Are You Ready for Governance?
Family business leaders tend to procrastinate when it comes to governance.
In a typical scenario, the business starts small under the first generation. Upon transfer to the next generation, exponential growth can occur. The increase in the size of the business and profits validate the CEO’s leadership to the family. The family’s wealth and prominence in the community are palpable. The family CEO creates a culture and policies that engender loyalty and long-tenured employees. It’s all going great!
But the shareholders at that point are typically from one generation. Not all work in the business. The family CEO makes business decisions and updates the other shareholders. Sometimes consultation happens, but they meet infrequently as a “board”.
Who is accountable?
In a privately held enterprise, quarterly earnings reports aren’t required. Business reviews, future projections, and strategic goals often aren’t mandated by the other family owners. Banks want some disclosure, but 2023 (or 2008 – pick your financial crisis) validate that bank lending is no proof of business viability.
What is the plan for the future?
The family business leader needs to be open and ready for the construction of governance. The catalyst for readiness can be a health crisis, uncertainty around succession, or simply the family CEO wanting to shift from an operating to an oversight role.
Implementing governance can seem daunting, but it mitigates risk by creating structures for strong business oversight and pathways for future family leadership. More importantly, implementing governance creates communication channels that keep the family bonded.
Formal business governance can also bring outside expertise into the family business. A business board should include non-family members and require quarterly business reviews with rigorous performance measurements. Non-family board members are selected for their industry expertise, network, or relationships, and ability to help the family CEO set strategy. Sometimes, members of the next generation serve as board observers, preparing them for later roles in the business or business oversight. Governance boards also mandate succession planning that can be a difficult topic for family businesses but paramount for future success of the business.
Particularly as family leaders seek to shift out of operating roles into board leadership only, comprehensive governance structures serve to protect family capital and ensure accountability within the business. Governance, Compensation and Nominating Committees within the Board reinforce the guardrails.
Governance at the family level
Family governance is another important tool, providing clarity and guidance to family members on their roles. Often, a Family Council serves as a platform for all family members to learn about the business from the family business leader and non-family executives. Family employment policies may require outside work experience before entering the family business. Entrance into the business through regular channels and advancement without special treatment set the standard for merit. Estate plans and shareholder transfer restrictions should be communicated at age-appropriate times. Planned communication removes uncertainty and family members understand expectations. The family connectedness can deepen.
Ultimately, governance creates the scaffolding needed for the family and businesses to succeed … are you ready?