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It’s a family affair - the need for governance in a family business

Posted on 18th April 2017 by Alexis Outram - What's trending?

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Family owned and managed businesses differ in many ways from their more corporate counterparts. Perhaps the biggest difference is the fact that they are run by members of one family with often multi generational involvement. As a result they are prone to differences in opinion and view points on both the vision and day to day running of the business.

In corporate businesses decisions will often be taken more formally in a Board meeting in accordance with a formal decision making process. In contrast the decisions involved in running a family business are as likely to be discussed over Sunday lunch and subject to the nuisances and emotions of all that makes a family a family. Equally it is often the case that many a family business has more than a sprinkling of entrepreneurs at their helm, individuals who are typically more excited by doing the business than managing the business.

Many family businesses can and do trade for more than one generation. However it seems with an ever changing world the future and success of such entities will be dependent on ensuring some form of protocol and guidelines are in place. Typically differing views on the direction and even management of a business can and does lead not only to disharmony but also to distractive fractions and overall decline in financial performance.  The counter point is that with good governance in place, a well run family business can yield good financial returns and also provide for that enhanced sense of fulfilment and pride.

Where then might those running a family business start when it comes to good governance and getting their house in order?

The starting point must be to collectively share what vision members have for the business and the values they attribute to them. Certainly a vision that focuses on business succession beyond the current generation for example is very different to that of a business that looks for an exit or sale. Family members also need to consider what is important in terms of the values they would like their business to be known for.

For some family businesses the exercise of sharing and agreeing a vision can be more or less challenging. Those who already have a more collective and harmonious vision for the future and agree on the values they wish to extol will undoubtedly find the task much easier. Those with less harmony may find the exercise is made easier by using a third party facilitator, a business acquaintance, or even better perhaps an unknown adviser.

The next step is to create what might be described as a family charter; a document or agreement that outlines the family’s vision for the business. In addition such a document can and should perhaps include other unique aspects often associated with the running of a family business such as guidelines as to the employment, role and responsibility of family members, their admission into the business and their cessation of association. The document may also want to cover financial rewards for family members who retain an interest but are not actively involved, as well as treatment of external investment or management.

It may also be desirable whilst working through this exercise to consider reaching agreement around how decisions will be taken along with the format for meetings and recording the outcomes of the same.

Hopefully at the end of this exercise those running their family business should be clearer about the decision making process, have relevant controls in place and have an agreed approach to sharing information as well as being better placed to deal with the unexpected. No doubt the business will still be the topic of conversation at many a family gathering but hopefully such conversation might be more healthy and harmonious.

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