Corporate Governance in Family Businesses in Serbia

CORPORATE GOVERNANCE IN FAMILY BUSINESSES IN SERBIA PhD Katarina Djulic, force of Economics, Finance and Administration, emailprotected edu. rs MSc Tanja Kuzman, Faculty of Economics, Finance and Administration PhD Katarina Djulic is Assistant prof at FEFA on subjects of bodily Finance and embodied government activity. She also kit and caboodle as Senior Consultant in KPMG Serbia. She rifleed as an Associate trading operations Officer at the multinational Finance can, World Bank Group, on the corporeal Governance Program. She holds a Bachelor of Law from the University of great(p) of Serbia and Montenegro, a master key of Law (LL.M. ) from Northwestern University, a Master in Public insurance polity from Harvard University JFK School of Government, and a PhD degree from the University of Belgrade Faculty of Economics. Prior to connector IFC, Ms Djulic worked as a jural adviser to slosheds in Belgrade and New York and afterwards at the Ministry of Finance, premier(pr enominal) as an adviser to the parson and then as an Assistant Minister in charge of the financial System Division. She also worked for European Bank for Reconstruction and Development in London in Office of General Council.PhD Djulic was a member of batting order of music directors in DDOR, Novi Sad, a member of Supervisory Board in Jubanka, capital of Serbia and Montenegro and Chairwoman of Supervisory Board in Central Securities Depositary and Clearing House, res normala of Serbia. MSc Tanja Kuzman is Teaching Assistant at Faculty of Economics, Finance and Administration. She teaches Corporate Governance and Corporate Finance. She is also Advisor for Corporate Governance and Corporate Finance in Chamber of medico and Industry of Serbia, Executive Director of the Institute at Faculty of Economics, Finance and Administration and a fraction of the Board of Directors of Alumni FEFA.She holds University of Sheffield Masters Degree with Distinction in Banking and Finance, where she was pro studyed as one of the dress hat students, and a BA from the Faculty of Economics, Finance and Administration. She was awarded with ii HEADs list certificates for proscribedstanding academic achievement of the University of Sheffield and in February 2011 she started her PhD studies in Finance. From September 2009 to December 2011 she worked as Coordinator of the National Competitiveness Council of the defer of Serbia and Junior Advisor for Economy and Finance in the Office of the surrogate Prime Minister for European Integration.In July 2011 she has spent a month working(a) for European Commission, Directorate General for Economic and Financial Affairs in Brussels, on the issues related to the financial stability and financial institutions of the European Union. She has end training on European Negotiations organize by Centre diethylstilboestrol etudes europeennes de lENA from Strasbourg. Abstract Family nonees constitute the worlds oldest and nearly sovere ign stamp of stemma organizations. In many countries, including Serbia, family barteres play the key type in the economy growth and workforce pursuement.Yet many of them fail to be sustainable in the long-term often dates due to some specialised governing clay challenges (family lineage chronological sequence, professionalization of the wariness etc. ). In Serbia, it has belatedly been cutd that family workes hire more institutional support in the country of unified brass. The somatic governance visiting card (questionnaire on key aspects of collective governance) for family dutyes in Serbia was developed as part of cooperation amid the Chamber of Commerce and Industry and the IFC.This paper presents the results of the lineup used in measure placeing corporate governance in seven family vocationes in Serbia. Analyses of the results represent a unique pil low-tonedcase study that set ups an overview of the prize of corporate governance in family- deliv ered companies in Serbia. It destines that the state of corporate governance in family businesses on the Serbian foodstuff place has a circuit of distance to go to reach best entrust. All companies recognize the fundamental richness of family governance to their business. However, they escape companionship and guidance on how to agreementatically deal with governance challenges.Key words family businesses, corporate governance, scorecard, come on of directors, transp arncy, unequivocal environment. Paper classification Case study. INTRODUCTION Family businesses argon one of the oldest and roughly habitual devises of business organizations, drivers of economic growth and economic exploitation, representing a Brobdingnagian percentage of the total number of companies in the world. Family businesses in most countries in the world narrative for over 70% of the total number of businesses and open genuinely signifi trampt impact on economic growth and employment. For ex ample, in the U.S. family businesses create 59% of new jobs, plot their shargon in the gross national product is 50%, and they represent nearly 90% of all businesses (Kuratko and Hodgetts, 2004). Family businesses in Spain and Latin America produce, respectively, 75% and 60% of the GDP (vane for Family Enterprise, 2008). Poutziouris (2000) also notes that in profit to economic growth and employment, family businesses build entrepreneurial spirit and enable acquaintance transfer among generations as well as learning of a find of loyalty, long-term loading and corporate independence.Therefore it is considered that the creation, growth and sustainability of family businesses is crucial for the development of national economy. According to data of the KPMG Canadian Centre for family business in neighboring 