Governance in Family Businesses

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Family businesses also face generational issues as family members of different age groups who are involved in decision-making have different work ethics and values. They tend to differ on many issues like what business strategy to pursue, which business sectors to invest, [n]how family members are employed and their level of compensation and even follow differing management styles of running the business.

Conflicts and personal rivalries amongst family members have the potential to bring down the family business to the path of failure. It is very important to ensure that the conflicts are addressed from the very outset and businesses have some sort of formal forum which allows family members to express their opinions on the business, its direction and development. This can be done by establishing family assembly which allows family members to formally meet at regular intervals[o][p]. Establishment of family council is advisable as the family expands and reaches thirty to forty members. [q](Neubauer and Lank, 1998).

Family businesses can also see tensions between family members who have controlling interest whose primary goal is investment and growth and minority shareholder family members whose interest may lie in dividend growth and personal liquidity as has been highlighted by Sir Adrian Cadbury in his family firm. (Cadbury, 2002)

Other potential conflicts can arise as family business transitions from owner managed to a stage which involves separation of ownership and management. Owner family members who are not actively involved in the day to day management of business may feel disgruntled and left out[r] in the important decision-making process. Conversely, those who manage the affairs of the firm may feel that others who are not so actively involved are enjoying the fruits of their labour and have a free hand to criticize their business decisions. (Cadbury, 2002)[s]

Other challenges faced by family business are relating to family [t][u][v]member’s employment as it balances the need to fulfil wants of family and [w]requirement of the business to have external [x]professional managers of high calibre [y][z]crucial for the survival of the business in the long run.

Family members can also feel difficulty in sharing power with the externally brought non-family employees who are charged with the executive management. (Cadbury, 2002)[aa]

2. Family business governance - its importance, governance institutions and practices

Definition of Corporate Governance

“Corporate governance refers to the structures and processes for the direction and control of companies. Corporate governance concerns the relationships among the management, board of directors, controlling shareholders, minority shareholders, and other stakeholders. Good corporate governance contributes to sustainable economic development by enhancing the performance of companies and increasing their access to outside capital.” (International Finance Corporation, 2016)

Benefits of corporate governance for family businesses

Family relationships at some stage of family business obstruct its effective functioning[ab], it is when developing a formal governance structure becomes crucial. (Mallin, 2004). Governance structure offers clearly defined lines of responsibilities of family members towards the business. Investors hold family businesses in premium which are run by the professional board with independent directors. If a family business has future plans for going public by issuing initial public offering, it becomes crucial to have a formal succession plan in place.[ac][ad][ae] Independent non-executive directors bring in functional expertise, business experience and provide strategic direction essential for the family firm's survival and growth. According to Sir Adrian Cadbury, a good governance structure helps family firms to be able to hire and keep talent, develop a culture of trust and transparency and successfully manage the impact of growth by creating efficient organisational structure.[af][ag] (Cadbury, 2002)

Essential elements of governance structure

One of the most important elements of governance structure for family business is ‘[ah]Family Constitution’. Family constitution essentially outlines family values and its commitment to core business objectives. It regulates the conduct of family members towards the business, [ai]board of directors and executive management, defines powers of family governing bodies like family councils, roles and responsibilities of family advisory boards and specify other important policies like family employment, shareholding and succession. (IFC family business governance handbook, 2011).

Good governance structure will also employ fair employment, compensation and promotion policies for the family members in the firm based on their level of responsibility, qualification and experience and should be at par with non-family member employees without any unfair distinction.

Family governance institutions like family assembly allow family members a forum to address their views on key business decisions, educate members of their rights and duties and allow information dissemination regarding any business developments. [aj]Family councils can also be created with key family representatives to function as a governing body regarding the matters of the family. The family council usually have 5-9 members and a chairman elected by the council members. [ak][al][am](IFC family business governance handbook, 2011).

Family businesses also sometimes appoint an advisory board to advise the largely family-dominated board of directors in functional areas like finance and marketing. Advisory board is a one step back of the fully independent board and is often constituted where the family is reluctant to share business information with outsiders or give up control over decision-making but at the same time wishes to be benefited from the expert's opinion. [an][ao][ap][aq][ar][as]

Family businesses can benefit greatly from a fully [at]independent board of directors whose primary responsibility is to set a strategic direction for the company, make financial means available for investment opportunities as they arise, oversight the executive management of the business, instituting policies for managing control and risks and be answerable to the shareholders of the company.[au] Independent directors also play an important role in family businesses. They bring in external perspective in family business, be able to handle sensitive issues like planning succession without the bias that affects the family