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Family Business: Its Survival and Governance
An executive summary from 'The Family Business School'
Corporate governance is a critical concern in any company. In the family business, the matter of governance is a bit more complicated, particularly if the family owns and runs the enterprise. The central role of the family in the business adds an extra dimension to governance. In this instance, it is not only the business that needs governance, but the family as well.
In its Latin origins, the word "governance" connotes "steering." Hence, in the context of a business enterprise, governance means setting a direction, establishing corporate values and instituting policies that define how the company should behave or act in certain situations.
Professor John A. Davis of the Harvard Business School also emphasizes another facet of effective governance, which is that it "brings the right people together at the right time to discuss the right (important) things."
Different family businesses handle the matter of governance in different ways. Some family businesses have effective governance systems that are based on informal and casual methods. Others create more formal structures of governance involving family councils, boards, formal agendas, voting and the like.
It is not absolutely necessary to have formal structures in place as long as informal methods achieve the goals of good governance, which are to set a clear direction, clear values and clear policies for the business. However, if an informal governance structure fails to achieve these goals, then this structure is flawed and should be improved. Perhaps it’s time to establish a more formal structure of governance. No business, whether family run or not, can be effective over a prolonged period of time without effective governance.
There are three basic structures that can aid family businesses in governance: (1) a board of directors, (2) a family council, and (3) a succession task force.
· The board of directors handles issues concerning ownership and policy.
· The family council tackles family issues.
· The succession task force takes care of strategic concerns and helps train successors.
It is important to note that a company's governance structure tends to vary depending on the size of the organization and the size of the family. There is no one-size-fits-all system of governance. For example, a small company may have a small advisory board instead of a board of directors while a large corporation may have a family council as well as a family assembly that brings together all family members at least once a year.
As a general rule, the longer a family business operates and bridges several generations, the greater the need for a more formal structure of governance. The family council should have regular discussions on how the current governance structure meets the company's and family's needs.
Most family businesses use the family council as a forum for discussing issues involving family members but which also have bearing on the way the business operates. This is especially the case for issues that can lead to misunderstandings, dissension and stress. For example, the family council is where family members can clarify their roles and responsibilities in the business, discuss parking or workspace issues, clarify their compensation and benefits package or simply negotiate their work hours and vacation time.
There are times when the board of directors and the family council have seeming overlaps in function, particularly when it comes to setting policy. There has to be a clear-cut separation of functions.
The family council is primarily concerned with policies involving the family and may make recommendations regarding the family to the board. Meanwhile, the board of directors is primarily concerned with policies involving the business and may make recommendations to the family council regarding the business.
In an ideal setting, both family council and board of directors coordinate closely with one another but do not encroach into the other's territory.