News and Views
October 4, 2019
Posted in: WATSON Views
Good governance is always important. But add family relationships to the dynamic around the table and you might just see the need for good governance amplify. There are certain elements of a family business that inherently support good governance – foundations of trust, strong relationships, and a shared commitment to the business. At the same time, there are other elements that can lend themselves to inefficiency, power dynamics, and at their worst, total dysfunction.
How can family businesses play to the strengths of their unique family structure while avoiding the challenges that come with mixing business and family?
1. The Great Generational Divide
One thing that makes family businesses unique is the generational diversity of boards and management teams. A multi-generational leadership team can be a strategic advantage, bringing together different experiences and representing a broad cross-section of stakeholders. At the same time, societal evolution can result in shifting values and focus over generations – a tension between purpose and profit, varied commitments to sustainability and social responsibility, and a rapidly changing technological landscape. The way businesses operate is constantly shifting and different generations bring different lenses as they navigate and respond to change.
Different family generations also have different needs and motivations based on where they’re at in life. Childless family members may want to cash out early, while those looking to pass on the business to future generations may make decisions with a longer-term view. Tension between short and long-term interests can have significant consequences on an organization’s strategy and risk profile.
An advisory board with outside expertise can help family businesses craft strategy and consider risk from a more objective position, bridging different family interests, and keeping a steady focus on the best interests of the organization. A talented multi-generational board and management team, complemented by advisory board members with relevant outside experience, can leverage the strengths of diverse perspectives and experiences while diffusing different interests of family members.
2. Process Over People
Family businesses often see unrivaled levels of emotional connection by directors and management. A family name on the building and stories of multi-generational leadership drive a deep personal connection to the business that public and private companies can’t replicate. This passion and commitment are what helps family businesses thrive and maintain a competitive advantage over generations.
Passion can be a powerful motivator, but it can also be detrimental to effective decision making in the boardroom. The tension between facts and feelings is a reality in any boardroom. When directors are passionate about the business, their emotional blinders go up, making it difficult to see the data, logic, and analysis behind different perspectives. This can cause friction in relationships, slow decision making, and potentially result in bad decisions that hurt the business.
A sound governance framework puts processes and structures in place that can alleviate emotional elements of decision making. Clear roles and responsibilities, meeting protocols to guide decision making, and effective board leadership can help set up decision making processes that are focused squarely on the best interests of the business. Well-designed meeting materials can structure and inform objective decision making, diffusing emotional reactions before they occur. As well, an advisory board with external directors can shift the dynamic in the room, bringing outside experience and a focus on process, information, and logic over emotions.
3. Governance Gaps
Family business boards are unlike public and private company boards. When you look around the table, you may not see the standard lawyer, accountant, and CEO, each with industry and governance experience. Instead, you see an extended family with varying levels of skills and experience. Some family business boards are composed of skilled family members with diverse experience, inside and outside the company. Others consist largely of family members who have only ever worked for the family business, if at all. Some family members bring outside governance experience, while others have only seen the inside of the family boardroom. As a result, certain governance and oversight practices can be missing or underdeveloped in family businesses.
As family businesses become more complex and operate within a changing landscape, governance and oversight systems often lag behind. Family business leaders tailor governance and oversight to their current needs without full information. They are anchored to what they’ve seen done in the past, often unaware of the pace of change in areas such as risk management and internal controls in the broader market.
Bringing in outside directors and advisors with the right experience can help complement the skill-sets around the table and bring modern governance and oversight practices to family businesses. Skilled outside directors can bring knowledge of current governance practices, along with specific skills and experiences relevant to the business. The right outside directors and advisors understand the family, the business, and the broader industry. They bring forward new practices and structures that make sense for the business.
Family businesses are a cornerstone of our communities and contribute to a stronger Canadian economy and society. If governed well, family businesses can draw on their unique strengths while also leveraging leading governance practices, putting them in a unique strategic position.