Family Business Governance

One common story often told at family business gatherings goes thus: A family business patriarch keeps hearing about his son’s poor work habits as a manager at one of their stores. Finally, he summons his son to his office and reluctantly says, “You are doing a terrible job, and as your boss, I have no choice but to fire you.” Later, when the son comes home for dinner, his father greets him saying, “I’m sorry to hear you lost your job. How can I help you?”

This story exemplifies the dual reality every family member operating a family business faces. There is a constant tussle between balancing decisions that positively affect the family business and maintaining a cordial relationship between family members.

When non-family business partners commence operations, the issue of corporate governance is readily brought to the fore so as to formalize the governance process; usually not so when the business is owned by a family. However, due to the proliferation of family owned businesses, the need for such businesses to adopt a tailored and effective family business governance mechanism arises.

Family Business Governance refers to a well structured and balanced process that governs decisions made around the family, the business and the intersection of the two.

Family businesses come in different forms and sizes, from small mom-and-pop stores (such as small or medium sized businesses owned by a husband and wife, siblings, extended family members etc) to global companies (such as  Walmart, Johnson&Johnson, the Henry Ford Motor Company and the Dangote Group), and these businesses account for a significant share of the economy in the jurisdictions where they operate.  Job creation for family members and other employees, source of revenue for suppliers and governments, and general economic stability of the host communities, are some of the ways the family business supports the ecosystem. Hence, the  failure of these enterprises can have cataclysmic implications on economic growth, especially in developing economies

Just like we see generally in businesses, disagreements envenom relationships and could be fatal to the life of a business if no effective resolution is found. It therefore means that families in business can benefit from establishing a sound operating model. Principle 9 of the UK Institute of Directors Corporate Governance Principles for Unlisted Companies states that family run companies should establish family governance mechanisms that promote coordination and mutual understanding among family members as well as organize the relationship between family governance and corporate governance.

Here are some established best practices for families to consider as they evolve and formalize their family business governance practices:

• Clarify the overarching business priority. That is, whether to build a great business, maximise wealth or put the family first by creating and securing opportunities for the current generation and the future ones.
• Anticipate and provide solutions for flash points that can derail the success of the business and jeopardize family harmony. Such issues include leadership choices on who handles what aspect of the business, resolution of disputes, wealth sharing among family members etc.
• The family members should have a working understanding of the ownership structure (current and future). Every member should know who owns or is entitled to what.
• Establish a family council that is saddled with the responsibility of making decisions on policies that pertain to the intersection of the family and the business, including family employment, liquidity, succession, promotion, conflict resolution and communication policies.
• Determine the disciplinary/corrective actions to be applied to family members in the event of misconduct.
• Partnering with trusted professional advisers (such as corporate lawyers) with relevant experience can help avoid common pitfalls and imbue best practices into the development process. They can act as an independent sounding board for strategic business considerations. Another very important function of these trusted advisers is to facilitate the very difficult and sometimes raw conversations about succession planning, remuneration/profit sharing among family members, roles and involvement of various sections of the family in the business, disciplinary measures etc.

Regardless of where the family and the business are in their progression, implementing governance is always a worthwhile exercise.