What is a family business and what type of governance structure does it require?
A family business is a company that is owned and led by multiple members of a family. The most well-known family companies include LVMH and the Carrefour group in France, and Wal-Mart and Ford Motor Co. in the United States. This particular business structure is unique as highly personal relationships coincide with business alliances, so careful and well-thought-out governance is critical.
What is a family business?
Family-owned companies have both advantages and weaknesses. Among its many strengths, family companies typically see better performance in terms of growth and profits. This is due to the strengths held by these companies compared to their counterparts. The family commitment, especially in its willingness to pass on the business to descendants, is a strong motivator for high performance. Additionally, the emphasis on reliability and reputation helps family businesses reach great heights.
However, this type of structure is not without its weaknesses. Among them, it can be difficult to make family-owned companies last in the long term. It is estimated that two-thirds of family businesses fail quickly, even though their founders are still at the head of the company. In addition to the classic reasons that lead to the failure of a company, there are certain weaknesses intrinsically linked to the nature of this structure. In particular, the complexity of the governance of family businesses can pose problems, especially when family issues are involved. Some internal conflicts can appear over time and threaten the sustainability of the business.
Which governance model is necessary for family businesses
Governance in a family enterprise must be approached cautiously as there are various dynamics at play. Not only is the company controlled and managed by different family members, but the organization is passed on from generation to generation.
The governance structure of a family business involves multiple layers of responsibility. This includes the presence of various family members among whom are shareholders and non-shareholders. The latter sometimes lack involvement in the life of the company, alas the creation of structures such as the Family Council is extremely helpful. Involved also are the directors and managers who are not part of the family but also share the heavy responsibility of implementing strategy and day-to-day operations.
With such a great diversity of stakeholders, there is the potential for several conflicts to arise. In general, these disputes relate to succession and inheritance. However, the survival of the company often depends on this succession.
The Family Council
A governance structure in its own right, the Family Council allows its members to discuss the company’s major issues. In a way, it is the equivalent of the Board of Directors in a family business. Its objective is to ensure the continuity of the business and family harmony. The Family Council includes all members, including those who do not work directly for the company. The members use these meetings to express themselves, as they cannot sit on the Board of Directors. In practice, the more inclusive the council is, the more it gives a sense of belonging to the whole family. Its composition can be reviewed over time, which is sometimes recommended since it has a direct impact on the conduct of meetings and on the responsibilities of each person.
More than a simple discussion body, the Family Council is the heart of the transmission of family values. It is part of its strategy and articulates the family vision passed down from generation to generation. The members act as guardians of the family patrimony, to be passed on to the next generation for the successful continuity of the business. It is also sometimes used to manage inevitable conflicts, to set up training, and establish the role of the shareholders.
How to create a structured governance system in a family business?
To maintain quality governance in a family business, it is important to pay attention to several elements:
- Strict equality between board members,
- The participation of independent directors who must also be able to give their opinions,
- Gender parity and diversity,
- The implementation of tools to improve governance, such as digitalization for better efficiency,
- The utilization of a Board Portal to digitalize governance bodies and optimize transparency within the board.
Family businesses are the engine of the global economy. For this reason, they deserve careful thinking and attention when it comes to governance if they want to ensure their longevity. A well-designed governance system will allow entrepreneurs to address factors that often lead to business failure in family businesses such as family feuds or poorly planned succession. By deploying the right governance, family companies set themselves up for success, allowing them to create long-lasting legacies.