The definition of “closely held businesses” strictly speaking, refers to companies with a small number of shareholders whose shares are not widely available to the public. Privately held family businesses (FBs) are often characterized as closely held businesses to indicate that decisions are the domain of a very select few and there is no ready market for FB shares. The expansion of that category has led to an accounting sub- specialty in valuing those companies and any number of books and articles have been devoted to this topic. While this is a technical definition, it conveys an accurate sense of the tight secrecy under which FBs often choose to operate. A family business consulting colleague says that FBs are not closely held, they are “hermetically sealed.”  I am afraid that my experience bears out this seeming exaggeration on his part.

FBs do not usually divulge information readily, totally, or even accurately to anyone, and that includes government agencies, bankers, auditors and even Board members.  Incomplete information results in irrelevant advice. In contrast, transparency in business involves an approach to corporate management that emphasizes as much disclosure of information as possible to stakeholders.  This approach implies a lack of hidden agendas and conditions, accompanied by the availability of full information required for collaboration, cooperation, and collective decision making.

It is desirable that foods we store in the freezer be hermetically sealed to avoid the entrance of air and its damaging effects. The food is meant to look and taste the same as when we first sealed it for storage. Unfortunately, FBs which make themselves impervious to external influence remain the same over time and the businesses often decline.  As damaging as this could be to the business, the lack of transparency within the business means the senior employees, passive, and sometimes even active shareholders are often kept in the dark about what is happening within the business. While the concern that most readily comes to mind is financial disclosure, there are other pertinent and important matters which must be made clear to all involved.

Financial opaqueness though is a matter that leads to excessive speculation and untold suspicion among family members. Those who work at management levels within the business have access to the purse over and beyond their salaries. They have signing authority on purchase orders, company credit cards, travel accounts and the like. Unless these financial arrangements are well defined, exposed, and subject to scrutiny, there is inevitable finger pointing. Family members who work in the business are often reluctant to share their salary level and perks with the passive shareholders.  I once had a family member CEO say to me that he does not ask his doctor brother what his income is, so why should he reveal his? As reasonable as this may appear, I am afraid it will not pass muster in an FB that wants to achieve the harmony that is a direct result of transparency. There are mechanisms which may be employed in setting compensation levels and as public companies are discovering in America and Europe, the shareholders hold some power over those decisions. The difficulty in some FBs is that the controlling owner, as in Dad, not only makes financial determinations but often keeps them close to his chest so that siblings working in the same company may not even be aware of each other’s remuneration.

While money may well make the world go around, there are a host of other decisions that ought to be transparent which impact the family business and the family. Failure to grapple openly with issues of retirement, estate planning, leadership succession, investment policy, dividend policy, buy-sell agreements, in- law involvement, ownership transfer, among others, will likely create a situation where each family member holds a distinct view of these matters in his/her own mind only. Not surprisingly, family members sometimes arrive at conclusions that serve their own individual interests. That could be attributed to the human condition, although it is more likely derived from snippets of bilateral and often confidential conversations held with Dad or Mom or uncle or sibling or cousin. It is not that those in the know are deliberately misleading. Sometimes their own thoughts are half cooked but once they are revealed and interpreted as fully done, someone seals the discussion and a decision suddenly becomes airtight, frozen in the consciousness of one person or group.

Even more disturbing to me is when the controlling owners—usually parents, know exactly what their intentions are with regard to issues that directly affect the next generation.  They may even formalize it in a set of documents locked up in their lawyer’s vault, never to see the light of day till they are no longer around.  By the time their intent is made clear, rot and rut may have already taken hold in the family and the business.  My senior generation clients probably think me a stuck record when I urge repeatedly that they divulge their intentions, give the rationale for their thoughts and invite some fresh air into the deliberations. I advocate a public reading of the will when the author is very much alive. Too often, family members are taken by surprise when they learn about ownership or management succession and the resulting fracas is ugly with all the family’s business being exposed to the scrutiny of courts and newspapers.

Transparency is one of the piles on which the foundation to good family business governance lies. It is the third leg in my three-legged approach of communication, accountability and transparency and they are related to each other. Governance structures will achieve their aims if family members commit to these principles. The good news is that the enactment of the governance mechanisms often leads to the strengthening of those legs and like any muscle building exercise, it requires commitment, practice, and repetition and of course, good form.