Good Governance in a Family Owned Business

Adam Jones shares his spot-on observation on good governance within family business in his article in Family Business United. “Good governance in a family business, therefore, is less about structures and more about guidelines on freedoms.” – David Harland, Managing Director of FINH

Perfect governance of a family owned business would be like having lightning in a bottle so what is governance and what does it mean for family firms. Adam Jones explains more.

The idiosyncrasies that we associate with a family owned business – the blood ties, the feelings and emotions, the close personal relationships in the workplace – are issues you simply would not see in any formal published governance guidelines or regulations.

So how do we address this?

We are familiar with the classic trichotomy of family (with the aim, if they wish, of all members having some form of involvement), business (with the focus on making the right decisions and, where appropriate, using non-family expertise) and ownership (comprising the rules on who can and cannot hold equity).

As a base for governance, that is fairly sturdy, but we must overlay it with something much more subtle, and bring focus to how the particular family owned business in front of us needs its own particular guidance.

Governance is about accountability, transparency and, if all else fails, having a framework for finding a way through for the business continue – it is, after all, likely to be the family’s most significant asset and source of wealth. As a family owned business grows and changes, potential for conflict increases, family members can become distanced from decision-making, and suddenly the atmosphere changes and impacts every aspect of all their lives. So in reality there is a heightened need for good governance.

Yet that governance itself need not be incredibly detailed or oppressive. In fact, the best governance for a family owned business is likely to be less tight than that between business partners or third party shareholders. With a business that is tied so closely to a family which itself will continue to evolve, the demand for flexibility is high, whilst maintaining the core values and vision of that particular family. For this reason the focus, initially at least, should be on non-binding constitutional values, answering questions on desired levels of stewardship and long-term growth, and agreeing on easy to arrange concepts such as having a “Family AGM” (as distinct from just shareholders).

From there, we can look at building more formal structures as may be required, whether developing a family council as the family and its interests grow, or leading on to binding legal documentation where appropriate.

In a family owned business, though, governance must also take note of, and go hand-in-hand with, various other impactful areas, including the estate and succession planning of the founding or major shareholders, robust policies regarding recruitment and promotion in the business, and a generally more elevated importance being acknowledged as regards the rights (no matter how big or small) of each member who is – or should be – involved in some way.

Good governance in a family business, therefore, is less about structures and more about guidelines on freedoms – freedom to be involved, freedom to pursue the shared vision, and freedom to hold everyone else around you to the same values and standards that the family, with the family owned business firmly in mind, have set for themselves.