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8.3 Corporate governance in family businesses

Strategic planning in family businesses is also connected with the so called corporate governance, which builds on the idea that for an effective management of family businesses it is necessary to consider the interests and needs of other interest groups, which are also influenced by the business activities (e.g. finance in the case of the partners of the family business owners, etc.). Effective corporate governance, namely in the bigger or growing family businesses, should assure the following:

Communicating the family values, mission, and long term vision to all family members
Keeping family members (especially those who are not involved in the business) informed about major business accomplishments, challenges, and strategic directions.
Establishing formal communication channels that allow family members to share their ideas, aspirations and issues (these channels are effective namely in bigger businesses, which are often managed in further generations by more, often furcate families)
Allowing the family to come together and make any necessary decisions.

Source: Http://www.ifc.org/wps/wcm/connect/6a9001004f9f5979933cff0098cb14b9/FamilyBusinessGovernance_Handbook_English.pdf?MOD=AJPERES

When building corporate governance, family businesses can find the following tools useful:

Family rules and values (sometimes also called “family constitution”) – these rules can define the substantial rules for common functioning of the family and the business – e.g. for transferring the family ownership to the next generation, and holding own shares, rules for selection of the successor for the top management of the business, rules and conditions for employing and rewarding family members. Further on in can include the rules for functioning of the family institutions (see the next point).
Family institutions: To enable businesses to achieve certain level of harmony between the needs of the business and family members, so called family institutions can be used (Jinks, Leedy and Teal, 2001). These can have a significant influence not only from the viewpoint of lowering risks emanating from the mingling of business with family system. They can also positively influence the entrepreneurship of the business (Mustakalio and Autio, 2002) and improve communication and overall harmony in the family. According to Neubauer and Lank (1998) family businesses can choose from the following types of family institutions (except the standard management bodies like executive and advisory boards):

Family gathering – informal regular meetings of family members (e.g. once to twice a year), where the business issues are discussed.
Family assembly, forum – more formalized, regular meetings of family members, where the business issues, development proposals, needs of individual family members are discussed, and where the information on the business operation are provided. Family gatherings usually happen several times a year, and are open to all family members, who are directly or indirectly influenced by the business activities. In some businesses, though, there also exist certain limitations of participation in the family gatherings – age of participants, participation of in-laws, limitations related to the voting rights etc.
Family council – usually established at the time, when the family gatherings become too big – overreach e.g. 30 members. In such case the family assembly elects a formalized family council, which represents the family assembly towards the business management (executive board and top management). Family council usually has 5-9 members elected by the family assembly based on the age, qualification and other preconditions for execution of this role. Council membership is usually given for a limited term.
Advisory council – usually formed by those businesses having only family members in their executive boards, which represents a risk of an insufficient representation of an external viewpoint. Advisory council is thus often formed by external members – experts in the given field.
Other family institutions – e.g. education committee or committees focusing on other fields – employment and carrier growth of family members, governance of funds delimited to purchase of shares from family members, who want to leave the business etc. (Neubauer and Lank, 1998).

Some of the specific challenges family businesses have to deal with can be addressed by adopting corporate governance principles within the company. Within this activity, there should be clearly defined the roles, responsibilities, rights, and interactions among the main governing bodies of the company. The responsibility for corporate governance tasks in a family business is generally shared among the owners, the boards, and the senior management. Family members, however, should take more responsibility in ensuring that their business is governed in a way that will make it viable and sustainable in the long term. Obligations of the family members are not limited to the governance of their company, but they are also responsible for the governance of their family and its relationship with the business. Setting a clear governance system early in the lifecycle of the family business can help to anticipate and resolve potential conflicts among family members on business issues. This allows family members to concentrate on other key issues such as further development of the business.

In addition to their own governance, family members have to ensure appropriate board structure of their company and its senior management. Competent, independent, and well organized board of directors enables setting the right strategy of the company, and adequate monitoring and evaluation of its managers’ performance. Professional and well-driven management is also essential for ensuring the everyday activities of the company. Selection of key company representatives and key managers should be based on their qualifications and performance and not on their relation to the family.

It is very important that families in business realize the importance of these issues and start building an appropriate corporate governance structure as soon as possible. Waiting until the size of the family and the business exceeds a certain level can greatly complicate solution of the existing conflicts between particular family members. Timely set and clear management structure makes it easier to maintain family cohesion and harmony of interests of members of the family and its business.