Michael Stolp

Governance in Family Enterprises

Michael Stolp, VP and Senior Business Advisor-BMC

Most family businesses fail or are sold to non-family owners before they reach the third generation. This is partially because family businesses often rely on trust and familial bonds to hold the business together. While the informality of family works for some, successful multi-generation family businesses have learned that as families grow and businesses increase in complexity, more formal governance structures and communications are required. Learn three easy steps to strengthening governance and communication in your family business.

In this article, we highlight three key lessons from the book Governance in Family Enterprises: Maximizing Economic and Emotional Success, a great read for family businesses interested in taking their governance structure and owner communications to the next level.

Define Owners’ Roles
Equity investors are generally interested in the performance of their business interests, but owners’ direct involvement frequently varies. It’s important for the ownership group to be clear about how they (as a group and individually) interface with the business and to establish protocols for how owners make decisions together, providing one voice and clear direction to the management team.

In most family businesses where owners and managers overlap, it is especially important to have very clear guidelines about which decisions fall to owners and which are the responsibility of managers. In order to better understand owners’ perceptions and minimize potential misunderstanding or miscommunication, use the table below to help your ownership group define and discuss their roles.

Actively involved in management.
Oversees board function and holds positions on board or committees.
Attentive to operational issues, business strategy and corporate culture, but less connected than operating and governing owners.
Strong emotional tie to the business, but not involved (and may not understand) strategy, management or governance.
Happy to receive dividends and benefits of the business; low or neutral emotional ownership and no responsibility for the business.
Interested in financial performance and keeps or sells shares based on performance; no emotional ownership in the business.
Source:  Aronoff, C.E. and Ward, J.L., "6 Kinds of Owners," in Family Business Ownership: How to be an Effective Shareholder (Palgrave Macmillan, 2002, pp. 7-9)

These categories may not be an exact match, but they’re a great starting place for discussion about the appropriate role of owners in your business. Owners may identify themselves in different categories base on their perspectives, interests and direct role in the business.

Where there are differences of opinion about how owners should be involved in the business, make sure the group has made a distinction between individuals who are solely owners and those who are owner/employees. From there, work to reach consensus surrounding the appropriate role of owners (as a group) and develop your business’ definition of what it means to be an owner. Clarity here will help focus owner discussions on owners’ issues, leaving appropriate operational and execution details to the management team.

Remember, there is no ‘right’ answer, just the right answer for your team and business.

Let Fresh Air In
Professional boards can strengthen a family business’ competitive advantage. Even for ‘Operating’ ownership groups where all owners are involved in the business, a professional board can provide the benefit of ‘letting fresh air’ into the business. Whether a fiduciary (formal) or advisory (informal) capacity, boards can balance economic and emotional value by:

Reviewing financial statements and providing a critical review of strategic business proposals.
Business leaders may benefit by exploring challenges, opportunities and threats with a board. Dialogues with boards can generate new ideas and lead to more informed decisions.
Involving non-family members in the selection process of key business leaders can help avoid nepotism, elevate succession planning and assure excellence in leaders' selection.
Non-family members extend a business' "radar" with different information, contacts and relationships.

Establishing a professional board does not mean removing existing owners from the boardroom, but is a continuation of the discussion about ownership roles. In fact, a professional board may simply mean professionalizing or formalizing the governance systems and processes of your existing board.

When including outside third parties on the board, many family businesses start small, bringing on one outside member to be involved in their existing board activities and processes. Some worry about losing control with the addition of outside board members. A common practice to alleviate these concerns involves various methods to ensure the family ownership group retains final say (through veto or voting processes) in major strategic decisions.

Focus Family Business Dialogues
It’s a timeless rule. Family businesses are healthier when communication is regular and constructive. As the business (and number of shareholders) grows, effective communications become more difficult and more important to the long-term success of the business as a family enterprise. Many businesses struggle to keep everyone on the same page when there are two or three owners. Imagine the challenge of aligning the needs, desires and opinions of a group of 30, 40 or even more shareholders. In family business, it does not take very many generations to build a shareholder group of this size.

Although the formality of communications with family-owners varies with size, family businesses with more than one family member should consider aligning their thoughts surrounding the following key questions:

  • What are our family business' goals for stability/risk, profitability, growth, productivity, focus/diversification, dividends, etc?
  • What is our employment policy for family members interested in working in the business?
  • What are our family business' shared values, history and desired relationship between the company and the owning family going forward?

These questions can help your ownership group identify areas of commonality and potential conflict. Clearly define areas of agreement to use them as a foundation and ‘touchstone’ to address differences of opinion constructively. If you identify fundamental and irreconcilable differences of opinion surrounding these questions, it may be a good time to consider a third party facilitator or consultant to assist in the process.

Build It Before You Need It
Governance systems, processes and structures are very difficult to develop when you’re facing an immediate decision or issue. Consider crafting ‘rules of entry’ to govern family member employment in the business when two family members are competing for the same job. It will be much easier for the family to agree on minimum standards and evaluation criteria before deciding whose daughter or son managers should select for the position.

Some say, ‘we’re a family and we trust one another to do the right thing – that’s all we need.’ While trust through family relationships is a key success factor for many operations, consider how the model scales to future generations of ownership and management. If you want to beat the statistics and maintain a successful family-owned enterprise for future generations, developing governance systems before they’re needed will go a long way towards reaching your goals..