Nael Saab The following case illustrates the story of a friend of mines hotel located in Lebanon, which is owned

and managed by his family and outside partners. For the sake of confidentiality, the names used in this case have been altered. Business History: The hotel was founded by his late grandfather with a partner and is currently owned by his father and uncle. Upon the grandfather s death, the shares were directly transferred amongst his two sons equally while the other shareholder remained in possession of his minority stockholding. The next 6 month following the change of ownership, management restructuring took place where Mr.Joe Jaroud (the uncle) was appointed CEO and chairman of the board. As for his father (Mr.Mark Jaroud), he decided to stay out of the management of the business and was only part of the board of directors to ensure the business is being run smoothly. His decision was based on the fact that he had already established his own businesses and was never involved in his fathers business to start with. The first board meeting that took place at the end of the year addressed several issues related to the problems the business was facing. The hotel had high costs that were not sustainable due to the seasonality of the hotel business in Lebanon, which made it a burden in carrying the same number of employees all year long. Mr.Mark Jaroud (friends father) suggested to lay off employees during the dead season in order to cut costs down and re-hire on a part time bases the extra number needed during the summer season. However, his recommendation was overthrown by his brother, the newly appointed CEO, on the basis that lay offs would cause disruptions amongst the employees and will negatively affect the business. Brief Country Background: Lebanon is a small country with an estimated population of 4.5 million citizens. Moreover, the country has more than 18 recognized religious sects that are all part of the parliament and exert their influence over Lebanese businesses. As a result, employees have a strong bargaining power when it comes to their relation with the management of businesses since they had the back up of their respective religious affiliation and thus had the power to disrupt the business if they feel their jobs are being threatened. This issue presented itself as a handicap for the hotel itself since the CEO, who had good connection with local officials, had to accommodate employees that are not needed and of course pay the salaries at the end of each month. Problems: As mentioned earlier, due to local political environment the CEO was stuck between satisfying his employees and government officials. On the other hand, the business was incurring extra costs that are diminishing its profitability and 1

threatening the sustainability of the business model. Another problem that arose is the death of the other non-family partner and thus the transferring of shares equally amongst his two children. As a result, ownership of the business was now distributed amongst four owners from the 2nd generation with each having differing interests and views on how the business should be operated. Exhibit 1 at the end of the case illustrates the ownership structure of the hotel at the 2nd generation level. The non-family owners wanted to be part of the hotel management and thus demanded key job position with a generous salary. They were not really interested in the hotel as a business; however, they wanted to secure a steady income for themselves since none of them worked and are both dependent on hotels income for a living. On the other hand, the CEO felt a sense of duty to carry out his fathers legacy and expand the business. This added another layer of complication to the CEO; since he had to consider the new owners knowing that what matters to them is dividends and monthly income with no emotional attachment to the business itself. As result of these complications, the business was trapped between the three circles of the family business model being ownership, business, and family members. On the business level, the CEO was managing the company in an informal way where family members would earn higher salaries than other executives just for being part of the family. The salary structure for family members was not based on performance-based criteria but on an informal manner where it is expected for members of the family to earn a higher salary than the rest of the employees. This is a result of the salary structure that was put in place by the founder at times where this was the norm in Lebanon. Moreover, decisions at the board level were always taken in a way that favors the direct interest of the owners as oppose to what is right for the business. The inclusion of nonfamily owners into the business raised problems amongst key outsider executives due to the ease those individuals had in joining the key positions in the business. Moreover, these earned a higher salaries than other outsider employees even though the latter where more competent and qualified in performing their jobs. The two sons of the deceased shareholder had no experience in managing a hotel and took advantage of their positions as owners to turn the hotel into their backyard for private events and a resource base to be used for their personal lives. This resulted in a clash between the outside owners and key non-family executives working in the hotel as well as the CEO and his brother. The issue went further having disputes with the CEO for favoring ownership members over the rest of the staff so openly when it was apparent that they were incompetent to run the business. Theories: Based on the above-mentioned problems it has become apparent to the CEO that the business needs formal governance methods in place at the three levels being the business, management, and family dimension. To better understand the issues and overlaps in the three dimensions the following diagram concerning the three spheres of family business should be considered and applied:

Referring to the above figure the issues mentioned earlier could be classified in the following: At the family level (1): Clash of views between the CEO and his brother concerning the number of employees and the way to handle the issue

At the Ownership level (2): Both the founders sons (Joe and Mark) have equal shares Both sons of the non family owner have also inherited shares equally but in total hold a minority stake relative to Joe and Mark. However, they have a blocking minority according to local law and thus can veto any taken decisions. This power acts as a handicap for the family owner since they could not take any manor decisions unilaterally.

At the Business level (3): Key employees that have been working in the hotel since its founding raised their objections concerning the salary structure, privileges, and ease of access that the non-family owners received. The salary structure should be reconsidered on a performance-based manner with no differences amongst all those working in the hotel.

At the Family and Ownership level (4): Mr.Mark Jaroud raised his concerns about the sustainability of the business and asked his brother (CEO) to lay off employees in order to decrease costs and in return secure steady yearly dividends.

At the Business and Ownership level (5): Mr.Joe Jaroud had to come up with a plan in dealing with the number of employees and government officials. This was vital for the sustainability of the business and to his plans for expanding it in the future.

Mr. Joe Jaroud has to also address the concerns of key employees that he inherited in the business from his father concerning the unfair privileges afforded to owners working in the business.

At the Business and Family level (6): Mr.Joe Jaroud should reconsider his options clearly concerning the formality of the organizational structure of the business. The business model that his father created was based on a start up company with a few employees. Today, the hotel has around 120 employees and thus the needed restructuring should take place. Effective governance method should be put in place to control the interaction between family and business and avoid any potential dispute that could arise with his brother due to diverging interests.

At the Business, Family, and Ownership level (7): Mr. Joe Jaroud has to ensure the successful continuity of the business by dealing with the management and family problems discussed above. Furthermore, he should start thinking of a succession plan at an early stage to ensure the continuity of the business and avoid the pitfall of managing as a monarch.

Figure 1: The following is the Ownership Structure at the 2nd generation:

Grandfather (Founder of Hotel)

Mr.Joe Jaroud (CEO)

Outside Partner
1st Son (Owner and Executive) 2nd Son (Owner and Executive)

Mr.Mark Jaroud (Owner)