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May 2021 < Back

GOVERNANCE IN FAMILY BUSINESS

Managing family business involves managing both - the family and the business. The CEO of a non-family business has to manage sales, supply chain, talent and report attractive financial results to satisfy the expectations of shareholders.

A CEO of family business (remember that he is a family member too) has a difficult task. S/he faces the task of keeping the family together and manage various forms of differences in decision-making that impact the business and its stakeholders. This makes the family business more vulnerable.

'Family' and 'Business' are often described as oxymoron

By the term oxymoron, we are referring to two fundamentally contradictory entities by nature. The family is an emotional system that demands equality while the business demands rationalistic approach. Family is described as socialistic and business is capitalistic in its nature.

In reality, Family and Business are both collaborative and conflicting - these dynamics cannot be managed in isolation but as a mutually occurring phenomenon

The family system plays a supportive role by providing 'family capital' financial and non-financial resources like talent/skills, sacrifices of personal comforts, building good work culture, and emotional ownership. In this collaborative or supportive role, It serves a 'lifeline'

On the other hand, the family can become a 'bottleneck', if for instance, family members who work in the business expect a much higher remuneration/ special perks, thereby treating the business as an entitlement. In such circumstances, the family may end up draining the resources of business without any regard to the needs of the business.

Three circles of Family Business & complexities

Three circles model of family Business system

The Three-Circle Model of the Family Business System shows three interdependent and overlapping groups:family, ownership and business.

The Model identifies where key people are located in the system and think about different roles that family members have: being a family owner, or a family employee. These overlapping areas in the model indicate role overlaps and potential role confusion." - John Davis

Each of the seven zones of the diagram represent interest groups with their own viewpoints, goals concerns, and dynamics. The views of each interest group are legitimate and deserve to be respected. No one viewpoint is more legitimate than another but the different viewpoints must be integrated in order to set future direction for the family business system. The long-term success of family business systems depends on the functioning and mutual support of each of these groups.

Source: John Davis "How Three Circles Changed the Way We Understand Family Business", Cambridge Family Enterprise Press 2018

Complexities

Complexities increase as the family expands, bringing in adult family members and their families like spouses or in-laws and next generation members.

This makes it vital for a family business to engage in strategic planning for the family's future and also simultaneously plan for the growth and expansion of the business. This way, it will enable more family talent to contribute to the success of business and generate sufficient wealth to address the growing needs of the family

Need for Family Business Governance

The solution lies in putting in place, the right systems and structures which will take care of balancing the family and business to manage such complexities.

'Family Business Governance' = 'family governance + business governance'

To operationalize the Governance systems, structures have to be put in place clearly defining the composition, functions, roles and responsibilities of each of its constituents.

  • In the family governance system, we have family council, family business board/ or family business forum.
  • In the business, the corporate governance system functions through the Corporate Board.

Many family owned businesses drift inconclusively into haphazard and destructive patterns by negligence, complacency or tentativeness. The history of family business is full of such examples of what can happen in the absence of effective governance. The founder's life time is called the 'golden period' to initiate the governance initiative.

JOHN DOE* FAMILY

In one of the South African retail chain, the founder John Sr. took a decision to retire (after working for 40 years in family the business he founded along with his 3 siblings) to join a political position. John Senior nominated his elder son John Jr. as successor who was also accepted by his other 3 siblings. But to their misfortune, John Jr., passed away. The siblings made his son- John II as the CEO. The first question John II faced from his cousins was "what is our share in ownership?" John II took the help of a family business consultant from a University. He studied MBA and put it in place a governance system.

*Pseudonyms (fictitious names) have been mentioned to protect confidentiality.

The main procedure of creating family governance is to establish family forums (family platforms - Family Council, Family Business Forum, Owners' Council) for discussion of vital issues both 'hard and soft' issues.

Hard issues pertain to business ownership, succession plan, holding structure, share holders' agreements, professionalization. Soft issues relate to Values, Vision, Mission, philanthropy, communication, socialization, code of conduct and behavior etc.

Most of the problems of family business are common and predictable. A list of such issues have to be anticipated by the family and addressed through various family polices. As the adage goes - "prevention is better than cure", in the case of Family Business it is necessary to anticipate- and put in place policies before the problem arises. Family businesses should become proactive than reactive. That is essence of Family Business Governance. Family Constitution or Family Charter by whatever name it is called is an instrument or document by which the 'Family Governance System' is created and operationalized.

Featured Video
Transformation and change in Family Business- Ross Ellenhorn

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PFBI Connect is conceptualised, designed, edited and published by PFBI. All the articles and news are researched, selected and suitably edited at the discretion of the editorial team. All rights reserved. Information and data featured in PFBI Connect cannot be printed or reproduced without prior approval.

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