20 years 15 trillion dollars of wealth in the world will be transferred from one generation to an another(prenominal). The same author also points out that 70% of family busi nesses do not survive the diversity to the second generation, 90% do not survive the revolution to the thirdly generation, and 95% of family businesses do not forge succession.Other sources con self-coloured these findings indicating that plainly 5-15% of the family businesses compensate to exist in the third generation of the successors of the fo chthonian (Davis and Harveston, 1998 Neubauer and Lank, 1998 Poutziouris, 2000, Ibrahim and Dumas, 2001 Grassi and Giarmarco, 2012 ). The reasons for the unsustainability of family businesses ar some fourth dimensions exactly the same as the reasons for all other businesses. Management subprogrames, easiness and neediness of discipline atomic number 18 the most common weaknesses of family businesses (IFC, 2008). In the process of managing the family usiness, unlike other businesses, happenings and family problems flowerpot be take in-to doe with complicating in that commission the perplexity process. On the other hand, the lack of procedures and in con stochastic variableityality in the consume of business, can wind instrument to inefficiencies and conflicts, while lack of planning in hurt of succession, property management and absence of policies for the employment of family members leads in most cases to the bereavement of the family business. All the above mentioned reasons for the failures of family businesses stem from various weaknesses in Corporate Governance (hereinafter CG) practices employed in family businesses.Therefore, several interrogationers withstand investigated the relationship between the train of CG and family businesses as to ascertain whether these two variables atomic number 18 demonstrablely or negatively correlated. In their study Cheung et al (2010) wealthy person found that quality of CG appears very prodigious for family businesses. They concord sh give birth that good CG practices in family businesses atomic number 18 linked to high stock returns and lower un formatic risks (Cheung et al, 2010). Results of their study for family businesses argon consistent with findings of Renders et al (2010) who found a positive correlation between CG practices and telephoner work. gain groundmore, Renders et al (2010) fork over proven that higher(prenominal) CG ratings lead towards modify operating performance and higher merchandise values of companies. These positive effects of CG ratings on market values of companies tolerate also been recorded in emerging and transition countries (Gary and Gonzales, 2008 Khanchel El Mehdi, 2007 Black et al, 2006 Durnev and Kim, 2005 Black, 2001). Notwithstanding, Cheung et al (2010) and Geksen and Oktem (2009) find that family businesses have short(p) CG practices.Cheung et al (2010) pardon that family businesses, which in most cases have concentrated ownership structure, are associated with low aim of CG. Furthermore, their finding indicates a concerning fact that family businesses improve their CG practices sulky than their peers (Cheung et al, 2010). Geksen and Oktem (2009) also find that practices which prevail in family businesses strongly contradict the recommendations of the CG edicts of best practices. When it comes to Serbia the picture is more or less the same as in all developing countries.We have bragging(a) number of family businesses which went from being an entrepreneurial project to holding structures, now with several hundreds of employees. Family businesses in Serbia perceive CG as something abstract, fleeting, something that is hard to define and measure, and hence thither is the conviction that CG does not recreate concrete, tangible and quick benefits. Better business results which follow concerted CG efforts are nearly never exclusively linked to improved CG mechanisms as from stances of family businesses in Serbia.At best, they are ready to admit that CG can contri barelye to moderately improved business results. Despite this perception, the goal of t he authors was to investigate the level of CG in family businesses in Serbia in order to be able to recognize the main weakness/problems and provide recommendations which could solve them. This paper presents the findings of analysis of CG practice in 8 Serbian family businesses that responded to the invitation for assessing CG practice using the scorecard methodology.The scorecard was developed by the Chamber of Commerce and Industry of Serbia (CCIS) as part of the Program for alter CG, with the support of the IFC and with booking of one of the co-authors of this paper. The scorecard consists of questions that are systematically make into CG domain of a survives that reflect the canonical principles of good corporate governance. Based on the scorecard the CG rating in Serbia can be created and even though it is chassisa hard to produce a quantitative evaluation of CG the scorecard can still be a valid indicator of good or bad CG practices. The paper is divided in three addi tional partitions.The accounting entry is followed by a presentation of the methodology used in assessing corporate governance practice. In second part, results of the assessment of CG in family businesses in Serbia are presented. In conclusion, closing considerations followed by recommendations for set ahead CG improvements in family businesses in Serbia are noted. METHODOLOGY The CG scorecard for family businesses in Serbia, developed as part of cooperation between the Chamber of Commerce and Industry of Serbia and IFC, is a questionnaire whose questions are systematically presented under transportings that reflect the basic principles of good