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Family businesses need governance to stay on right track

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Governance is hot.

Shareholders, managers and business advisers are demanding improved governance of (typically public) companies by strengthening their boards and developing more responsive shareholder relations.

But what happens when your board of directors is also your family?

The governance of a family business is more complicated than for nonfamily owned companies because of the central role of the family that owns and typically leads the business.

In a family business, the business, family and ownership group all need governance.

Families without some sort of governance often get messy, and the lack of governance is a major cause. Love, power and money can be a powerful force to grow the business, but can just as easily blow it up.

Governance helps family businesses make better, more informed decisions. Good governance:

Generates a sense of direction, values to live or work by and well-understood and accepted policies that tell organization members how they should behave or what to do in certain circumstances.

Brings the right people together at the right time to discuss the important things.

Measure the effectiveness of your governance system by these outcomes, not by the boards and councils put in place.

If your organization does not have these outcomes — a clear sense of direction, clear values and well-understood sensible policies – and does not assemble the right people in a timely way to discuss and decide big issues, then your system is flawed.

Since many people are slow to confront especially sensitive issues and to plan, some degree of formality often helps people focus on issues, work toward goals and resolve differences.

What is clear with family enterprises is that a few well-composed and well-managed governance structures greatly increase the performance and ongoing legacy of the business.

Additionally, attracting and retaining talent requires solid governance. No one, including the kids, wants to work where the rules are unknown, things change on a whim and there is no clarity on direction.

Family enterprise generates a mixture of business, family and ownership concerns that can make these systems emotionally charged environments.

Individuals must manage issues within and across three overlapping groups, or circles: the family, the business and the ownership group. The overlap often leads to differing points of view.

For example, family shareholders not employed in the business often have different views about the level of dividends than does nonfamily management that works in the business. Both viewpoints must be reconciled in a respectful way.

Effectively managing business, family and ownership concerns requires communication and decision-making within and across family, business and ownership groups.

Too often, family firms employ dysfunctional and short-sighted approaches to handle tensions, such as:

Exclusion and secrecy — Keeping some family members or shareholders out of conversations and keeping too many secrets from employees, owners or family members.

Divide and conquer — Relying on the support of some allies and excluding others from information and decision making.

Bribery — Hiring relatives who do not deserve jobs, paying relatives more than they deserve, distributing more funds from the company than is responsible for the sake of preserving family harmony or maintaining certain individuals' power.

These methods can provide short-term relief but rarely resolve issues and predictably intensify them.

Good governance contributes three fundamental ingredients:

Clarity on roles, rights and responsibilities for all members of the three circles.

Encouraging family members, business employees and owners to act responsibly.

Regulating appropriate family and owner inclusion in discussions.

Some companies worry that governance will slow their business and create bureaucracy, but the opposite is true. Good governance leads to clarity and trust, both of which lead to speed. And speed leads to lower costs.

Family business governance is an iterative process. Just like your strategic plan, it changes as you learn and as the environment changes.

Most family enterprise systems can be governed by a few structures:

Executive management group.

Board of directors (or board of advisers).

Family council.

Owner's council.

The membership and functions of these need to evolve as the business, family and ownership groups change over time.

A first-generation family business may only require (or tolerate) a small, informal advisory board rather than a board of directors. A third-generation family may need a family council to bring together, for example, 50 family members on an annual basis to set policy.

As ownership of the business becomes more divided over generations, board composition, owner's council composition and the role of the family council need to change.

To get started, create an owner's council, board of directors and family council (in that order):

The owner's council makes decisions on the big-picture goals of the family and communicates these to the board.

The board of directors sets policy for the business, approves the executive management team's strategic plan and also may make recommendations to the owner's council and family council. They should all coordinate their work, but not overstep each other's domain.

The family council sets policy for the family and recommends policy to the board (e.g., policy about family employment).

If your family business is struggling with direction, communication or growth or simply trying to function, look at governance.

To family businesses cruising along just fine, remember, the skies do not remain that way forever. Good governance will help prevent what could go terribly wrong when a storm hits.

Tom Garrity is managing partner of Compass Point Consulting LLC in Bethlehem. He is a certified coach with Gazelles International and a certified exit planning adviser with the Exit Planning Institute. Compass Point provides growth and business transition consulting to small- and medium-sized businesses. He can be reached at 610-336-0514 or tgarrity@compasspt.com.

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