A family business may choose any one of a number of governance models such as an all-family board, a partially independent board, or an independent board, or even an advisory board. Whichever style of board is used, three elements serve as enabling forces: clarity of roles, responsibilities, and how decisions are made; an understanding of the culture—the vision and values—and how that impacts decision making and implementation; and communication—transparency and information flow that enables the board to fully understand the challenges and opportunities facing the business and add real value as the company refines its strategy, grooms new leaders, and continues to grow.
Clarity: Roles and Responsibilities
In a family business, there are family members, there are owners, there are members of management, and there is a board. In small businesses, these roles are likely to be filled by the same people, and decisions ranging from geographic expansion to estate planning to family vacation plans move fluidly.
However, businesses that endure across generations eventually grow to a point where they can no longer operate that way.
Following are recommendations and observations on common (and potential) roles and responsibilities of key stakeholders:
- Family: When the family grows large enough, a family council can be The family council may help the family preserve wealth through a family office that provides investment advice and estate planning; it may coordinate family philanthropy; and plan family gatherings. The family council can also be a good forum for developing policies regarding employment of family members. It should be clear, however, that the council is providing input and recommendations on this subject rather than making final decisions.
- Owners: The family council group and the owners group will usually have significant overlap in membership; however, they may not be identical for various reasons. For example, there may be outside investors, and/or there may be family members who are active in the family council but have transferred their shares in the business to other members of the family. Even when the membership of both groups is identical, there may be differences in decision rights; for example, one family member may own a greater percentage of shares (and therefore have a vote that carries more weight as an owner) than others.
In light of the high level of membership overlap and the informal nature of many family businesses, extra care may be needed to avoid the frequent confusion that arises between the role of the family council and the role of the owners. Binding decisions about the company are the purview of the owners and not the family council—it is the owners who elect the board and approve major decisions such as whether to issue public shares, make an acquisition, or sell the company.
- Board: The board governs the business on behalf of the owners. Boards operate through committees as well as through the full board.
- Management: Management runs the company under the leadership of the CEO, who reports to the board and/or owners.
Culture: Vision and Values
Family businesses tend to have a long-term vision and a deep sense of responsibility to and pride in the company that often bears the family name. A strong vision and commitment to operating in a responsible manner can serve as a touchstone when recruiting talent, from junior positions all the way up to the board, and inform decision making at every level. As the millennial generation – which is known for caring deeply about sustainability and the values of the companies they buy from, sell to, and work for – takes its place in the global economy, a company’s long-term vision and deeply rooted values can provide a strong competitive advantage.
Family members who have grown up steeped in the company’s values may take them for granted and assume that every company operates in the same way. Independent directors may be able to help the business view the vision and values—as a brand— through an external lens, to ensure that the company is communicating and leveraging them to full advantage. In addition, periodic review and adjustments to evolve the culture and vision (as needed) will maintain relevance, alignment with company strategy, and competitive advantage for generations to come.
Communication: Transparency – The more information directors have access to, the more all-encompassing and valuable their perspective and guidance can be. All boards, including those of large public companies, often face the inherent challenge of “information asymmetry,”i.e., the people running the company know more about it than outside directors. In a private family business, however, lack of information may be of a different order of magnitude altogether.
In family businesses, family members may desire to keep certain matters that are normally the purview of the board—such as executive compensation, succession considerations, or even business challenges—within the family. Extra care taken to build and maintain trust that the information will remain confidential and not be misused, may help independent directors gain access to important information over time as the family becomes comfortable with sharing sensitive information with the board.
The work to achieve and maintain clarity, culture, and communication is not easy; defining roles and responsibilities can be emotional and highly charged, sometimes involving months or even years of hard work. The effort works best when there is open and honest discussion without the emotion or time pressure of a precipitating crisis. Roles may need to be adjusted as circumstances change, culture must be reinforced to remain relevant, and communication must be ongoing.
Understand the governance framework—how are the various stakeholders (family, owners, board, and management) organised and what are their roles and responsibilities?
- Establish and maintain living, breathing charters that clearly document roles and responsibilities, and are reviewed and updated as needed.
- Understand the vision and keep it updated and top of mind as you guide the company.
Understand the culture and be a keeper of the culture. Monitor the extent to which the company’s values guide the organisation as a whole.
- Be alert to information asymmetry—and work to gain access to needed information by earning the family’s trust.
- Recognise that family issues and emotion may make it very difficult to define and enforce roles and decision rights, and help the owners find ways to break through.
This article is an extract from ‘Enduring Across Generations – How Boards Drive Value in Family Business’ published by KPMG in conjunction with WomenCompanyDirectors.