Six foundations of good governance for family businesses
Family businesses have unique challenges to other businesses. They are often built on a large degree of trust and informality and have the added complication of having to deal with family conflicts and problems within the business when in most businesses those issues would be ‘left at home’.
In order to be successful and scale-up in the modern world, family businesses need to have good governance in place or it’s unlikely that their strategies and goals will be achieved. Although you could easily write a book on this subject, this article just aims to highlight some of the key areas that people in family businesses should start thinking about, if they have not done so already.
The very first thing to say, is that all of the family members need to sit down and start talking about these issues. All too often families dance around the elephant in the room. Until the nettle is grasped the real challenges facing the business cannot be addressed.
It is critical that the best people for the job manage the right areas of the business, whether that be a family member or an external employee. Again, a common mistake for family businesses is to introduce children or other family members in to management roles within a business when they do not have the skill set or experience to fulfil the role. If the plan is for children and other family members to take up management roles within the business then plans need to be put in place to involve and develop those individuals over a prolonged period of time and be clear as to which individuals are going to be responsible for which aspects of management within the business. If the business is to grow and scale-up, one person cannot do it all.
As you might expect, how much money different family members receive is one of the most common causes of family disputes. A family needs to have clarity from the outset as to what each family member is and isn’t doing and how they will each get paid for fulfilling their role (whether that is within or outside the business itself). The roles of employees, directors, non-executive directors, and shareholders need to be clearly separated and remuneration packages for each role agreed in advance and set out in black and white. This allows all family members to know how each is to be remunerated and why, rather than it being left to a more ad-hoc arrangement, or decisions made based on family needs rather than fair market amounts for the role they are fulfilling.
Quite often, all or the vast majority of the ownership of a family business lies with the ‘head of the family’ and often that person is reluctant for that to change even though they say they want to “pass the business on to my children” and for “my children to work in and take-over the business”. However, careful planning is often needed in order to pass the ownership to the right family members at the right time, in a tax efficient manner.
DECISION MAKING / CONTROL
Once there is more than one owner of the business or family members are brought in to do specific management roles, careful thought needs to be given as to who has what authority to make what decisions. There is no point in passing on ownership to family members or making them directors if the control of all decisions remains with one or two people. A balance needs to be struck and then documented as to what decisions can be made by each individual and then what big key decisions need the backing of a predetermined percentage of the owners. Once the separation of powers is agreed, these need to be respected and the decisions made allowed to stand.
As you will be aware, none of the areas above happen overnight and careful thought and planning is needed over several years (or even decades) so that the balance of each of the above areas is right at all times and to ensure that the right family members develop, train, grow and get integrated into the business. This will allow them to feel committed and adequately rewarded for their input and to clearly see the plan for the future of the business and their role within it. Without this, all too often family members become disinterested in the family business and conflicts arise between the founder and other family members.
Putting in place robust governance structures for family businesses is entirely normal and needs to be done if you want your family business to stand the test of time. Given the added complexities and unique personal relationships for family businesses, it can often prove helpful to work with an independent party (such as your lawyer or accountant) so that they can advise on suitable frameworks to ensure the business is put at the heart of all decisions made!