The Benefits of Governance

The Benefits of Governance

Great family businesses are built on strategy, vision, values, and execution, but family businesses that endure across generations have an additional edge: governance. Governance becomes vital to a family business as it grows and confronts new opportunities, challenges, and critical questions about its future direction. “The growth and sustainability of a family business lies in the fine balance between the needs of the business and the expectations of family members,” notes Christophe Bernard, KPMG partner based in the French firm’s Paris office. “Effective governance of a family business can help improve the company’s performance and satisfy the expectations of family members.”

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Great family businesses are built on strategy, vision, values, and execution, but family businesses that endure across generations have an additional edge: governance. 

Governance becomes vital to a family business as it grows and confronts new opportunities, challenges, and critical questions about its future direction. “The growth and sustainability of a family business lies in the fine balance between the needs of the business and the expectations of family members,” notes Christophe Bernard, KPMG partner based in the French firm’s Paris office. “Effective governance of a family business can help improve the company’s performance and satisfy the expectations of family members.” 

Defining governance

Governance is a broad term that can encompass many aspects relevant to the running of a business; in short, however, it defines the rights and responsibilities of the various stakeholders in the business, determines how decisions will be made, and establishes checks and balances. And a central element of corporate governance is the role of the board. 

“The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and shareholders,” according to the OECD Principles of Corporate Governance1. There are family businesses that survive – and even thrive – across generations without boards or independent directors; however, in the experience of the Commissioners, these are the exception rather than the rule. “A board that includes independent directors can add value – to strategic planning, succession, execution – by bringing in new ideas, spurring innovation, and helping the owners make necessary, tough decisions,” notes Christine Blondel, adjunct professor of Entrepreneurship and Family Enterprise at the Wendel International Centre for Family Enterprise at INSEAD.

This perspective is consistent with the findings of a study conducted in the US of more than 80 family businesses run by the third or later generation that, as referenced in the IFC’s Family Business Governance Handbook, “showed that the existence of an active and outside (non-family-controlled) board was the most critical element in the survival and success of these companies.”2

Factors shaping boards

Boards – and directors – are not all the same. Contrary to Tolstoy’s line that “all happy families are alike,” all family businesses – whether successful or struggling – face different challenges, and their boards are shaped by different factors, including: 

  • The legal and regulatory obligations of the relevant geography – which may range from a highly regulated environment that dictates board composition and responsibilities, to no applicable laws at all, depending on the country in which the business is based.        
  • The company’s ownership structure – which may range from a business closely held by a few family members who see each other on a daily basis, to one with numerous, geographically dispersed distant family members, to inclusion of other investors, either through private equity investment or publicly traded stock.
  • The expectations and interests of key stakeholders including owners, other interested family members (such as the owners’ likely heirs), customers, and insurers.
  • The company’s attributes – size, resources, maturity, culture and level of complexity. 

Each family business is unique, and of course its needs will change over time. The key, as Toti Graham puts it, is to “have the family, the stockholders, and the business well-coordinated.” And it’s clear that family businesses with effective governance – including a board that brings experience, insight and objectivity to the table – are far better positioned to not only survive, but also thrive across generations.

Footnotes

1The OECD Principles of Corporate Governance are a nonbinding guidance established for public companies globally (and adaptable as appropriate for private companies), to provide an international benchmark for policymakers, investors, corporations and other stakeholders worldwide.

2IFC Family Business Handbook, Third Edition 2011, citing John Ward, Creating Effective Boards for Private Enterprises (Family Enterprise Publishers, 1991).

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