Date posted: March 4, 2016

Presiding over a family business is hardly restful. The lucky one elected to this role is like an entrepreneurial ‘Swiss Army knife’, who’s multiple duties and responsibilities include:

  • Define the strategy and ensure its implementation
  • Manage the relationships with various stakeholders
  • Understand and guide the founder(s)’ family(ies)

The first two aspects of their role are normally among the prerogatives and duties of any company’s chairman, be it a family-owned business or not. However, the latter aspect is quite specific in many ways.

When we meet to talk to the founding group’s family members, we realise the extent to which their strong attachment to their roots and family history – if not to say, to their family saga – defines their attitude and behavior towards the company and the chairman. The legacy of transmitted values, assets and memories as well as the strong respect shown to their ancestors permanently coexist with the necessity to perpetuate and further develop the family business. This coexistence may become even more complex as the skills and time each family board member dedicate to the business may be limited. Further difficulties arise when the chairman is not from the family by blood. In case of a conflict between the chairman and his board, the family finds it easier to forgive a chairman belonging to the family rather than an outsider.

The Boards are often composed of family members who entered by default or because of political reasons. In order to ensure all emotions and feelings are acknowledged and recognised, each family branch or each generation should have a representative in this lovely institution – The Board of Directors. The Board of Directors reflects the family tree and resembles a family memorial, sometimes at the cost of its initial vocation. Over generations, the families expand and scatter, as do their desires and visions. The resulting family divergences can throw off the governing body from focusing on and asking the right questions and making the right decisions regarding the day-to-day management and the future of the business. The Board then loses its magnitude, it no longer plays its role of a challenger to the chairman, and in a worst case scenario can block the key decisions that ensure the sustainability of the family business. The shareholders – most of them also family members and some of them – those who are Board members – may find it difficult to prevent a certain brother, sister, son, daughter or cousin from entering the Board or renewing his/her position in this important role. “If your son is a member of the Board, why wouldn’t my daughter be entitled to join it as well…? This may cause danger to the family’s dynamic.

The president, in charge of the company’s interests, turns either into a family meeting planner, or into a lone man that should be preserved at the head of the company. Depending on the Board members competence levels, which may not be sufficient, the president devotes a lot of his time and energy explaining and discussing with the family members, without getting any feedback or help from other members. Eventually, he runs the company alone and is constantly occupied with the most essential aspects of the business in order to respect the law.

This very negative outlook that one may find exaggerated, is actually an example of a textbook case. Our role as advisors requires us to inform and explain to the families the distinction between the management of a company and the management of a family. By trying to manage both family and business through a Board of Directors, they are committing prejudicial errors to their business’ development and longevity, two values usually defended by the families themselves.

The Board of Directors’ role is to manage the business, while the Family Council resolves and regulates the family issues. Within each family, commitment rules must be established, defining the conditions when entering family ownership, governing bodies or operational positions in the company. These rules are based on the already mentioned family values, a common groundwork. The Council defines the training & development conditions, the required skills, motivations and experiences. Whether formal or informal, the Council (whatever the company chooses to name it in reality) establishes the links between the family and the business. It can of course have representatives in the Board of Directors, which is most often the case. The representatives are elected based on the predetermined and defined criteria, as noted above. The Council also manages family conflicts, often anticipating them with the use of a Family Constitution or Family Charter.

The Board of Directors, made up of competent members and freed from the family issues, can fully perform its function. A communication process should be set up between the Board and the family. The Family Council should keep in mind the family values, forming the family groundwork and communicating these to the Board so that they have a better understanding of the company’s lifespan.

There are two different structures that have both proven to be necessary – the leadership of two CEOs: a Chief Executive Officer to manage the business and a Chief Emotional Officer to manage the family.

This is not about creating a complex and incomprehensible production plant, but simply about facilitating the coexistence of family owned industrial/or commercial assets and values with the reality of managing these assets in order to sustain and develop them. Given the importance of this sector for the Australian economy in terms of employment creation and new investments, family business’ major issues should not be overlooked.

This article has been provided by KPMG and the advice is designed to be general in nature.

For more information feel free to contact Dominic Pelligana, Bill Noye or one of KPMG’s national team of family business advisers.