Established in 1952, Nuqul Group is now a conglomerate of over 30 companies and one of the Middle Easts leading industrial groups. The company was founded as Nuqul Brothers Company by the current chairman of the board of directors, Elia Nuqul. It is privately-held, family-owned, and employs around 6,000 people.

The company started out as a modest trading operation focused on the importation and distribution of food products. Over the years, management embarked on an expansion strategy that centered on trading integrated industries, expansion, and diversification throughout the Middle East. Its lines of business now cover a wide range of products, including: hygienic tissue paper, non-woven fabrics, processed meats, aluminum profiles, ready-mix concrete, synthetic sponge/foam, plastic pipes, stationery, and printed packaging materials.

moving from a One-man Show: Institutionalizing Nuquls Systems and Processes

Ghassan Nuqul, the vice chairman of Nuqul Group, took a leading role in 1985, 33 years after his father, Elia Nuqul, founded the company. At the time, the company had grown its line of business from wholesale supply to include manufacturing goods. By 1985, four plants were in operation, and Ghassan Nuqul immediately recognized that in order for the company to grow and sustain itself, he would need to institutionalize processes, allocate tasks, and develop accountability mechanisms.

kEY LESSONS LEaRNED

Advancing Corporate Governance in the Middle East and North Africa: Stories and Solutions 15

He was faced with a challenge found in many family-run businesses. The operation begins as a one- man show with all decisions passing through a single person. But as a company grows, this system becomes nearly impossible to run effectively. Business theorists call this a span of control issue.

At Nuqul Group, the head office had to absorb and process all purchase orders as well as accounting and auditing documents from the four plants. Little accountability existed outside the head office. This became the major impetus behind assigning and institutionalizing corporate practices. For one of his first projects, Nuqul painstakingly inspected, updated, and documented all the procedures and systems. This allowed him to proceed with a decentralization program to streamline activities. His father fully supported him, encouraging him to put his theoretical education to practical use. Nuqul says he felt fortunate to have a father who was open to listening to the ideas of other people, regardless of their age or position. This culture of openness has proven to be a major asset to the company.

Over the next five years, Nuqul headed the decentralization process. He separated and delegated tasks, created job descriptions, established measures of accountability for managers and employees, drew up business plans, established key performance indicators, created balanced performance scorecards, and evaluated the company against others in the industry both regionally and internationally. Much of the process was fundamental, with the work performed in-house. As they observed the usefulness of the initial steps, the company later contracted consultants to help them reach the level of professionalism to which the company aspired.

The result of these reforms is accountability among managers, employees, and the family, which ensures the companys sustainability. A 10-year business plan was implemented, with forecasted budgets for every year. The company was able to create benchmarks and measure itself against global best practices. They have continued to grow in terms of size and level of profits.

ImPLEmENTING CORPORaTE GOVERNaNCE

[Corporate governance] evolved from what seemed innate and relevant. It didnt come from attending a particular seminar or bringing in a consultant who said this is exactly what you need.

we did it ourselves. And you know what a few years later, I attended a seminar on the subject, and it was then that I realized it was called corporate governance. we probably already had 80 percent of what they were talking about. Eighty percent! And this proves that corporate governance is not something that has to be imposed on corporations from outside.

I can tell you in my case what developed and what evolved in Nuqul Group was done in response to challenges and actual needs on the ground and it turned out to be what you call corporate governance.

GhaSSaN NuquL | VICE CHAIRMAN, NUqUL GROUp

16 Advancing Corporate Governance in the Middle East and North Africa: Stories and Solutions

building an Effective board

Nuqul Group has established a strong board composed of both family and non-family members. It includes board members who work for the company, board members from outside the company, and board members with specializations in fields other than wholesale and manufacturing.

The current board includes three family members, two Nuqul Group CEOs, a corporate affairs director, and two independent directors. Two other independent directors sit on board committees, but not on the board itself. As Vice Chairman, Ghassan Nuqul chose to add two independent directors from outside the industry an engineer and a banker with extensive experience in their fields because he believed they would bring a fresh perspective to the board and would challenge the way the other directors think and operate. The six other board members all have extensive experience within Nuqul Group and can accurately reflect the interests of the company. While it may be counterintuitive to some, Nuqual believes that the mixed board structure ultimately serves the best interests of the family.

Two committees function under the boards oversight: an audit committee, and a management development and compensation committee. Both committees are chaired by Ghassan Nuqul. The audit committee also includes the corporate affairs director, the banker (as an independent director), and the CFO of a large regional company. Marwan Nuqul (the brother of Ghassan), the corporate affairs director, a human resources director from a multinational company, one of the independent directors, and Ghassan Nuqul sit on the management development and compensation committee.

Independent directors are remunerated according to the board charter. Each year a renewal letter is extended to current directors, which opens a window for a change in board membership or a confirmation of the existing composition. The board adheres to the by-laws, charters, and role descriptions that were established as the company developed its governance model. Yet, as Ghassan Nuqul emphasizes, even though procedures and protocols have been developed and institutionalized, it is important to remain open to changing them.

Setting up the Family Constitution

Ghassan Nuqul first encountered the idea of a family constitution at a conference on family businesses. The conference provided an opportunity to learn from other family-owned companies that shared similar experiences and challenges. CEOs and directors were able to learn about best practices that informed the direction of their respective companies.

Creating the family constitution required considerable effort and took a year and a half to complete. Nuqul admits it was a challenging process, but in the end, the carefully developed framework laid the groundwork for a fortified corporate structure that helped to minimize potential family conflict. From his experience, a key element for success is timing; it helps to develop a family constitution when the family patriarch is in complete control of the company and when there are no apparent conflicts on the horizon.

