A family business may choose any one of a number of governance models such as an all-family board, a partially independent board, or an independent board, or even an advisory board.
This article is an extract from ‘Enduring Across Generations – How Boards Drive Value in Family Business’ published by KPMG in conjunction with WomenCompanyDirectors.
A family business may choose any one of a number of governance models such as an all-family board, a partially independent board, or an independent board, or even an advisory board. Whichever style of board is used, three elements serve as enabling forces: clarity of roles, responsibilities, and how decisions are made; an understanding of the culture—the vision and values—and how that impacts decision making and implementation; and communication—transparency and information flow that enables the board to fully understand the challenges and opportunities facing the business and add real value as the company refines its strategy, grooms new leaders, and continues to grow.
In a family business, there are family members, there are owners, there are members of management, and there is a board. In small businesses, these roles are likely to be filled by the same people, and decisions ranging from geographic expansion to estate planning to family vacation plans move fluidly. However, businesses that endure across generations eventually grow to a point where they can no longer operate that way. Following are recommendations and observations on common (and potential) roles and responsibilities of key stakeholders:
Family businesses tend to have a long-term vision and a deep sense of responsibility to and pride in the company that often bears the family name. A strong vision and commitment to operating in a responsible manner can serve as a touchstone when recruiting talent, from junior positions all the way up to the board, and inform decision-makinWomenCorporateDirectors at every level. As the millennial generation – which is known for caring deeply about sustainability and the values of the companies they buy from, sell to, and work for – takes its place in the global economy, a company’s long-term vision and deeply rooted values can provide a strong competitive advantage.
Family members who have grown up steeped in the company’s values may take them for granted and assume that every company operates in the same way. Independent directors may be able to help the business view the vision and values—as a brand— through an external lens, to ensure that the company is communicating and leveraging them to full advantage. In addition, periodic review and adjustments to evolve the culture and vision (as needed) will maintain relevance, alignment with company strategy, and competitive advantage for generations to come.
Communication: Transparency – The more information directors have access to, the more all-encompassing and valuable their perspective and guidance can be. All boards, including those of large public companies, often face the inherent challenge of “information asymmetry,”i.e., the people running the company know more about it than outside directors. In a private family business, however, lack of information may be of a different order of magnitude altogether.
In family businesses, family members may desire to keep certain matters that are normally the purview of the board—such as executive compensation, succession considerations, or even business challenges—within the family. Extra care taken to build and maintain trust that the information will remain confidential and not be misused, may help independent directors gain access to important information over time as the family becomes comfortable with sharing sensitive information with the board.
The work to achieve and maintain clarity, culture, and communication is not easy; defining roles and responsibilities can be emotional and highly charged, sometimes involving months or even years of hard work. The effort works best when there is open and honest discussion without the emotion or time pressure of a precipitating crisis. Roles may need to be adjusted as circumstances change, culture must be reinforced to remain relevant, and communication must be ongoing.