Family-owned businesses are significant creators of wealth, employment and opportunity in our communities. A successful family business can continue to thrive for generations, but the nature and complexity of many such organisations demands effective governance to enable sustainable intergenerational value creation.
Additionally, the pandemic has created uncertainty that reinforces the need for boards to be fit for the future and be well equipped to successfully seize opportunities for their business. Good governance is at the heart of this.
Good governance starts with role clarity on the board. Unfortunately, the separation of roles of the owners, family, management and the board can sometimes become blurred in a family run organisation. Passionate owners and family members can be tempted to get involved in many aspects of the business, from decision making on the board to day-to-day management. It is family boards that have a clear understanding of how they will work to add value to the company that will be most effective. In particular, in helping to steward the creation of value and demonstrate this through their contribution to the board.
Diverse board composition
The board of directors at a family business has to be able to see the “wood for the trees” and this is where separation from the day-to-day management of the organisation becomes critical. The recruitment of external directors that can bring the perspective of distance, additional skills, different demographics, experience, thinking styles and circles of influence can add significant value to the boards of family run firms. Recruiting incompetent directors or directors that are friends or family but simply don’t have the skills, perspective and calibre to be effective is one of the most common and expensive mistakes that can be made.
Good boards have four lines of sight and enact effective processes to ensure that each perspective adds value:
- Oversight: Boards at family-owned businesses must have processes in place to ensure effective oversight and accountability.
- Insight: Effective boards understand the company, the financial engine and competitive edge of the organisation and the external business environment. This insight drives a more objective and enabling assessment of performance and strategy.
- Foresight: The ability to anticipate, to see what is coming and the future forces that will impact the competitiveness and sustainability of the business is critical to effective understanding of risk and development of strategy.
- Hindsight: Effective boards can bring significant company and family knowledge, the hindsight to remember previous initiatives and reflect on the good, bad and ugly learnings from the past.
Additionally, the board has a critical responsibility for ensuring proper processes are in place to review the leader of the management team, the CEO – a role that has been under huge pressure during the pandemic. It’s essential that there are effective processes in place to evaluate their performance, succession and transition. Boards at family businesses must also ensure the processes for selection, appointment, induction, review, succession planning and exit of directors remains effective, so the board remains fit for the future.
Strong board relationships
Relationships between board members, the board and the owners of a family business as well as the management team, particularly the CEO, must support the creation of value. Ideally boards will leave the family baggage out of the family business and, in particular, the boardroom. Boards must also have good relationships with management, with the company secretary and key stakeholders. The most important relationship in the governance system is between the chairman and the CEO. It must be built on honesty, candour and should be a relationship where the chairman and CEO are friendly but never ever seen as friends.
A good culture aligned with the values of the family and the business is critical for a successful organisation. Effective boards recognise that they are both custodians and shapers of the culture at their business. Custodians take the valuable and good parts of the culture forward to future generations, while shapers evolve the culture to remove elements that are not fit for the future. Governments, employees and regulators are all increasing their focus on culture. The role of the board in building culture is important with the risk that directors will become increasingly liable for poor company culture, which can lead to misconduct and damage to the reputation of the company, the family owners and the board.
Family businesses are different to other businesses in a number of ways, but one thing that is not is the importance of delivering good governance. Doing so can add significant value and help any company better navigate the minefield that is business. Boards at family-owned organisations must therefore sweat the governance to ensure they are effective and fit for the future. This requires role clarity, the right skills and diversity on the board, having effective processes in place, strong relationships, and a good culture aligned with the values of the business.