CG.Responses to questions generate a score that is try out as a percentage and indicates what percentage of best practice was utilize by a given family business in a accompaniment CG area. The main goal of the scorecard nestle is to enable companies to easily assess their own CG practices, to allow investors to position their prefe rence regarding the level of CG which companies need to have in order to be considered as possible investment and to enable comparison across countries and industries (Bassen, 2004 Strenger, 2004).The scorecard is divided into the following five areas of corporate governance 1) commitment to good CG practices 2) hop on of directors 3) oversight, take care and self-sufficing study operations 4) hydrofoil and disclosure 5) owners Each of these areas has a relative importance uttered in percentages in relation to the total of 100%. In view of the fact that each area is significant in its own way and has a different contri only ifion to governance, their relative importance differs accordingly.A comparatively great weight is carried by two areas for which experience carrys that they represent merry points of good CG in a company company commitment to CG principles and supervision, wangle and independent study operations. As a result these two areas are weighted with 25%, boar d of directors and owners are weighted with 20%, while transparency and disclosure is weighted with 10% in the terminal score. In each of the specified areas thither is up to eight questions that reflect recommended practice for realizing principles to which a detail area is dedicated.Answers to those questions are graded with marks from 1 to 10, where each mark is related to certain percentage of the mark for that peculiar(prenominal) area. A total result of around 50% means that a company has implemented CG practices as need by relevant legislation. In order to achieve a score of over 50%, a company needs to go beyond the requirements of statutory regulations. Finally, a particular quality of the scorecard is that it takes account not just of the general score, but also of the scores of individual CG areas, which gives a test company a enlighten indication of the areas in which its CG practices lag behind the company middling.The CCIS and the IFC, with participation of so me(prenominal)(prenominal) authors in the process, have use uped an assessment of CG practices in 8 family businesses in Serbia. Family businesses were guaranteed confidentiality in respect of scoring and results, with a view to ensuring objectivity and possible assessment of current status. ASSESSMENT RESULTS commission to good CG practices As offset printing area in the scorecard it consists of questions which provide a general sense of the level of CG practices employed by the family business.The scorecard for this area seek to assemble (i) the existence of a CG code (whether developed in-house or whether an animated code has been adopted), (ii) to what extent the companys inside corporate documents reflect the CG principles, (iii) whether carrying into action of CG principles is hash outed in company (if yes, how often and on which level), and (iv) do principles of CG and corporate complaisant responsibility take into account the interests of various stakeholders, thus maintaining conflicts.The figure on a lower floor summarizes the scores of family businesses for this area (companies are designated by letters to envision confidentiality of results). pic map 1 Commitment to good CG practices. CG Codes are not present in six out of eight family businesses, implying that those companies have not developed their own codes and have not adopted the existing codes of CCIS or Belgrade course Exchange. Despite that fact, owners and higher management have shown a great level of consciousness regarding the importance of CG and further improvements they need to make in CG area.When it comes to conversations slightly CG and succession process in most cases owners and family members talk or so those issues from time to time and except family members elusive in family business management others lack the interest or they are quite an passive in the safe and sound process. Internal documents exist in all companies but they usually indulge the minimum r equirements prescribed by law and do not cover the CG best practices and principles. Most of internal acts exist officially due to jural requirement but they are not implemented in conduct of family business.Furthermore, owners and higher management have fresh system for future development of family business, but that strategy in not hold in the form of document. receivable to that fact family members adhere to goals mentioned and set through formal or informal conversations between family members and higher management. Although poorly implemented in practice, family businesses show a clear vision of how their business should be organized and in which direction should be developed. All family businesses recognize the importance of corporate complaisant responsibility.Therefore they pay more attention to local communities in which they undertake their operations but their corporate social responsibility in most cases boils win just to the philanthropic activities. In conclus ion we can state that in family businesses in Serbia there is the absence of CG codes, that business strategies are not adjudge in the form of documents, that internal documents fulfill legally determined norms but do not encompass the CG best practices and principles, that owners and higher management tie a high level of importance to CG and that family businesses in Serbia undertake large number of philanthropic activities.Board of directors In assessing the do working of the board of directors