Governance in the "Business" includes all the practices, processes and policies that help one guide the family business in the right direction, through a Family Business Board. It is a group of individuals who are appointed by the shareholders or owners of the business.
In a Family run enterprise, it is vital that the governance needs of the family are served by the Family Council while the governance needs of the business be served by an active board, preferably one with a majority of qualified, independent directors.
The role of the Board of Directors might vary from one family business to another. However, most of the boards are responsible for important functions like:
- Approving the Company’s Financial Statements
- Guiding the Company’s Business Strategy
- Reviewing the performance of the company’s senior leadership team
- Aiding the process for Family Business Succession.
The Board makes important decisions, keeping the best interests of the business in mind and by understanding the goals that need to be achieved.
Family Businesses with active boards tend to have faster revenue growth, more disciplined business practices, and more deliberate strategic planning processes.
Active boards provide in-house Experience and Expertise through qualified independent directors who have a rich, past experience. They also encourage self-discipline and bring in accountability in the management. Overall, they help enhance cooperative relations with various stakeholders like the Employees, Suppliers, Customers and the Community at Large.
It is advisable that the board should include qualified / competent individuals other than the company’s majority shareholders, President, Chief Executive Officer, or people who are in any other prominent position in the business. Family owned businesses tend to have family members (not having an active role in the day-to-day operations of the business) sitting on their Board of Directors. However, it is important that non-family members also be there on the board. A good mix of family and non-family members enables the board to provide the best possible unbiased guidance to the company.
Smaller boards are easy to manage but their feedback and oversight might prove insufficient. On the other hand, larger boards may lead to greater feedback and accountability but they may inhibit full participation. Depending upon the size of the business a board with a size of 7 to 10 members having distinct competencies can prove to be effective.
Family Representation in the Board
The family should work on the principles on how the members of the family could be appointed to the Board. As an illustration, one approach is that the family council could put in place some entry criteria for the Next Generation of a multi-generation family enterprise: (1) the family member should be actively involved in the business; (2) they should have experience of managing the P&L of a business; (3) they should have the experience of being on the board of a relatively smaller entity etc. It is generally recommended that the family should collectively decide and agree upon the principles for board representation based on the stage and size of their family enterprise.
The family members tend to play multiple roles at the same time - management positions, ownership roles, and family roles. Therefore, decision making influences and impacts all the 3 systems (or circles) differently. The above picture illustrates a few examples of the principles or policies that the family business board addresses.
One particular example can be that the family might decide that it wants the business to pay high dividends. That is the family’s right as shareholders. However, the board might perform a family-education role by pointing out the consequences. Excessive dividends drain business capital and can prevent reinvestment or needed R&D spending, weakening the business and potentially destroying the family’s economic foundation. When this message comes from independent directors, it may carry more weight than from a family member with a perceived vested interest.
Similarly, many family policy decisions require a clear and immediate understanding of their impact on the business. If the family decides to use business capital to finance entrepreneurial ventures by family members, for instance, the board must be involved in helping decide the interest rate, term of the loan and the degree of risk that is acceptable to the business. The family needs to be aware that such decisions also hurt the ability of business leaders to gauge the business’s performance and assure predictability of earnings.
In conclusion, a family business can benefit immensely with an active board that can help differentiate decision-making matters between family and the business. At the same time, it can serve as a mediator to help align decisions that serve the interest of the family and the business.