers)

•day-to-day management of the office

•Attending to legal issues

Performance Assessment to be based on:

Achieving the annual business plan targets in the areas of:

•Staffmorale

•Staffturnover(attrition)

•Retentionofkeyemployees

•TrainingandDevelopmentPlans

•CoachingandMentoringSystem

•TalentManagement

•SuccessorDevelopment

adminiStration

[ 64 ]

purChaSinG

•Maintaining good relations with key suppliers

•looking for new sources to reduce cost and increase margins

•reduce wastage and poor quality items

•Negotiating the lowest prices with suppliers without compromising on quality

•Managing supplier risk through relationship management

•document Product specification Form (PsF) with suppliers

•develop standard agreement with major suppliers

•studying sales records and inventory levels

•Manage inventory levels and improve inventory turnover

•Placing orders – managing inventory levels

•ensuring adequate and continuous supply of stock

•Coordinate production levels with sales and Marketing; ensure regular liaison and com-munication

•ensure that goods purchased are of the highest quality

reSponSiBilitieS

planninG

•implementation of the business plan in conjunction with the Board of directors

•Coordinating the opening of new stores in relation to supply of stock

•developing new product lines in conjunction with sales & Marketing

Saleem SohailDirector, Planning & PurchasingReports to: The Managing Director

[ 65 ]

•develop and implement KPis for all staff, linking them both to the company’s strategy and operations

•establish and maintain client relationship management system

•develop a reporting system for directors and all heads of departments

•overall responsibility to ensure a continued delivery of stock to the company’s outlets; en-sure no stock-outs (right Time, right stock, right Place)

•Working closely with staff to ensure a high degree of client satisfaction

•resolve, in collaboration with sales & Marketing, all client complaints with corrective mea-sures in the quickest possible way

Performance Assessment to be based on:

Achieving the annual business plan targets in the areas of:

•InventoryManagement(turnovertobemanaged–4xperannumforthewarehouseand5xper annum for the shops)

•QualityControl(claimstobereducedtolessthan1%)

•ContributionMargins(increaseto55%forshoesandhandbags;50%forchildren’sshoes)

•NewProducts

•Keepingaheadofcompetitors

•Managingsupplierrisk

•CoordinationwithSales&Marketingtoensuretherearenostock-outs

StoCk delivery

Contact information:

international Finance Corporation

2121 Pennsylvania Avenue, NW

Washington, dC 20433 usA

iFC Corporate relations

Tel: (202) 473-3800

Fax: (202) 974-4384

ifc.org

2013