Corporate Governance for Family Firms
Family-owned businesses create substantial wealth, employment and opportunity in the communities they operate in. While many have decades, sometimes hundreds of years of successful operating experience behind them, to continue to deliver sustainable intergenerational value creation they need effective governance.
Today, it’s more important than ever to have good governance with the pandemic not only creating uncertainty and challenges, but also once in a lifetime opportunity. It’s those boards that are fit for the future and well equipped to successfully seize these opportunities, because they have effective governance, that will prosper – hopefully for generations to come.
Good governance starts with role clarity. Family businesses must be clear about the role of the business and keep the family baggage out of the organisation. This also involves the separation of roles of the owners, family, management and the board, that can sometimes become blurred in a family run organisation. The passion of the owners and family members can mean that they are drawn into many aspects of the business, from decision making on the board to day-to-day management. It’s successful family firms which recognise that this is not healthy and respect the need for role clarity. They acknowledge that directors who have a clear understanding of how they will work on the board will add value to the company. In particular, how they will help steward the creation of value and demonstrate this through their contribution to the board.
Diversity on the board
It can be difficult for the board of directors of a family business to be able to see the “wood for the trees” if they lack diversity. It’s the recruitment of external directors that can bring the perspective of distance, additional skills, different demographics, experience, thinking styles and circles of influence which add significant value to the boards of these organisations. Boards that are loaded with friends and family members without relevant skills and experience are ineffective. One of the most common and expensive mistakes made on the boards of family businesses is recruiting incompetent directors or directors that are friends or family, but simply don’t have the skills, perspective and calibre to be effective.
Family firms must have four lines of sight and enact effective processes to ensure that each perspective adds value:
- Oversight: Boards must have effective processes in place to ensure oversight and accountability.
- Insight: Effective boards understand the business, the financial engine and competitive edge of the company and the external business environment. This insight drives a more objective and enabling assessment of performance and strategy.
- Foresight: The ability to anticipate, to see what is coming and the future forces that will impact the competitiveness and sustainability of the business are critical to the effective understanding of risk and development of strategy.
- Hindsight: Effective boards can bring significant company and family knowledge, the hindsight to remember previous initiatives and reflect on the good, bad and ugly learnings from the past.
Processes must be put in place by the board to regularly evaluate the performance of the leader of management team – the CEO – the most important role on the board. As the CEO has been under huge pressure during the pandemic, reviewing their performance is absolutely vital. The board should also implement processes for handling the succession and transition of the CEO.
It’s not only about the CEO; boards at family firms must ensure the processes for the selection, appointment, induction, review, succession planning and exit of directors remains effective, so the board remains fit for the future. This way the boards of family businesses are better able to ensure they have the capabilities and resources to deliver success and sustainability for their organisation.
Strong board relationships
Relationships between board members, the board and the owners of a family business as well as the management team, particularly the CEO, must support the creation of value. What’s crucial is that boards leave the family baggage out of the family business and, in particular, the boardroom. Boards must also have a good relationship with management, with the company secretary and key stakeholders. The relationship that is most important in the governance system is between the chairman and the CEO. It must be built on honesty, candour and should be one where the chairman and CEO are friendly but never ever seen as friends.
A good culture aligned with the values of the family and the business is critical for a successful organisation. It’s effective boards which recognise that they are both custodians and shapers of the culture at their business. Custodians take the valuable and good parts of the culture forward to future generations while shapers evolve the culture to remove elements that are not fit for the future. Governments, employees and regulators are all increasing their focus on culture. The role of the board in building culture is growing in importance, with the risk that directors will become increasingly liable for poor company culture, which can lead to misconduct and damage the reputation of the company, the family owners and the board.
Family businesses are different in a number of ways to others, but one thing that remains the same is that good governance can add significant value and help organisations to better navigate the minefield that is business. Therefore, it’s time for family firms to sweat the governance to ensure that they are effective and fit for the future. This requires role clarity, the right skills and diversity on the board, having effective processes in place, effective relationships, and a good culture aligned with the values of the business.
Whether you are a family business or not we can help ensure your board delivers good governance, so it’s effective, fit for the future and well positioned to seize opportunities to deliver long term growth. Please get in touch with us for a confidential conversation.