What is Governance for a Family Business?

Feb 9, 2008 | Articles

Ever since the Enron scandal, the word “governance” has been bandied about in business circles. The cry for good governance is heard everywhere. Shareholders, academics and politicians are all seeking the holy grail of good governance. Notably, there are very few people who can offer a good definition. Moreover, when the concept is mentioned, most people think primarily of public corporations, and the rules relating to their boards of directors.

What does this word governance really mean? And how does governance apply to families in business? These are two of the questions I would like to address in this article.

 

GOVERNANCE IS COMMUNICATION AND DECISION MAKING.

When looking for a definition of governance, I came across this short form definition: Simply put; Governance is communication and decision making. This definition is profound and also practical. It is disarmingly simple. It uses words we can all relate to.

Moreover, it is focused on the effect of governance, and not its processes and structures. To explore its application, think about a well run corporation. Chances are the leadership is good at communicating and typically make good decisions. Now, think back to your childhood. What about governance in the classroom? My experience would suggest that the teachers who “governed” their domain well, did an exemplary job of communicating, and also made good decisions. Their communication not only included the subjects they were teaching, but also their expectations regarding conduct in and around the school. Their decisions not only included what to teach, but also how to test our learning, and who to reward with top marks. The good ones also chose appropriately regarding who was disciplined, or asked to stay after school for some extra work.

In a family business, it is easy see when things get “off track”. More often than not, I would submit, it is because one or both of these two foundational areas are ignored or not managed well. Family businesses that don’t communicate well, or make good decisions get themselves into trouble. In short, they often don’t have good governance, and are typically not even aware that this is one of their problems.

 

COMMUNICATION:

I have worked with many families who are trying to manage the intergenerational succession process. Typically they have not had much prior communication about what “the plan” is. ( if there is one) The elder generation will usually not know how to bring up sensitive topics like who will run the business in the future, or who will own the shares. Similarly, the “would-be successors” have difficulty trying to get mom and dad to focus on these topics, because everyone is too busy looking after the business, day to day.

Some people will assume that these problems are just a result of fear on the part of the senior generation, or perhaps a desire to maintain control. Both are probably contributing factors. However, the real problem may be one of governance. In the vast majority of family businesses, there are simply no processes, or structures, established to ensure these concerns are addressed. In fact, is it likely no-one has even thought of it in these terms.

 

DECISION MAKING:

Similarly, in a family business, the entrepreneurial leader is often used to making all the key business decisions without reference to other stakeholders, especially if these include his offspring. He (or she) presumably did fine before the kids were even born, so why should they expect to be included in important decisions now? Some observers would comment that the leader may just need to delegate more, or to develop a more inclusive, consensus oriented management style. These factors may be at play, but I would submit that, again, this is more a question of governance. I would be willing to bet that few have ventured to think of it in these terms.

 

EFFECTIVE GOVERNANCE:

What is missing in these situations? And, if business families want to do things differently, how do they go about developing good governance? In fact, what does good governance look like in any organization?

I think the most helpful way to think about it, is to realize that effective governance results from “PROCESSES AND STRUCTURES WHICH MAKE REVOLUTION UNNECESSARY”.

Think about the tragedy associated with any of history’s violent political revolutions. There is little doubt that those who revolted were clamoring for a voice ( communication) and a change in power ( decision making).  Think back to Enron. If good governance was in place, one would hope that the legendary abuses of power could have been prevented, or at least curtailed. Applying this to family businesses, there is no need to be melodramatic. Every year we hear about families that are torn apart during the succession process. Ask yourself; was there good communication? Were those involved content with how decisions were being made? Effective governance is built on these two foundations.

 

FAMILY MEETINGS:

Virtually every family business advisor I know encourages business families to hold regular family meetings. Why is this? I believe it is because a family meeting ( or Family Council) can provide a forum for communication and decision making within the family.

Starting when the kids are young, family meetings can address topics like chores,  allowances, and rules related to homework. When the children are older, family holidays, and charitable giving priorities may be discussed. Ultimately, family employment policies, investment strategies and succession planning are topics which can be tabled.

In summary, good governance in a family business requires regular family meetings.

By having regular meetings, Families can build unity and learn to solve problems together before they have a chance to escalate.

A good friend of mine told me that he and his wife held weekly family meetings with their three boys as they were growing up. In hindsight, he realized that this simple routine provided an escape valve for issues and concerns, so they could be discussed before they became unmanageable. Interestingly, this dad told me he had to make amends to one of his young lads, when it was brought to his attention that when he assigned the gardening duties he hadn’t done so fairly. The family meeting gave his young son a time and place to respectfully raise his concerns.

Getting the family together to talk regularly may not seem revolutionary, but it is one of the most important things that can help foster good governance.