questions in this section try to give a snapshot of practices regarding the management of family businesses and the role of the owner in them. In this CG area family businesses are asked whether there is a clear demarcation between operational and strategical/supervisory level in the company, is there a ormal board of directors or some other body which is responsible for the formulation of the strategy and supervision of the management, if there is a board of directors is there an inter nal act on the functioning of the board which defines unavoidable competencies of the members of the board of directors and their responsibilities, is the function of the general manager and president of the board of directors understandably separated, how compensation of the members of the board is determined, is there a process of evaluation of metier and quality of the work carried out by the board, whether the board establishes committees which could contribute to the quality of their work, is there the annual plan of board of directors shocks and whether members of the board of directors get the materials for the meeting in advance. pic Chart 2 Board of directors. In all of the well-tried companies there is the absence of Board of directors. Members of the families often have management functions and are directly entangled in the operational management of the business.On the other hand, they are usually the ones determining the strategic path of future development of the f amily business implying in that way that there is no clear distinction between operational and strategic/supervisory level. In most cases owners convenes meetings when he assesses the need for doing so and only in two family businesses there is clear and constituted dynamics of these meetings. Only in one of the well-tried companies owner of the family business is not as the same time a director and there is no overlapping of responsibilities and in just two companies owner sees themselves as president of the board of directors in future. Three of the time-tested companies have family meetings during which they discuss performance of the family business, family issues which can influence the business and its future development.When it comes to the professional management, in only two of the companies tested, managing of the company is undertaken by family members and impertinently hired professionals which proves the low level of consciousness and the need for professionalizatio n of the management. In most of the family businesses there is no established and formalised reward system. Absence of reward system is also a potential problem, because it reduces the possibility of objective and adequately reward or punishing of employees. The commonly established practice in tested companies shows that owners usually determine the rewards, its level and they make assessment of the effectiveness of the management. scour though the test has shown that owners of family businesses have aversion for professionalization of the management they feel reluctant in hiring immaterial experts and consultants from time to time.Based on the results of the scorecard we can bring to an end that in family businesses there is no formally established board of directors and that there is no clear distinction between operational and strategic/supervisory roles. Supervision, restrain and independent audit operations In this area the questions concern internal determines, internal audit function, remote audit and coverage mechanisms in the company. Seeking to determine whether the company has any kind of internal supervision system in place, the scorecard focuses on functions instead than on formal bodies. It tries to gauge comprehensiveness, sophistication and effectiveness of the existing system. The area has a 25% weight in the final grade.Two multitudes of questions focus on the system of internal controls Has the company formalized its procedures? If yes, who is in charge of development of such a system? Have the owners formally discussed risks and have they analyzed the existing procedures and the companys modus operandi in light of the identified risks? How does the company ensure that it is compliant with relevant laws and regulations? The next two groups of questions relate to the internal audit function Does it exist in any form? Is it formalized? What kind of resources does it have at its disposal? Is it independent from the management? Th e third group of questions relates to the external audit and tries to capture the companys experience with external listers in the ast couple of years Does the company have an external auditor? Who is the external auditor of the company? Has the external auditor ever issued a qualified opinion? The last question relates to the supervisory level of the company (the board if it exists or the owner(s)) and seeks to define to what extent and in which way the management communicates with the companys supervisory bodies. pic graphical record 3 Supervision, control and independent audit operations. In the tested companies, internal controls are either exclusively absent or they have been introduced in response to customers or regulatory demands without any prior analysis of internal risks in the company.The tested companies that mold in regulated industries (food production, medical supplies, transportation) and that are export-oriented received relatively higher scores since there is a large number of international industrial standards in these industries/markets that allow companies to adopt these standards routinely rather than to develop separately in-house internal control systems. Although these standards represent a type of internal control system, an internal control system should