Family Business
Advisor & Coach

Family Business Governance: Boardrooms and Bedrooms

Business schools teach that corporate governance, in the guise of well constituted Boards of Directors, are a foil against Agency Theory which postulates that there is often a conflict between the aims of shareholders and the self-interest of managers. In family businesses (FB), however, the same family members often hold ownership and management positions.  It seems intuitive that agency concerns and costs are greater in non-family firms than in family firms and this is borne out by research. Family firms led by family members exhibit more signs of Stewardship Theory than do non-family firms. Stewardship Theory is based on the concept of managers identifying deeply with the business and being more in step with organizational goals.  In FBs, organizational objectives extend beyond the financial and include non –economic aims like family involvement and harmony.

This does not preclude the need for proper governance structures and mechanisms. Indeed, the inclusion and expansion of the three sub-systems of ownership, management and family require much focused oversight to avoid a destructive blurring of boundaries. In the beginning stages of a family business, there is seldom a distinction among the groups—it is himself owning the enterprise, running the firm, and advising himself on all matters ranging from family member employment to capital expenditure. As the business and family grow, there come into being all the sectors represented in family business—the passive shareholders who own shares but do not work in the business, the potential shareholders as in spouses and next generation, the non-family executive who has risen in the ranks and may occupy a higher position than family members working in the firm.  Not only are there more constituencies to consider, the range of issues to be discussed and decided upon expands exponentially.

The business of the business itself becomes more complicated as a more delineated strategic direction must be laid out. Policies must be defined, implemented, and monitored or else the harried owner/manager literally collapses under the weight of demands upon him, sometimes taking the firm down with him. Within the management sub-system, well-run firms institute executive committees to aid in the formulation and execution of professional protocols. The more enlightened business owner recognizes the advantages that a suitable Board of Directors affords the business. These governance mechanisms are not as easily installed in both family and non-family businesses as these one sentence declarations seem to suggest. There are specific conditions though, that prevail in family business around those structures and I will explore those in future articles.

Family Business governance includes managing family involvement in the business. It is about integrating the ownership, management and family sub-systems while maintaining the necessary boundaries. In family business, critical decisions are often made overnight in the bedroom, not the boardroom and stakeholders are often not even informed, far less consulted.  Policies regarding family members are undertaken within the business without input from the wider family circle. Passive shareholders complain that they are not in the loop and are resentful of those family members who seem to be making decisions on their behalf.  Complaints emanate from each of the three sub-systems—the executives feel like lackeys; owners have individual and conflicting visions; and family gatherings are fraught with tension. Boardrooms become brawl rooms and Sunday lunch gatherings resemble a call to arms with opposing sides setting up armor.

It will belie my own acknowledgment of the complexity of family business if I were to pronounce that proper governance mechanisms will make all things well. It is though, a helpful tool. One of my lecturers gave what I consider a good working definition of Family Business Governance. She considered it “the right people discussing the right things in the right place at the right time.”  There are discussions that are best held around the kitchen table, not the Boardroom table and vice versa. The sub-systems of ownership, management and family have specific roles best assigned to and conducted by designated bodies. Yet, in family business, the structures are often ineffective. The controlling and active owners sometimes set up and dominate what is often a rubber stamp Board and the business is run in their image and likeness with no input from passive shareholders or external advisors. Executive committee members see no role for themselves in real decision making and resign themselves to following orders. The mechanisms may exist in name and theory but are not efficient or effective.

While this may not be unique to FBs and cause stagnation in family as well as non-family businesses, there is a bigger danger lurking for FBs. Unless there are specific guidelines set up to govern family interaction with the business, decisions are made on an individual basis and often without forethought, consultation or even rhyme and reason. Pronouncements may generate short-term compliance but resentment festers.  In smaller families where members all eat regularly at the same dining room table, there is ample opportunity, if not will, to talk about family employment in the business or in-law involvement and the like. My experience though is that these are emotive topics and often left untouched until things come to a head and then the senior generation leader lays down the law. This may buy the business and the family some time but generally is not sustainable.

Just as a management team and a Board of Directors have specific roles and policies to consider, there is a governance mechanism that oversees family interaction with the business. In the Family Business literature, it is generally referred to as a Family Council and I have seen it described as a Family Committee or Family Board. This is a feature of FBs only and well worth implementing..