Family Business Governances issues and strategies
By S V M Sastry
Senior Advisor - PFBI
February 06, 2015
Resistance to Resilience
Family businesses start contemplating on governance when faced with challenges or triggered by certain events, when the problems become unavoidable or due to the curiosity generated by the new awareness.
But they are faced with Resistance of two kinds
- Resistance to start the process arising out of a deep fear of opening ‘Pandora’s Box” like somepeople do not go to a doctor lest he may unearth serious problems. .
- Start and then give up when confronted with problems like opposition by family members,differences, cost, time etc.
Development of Family Business governance requires courage to start, determination to persist and
develop resilience in the face of obstacles and problems. It also requires strategic thinking to see the
Big Picture, have a Long Term view, shared vision, experience self-discovery of family identity and
values besides installing certain crucial policies for sustaining and perpetuating the family business
Critical issues of family business
Lack of Succession planning is the top most potential risk and critical for sustaining the family business
through generations. Succession is not an event but a continuous process. As said humorously, “there
are three problems in Family Business—Succession, Succession and Succession!!” Succession involves
besides ownership, the leadership (who should be the next head of the group or company) to pass on
non-monetary assets like values, network, culture etc.
Likewise the policy of managing and resolving differences is an endemic and continuous process, which
can be neglected only at the risk of disaster.
Ownership clarity is another key factor which cannot be neglected. Some family businesses create
complicated trust structures with interlocking ownerships- on the advice of tax consultants and legal
pundits- this is called “tunneling”, with a view to undermine non family shareholders, tax avoidance etc.
Under the ownership- it has also to be decided what should be the holding structure, who should be
given ownership, voting rights, valuation, exit policy etc. All the ownership issues are normally governed
by a legal document – a Share Holders’ Agreement.
In all the above issues, there are many options for which the pros and cons have to be understood and decided by the family.
Steps involved in writing the Family Charter
The three steps involved in creation of governance system are:
- Awareness - to get sensitized about benefits and potential problems, .
- Education - to understand and identify the issues of family business, the best practices, the processes involved in evolution of governance
- Development - to draw a Road Map, start on the building of governance systems by creating mechanisms/ structures to give shape to the family charter. .
It is necessary that at all these stages, all the family members should be involved to ensure their conviction and commitment.
The process of family charter concludes with the presentation of the charter to the family members to confirm their commitment and sign the document.
The best time to start the family charter is the founder’s life time (called the Golden Period) as founder
has the formal and moral authority to drive the process. The other alternative is to start at the stage of
sibling partnership when the relationships are healthy and business is doing well and this is the time
when the third gen comes up and starts questioning about various issues like ownership, succession,
decision making process, and entry norms etc. As the family grows, ownership is diluted due to
repeated divisions and distributions. Besides having too many owners like cousins in third and fourth
generations not working in the business and living in different and distant places etc.,effective
governance systems at this stage will become a challenge for communication, decision making,
sustained interest/ participation and so in many cases, it becomes not feasible.
Moving from Reactivity to Proactivity and from Resistance to Resilience is the key. The sooner the
paradigm is recognized, better the chances to activate the family business governance for the long term benefit.