There is a view that in operating a business enterprise it’s not all about governance, which sometimes can be described as a series of boring meetings and tedious tasks, especially for family businesses.
In my opinion family owned businesses often do not formally set up governance structures, but instead create an informal governance and risk structure that can be summarized as “the way we do things around here” and “this has worked well in the past”.
Over a 35-year business career I have gained significant experience working as an executive with, or been a banker to, directed or advised some iconic family businesses within Australia, Asia, USA and Canada. From my observations, many of these family owned businesses had common values and challenges, across diverse industries. Some of these values are building blocks for long term business success and family harmony, such as:
- The Founder leaves significant long-lasting impressions on the business. Usually frugal in the beginning many decades later these companies “continue to have thin carpets” Why is that? Well it’s the creation of a culture, preserving cash capital for more important things. A refurbished secondhand machine will do the job instead of a bright shiny new one. We sometimes hear this described as setting the “tone at the top”.
- Well past the Founders active days (when a family CEO is appointed) the successful family companies continue to adopt the Founders principles often with many more sophisticated tools, such as, more formal strategic planning, determining risk appetite, capital allocation modelling and even non-family advisors.
- The family company now embraces employees more like family members as their success goes beyond the scope of just the family operated business.
- As the business grows, decision making is more long-term focus than short term, so while next quarter P&L is important, a downturn in the numbers will not rock the boat.
- Employees see the expanded family making decisions that honor the origins of the business, doing the right thing with suppliers and customers, a sense of fairness and being authentic.
- Successful family businesses rarely loose curiosity, asking questions like, how did this machine work, how are competitors doing that and why not have a go at developing a new product.
- A sense of stewardship around the land, buildings, processes that allowed the company to grow becomes important to the family, which helps employees understand the family are in this for the long haul. This has a positive influence on employee retention.
- A laser focus on the business health, deeply understanding the real profit and loss. Often regular open communication with their bankers, at the same time not wanting to borrow too much, despite what is being offered. Uncanny ability to only borrow to invest in high return projects. Watching the $$ like it was their personal bank account.
- Successful family companies have often created structures whereby family members are listened too without the fear of being chastised for a silly or naive idea or question.
- Not every family member is guaranteed a job or the job they want. Often aspiring family members are asked by the CEO or Founder to go work in another industry and learn some different skills and gain experience outside the family structure.
Like all businesses there will be disagreement, fractions and disruption. Family businesses are no different, however there can be a heightened level of emotion. Short term fixes are not the answer. Instead the family must step away from the day to day operations and consider ways to build consensus and harmony amongst the family members. Whether they work in the business or are just shareholders.
From my experience, some of the following processes have worked successfully in rebuilding trust and confidence in the family business:
- Be open and advise the extended family there is a need to spend time and make a commitment to invest in righting the ship.
- First accept that the Founder or CEO may just inflame the issue’s if they manage the process, as their views may be biased, create conflict and impede progress.
- Appoint a trusted adviser, who is independent of the business. Conduct interviews across the extended family, resulting in an independent collection of the types of frustrations, challenges and blockages.
- Hold a family strategy day where the independent adviser presents a summarized version of the issues (not edited by the CEO).
- Invite a guest speaker to talk about new opportunities and competitor analysis, so family members broaden their horizons beyond the existing business issues.
With an ear to listening, create a list of priorities that maybe creates some improvement opportunities for the family. Active listening, open mindset and willingness to embrace change will create business improvement opportunities. Over my 35-year business career, these are the most common issues:
- Family employment is inconsistent – create a well-researched family employment policy that makes it clear how family members earn the right to work and progress in the business.
- Company structure is often complicated – have financial advisers educate family members and shareholders why the structure is like it is and explain the numbers in simple language and terms for non-accountants.
- Personal development is inconsistent – staff members are trained, whereas family members are often not. Create a consistent training policy that is open to all staff and family members in the business and now and in the future.
- Dividends not enough – create a dividend policy that states the family business intentions that the Board will only deviate from the policy in exceptional circumstances. Have the CFO explain the cash capital creation to the extended family in simple language and terms for non-accountants.
- Unsure what happens at company board meetings – invite extended family members to attend one or two board meetings as observers. Budget and strategy board considerations are great learning opportunities on the Board calendar.
- Pay is low compared to non-family executives – apply the same rules to all staff family or non-family and review salaries to independent market surveys.
- Some family members are poor performers – always a sensitive issue and at times is avoided. A family pathway must be established to expose the undiscussable issues before it creates damage in the business. Be courageous and have a family meeting where undiscussables are encouraged to be put on the table.
- Senior non-family employees know more – this will always be the case if you are not in the business full time. Consider creating a family council that meets 2-3 times per year to explain the business in more details to extended family members.
- External Board Members/Advisors – if appropriate start the journey with non-executive directors with the right skill sets that will add value to the business
- Will we sell – depends on the family views. The pro and cons should be discussed every year or two with the extended family and a definitive policy created.
As you can see, family companies have many opportunities, flexibility and challenges. Concentrating on good governance for the business and open communication with family members are critical to growing the business and achieving successful outcomes.
For more information please contact Kevin Osborn on firstname.lastname@example.org
Kevin Osborn FAICD FIPA
Chairman VUCA Trusted Advisors