Although Nuqul Group was not in a moment of crisis, it realized that issues addressed in the family constitution would have surfaced at some point in the future. When issues did appear, they were able to navigate the issues smoothly because they had a concrete and clear action plan. The articles of the

Advancing Corporate Governance in the Middle East and North Africa: Stories and Solutions 17

family constitution also fed directly into the articles of association in the holding companies operated by Nuqul Group, which allowed for uniform operation of all Nuqul Group subsidiaries.

While it is not necessary to contract an expert or consultant to formulate a family constitution, Nuqul Group found it useful to work with PriceWaterhouseCoopers, which offers services to family businesses to help draw up family constitutions. The Nuqul constitution governs all aspects of family involvement in the business, including who is allowed to sit on the board, who is allowed to act as chairman of the board and the requisite qualifications for board positions, who is allowed to take over or own shares in the business, bloodline versus in-law privileges, how to conduct evaluations of family members, and the employment, compensation, and education policies.

Employment policies are clearly defined, such as rules about how family members can enter the company and to whom family members can report (e.g. a son/daughter cannot directly report to a mother/father). Family members are required to obtain at least two years of outside experience before joining the company. This is a common guideline for family businesses: By requiring family members to pursue work experience outside the company, both company and employee benefit from the experience.

The structure of family ownership was also addressed in the protocol. As a part of the succession and sustainability plan, and as a way to maintain wealth within the family, the constitution set forth a plan for family members to begin owning shares in Nuqul Group subsidiaries.

Voluntary Transparency

Since Nuqul Group is a private, non-listed, family-owned company, it is not required by the government to publish financial statements. Yet, the company assembles an internal annual report voluntarily disclosing information including employee numbers, staff turnover, corporate social responsibility indicators (such as environmental footprint), community service participation, and philanthropy operations in the family foundation.

Nuqul Group recognizes the importance of presenting a track record to existing and potential partners in order to secure strategic partnerships. Most recently, for example, the company became a licensed distributor for Audi, Porsche, Volkswagen, Skoda, MAN, and Lamborghini automobiles. A requirement for the licenses was the clear documentation of their operations. The annual report functions as a transparent communication tool for partners with whom the company does business.

attracting and Recruiting First-rate Employees, Professionalizing management, and Separating the Role of Ceo and Chairman

The companys transparent practices have attracted high-caliber employees, which the vice chairman emphasizes is a main factor contributing to the companys success. Employees are fairly compensated according to corporate policy, and are clearly informed of the paths for advancement within the company. The corporation is structured so that, even though the company is family-owned and managed, any capable person can move up the ranks, even to the level of CEO.

Many family-run businesses never consider having a non-family CEO. However, Nuqul Group realized that the CEO does not exercise corporate power unilaterally, but rather executes the wishes

18 Advancing Corporate Governance in the Middle East and North Africa: Stories and Solutions

of a well-functioning board, which, in turn, represents shareholders. As a number of family businesses have discovered, it can be better if the CEO is not a family member, particularly in the second and third generations and beyond. An effective CEO may be found within the family, but seeking a CEO from outside the family can widen the available talent pool, as well as minimize or prevent friction between various parts of the family. Moreover, even if a family member is chosen as CEO, the ability to select an outsider can serve as motivation for the family member, since skill, drive, and competence will determine the CEO selection, rather than birthright. Both the founder and the second generation of Nuqul Group commented that in a family-run business, it is difficult to retain high caliber employees because of the perceived ceiling for opportunity that exists for outsiders. Additionally,

ImPaCT OF a SOLID CORPORaTE GOVERNaNCE FRamEWORk

Lack of structure, procedures, uniformity, and consistency would definitely present a big risk for you in times of difficulty. This is because you might have certain managers that, because of lack of experience, might make certain decisions that could really cause a lot of damage, not only financial, but also in reputation.

Common sense says there is something called a corporate entity separate from the individu- als who make up the corporation. If you dont institutionalize your companys business prac- tices with written procedures, documentation, communication plans, vision, mission, etc. you are at the risk of a person leaving with that information and finding that it is lost.

GhaSSaN NuquL

VICE CHAIRMAN, NUqUL GROUp

family members can, in the absence of specific policies outlining performance expectations, take their positions for granted and fail to exert maximum effort.

There are other benefits as well. According to the vice chairman, ambitious people scrutinize an employer as much as they themselves are scrutinized in an interview. From his experience, they want to know what opportunities exist to advance and the nature of the corporate culture, particularly in a family-owned company. In the case of Nuqul Group, the company directly attributed the ability to attract and retain excellent employees to their corporate governance practices, and to the specific policies that promote employee advancement.

According to the experience of Nuqul Group, the implementation of corporate governance practices both improved internal efficiency and enhanced its relationship with stakeholders.

Although not a listed company, Nuqul Group has made investments and entered into partnerships that would not have been possible if the company had not displayed a solid

foundation of corporate governance. The companys extensive documentation of financial figures and annual reports has been a key to attracting and establishing partnerships.

The company views its improved corporate governance practices such as the institutionalization of previously informal practices, a strong board, and functional checks and balances as key ingredients in its expanded growth. Nuqul Group has found that banks and private equity firms are more eager to work with the company than with companies that have not codified their practices, particularly if those companies operate in emerging markets where government oversight and regulation can sometimes be hampered by a lack of resources.

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Nuqul Group has expanded from four subsidiary companies in 1985 to 30 today. According to the vice chairman, this level of growth would not have been possible without the improved corporate governance practices.

DISCuSSION quESTIONS

> How is corporate governance different for a family-owned company, compared to a company with either a non-family controlling shareholder or diverse ownership?

> Do you believe an outsider can serve effectively as the CEO of a family-owned company, or should the CEO always be a family member?

> what are the advantages of providing increased levels of transparency to your shareholders, employees, and partners? what are the disadvantages?