"We've got a non-family CFO and to be honest we don't know what he's doing all the time. He's got full access to the bank accounts and everything else. Occasionally we have time to look at bank statements, but if he was a dishonest type of guy, he could probably do some serious damage. We just don't know or have the experience to understand what to put in place to monitor that." - KPMG in Australia focus group participant
Governance has been described as the ‘way we do things around here’. More formally, it’s about the structures, frameworks, controls, accountabilities and responsibilities that together help a family business meet its strategic objectives and manage risks.
Public discussion of corporate governance focuses on the big end of town, notably public companies. Yet it’s also relevant to family firms, although this relevance may not be apparent from KPMG and Family Business Australia’s Family Business Survey 2011.
|Business management team||82||18|
|Management and governance structures||67.5||32.5|
|Performace evaluation indicators||62||38|
|Informal Board of Directors/Governing Body||46.5||53.5|
|Formal Board or Directors/Governing Body||39||61|
|Formal feedback to family members about business matters||38||62|
|Self assessment of the board of directors||34||66|
|Formal feedback to all shareholders about business matters||34||66|
|Independent review of the management team||23||77|
In assessing these results, it’s important to remember that many respondent businesses were relatively small – 50% reported annual turnover of less than AU$6 million. More than half had fewer than 20 employees. Many of these businesses didn’t need, and couldn’t justify, all of the governance structures required of larger organisations.
Nevertheless, it is concerning that more than half of all the surveyed firms had no board of directors or governing body, formal or otherwise. Two-thirds did not have a family council and nearly as many failed to provide family members with formal feedback about business matters. Three-quarters lacked independent review of their management team’s performance.
And yet, 70% of respondents considered governance structures were an important element of their businesses, which perhaps suggests that the governance of family companies often reflects informal processes and arrangements that, in many instances, seem to work quite well in practice.
Does the fact that key figures in many family businesses are also family members absolve them from following good governance practice? Does the rigour of family scrutiny match that of outsiders? Can external directors and managers add value and different perspectives to the business? Many family businesses are probably not considering these questions.
It’s encouraging that significant numbers of outsiders are holding down management and non-executive board positions in Australian family businesses. But of those with governance structures in place, when asked about the adequacy of said structures, just over a third thought their existing governance structures were adequate for the needs of the business, and only 48% thought minor or major changes could be made.
When compared with the results of the KPMG/FBA Survey of the Next Generation 2010, where only 21% said their structures were adequate, and over 60% said some change was required, a generational gap is definitely evident.
Respondents were asked what they thought would be the priorities of the next generation member taking over the business – only 4% thought their ‘next gen’ successors would treat governance matters as a priority, whereas the 2010 Next Generation report revealed that more than 23% would make governance structures their key priority.
How would you say your family business stacks up to your Australian counterparts in governance practices and priorities?