 

BOARDS OF DIRECTORS:

Numerous family business research studies suggest that a board of directors, with independent members, can be very helpful for family businesses. This is especially true when they are trying to navigate the turbulent waters of succession. How can a board help, the skeptic may ask? Besides, isn’t a formal board overkill for a smaller, private, family firm?

I would argue to the contrary. In fact, a functioning board can be the most cost effective source of advice an enterprise can ever find. If your company is small, you may want to start with a board of advisors, who may agree to serve for a nominal fee. Or perhaps you can offer some of your products or services to them in lieu of cash. On way or another, I believe that willing advisors can be found.

Simply stated, a formal board, with non family membership, can create an environment where professional communication and decision making is cultivated. At one level, this can help improve business decisions and the financial results of the company. On another level, instead of the patriarch (or matriarch) ruling his family in an autocratic fashion, a board of directors can assist the leader to learn how to share information and authority in a constructive way.

Simply stated: Good governance in a family business includes a functional board, with independent members. This group can help bridge the generation gap in a family business, and help ensure the business remains healthy.

A colleague of mine was initially “required” to create a formal board, because his co-investors insisted on it. Many years later, this extremely successful family business entrepreneur has acquired virtually 100 % ownership of his company. Consequently, he is no longer forced to have a board. However, having seen the many benefits of having an active board to advise him, he has not only retained this outside group of advisors, he has made the cultivation of this group a major priority.

Having a functional board may not seem revolutionary, but it is good governance.

 

SHAREHOLDERS MEETINGS:

For effective tax planning, in most family businesses, an estate freeze or a family trust will often be utilized. As a result, offspring will become “co-owners” of their family’s business. However, in the vast majority of these situations, the siblings are never asked if they want to become partners with one another. This is understandable, because usually the easiest way to be fair is to give everyone an equal “piece of the pie”.

However, this isn’t the end of the story. Typically, siblings who become shareholders in this way, never meet together to talk about what their collective vision for the future is. More often than not, they also don’t know enough about the business to question the elder generations’ strategy.  Besides, the seniors will often have retained the voting shares to protect their investment and decision making authority, and so the next generation is not expected to have a voice in charting the future direction of the firm.

Obviously, any casual observer will realize that this situation doesn’t foster good communication. In addition, it definitely doesn’t prepare the next generation very well for their future decision making responsibilities.

Simply put: Good governance in a family business includes regular shareholder meetings. This is where the company’s vision, and broad strategic direction can be discussed and agreed upon.

A very successful business family I know well is moving in this direction. The two siblings, are now working for the company, and they will ultimately inherit 100 % of the business. Early in their careers, they were each responsible for separate elements of the family enterprise. This enabled them to develop their own spheres of competence and influence. However, more recently, they have relocated their offices, so they can be immediately next to each other. They have begun to develop a cohesive, shared strategy for the future.

If they continue to meet together regularly, this will not be revolutionary, but it will likely lead to good shareholder governance.

 

BODY BUILDING AND GOOD GOVERNANCE:

My fitness trainer who I have worked with for many years now, is a former national champion bodybuilder, from South Africa. Although he no longer competes, he maintains a very impressive physique. There are many men who like to look like he does. However, there are no quick fixes to build and maintain a body like his. Obviously, at one level, most us have the potential to develop a healthy body. We just need to exercise regularly,  watch what we eat, and maintain our flexibility by stretching. However, even though we all know this, few of us achieve our fitness goals. We know what we should do. We just don’t do it!

Similarly, in a business family, many of realize that we should create a Family Council, form a Board of Directors, and have regular Shareholders Meetings. We know what we should do. We just don’t do it.

If our goal is to develop a healthy body or a healthy family business, we need three things if we want to turn potential into reality. We need three important qualities to put theory into practice. Put succinctly, we all need Discipline, Consistancy, and Focus.

With these three characteristics we can build strong family businesses. When we do, fewer detractors will risk kicking sand in face at the beach. They wouldn’t dare!

 

CONCLUSION:

Governance is composed of two key activities: communication and decision making. Effective governance comes from creating structures and processes that make revolution

Un-necessary. If you want to avoid a revolution in your family business, it is also going to require discipline, consistency, and focus.

If you want to start building a stronger family business, then I encourage you to ensure that board members, family members and shareholders all meet regularly. It may take several years to develop a strong governance system, but doing so is definitely worth the effort. Any thing worth building takes hard work. Just ask my friend, the body building champ from South Africa!

About the Author, David C. Bentall

About the Author, David C. Bentall

Author, Speaker, Family Enterprise Advisor

David C. Bentall is founder of Next Step Advisors and has been advising family enterprises for over 25 years. He has also personally experienced succession in his family’s real estate and construction businesses. Additionally, he is a gifted author, coach, speaker and facilitator. His book, Dear Younger Me: Wisdom for Family Enterprise Successors (Castle Quay Books, May 3, 2021), explores the character traits critical for navigating the interpersonal demands of a family business enterprise. Learn more at nextstepadvisors.ca/purchase-books