This article is part of a series focused on family businesses (and family offices) and the key to their long-term success. They draw on observations I’ve made over the years working with a number of prominent families. Each post touches on one attribute that has helped them endure and thrive. (Find the first article here).
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#2: An effective governance framework
A family business will not endure without proper governance, because before long ulterior motives, competing agendas and organisational nepotism will begin to rot the foundation of the enterprise.
Good governance helps a family business:
- Achieve the returns it needs to succeed
- Manage staff – both family and non-family
- Separate the family from the business
- Manage disputes
- And more
A well thought out and carefully structured governance system will enable effective decision-making by the board and the family panel (or family council). This helps the family manage its relationship with the family business, and vice versa.
You see, a system of governance becomes essential as a family grows. Because as the number of family members and wealth increases the original family values that bound first generation members together can lose strength.
Also, as a family grows and multiple generations of family members come into the picture, not to mention their spouses and in-laws, further complexities arise. With it rivalries can surface, leading to infighting. This ends up costing the business and, if unchecked, can even lead to an enterprise’s downfall.
Another important reason why a solid governance framework is necessary is because of phenomenon that often crops up with family businesses and also family offices: the person at the top is unable to separate himself or herself from the business and doesn’t want to let go of the reins. Because of this intransigence, they generally tend to have a far rosier picture of the business than the rest of the family. Consequently, they do not take as seriously the implementation of a governance structure, which enables a business to successfully carry on in the event that, say, the head of the business departs one day. Let me stress that this point doesn’t only apply to the dynamic between a) the head of the family and b) the rest of the family; but also to the relationship between a) family in general and b) non-family professionals working in the business.
If you walk into a family business / office and it feels like the family alone decide everything and that other, non-family staff are just dancing to the family’s tune then that family is doing itself grave disservice and harm. I saw this with one family office that was a client of mine. There, the main individual – the father – practically made all decisions. The children followed whatever their father said. The non-family professionals, many of whom were, in most cases, far more qualified than the children, and, in some cases, more so than the father when it came to making investments, were not given any autonomy. What happened in that office was that every 6 months to a year non-family staff would leave and new people came in. There was little continuity in that respect. The family suffered as a result and missed out on many great investment opportunities.
Having independent oversight is another critical component of an effective governance framework and some argue it should be one of the first steps a family takes. This can be a supervisory board. Of course, some proportion of those boards will include family members. But the point is to have external advisors and professionals with relevant experience so as to tap into their knowledge, expertise and insights.
In summary, good governance will offer a family a roadmap, a shared vision and guidance on how to deal with difficult situations.
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For a comprehensive list of major family offices based around the world, click here.