Modern Governance Software

How governance for family run companies is evolving

Keeping things ‘all in the family’ is always a tempting option for family-owned businesses – but it isn’t always the right one. Not every family can count on producing generation after generation of effective CEOs and senior managers. And even for those that can, there are still benefits from bringing in professional leaders.

The key to making an external (non-family) appointment a success is, essentially, to allow them to get on with their job. CEOs must be able to exercise their judgement independently and in the best interests of the company – which may or may not align with a family’s view of the business and its future.

We have seen several high-profile examples of conflict between CEOs and family members in recent years, such as Tata Sons CEO Cyrus Mistry’s sacking in 2016. Allegedly for “departures from the Tata Group’s ethos and culture”, it was also reported that Mistry’s relationship with Ratan Tata was not strong.

Similarly, Infosys CEO Vishal Sikka’s 2017 exit was allegedly over corporate governance issues, but Sikka claimed constant negativity from the founders was “inhibiting value creation”.

Making the relationship work

The dilemma is two-fold. Professional CEOs (and senior leaders) must be clear about the family’s goals, ethos and level of involvement in company decision-making before they take on their role, while family members, whether on the management board, as leaders, in operational roles or as shareholders, must ensure they respect the CEO’s professional capabilities and legal and regulatory responsibilities.

The Harvard Business Review (HBR) explored family business governance in a 2019 feature, itself a follow-on from a well-regarded 2015 investigation. Its findings were sobering: only 30 per cent of family businesses operate into the second generation, 12 per cent in the third and just 3 per cent reach the fourth generation.

Tellingly, such a platform also supports the four critical leadership lessons the HBR identified for family businesses:

  • Maintain good governance to help attract “the best outsiders”
  • Look for future leaders both within and outside the company
  • Commit to a disciplined CEO succession process
  • Preserve family gravity

The first three are self-explanatory; however, the notion of ‘family gravity’ bears closer investigation. It comprises six elements to guide and define how family members interact with, and influence, the company:

  • Values system
  • Vision for the future
  • Involvement
  • Cohesion and interaction
  • Family governance
  • Leadership principles and roles

These can play out differently in different companies. For example, in the LEGO Group, now in its third generation of family control, “family members have consciously divided their activities among various parts of the business. The basis for this is a strong bond of understanding, respect, and support for fostering one another’s growth and responsibilities”.

Governance revisited

Governance is a critical issue for all companies, but it takes on added significance for family-owned businesses, thanks to the sensitivities around family control and influence.

We believe a Modern Governance approach, using a single, cloud-based technology platform to provide secure, mobile access to board, governance and risk management tools and information is the best way to achieve the degree of clarity, insight and transparency needed.

Beyond providing the right tools for good corporate governance, we also believe every board of directors in a family-owned company should consider their governance structure more broadly. Some European and Asian businesses have adopted a two-tiered board structure to clarify the ‘interface’ between board and CEO. It involves establishing a management board and a supervisory board, each with carefully described responsibilities:

  • Management board: The management board comprises the managing director and employee directors. It’s responsible for determining the company’s overall strategy and direction, and managing day-to-day operations.
  • Supervisory board: The supervisory board comprises independent and external directors appointed by shareholders. It’s responsible for overseeing the management board and providing strategic direction

In this structure, the company’s professional CEO has the freedom to pursue the company’s goals as they see fit while still being accountable to the board, regulators, shareholders and other stakeholders.

Regardless of the board structure in play, good governance should remain a key focus for executive directors. Succession planning and board skills should be a focus, but this should not distract attention from other responsibilities. All families need careful governance, and family businesses are no exception.

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