not be reduced to their implementation. In order for an internal control system to fulfill its purpose, it must be implemented in an adequate control environment and be ground on a company-particular proposition and comprehensive risk analysis and assessment. None of the tested companies has any form of internal audit function and the entire supervision is performed by the owner personally and, sometimes, the employed members of the family.This monitoring style lacks a structured approach and a supporting system. Supervision is performed either continuously, which is exceedingly cumbersome keeping in mind operational responsibilities of the owner, or on an ad hoc basis. Often , the owner does not have sufficient technical knowledge to supervise all the business processes in the company and as a consequence he focuses on the business areas where he feels comfortable resulting in considerable supervisory blind spots. Supervision further suffers as the business expands since at certain point in time, the owners physical capacity becomes limitation for an effective supervision. Finally, since the owner often operationally anages the company, he effectively supervises himself which is far from good practice. The external audit function seems to be unders as well asd inadequately. The companies still perceive external audit principally as an expense so the function is introduced only if it is legally take. It often happens that the owner does not have any direct communication with the external auditor. The contact person for the external auditor is, in the mass of cases, the head of accounting (whose work is verified by the auditor). Where the function exis ts, the auditors, as a rule, are wee, local businesses that issue unqualified opinions. Their mandates are automatically wide for the period of 3 4 years.Transparency and disclosure Although a great volume of family businesses in Serbia are small and medium nonlisted companies, some of them are rather big and require a solid organizational structure, some have extensive international business operations, and others seek significant external accompaniment (from banks primarily but also from individual investors and private equity funds). Due to these considerations, the scorecard has a part that relates to transparency and disclosure. However, since the scorecard primarily focuses on non-listed companies, this CG area has relatively smaller significance and it contributes only 10% to the final grade.In this domain the scorecard seeks to determine whether the company has a reporting policy (formalized or not), whether it uses its website for publishing relevant info and, finally , whether all relevant information is also released in English (which allows a company to reach a far broader investor and/or client base). After this, the scorecard focuses on specific types of information which practice indicates to be of greatest interest to stakeholders. Thus it seeks to determine whether the company releases in timely manner (i) its financial statements, (ii) its management report, (iii) materially significant information, (iv) biographical information of all members of management i. e. family members that are pertain in business, and (v) related party minutes. pic Graph 4 Transparency and disclosure.The poor results presented in chart 4 are not surprising since, as already mentioned, the tested companies are mostly small and medium family businesses. In addition, there are no legal requirements for non-listed businesses regarding transparent business operations. Thus, the research confirms once again the assumption that companies in Serbia, as a rule, tend t o fulfill only the legally prescribed minimum. Some companies have justly informative websites but they contain only marketing information relevant for customers. The companies that export have also websites in foreign languages. No single(a) company in the tested group has a structured approach to information disclosure. Some of the tested companies do have monthly or quarterly bulletins that are distributed to their customers.Financial statements, as a rule, are not public and if some financial information is available on the company website, it is out of date. Only one company in the tested sample regularly gains an annual report because it participates in international tenders and this exercise helps it present its business efficiently to a more sophisticated business community. A majority of the interviewed owners stated that they would like to keep their business within the family and that they did not plan an IPO. Finally, most of the tested businesses engage in related p arty transactions but, as expected, these transactions are not regulated neither are they transparent.The research indicates that Serbian companies are still not adequately motivate to publish information and still continue to misunderstand the importance of transparency in business. Owners The last CG area of the scorecard deals with owners. This part of the scorecard focuses on key issues of family governance and has a 20% weight in the final grade. The scorecard tries to determine if there is any formal document which spells out family business guiding principles such as family protocol, family business rules etc. Formally establishing these rules could result in the most important piece of work achieved by the family business in managing its family component and the process of succession. The econd group of questions tries to determine quality, effectiveness and timing of communication between family members that are actively knotted in the business ant those members that pursu e other interests and thus are not familiar with the day-to-day state of the family business. The purpose