Governance is Not Bureaucracy
“Our kitchen table is our board room.”
“I have a board meeting with myself every day.”
“The whole point of concentrated ownership is you don’t need governance processes designed for a dispersed shareholder base slowing you down.”
These are real reasons Wingspan has heard from family business and family offices – of significant scale – as to why their business doesn’t need a board or to adhere to widely followed best practices in corporate governance. Even the families that begrudgingly accept that good governance is like Popeye’s spinach strength elixir tend to put off doing anything about it until something (a health scare, litigation, an unexpected departure) brings the business to the brink of crisis.
We always find this remarkable! While much of our advisory work focuses on diminishing the risk of future fears and crises, in this case, there is an extensive, irrefutable body of research supporting the benefits of good governance on business operations and business performance today.
“A 2019 study by the Diligent Institute found that the top fifth of performers on corporate governance in the S&P 500 index outperformed the bottom fifth by 15% over a two-year period. It also found that “companies with corporate crises fueled by governance deficits underperformed their sectors by 35%, on average…two years after experiencing a corporate crisis companies underperformed in their sectors by 45%, on average.”
And in case that’s not enough evidence, S&P found similar outcomes:
“To test whether ESG scores, G in particular, correspond to future stock performance, we formed hypothetical, annually rebalanced quintile portfolios, and we ranked them in descending order by scores and tracked their forward 12-month performance… There was a clear distinction between these quintiles and the bottom quintile. Securities with the lowest governance scores, on average, underperformed (7.84%) those that ranked higher.”
Those of us who are avid Succession viewers also know that the board was the primary check on the family’s political posturing and internal conflict that threatened to sink Waystar RoyCo (and themselves).
So why do we see such reluctance to implement something that so obviously has the potential to do good for the family, the business, and its employees? We see three key drivers behind this. If any of these resonate with you or your family, we challenge you to reflect instead on the Wingspan perspective:
1. The belief that governance will lead the company to look like governments… filled with red tape and slow-moving processes. Especially in a first- or second-generation family business or family office, where decisions were historically made in the moment with little outside consultation or concern, looping in other stakeholders and forcing controls seems unnatural and burdensome.
Wingspan Perspective: For any business of scale, not having clear and distinct roles and responsibilities, dispersed decision-making authority, and appropriate checks and balances will actually slow down the business considerably. Without this, either all decisions must pass through the owners creating bottlenecks and reducing team accountability or insufficient controls opens the business up to fraud (both outcomes we’ve seen firsthand).
2. It’s not that easy and not that fun to do governance well. Putting in place an advisory or fiduciary board is the standard for good governance, but doing so effectively is so much more than simply gathering in a conference room once a quarter. For a board to be effective, there must be a clear mandate, transparent regular financial reporting, and a thoughtful mix of family, management, and independent directors. Not to mention that someone has to chair the meetings effectively to drive towards outcomes rather than letting the meetings devolve into family dinner banter or cajoling.
Wingspan Perspective: We can promise you that litigation or family conflict and the resulting avoidable financial strain on the business is a lot more work and significantly more painful than putting in place rigorous reporting and communicating it out to key shareholders and stakeholders. No one ever sees these things coming but you can rest assured without appropriate governance they will come sooner or later.
3. People are afraid to learn their baby is ugly… or at least may need a bath. It can be daunting for a family executive to open themselves up to scrutiny from other family members, or to let “outsiders” opine on how the family choses to run the businesses’ P&L and balance sheet.
Wingspan Perspective: This accountability is part of what drives businesses with good governance to have stronger performance. It causes family executives to be deliberate about the choices they are making and defend to themselves (so they can ultimately explain to others) the rationale behind certain operating and investment decisions. And if that isn’t enough, the outside perspective and industry best practices brought in by strong board members should more than justify the potential discomfort caused by transparency.
We challenge all readers to think about these perspectives, how it relates to them, and how they can help lead their family – with Wingspan or on their own – towards the benefits of good governance.
Want more content? Read more Wingspan Perspectives.
