The primary usefulness of governance to a family controlled enterprise, is as an enduring place and process for owner managers (insiders) to meet and work with non-management owners (outsiders), non-owner managers (professional management) and voices of loyalty, reason and commitment to the enterprise's long term success (directors independent of management).
In too many family businesses, the insiders resent disbursing dividends to the outsiders, while the outsiders, living far from the realities of the business, resent the "high" salaries and perks of the insiders. Assumptions abound. And, given the taboo of discussing issues of money or power in most families, conflict looms when some unifying authority figure retires or dies.
A well conceived and well executed program of governance, guided by advisors, trained and experienced in the mechanics of governance, is the best insurance for profitability of the business and peace in the family and that tactical nuclear war will be averted! Yet there are many other tangible benefits to the family controlled enterprise that follow from establishing effective governance.
- Credibility with non-family managers
Recruiting and retaining the highest quality manager is always an issue for smaller and middle market family firms. Not because managers want equity or control (phantom stock or the equivalent will do nicely), but because they fear the absence of checks and balances on entrepreneurial family business men and women.
The active presence of a board of directors or council of advisors, including using the board/council as an interview venue prior to hiring key managers, lends real credibility to any owner's claim that the family controls the business, but decisions are made in the best interest of the firm, not the family.
- Credibility with financial institutions
Financial institutions are similarly impressed by a private family controlled company with truly supervisory governance. A primary concern of all lenders to family business is how they will be repaid in the event of the death or disability of a new owner/manager.
Where there is a forum and a process in place and functioning to manage the process of management succession and to ensure that the best interests of the business continue to be the primary criterion for decision making, the impact can be favorable underwriting decisions, and even more favorable pricing when debt or equity capital is sought.
Moreover, knowing that a board is engaged in strategic review of operations or perhaps strategic planning, gives (as they say) "comfort" to the bank that the borrower is prudently managing their business affairs.
- Disaster management
We recently experienced, through a terrible plane crash, the loss of two brothers we know who owned 100% of the stock of their family business. While their team of senior managers were very able, only one had been on the board of directors for more than six months. The brothers' deaths left not only grieving widows and children, but also a total vacuum of authority at their company.
From mundane matters (who is authorised to sign cheques?) to the sublime (shall we sell the business?), the absence of a supervisory board of directors magnified problems faced by the family members who survived this tragedy.
- Co-ordination with non-management owners
Businesses grow linearly, but families grow exponentially. John D. Rockefeller begot John D. Rockefeller, Jr., who begot the "brothers", who begot 84 cousins. To fund the cousins' personal goals, a crown jewel of the family's holdings, Rockefeller Center, was refinanced and ultimately lost.
One cannot argue a priori that effective governance would have prevented this outcome. But in a world where intellectually able cousins, having both ownership interests in a family controlled enterprise and legitimate personal cash needs, a process for keeping them realistic regarding the business' affairs constitutes the primary defense to internecine warfare.
- Strategic planning
From our work over almost fifteen years with more than 200 substantial family controlled business enterprises, family offices and family foundations, a few general observations can be made. One is that such firms tend to be superb operators/marketers/manufacturers in the present, but relatively unversed in planning for the future.
Access to other owner/managers of similar enterprises as well as to academics and advisors, who serve on the board of directors or council of advisors, is often the most effective way for owner/managers of family controlled enterprises to overcome their resistance to strategic planning.
Read the article 'How To Create Effective Governance In A Family Controlled Enterprise - Council Of Advisors'
Read the article 'How To Create Effective Governance In A Family Controlled Enterprise - Advisory Council Meetings'
Author Credits
Richard L. Narva is a Partner at The Roseview Group. The Roseview Group advises entrepreneurs and entrepreneurial family controlled companies navigating organizational growth, change, continuity planning and capital market events. Please visit us on the web at www.roseview.com.