Sunday, August 9, 2020
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In a Word: Governance

In the family business setting, the term governance can take a variety of forms ranging from the very formal to the very casual. But no matter what shape it takes, it is all for the purpose of establishing how the business is run, from hiring practices to communication protocols. It can also include structures such as a board of directors or a less-formal family council. Despite a tendency for many family firms to believe that formal governance practices are needless, the need for such practices will surely become evident as the family business grows, evolves and diversifies.

Indeed, family businesses may even stand to gain more than a non-family business by establishing governance policies in order to ensure that family emotion doesn’t outweigh business objectivity in a variety of decision areas. Through established governance practices, the family business can gain credibility with investors, customers, the community and its own employees. Fortunately, family businesses already more readily adopt long-term thinking into their strategies, and governance policies fit right in with this thinking.

For the family business, governance practices provide a wealth of benefits:

  • Establishing a strategic direction for the family business which all initiatives and conduct must follow
  • Facilitating communication among stakeholders at the family level and at the business level for decision making
  • Preserving family unity and reducing disputes by removing “gray areas” in decision making
  • Clarifying roles and responsibilities, thereby encouraging accountability and responsibility
  • Bolstering investor confidence
  • Improving public perception of management and corporate responsibility
  • Increasing understanding among family business owners of the business structure and growth patterns, which can assist in strategic planning
  • Providing authority sufficient for business leaders to guide the operation of the business without requiring the board of directors or family council to step in to make decisions regarding minor details

If your family business could improve in any of these ways, formalizing some governance practices is likely in order. But as you consider governance practices, don’t stop at the business. Because family businesses are a more complex lot, they can benefit from additional layers of governance practices that guide the stakeholders on family, ownership and business levels. The needs of all three groups and the individuals within those groups, in whatever manner they overlap roles between family, owner and employee, must be met by governance practices established for the entire family business dynamic. (For more on the family dynamic, see The Full Circle of Family Business Dynamics.)

As the family business and its dynamic change, so too must its governance policies and structures. For example, a first generation, small family business may function very well with a small gathering of family members, owners and managers, whereas a third generation, large family business may demand a complex organizational hierarchy, a board of directors and an extended, multi-generation family council. As the business grows and ownership diversifies, it becomes more and more difficult to facilitate proper communication and stakeholder alignment without formal governance practices in place.

Whatever the governance structure, it must take into account all interested groups: the family, the business and the owners. Therefore, it must create parallel practices that accommodate the needs of all three interrelated groups. The family council creates family policies (such as those pertaining to family values, succession and family member compensation) that must align with those in place for the business, and vice versa.

  • As your family business approaches establishing or revising its governance practices, keep the following suggestions in mind:
  • Frame policies and procedures with a long-term perspective, rather than a short-term one.
  • Be prepared for disputes when establishing procedures as different family members and owners share differing views.
  • Be prepared to periodically review and update, if needed, all governance policies.
  • Seek the assistance of outside, objective counsel as needed. This includes the possibility of forming an independent board of directors.
  • Create measures by which your owners and managers are held accountable in adhering to the family business governance policies.

Without governance policies in place, your family, business owners and employees may resort to a variety of unfortunate behaviors or tendencies, such as forming factions, keeping secrets from the various family business dynamic groups and promoting unfair hiring or compensation practices. No governance policies are a guarantee of total harmony within the family business, but they can go a long way toward reducing tension, improving effective communication and promoting consistency within the business.

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