of this communication is to provide a forum that allows all the family to learn more about the family business and to provide them with an opportunity to express their views on family issues that impact the business as well as business issues that impact the family. The third group of questions enquires about the family grooming plan. The grooming plan outlines the most important business skills required by successors to effectively manage the family business at the transition date. The scorecard tries to determine how the family prepares the next generation for management succession and if it has a formalized grooming plan.The fourth group of questions asks if the family has developed an employment policy for family members. Its understandable that the senior generation would like to have all their children involved in the family business. However, allowing children a safe empl oyment haven just because they have no better alternative, can cause major problems. Thus, having criteria that outline what is required and expected from the family members who wish to be employed in the family business is crucial. The fifth and sixth groups of questions try to determine if the family members have any formal form of communication which would allow them to manage the key family component separately from managing business operations.The purpose of this forum is to lay out agreed ground rules and objectives for the firm and to discuss major issues (like succession) while minimizing the threat that conflicts in the family could jeopardize the business. pic Graph 5 Owners. The tested companies scored the highest in this CG area. The primary reason for such a good result is great commitment of the outset generation to prepare the second generation for the future transition. Although only one of the interviewed owners is familiar with basic CG mechanisms that family bus inesses have at disposal for managing ownership and management succession, all of them expressed great preparation to learn and to apply these mechanisms in their businesses.In fact, all the interviewed owners have been trying to find ways to manage these challenges and all of them expressed a great concern regarding succession process in their businesses. Now, there force be some research bias since the tested businesses volunteered to engage in the CG testing and all were attending a shop on CG organized by CCIS. It is probably true that a random sample would turn back lower scores in this CG area as it would in Commitment to good CG practices. Still, we believe that a succession threat is looming over the first generation of Serbian entrepreneurs and that all of them are experiencing problems due to a lack of the entrepreneurial tradition in Serbia and a lack of CG knowledge.None of the businesses had any form of family protocol neither did they have any formal for gathering f amily members involved in business to discuss family issues that affect the business and to prevent conflicts. Further none of the businesses had a formal channel of communication between the family members involved in business and those that are not but they all claim that communication is regular and intensive. The grooming plan is, as a rule, in some manner implemented in practice but it is not formal neither does it lay out ground rules for the second generation aspiring to articulation the family business. Finally, no formal family employment policy exists in any firm but there are certain guiding principals that are clear to both family and non-family employees alike in closely all businesses.We can conclude that the research has indicated (i) a great need for raising awareness among Serbian first generation entrepreneurs on CG issues and mechanisms (ii) an avoidance of the first generation to formalize the ground rules assuming that this formalization would lead to family conflicts and that it might destabilize both the family and the business (iii) a fear that the up sexual climax ownership and management succession will not be performed smoothly and successfully and (iv) an honest commitment of the family businesses to implement good CG mechanisms if it would help them overcome governance obstacles. CONCLUSION Serbia has a relatively short entrepreneurial history. Serious attempts to establish a family business could be linked primarily to the post-Milosevic period, i. e. after 2000. This research is providing a skim over showing where the first generations of Serbian entrepreneurs, i. e. the first generation of owners of Serbian family businesses is at present from the governance point of view and what kind of family governance challenges they introduce. As it was already mentioned, there is a certain bias which should be taken into account when interpreting the scores of the tested businesses.All of the tested businesses attended a workshop or ganized by CCIS for family businesses, they were present when the scorecard was launched and they applied to participate in a pilot CG testing voluntarily. This indicates that these businesses will most likely show greater commitment to CG and a deeper understanding of the family governance issues relatively to an average family-owned firm in Serbia. This also explains relatively higher scores in the CG areas Commitment to good CG practices and Owners. Still, we believe that the results obtained from this pilot testing are a good approximation of general state of affairs in Serbian family-owned businesses.Specifically, most of the family businesses in Serbia will sooner rather than later face serious succession challenges. Most of them still avoid putting these issues formally on the agenda, but there are triggers that will or have already forced them to do so. These triggers might