This article is an extract from ‘Enduring Across Generations – How Boards Drive Value in Family Business’ published by KPMG in conjunction with WomenCompanyDirectors
For any business, governance is important. Even if it’s a family-owned business, the people chosen to drive the company to success have an important job to do.
A recent report from Women Corporate Directors and KPMG was compiled to explore how an effective board can be used to set family-owned businesses up for sustainable success. This report—Enduring Across Generations: How Boards Drive Value in Family-Owned Businesses—includes practical insights, valuable lessons and sensible governance recommendations offered by owners, board members, executives and advisors, all with decades of experience in family business across the globe.
Today we’ll be taking a look at the role of the board and some issues that are likely to be faced in the family-owned business when it comes to nurturing and fostering talent.
When it comes to matters of human talent, monitoring performance, linking compensation to business objectives and planning for (and implementing) succession, a company’s board plays a vital role. In a family business, this can get complicated when there are family dynamics or feelings to consider. Directors can be used to alleviate these complicating factors if they are objective and can hold the family’s respect and trust, by playing the role of facilitator when it comes to decision making.
Succession is always a tough discussion to have. Many family businesses have experienced an owner or CEO who does not allow any discussion of succession planning, because he’s convinced he’ll live forever.
There is also the possibility that an owner or CEO might be reluctant to name his or her successor for other reasons; like sidestepping the issue of having to choose one child over another or avoiding the simple fact that there is no qualified successor within the family.
Succession planning – both long-term and as a plan that can be activated immediately in the face of crisis—is crucial to the company’s survival and it is the board’s first responsibility to ensure that such plans are in place.
While most corporate boards begin the succession process as soon as a new CEO is in place and keep it on the agenda for discussion at least once a year, owners may be reluctant to approach the topic.
This is where external directors with experience in other family-owned businesses can help by being advising on the importance of succession in business continuity and offering clarity on what is required from the next leader.
These individuals can also offer an objective assessment of how the strengths and skills of potential successors measure against the role requirements and can point out any shortcomings.
While CEO succession is an important issue there are still other company roles to think about. From an operational perspective, the board needs to know that there are plans in place address what should happen if any other key talent is lost. Considering other company roles is also a way of keeping talented family members engaged in the business even if they are not going to become the next CEO.
Not everyone wants to join the family business and next generation should only join if they’re passionate about it.
It’s the board’s responsibility to help family members understand that there can be roles for them even if they are not going to run the company and to encourage them to keep the family business running for the benefit of generations still to come, even if they choose not to embrace leadership.
Here, the board can assist the family in pinpointing skills that the next generation of leaders will need, and can work with the company to create a growth development plan that includes mentorship and earning business experience.
When it comes time to hand over the reins, family members who have spent their lives devoted to running the business might have a hard time finding other ways to channel their energy. When it’s time to step down, manage the transition to ensure there is no conflict or confusion.
A smart way to deal with this shift in leadership is to make use of a director that can serve as a bridge between the board and previous leader. The key to resolving intergenerational tension is to enable the previous leaders to maintain a connection to the company and provide wisdom in a way that does not disrupt the business or compromise control of the company from the current owners, board and leadership.
Family businesses that grow quickly tend to have an informal approach to compensation, often forgetting to consult the board on matters of money thinking it a sensitive family affair.
In terms of legalities, there are no obligations on private companies to disclose executive compensation so family businesses are not in the practice of scrutinising this matter closely or they simply lack experience with aligning compensation to business strategy and have not yet unlocked the value this alignment can bring.
All businesses can benefit from the alignment of compensation to strategic objectives and family businesses have the unique edge in that they’re able to flexibly design compensation plans that are tailored to the individual, while aligning incentives to the unique factors that are critical drivers of the business’s success.
This is where independent directors can truly add value to the family business. Relying on their own experience with their businesses, directors should insist that this alignment be done and push until the company gets it right. They’ll have to be sensitive to concerns that may arise regarding sharing information and pushing through the reluctance to share this information and earning the family’s trust might require some effort.
In a family business, performance can be a touchy subject. Who reviews whom? Who monitors the children of owners or board members who work in the business, and how do the managers of family members handle performance issues? What happens if there’s a family member who is unable or unwilling to perform?
While many of these issues are within jurisdiction of management, the board needs to have a firm hand in dealing with them. Having a strong board with independent thinkers is vital for the protection of the family business against non-performing family members. Even if a non-performing CEO is the sole owner, the board can, by taking appropriate action, protect the company and its future owners.
The board is also perfectly positioned to take an objective look at the company’s overall approach to organisational structure and performance. This is important because an incorrect approach can result in a disheartened, unengaged workforce at all levels.
Getting it right means the company is in a better position to attract, retain, and motivate talent from within the family and from the outside world.