Good governance helps family businesses

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Why good governance is so important for family businesses

Family businesses are the backbone of our economy. They face their own set of problems and opportunities which are often exacerbated and amplified in the arena of a family. It can be hard to separate family and business life, leading to increased stress for everyone. The statistics are staggering. Only 30% of family businesses make it to the second generation, and only 12% to the third generation. Most family businesses don’t think too much about governance, but taking a leaf out of the book of larger companies which have been around for years and survived constant changes in personnel can help. In this blog, we highlight the benefits of good governance to a family business.

Some of the distinctive problems faced by family businesses include communication among family members, perceptions of working with the company, succession planning and leadership development.

Communication can be difficult if there is a history of dominant / submissive personalities. A young family member coming up through the ranks may be hampered from fully participating in decision making by being overly aware of a family hierarchy. This may result in fresh, new ideas not being brought forward or being ignored if they are, leading to a spiral of silence.

Family businesses are often founded in order to provide a living not just for the founder but the whole family. As the company expands, there is a need to bring in additional staff. There can be a perception that no matter how well someone performs in their job, they will always be second best to a family member who will have a job for life, regardless of performance. This can be off-putting to capable outsiders.

In relation to succession planning and leadership development, there is a temptation for family businesses to ignore these crucial business areas. Some people may feel it is ‘unthinkable’ that the organisation might be run by anyone but the founder. This can lead to a lack of development of those who might run the company in future.

There is an understandable reluctance of family businesses to embrace principles of good governance such as:

  • Having a diverse and independent board
  • Regularly assessing board performance
  • Engaging with stakeholders in the development of company strategy
  • Challenging the executive in relation to direction and performance
  • The board having responsibility for setting the remuneration of the senior management team and overseeing the corporate risk register

After all, Steve Jobs was fired from his own company!

However, there are many benefits to adopting these principles as they lead to the board being more objective, open to change and outward looking. A strong board will challenge managers to justify how things are done, and ‘because that’s how we’ve always done them’ doesn’t fly in the boardroom!

Getting independent non-executive directors on to your board team is the first step in challenging old ways of doing things. New board members, properly recruited for their skills and experience, bring objective thinking and unbiased opinions. They can fill out skills gaps on the board, which is vital when founding family members have extensive skills in the delivery of their product or service, but may not have planning and development skills necessary to take the business to the next level. External board members can also bring a network of contacts which open up new doors to the business. This is particularly beneficial when family members have the same circles of friends and contacts.

Non-executive directors will change behaviours in the boardroom. They are more likely to question the status quo, and give new ideas a fair hearing. They will focus on objectives, rather than personalities, which is extremely useful in making good decisions. They can also mediate between family members in conflict, due to their objectivity and independence.

If you are a family business thinking about improving your company’s governance by taking on new non-executive directors, you should check out the Leading Governance website for more information on governance best practice. Make sure that new board members share the values of your business, and avoid people who have been involved with your company in the past such as professional advisors, customers or retired employees as these people may have fixed ideas on how the business should be run.

Instead recruit truly independent board members with skills, knowledge experience, personal attributes and connections which will really contribute to your business. As for Steve Jobs, while being forced out of his own company was traumatic, it ultimately led to one of the most successful companies of all time, and one of the most impressive comebacks for Jobs himself!

Some useful reading –

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