FAMILY BUSINESS GOVERNANCE
Many owner-managers of family businesses experience a growing sense of isolation in their daily struggle to survive and excel. Many will ultimately sell out under duress or fail, falling victim to a powerful tendency among family businesses to fall short of their potential. It is however well understood by business owners that you have to continuously improve if you are going to compete successfully. Good governance together with an active outside board has been the single most important element in their effort to reach beyond mere subsistence for enduring excellence.
"If you are trying to grow and stay a step ahead of the competition, you better have all the assistance you can get. I don’t know why anyone wouldn’t want to give himself all the weapons he can to win their advantage."
The most successful family businesses operate with strict internal policies and a clearly defined structure. One of the best mechanisms for ensuring that a family business runs like a corporation is the establishment and implementation of an internal Family Business Governance structure. This structure eliminates the danger of allowing family elders to control aspects of the business that are outside the realm of their responsibility.
"Governance is the system of rules, practices and processes by which a company is directed and controlled. It establishes the rules of engagement and how the game will be played. It also defines the boundaries."
EMBRACING EFFECTIVE GOVERNANCE IN FAMILY BUSINESS
As closely held entities grow and family controlled companies become more complex, with more family members involved, directly or indirectly, and as operations mature, all facets of governance need to become more structured, efficient and transparent. Principles, policies and structures need to be formalised and governance structures designed to safeguard the growth and interests of the company and family shareholders, while simultaneously promoting family harmony and welfare.
"Your non-executive directors combined with an effective board can be the sparring partner
who tests your strengths and weaknesses before you get to the main arena - the marketplace.
Where else can a family business owner go to find help from someone he trusts,
who is unbiased, and who will help him do the job?"
An effective governance system with non-executive directors are one of the richest and least-used resources available to family owned businesses. Family business owners with active boards said their non-executive directors helped them tackle major issues without robbing them of control, independence or any meaningful measure of privacy. For some, non-executive directors brought new ideas, perspective, insights, or self-confidence and they also acted as a catalyst for important strategic, financial and strategic planning. Almost unanimously, these owners agree that non-executive directors have improved the quality of decision making and increased their chances of perpetuating ownership to future generations, should they choose to do so.
RESISTANCE TO ACTIVE BOARDS
If an active board is such a valuable resource for businesses, by most estimates only a small fraction of family businesses have active boards. While some CEOs are not emotionally prepared to deal with an active board, some are receptive to constructive advice. More often though, resistance is rooted in a lack of experience or understanding of the benefits of and effective governance system and active board of directors. Some of the reasons cited by CEOs for avoiding an active board include:
Inertia is a deeply entrenched obstacle. Many CEOs say they plan to form an active board but add, "I've got a few things I want to clean up first. I don’t have a marketing plan…the plant isn't remodelled…" or whatever. In fact, the CEO who waits to put his or her business in perfect order will never form an active board. Other family business owners say they already have plenty of trusted people to talk to.
Many family business owners find in time that these objections evaporate when weighed against the benefits of an effective governance system and an active board of directors. Nowhere outside the boardroom can business owners find such a comprehensive structure for testing embryonic ideas, seeking support and advise from respected peers, and weighing such sensitive long-term issues as estate planning, executive compensation, succession planning, and family shareholder relationships. A well-functioning and independent board, in conjunction with good governance processes will serve the family well.
"Good governance is also considered to be one of the most important things for a successful transition."
If you want your family business to function efficiently and to enjoy as just as much success as a business not run by members of the same family, it is essential to have a Family Business Governance document. This structure establishes rules and mechanisms for resolving disputes. Family Business Governance also creates an environment with established roles, which will provide peace of mind for all involved family members.