FAMILY BUSINESS GOVERNANCE - APPOINTING A BOARD
Updated: Apr 28, 2021
How do you set your family business up to become a lasting family legacy? What sets legacy businesses apart from lifestyle businesses? How do you bridge the gap from spending time IN your business, and move toward spending time ON your business? How do you hand things over without losing control?
This is where the principles of good corporate governance show their value. By putting in the right structures and processes, you can rest assured that your investment can move from strength to strength and be sustainable for generations to come.
One of the right steps to take in turning your business into a lasting legacy, is to appoint the right executive team to get things done (execution). But even the best teams need direction, control and monitoring to effectively contribute to building a legacy business. Appointing the right board to set direction, implement controls and monitor performance is critical to building a legacy. The right board should have a balance of business interests (skin in the game) and be sufficiently independent to know when to do the right thing for reasons other than bottom-line returns. The right board also has a balance of skills, including operational knowledge of your business, with sufficient external expertise to help your team and business grow from strength to strength, especially in areas of financial controls, risk management, and stakeholder relations.
A common question asked at the transition phase of scaling a family business for sustainability, is to ask what a board of directors does, why not keep the family at the helm and keep doing things the way you always have, if that is the formula that brought your success? Some answers seem straightforward: age, ability, and diverse interests of other family members may not align to the strategic objectives and needs of the business.
As the business grows and matures, you as founder may see the value of appointing a suitably qualified Chief Financial Executive and an Operations Director who can bring a fresh outlook. Depending on the needs of the business, and the skills in the family, you may have looked beyond the family to equip your company with the right skills to drive the business to be sustainable. Typically, as the founder owner, you would have retained at least a majority shareholding and become the Chairman, steering the ship. Now you have a functioning board of directors. But do you know what your board should be focusing on? While it may be tempting to get together with your team to crunch data and numbers once a month, can you confidently say your board is effective?
As you step back from daily control, to oversight and monitoring, transitional problems start creeping in. Reporting isn’t reliable, the strategy isn’t executed, people aren’t communicating your vision and you’re spending more time doing damage control, and less time forging forward. Where did it go wrong?
From evaluating boards, and communicating with executive and non-executive directors, a trend has emerged that over 50% of directors experience communication as one of the top frustrations. Communication problems are a broad category which includes ineffective communication, lack of communication, and inaccurate information. It includes friction between the CEO and the CFO, leading to withholding of critical information, or a lack of co-operation from an operations manager whose goals don’t align to the direction you are trying to steer the business. These communication issues can be magnified by family members who disagree with external experts or a managing director who doesn’t have a good handle on the day-to-day cohesion of his team. The ability of a board of directors to make effective decisions is directly linked to the quality of information communicated between all spokes in the business.
This is where the recommended practices of good corporate governance come in. In King IV, the term used for a board of directors, is a “governing body”, the team of decision-makers responsible for achieving the governance outcomes of ethical culture, good performance, effective control and legitimacy. In King IV, the first principle of good governance is to lead ethically and effectively. This suggests that the governing body (or board) is not only focused on reviewing past performance. The word “lead” implies an active and forward-looking role. An effective governing body sets the strategy and approves the strategic plan to execute the strategy. The buck doesn’t stop there, an effective governing body puts in place the necessary structures to support the executive team so they have the tools to execute the strategy, then monitors the executive performance against key strategic objectives, to provide periodic guidance toward effectively delivering against the strategy, in an ethical way. Ethical leadership suggests that honesty, transparency and full disclosure starts at the top. Honest and effective reporting procedures are necessary for the board to achieve their core purpose. Robust internal audit processes provide assurance that the information on which decisions are being based, accurately reflects the true status of performance and compliance within the business.
One component of leading ethically can be understood as building a team who is honest in their communication. Honest communication allows the board to make effective decisions, and take action early when the ship starts steering off course. It is pivotal to building a legacy, that you foster an ethos that not only are the members of your board communicating openly with one another, but that communication both to and from the executive team is also honest and effective.
There is a wealth of recommended practices to improve communication between your directors, and between the board and executive team. These recommendations, while practical and necessary for all businesses, become ever more relevant when dealing with the delicate family nuances of a mature family business that is bridging from one generation to the next to become a family legacy.
Implementing recommended practices should not be seen as complicating the structure and weighing the business down in red-tape, but rather as tools available to the board, which will help them address some of the nagging dilemmas that creep in when letting go and stepping back.
Consider introducing structures to improve the following areas:
Dealing with conflicts of interests, through effective policies
Processes or frameworks that improve ethics, in the board room, and beyond
Cyclical board skills assessments, training & education
Visible, felt leadership initiatives to improve on-boarding for new directors, improve organisational learning and create director operational presence
Reporting structures, meaningful meeting papers and recording decisions to be executed
KPI’s to measure performance against the strategy
Setting risk appetite and risk control measures
Transparent communication and disclosing organisation effectiveness to other stakeholders
Effective boards build sustainable businesses – sustainable businesses last for generations. Isn’t that what we strive for when building a family legacy?
ARTICLE WRITTEN BY ASHLEY EATON - Ashley is a qualified Chartered Governance Specialist (FCIS), registered Certified Value Builder, and a member of the Institute of Directors and Institute of Governance Professionals. Ashley holds an Honours Degree (FCIS) Corporate Governance with The Chartered Governance Institute.
Family Legacies www.family-legacies.com is a multidisciplinary family business consulting company. Our consultants are leaders in their respective fields including; Family Business Consulting, Strategic Planning, Financial Planning, Wealth & Risk Management, Corporate Finance, Business Transitions & Exit Planning - Buy, Improve, Grow & Sell Businesses, Commercial & Family Law, Executive Coaching, Leadership Development & Facilitation, providing our clients with a professional and integrated multi-disciplinary service.