be results of some positive or some negative circumstances. Positive triggers include age and retirem ent plans of the first generation owners and/or CEO a boom in the economy or the firms industrial sector which could lead to a fast expansion of business an external take-over initiative coming from a strategic partner a need for a significant external funding to finance the rapidly growing business etc.On the other hand, typical negative triggers would be health problems and physical and/or physiological exhaustion of the first generation owner/CEO marriage problems of the first generation owners or their children financial problems a significant loss of the market share conflicts among the owners and/or their heirs etc. The testing confirmed that the interviewed owners had serious doubts that the management and ownership succession could occur smoothly i. e. without seriously destabilizing the family business. What are obstacles that prevent the Serbian family owners from tackling the succession challenges more successfully? According to the testing and the interviews, there are three major challenges that need to be soundnessd. First, there is a substantial lack of CG knowledge among owners of family businesses in Serbia.CG is usually perceived as an expensive exercise created primarily for listed companies. Most of the interviewed owners were not aware that a significant body of research in CG refers to family businesses only. Second, tackling succession presses some mad and financial concerns of the first generation. Often, the founder of the firm, who belongs to the first generation, has invested emotionally a lot in the family firm. He feels that the family firm is a great part of his demeanor and his legacy for the generations to come. From the financial point of view, the greatest assets of the founder(s) have, as a rule, been invested in the family business and they are quite illiquid.Lacking any reasonable diversification, the founder is uncovered to a serious financial risk. Without a clear exit strategy and a meaningful succession plan, the founder creates a void in the governance and ownership systems which present a great meat for the heirs. The results have also shown that most of the interviewed owners lack time, capacity and knowledge to successfully resolve these issues. Relatively higher scores in the CG area that relates to Supervision and control mechanisms could be explained by an obvious need to professionalize the firm and to alter the management. Most of the businesses are economically healthy and have had a rapid expansion of business that outgrew its respective organizational structure.The owners show the greatest readiness to implement practical supervision CG mechanisms since they expect that these mechanisms would increase effectiveness of their control over the business and the outside managers and thus reduce a burden which they barely handle. However, we have to emphasize that better supervision, although of a great value, cannot taciturnity for unresolved succession issues. Poor management and ownership succession would almost certainly lead to a collapse of the family business in the next generation despite good internal controls, internal audit function or any other form of internal and/or external supervision. Low scores in the CG area that relates to Board indicate that most of the businesses have not separated the supervisory and strategic level on one hand and the operational level on the other.This leads to a common situation that even in rather big family-owned businesses in Serbia that employ more than 1000 employees, we still have so-called one-man show and the key man risk. This risk scatters away investors and leaves these businesses without substantial external funding. It is rather common that many rapidly developing Serbian businesses finance their investments form short-term lending since banks refuse to carry governance risks over an all-encompassing period of time. This lack of good professionals at the helm of their companies, most of the interviewed o wners explain with a lack of qualified managers to whom they could entrust the family business.Finally, the lowest score in transparency area is somewhat expected. As already mentioned, these businesses are not listed and there are no legal rules that would insist on greater transparency for bigger, closed companies. While this is understandable, it also indicates that the Serbian businesses do not see any value in transparency per se which begs further investigation. Our assumption is that in very non-transparent, public and private sectors in Serbia too much of transparency is perceived as an unnecessary exposure to both the government tax authorities and competitors. The businesses are convinced that transparency would only lead to vulnerability without bringing any other value-added.Scorecard results imply that in family businesses in Serbia CG is on a low level, that there is a extensive space for improvements and even quick wins which can significantly contribute to the busin ess operational functioning as well as contribute to its overall performance. The authors will continue to further employ the scorecard and assess the CG level in family businesses as to create a solid basis for scientific conclusions in the area, but as well to see whether improvements through time will be made. LITERATURE Black, B. (2001) The corporate governance behavior and market value of Russian firms. Emerging Markets Review, 2, p. 89108. Black, B. , Jang, H. and Kim, W. (2006) Does corporate governance predict firms market values? Evidence from Korea.journal of Law, Economics, and Organization, 22, p. 366413. Bassen, A. 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