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.
This article is based on the KPMG & WCD White Paper : “Enduring across Generations”.
Let us consider the first of these three elements…
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. “In family businesses, things tend to get a little bit fuzzy sometimes. Directors need to know what decisions they can make and which ones must be made by the shareholders,” said Kitty Mulder, a Women Corporate Directors (WCD) Thought Leadership Council Member.
What follows are recommendations and observations on common (and potential) roles and responsibilities of key stakeholders:
When the family grows large enough, a family council can be helpful. The family council may help the family preserve wealth through a family office that provides investment advice and estate planning; it may coordinate family philanthropy; and it may plan family gatherings. The family council can also bea good forum for developing policies regarding employment of family members. It should be clear, however, that the council is providing input and recommendations on this subject rather than making final decisions.
The family council group and the owners group will usually have significant overlap in membership; however, they may not be identical for various reasons. For example, there may be outside investors, and/or there may be family members who are active in the family council but have transferred their shares in the business to other members of the family.
Even when the membership of both groups is identical, there may be differences in decision rights; for example, one family member may own a greater percentage of shares (and therefore have a vote that carries more weight as an owner) than others. In light of the high level of membership overlap and the informal nature of many family businesses, extra care may be needed to avoid the frequent confusion that arises between the role of the family council and the role of the owners.
Binding decisions about the company are the purview of the owners and not the family council—it is the owners who elect the board and approve major decisions such as whether to issue public shares, make an acquisition, or sell the company.
The board governs the business on behalf of the owners. Boards operate through committees as well as through the full board.
Management runs the company under the leadership of the CEO, who reports to the board and/or owners. Surprisingly, even some large, established private companies with strong governance and an independent board, operate through what Pat Milligan, a WCD Thought Leadership Commissioner, described as an unwritten “sense of the board.”
Written governance principles and committee charters are required in certain instances—for example for companies that are publicly traded on the New York Stock Exchange—and voluntarily following this practice serves private companies well, in the experience of the Commissioners.