Family owned organisations face different challenges than most corporate organisations in relation to the implementation of corporate governance due to the nature of the business and the nature of the family involvement. LinkedIn Article
In many cases there are more than one family member involved in the business e.g. Father, Brother, Sister, Son and Daughter all working within the organisation with their own roles and responsibilities within the organisation.
In many family organisations the status quo is good and the business is performing well giving the shareholder increased value year on year. The challenged can be dramatically different depending on the family-life – working-life dynamic but this is a different topic and we will not be touching on that in this article.
Within the family owned and operated organisations the following should be considered when building corporate governance structures;
- Succession planning – there is a need for every business to prepare a succession plan but it is vital in a family business. In a corporate (used to mean non-family) environment if the CEO decided to leave or passes way there is many potential replacements in the world. Within a family business there may be multiple sons/daughters/brothers who have a share in the business and the inheritance may be clear but the leadership of the organisation may not be. E.g. who is being mentored to be the next CEO? How ready is he/she? Is there agreements and clarity between all family members who does what?
- Business continuity – radical changes in management or leadership in a family business can have radical issues in the market with customers, suppliers and partners. Additionally there may be personal liability expectations placed on the leader in the event of a major disruption that is not associated with the corporate environment. E.g. the business takes a major downturn for whatever reason and the entire family income is not in jeopardy due to the fact that all the family members work within the business and need the income to sustain their respective families. It is best to identify the eventualities and implement mitigation actions to protect the business and the family.
- Inheritance – it is vital to ensure your family is secure in the event of the owners death. Legal conventional or Shari’a provisions should be made when there is time and no pressure to make these arrangements. It is also important to ensure all parties know and understand your wishes as you will not be here to mediate after your death.
- Roles and Responsibilities – in any organisation clearly defined roles and responsibilities are vital to the smooth operation of the business, within a family business this is even more important as there is a family-life dynamic involved where you may be someone’s son at home but their boss in the office. Only clarity of we are at work and this is the clear roles and responsibilities can assist in reducing the challenges when decisions are hard in the business.
- Management systems – as with any business information is king and within the family business this is no different, clear policies, procedures, processes and reports need to be implemented to assist all parties in the businesses to understand how to preform their duties and who will make decisions including at what level or authority.
- Financial management – there can be a tendency in family businesses to say well the money in the bank account is mine as I own the company and to use the business funds as a personal bank account. This practice is not aligned with professional corporate governance structures and systems. The better approach is to have financial independence with suitable pay-outs on a predefined schedule to ensure the financial planning of the business is sound.
- Independence – one example I saw of creating independence in the finances was 3 brothers who owned a group of businesses, each had their strengths, decided to bring a 4th person into the business on a small shareholding basis to be the Financial Controller (FC) who they entrusted the responsibility to manage the financial situation of the group. The FC would ensure the business came first in all situations while ensuring the shareholders received their dividend at the end of the year. Another example I have seen is the Husband is the CEO and his Wife was the CFO with the 2 of them as the only signatories on the company bank account. Things were rosy for many years until there was some challenges with their son who need cash, the shareholders removed some cash from the business but could not repay it on-time and the employees and suppliers were not paid.
- Duty of Care to your employees & suppliers – your employees and suppliers enter into a legal agreement with you to provide a service for a pre-defined compensation. The business has a responsibility to meet its contractual agreements, in a family business there can be a perception that the family will bail the business out in hard times. Clear roles and responsibilities need to be maintained in this case to protect all parties.
- Board of Directors – in many family business the leader has many advisors but no formalised board. Having a Board of Directors as per the first articles in this series is a critical part of implementing a professional corporate governance system within your organisation. Within a family owned business this can be even more critical, the members can be the family who sit in a structured way to make strategic decisions about the business. It would be recommended to appoint an independent member to the board to ensure the natural family bias is balanced with some independent input.
- Equity and Equality – it is important to recognise the commitment of family members joining a family business and becoming part of that business future. It is also important to recognise some of the natural bias which can arise and needs to be balanced as much as possible e.g. 3 brothers own the business, one as CEO one as CFO and other as Chief Investment Officer (CIO), in this case it is not a natural assumption that the son of the CEO will be the future CEO. Individuals need to be assessed for what is the best role for their skills, experience, passions and qualifications. It is also important to keep in mind what is best for the organisation.
- Financial clarity – the need to have clarity on salaries, allowances, perks and profit share cannot be emphasised enough in a family businesses. Within the corporate governance system this ensures clarity on what is allowed and what is not allowed as the owners/family. Family members should not be seen to be treated differently than the employees e.g. family come to work at 11:00 and employee gets fired if later than 08:05.
- Performance Management – performance management policies need to be applied to all employees across the organisation regardless of family connections. Disciplinary action needs to be consistent where wayward family members are brought back in-line same as wayward employees.
- Singular strategy – Family organisations are no different than corporate organisations there is a need for a consistent, defined and communicated strategy which each and every employee is behind or they chose to exit the organisation as private agendas are not tolerated.
- Recruitment – Recruitment polices in family business need to balance the desire to have a family member in the business with the needs of the business and finding the right fit for the role.
In summary there are different challenges within a corporate business and a family business some are more complex and need some thought to make them manageable. The critical factor is to ensure the business is run like a business with as much separation of family-life with work-life and the protection of the future.
Creating a structured, fact and policy driven organisation is the key to maintaining a health organisation and family relationships. Learn More