For the family-owned enterprise, good governance makes a significant difference to the way they operate.
Family firms with effective governance practices are more likely to conduct strategic and succession planning. On average, they grow faster and are in business for longer periods. Moreover, they are more likely to develop important formal policies addressing critical family business issues such as family employment, financing, auditing, etc.
However, in spite of these demonstrated advantages, few family businesses in Australia have effective boards and regular family meetings. For example, the AXA Australia Family Business Research Unit has estimated that only approximately 30% of family enterprises in Australia have an independent board and of those who do, around 49% have regular board meetings.
ReasonsOne reason why so few family businesses have independent and effective boards could be attributed to a general lack of knowledge about governance issues, unawareness of the possibilities that these boards offer, and not being conversant with the functioning of these boards.
Active boards can play a key role in the future development of family businesses. A well-functioning board of directors can in fact be a critical resource for both family and business, given its central position between the family and ownership on the one hand – the family board and the shareholders’ meeting provide the board of directors with the guidelines on how to manage the business – and the business on the other.
So what does corporate governance really mean? In short, corporate governance is a system of processes and structures to direct, control and account for the business at the highest level.
- Directing in this context means being involved in decisions that are truly strategic in nature.
- Controlling means oversight of management performance and monitoring the achievement of objectives.
- Accounting for means reporting to those making legitimate demands for accountability on the part of the firm (for example shareholders, employees, the public at large, and other stakeholders).
The emerging common corporate governance issue, particularly among larger enterprises, is the adoption of committee structures as a means of delegating responsibility from the entire board to a smaller sub-board in relation to matters such as remuneration of management and selection of new board members. The issue for family firms is whether these committees should be wholly or mainly comprised of non-executive directors (i.e., persons independent of management).
Membership of board sub-committees is generally confined to directors. These committees are ideally governed by a charter and they report back results of separate meetings to the full board on a regular basis. The delegation of duties to sub-committees does not abdicate the board’s responsibilities, but is said to enable examination of issues in greater detail. Moreover, use of these committee structures enhances the monitoring role undertaken by the board of directors. For example, the remuneration committee is designed to review the terms and conditions of senior management, whereas the nomination committee may review the performance of the board, including the contribution of individual members, on a regular basis.
In summary, active boards that rely on effective sub-committees can play a key and significant role in the future development of family businesses.