Corporate Governance for Family Business

Ranging from mom-and-pop corner stores to some of the world largest companies, family businesses are the cornerstone of most economies around the world. On a high-level, “family business” is a collective term used to describe family-owned businesses and family-run businesses. The former indicate that the ownership and management of the company is separated; whereas the latter suggest that the ownership and management of the company is centralized within the family. Family businesses impose some interesting challenges to corporate governance. The initial management of a family business is usually gripped in the hands of the founding owners. Thus, the interest of the company, its members and the management run hand in hand. Nonetheless, as the business and the family grow, not all family members will be directors and make it to the board. This creates resentment and drives family conflicts. On the other hand, some incompetent family members may mantle position of power and serve in unqualified roles. This hinders business growth and may kill the business. Family business corporate governance framework In order to minimise conflicts in a family business, it is vital to have an evolving corporate governance framework that is appropriate to the company at the particular stage. The corporate governance policies and board-level practices need to reflect the scale and complexity of the company’s activities, determining the relationships between shareholders, directors and management. The structure and composition of the board should reflect the stage of the maturity of the company and its business. As a starting point, family members should consider the following: At the shareholder level:

• Documentation of the family’s vision, mission and values for the organisation. This sets out clear ethical framework for family members or outside managers to adhere to when managing the company.
  

• Set up structure for interaction between family members and directors. This may be a family assembly or council where the terms of reference will be incorporated in the company’s articles of association, so expectations can be set on this relationship.
  

• Policy for family member appointment. This includes the procedure for appointment as well as the number of family members to be on the company’s board of directors. For avoidance of doubt, this should again be incorporated in the company’s articles of association.
  

• Exit mechanism for family members to sell their shareholding and move on from the company. Most company’s articles of association include pre-emption rights that dictate shares to be offered pro rata to the existing shareholders before they can be sold to outsiders. Some family businesses establish a fund to allow family members to cash in their shares at a fair price. Where such a fund exists, a family-fund committee should be setup to manage this fund. The constitution and terms of reference of this committee will again have to be documented in the articles of association.

At the board level:

• Setup advisory board. For board composition predominating filled by family members, the board should set up an advisory board comprising of experienced and respected individuals known to the family that can fill in the “skills gap” between family members.
  

• Appointment of independent directors. In addition to advisory board, family members should consider bringing in independent directors to provide constructive scrutiny and voice out uncomfortable topics, such as lack of effort by certain family members.

At the management level:

• Succession planning and skills development. Some family businesses set up education programmes and career planning to shape the next generation family members to lead the company. This ensures the family business can continue to prosper in the hands of the heirs.

Our thoughts Contrary to popular belief where family businesses do not last more than three generations, in 2019, the average age of the 500 largest Family business is 79.9-year-old. A family business starts when the first-generation owners founded the company and serve as the decision-makers and the implementers (manager) of the business. The successful ones will pass the family recipe to the next generation and the legacy continues. However, this is no easy task. Lack of trusted advisers, family conflict, different visions between generations, and unqualified relatives in positions of power are ingredients to sabotage the family business. For family businesses that do not have an explicit corporate governance structure, they usually operate under the approval of “the old man” - a dominant figure that makes all important decisions. They have unwritten rules that dictate the relationship between the company and each family members. But what’s next? Being able to think long term is crucial for succession. No generation wants to be the one that kills the business. By having a clear governance structure, it forces family members to establish boundaries and think long term. Only then the business will continue to last for the generations to come. Note: You are advised to contact us before making use of the information provided in this article. Lambros Industries is not Trust or Company Service Provider (TCSP) and does not provide those services. For more information, see Terms of Use.