Date posted: July 30, 2015

Great family businesses are built on strategy, vision, values, and execution; but family businesses that endure across generations have an additional edge: governance.

“Governance becomes vital to a family business as it grows and confronts new opportunities, challenges, and critical questions about its future direction.” Bill Noye, Family Business Services Leader, KPMG

Governance is a broad term that can encompass many aspects relevant to the running of a business; in short, however, it defines the rights and responsibilities of the various stakeholders in the business, determines how decisions will be made, and establishes checks and balances.

A central element of corporate governance is the role of a formal board of directors, however some family businesses find Advisory boards to be a valuable asset for both management and the board.

From KPMG’s experience, backed by our research through biennial KPMG/FBA Family Business Surveys, we know that the number of family businesses with formal governance mechanisms, including Advisory Boards, is increasing. In our 2013 survey, we also saw that those family businesses with a formal Advisory Board were outperforming those without. They felt they performed better both in terms of business performance and achievement of family-oriented goals compared to those that did not have formal advisory boards.” Bill Noye, Family Business Services Leader, KPMG

Advisory boards are made up of outside experts who bring niche skills or expertise to a company’s and board’s decision-making. Their advice is non-binding. They possess no legal or fiduciary responsibility, serve at the company’s (or owner’s) discretion, and are flexible in size, composition, and length of service—if any of those facets are even formalised at all.

Is an Advisory Board right for you?

  • Walking the walk. An advisory board provides intellectual capital, social capital, and creative capital. Members focus without distraction on specific issues of strategy and operations; they are a catalyst for change and progress.
  • Minimising risk, while maximising opportunity. Advisory boards can play an important role in risk oversight, as they can help evaluate strategies and analyse trends. Generally, advisory boards are risk-free investments; they have no fiduciary or legal responsibilities, while their fees and terms are limited.
  • Staying ahead of the moment. Advisory boards should have limited, well-defined missions. Often, they are used to anticipate the future, from deciding on a location for a new plant to evaluating market expansion opportunities. They can also be utilised to test a strategy’s soundness.
  • Anticipating the next big thing. Specialty advisory boards – technology, innovation, development – can be utilised in nearly every industry to focus solely on trends, whereas the fiduciary board has a broader focus.
  • Opening doors to new networks. As companies expand their geographic reach, an advisory board can provide a bigger perspective—on the ground throughout the world (or specific regions)—providing the local point of view in managing an expansion of both customers and vendors or suppliers.

A common question asked by family business owners is:

What governance mechanisms are appropriate for my business?

In its simplest form, governance in a family business relates to having:

  • A forum focused on the development of people and family harmony (a family forum/council), and
  • Establishing pre-agreed rules as to how the family will participate and be recognised (a family constitution/charter); and
  • A forum which focuses on business strategy, risk, accessing outside perspectives and developing future business leaders (a business board)

KPMG’s Private Enterprise team can assist family businesses in deciding what business governance structures (e.g. formal advisory board versus formal board of directors) are appropriate for their current and future needs. They can also assist in guiding families on an appropriate board composition, as well as how board meetings should be conducted to maximise their value.