Corporate governance is the system by which a company is directed, monitored, and encouraged. Good governance practices create healthy relationships between the board of directors, investors, managers, and employees. Thus, it is natural to say that the implementation of guidelines strengthens the organization.
In Zimbabwe, entrepreneurial families represent 90% of enterprises. Although this type of organization can be considered the backbone of our economy, family businesses are mostly unaware of the principles of good corporate governance. As a consequence, many ends their activities with the death of the founder, and another large portion ceases to survive after the third generation.
For better understanding, we invite you to continue reading this article and learn about Corporate Governance in Family Businesses.
WHY TALK ABOUT CORPORATE GOVERNANCE IN FAMILY BUSINESSES?
By establishing good corporate governance practices, companies (family or not) can reduce conflicts, motivate employees and strengthen accountability mechanisms, thus stimulating growth and the ability to earn a profit.
Family businesses are often operated with a certain degree of informality. Because of this, they believe that corporate governance does not concern them. However, we have to understand that corporate governance covers a wide scope.
When we talk about corporate governance in family businesses, we include:
Adoption of various policies that guide the operation of the business, such as conflict of interest policies;
A close look at the financial statements;
Establishment of a more transparent relationship between the company and stakeholders;
Creation of mechanisms for a discussion followed by the appropriate referral of divergent opinions;
Reduction of distrust among family members, since corporate governance values accountability and transparency of information; and
Adoption of clear rules of separation between management and ownership (with this, corporate governance in family businesses helps to mitigate the occurrence of conflicts related to succession issues of management and ownership).
Furthermore, we emphasize that corporate governance measures in family businesses can act as a preventive mechanism against many tensions that may arise between family members.
OTHER POINTS ON CORPORATE GOVERNANCE IN FAMILY BUSINESSES
Corporate governance in family businesses also acts strongly to:
Maintain harmony and establish a good business relationship between the family and non-family members of the business;
Eliminate the risk of nepotism and favoritism;
Make the company driven much more by professional ethics than by emotion;
Avoid conflicts over the control of the company;
Address succession issues through a clear and well-defined succession strategy; and
Ensure that the company’s interests come first.
Everything mentioned so far shows how much Corporate Governance makes sense for family businesses. However, there is an essential word to understand the importance of corporate governance for business families: professionalization.
WHAT DOES CORPORATE GOVERNANCE IN FAMILY BUSINESSES HAVE TO DO WITH THE PROFESSIONALIZATION OF MANAGEMENT?
To answer the question, we will analyze three points:
Separation of papers;
Management transparency; and
Separation of roles
Family businesses are complex entities where the roles of family, management, and ownership can easily be confused.
Corporate governance in family businesses distinguishes between ownership and management roles. Thus, if on the one hand, we have an heir (by property right), on the other hand, we do not necessarily have the right for him to manage the business.
This is possible because corporate governance creates clear rules regarding the composition of the staff, especially the management ones:
Command positions should only be occupied by family members who have the skills to do so. Otherwise, the functions must be occupied by professionals from outside the family circle.
One of the pillars of Corporate Governance is precise transparency in management. This means that any informality that may exist in a family business about balance sheet reporting must be eliminated.
It is important to highlight that transparency in management goes beyond economic and financial performance but also affects other factors (including intangibles) that guide managerial action and lead to the preservation and optimization of the organization’s value.
Corporate Governance in family businesses defines criteria for succession. Here, once again, the question of the separation of ownership and management comes into play, since the CG succession should not be assumed by principles of heredity, but of competence. In other words, good governance practices ensure that meritocracy is at the forefront.
Corporate governance practices seek to ensure the longevity of the organization. For this, governance seeks to preserve family values, defining boundaries between family and business interests. This means that corporate governance in family businesses is about guiding succession planning for the long-term preservation of the business.
HOW TO PUT CORPORATE GOVERNANCE INTO PRACTICE IN FAMILY BUSINESSES?
Below we will talk more specifically about the structure of Corporate Governance in family businesses:
It is a broad forum of an informative, guiding, and/or deliberative nature, where family alignment and positioning are discussed, in which all family members participate, according to previously agreed rules regarding age group, participation of spouses and household members, among others”.
The assembly must meet once or twice a year. The models are diverse and reflect the profile of the business family in question, but, generally, it is a celebration of family coexistence and has a more strategic scope. Among its activities are:
Update on activities carried out during the year;
Annual rendering of accounts (budgeted X realized);
Communications about the company, property, and other family activities; Evaluation of the activities of different family governance structures;
Discussion and definition of guidelines, plans, and family policies;
Family council election.
The Family Council is:
“Body responsible for keeping family matters separate from those of the organization to avoid undue interference in the organization for matters of exclusive interest to the family. The objectives of the family council are not to be confused with those of the board of directors, which are aimed solely at the organization”.
Note that by definition there is a differentiation between the Board of Directors and the Family Board. While the first deals specifically with the company’s management, the second is a group formed to discuss family matters and align family members’ expectations about the organization. To understand better, it is up to the Family Council:
The definition of boundaries between family and business interests;
The preservation of family values (eg history, culture, and shared vision) and the treatment of the organization as a factor of unity and continuity of the family;
The definition of criteria for asset protection, growth, diversification, and administration of family assets;
The creation of mechanisms (eg participation fund) for the acquisition of participation by partners who wish to withdraw from the company;
Succession planning, transfer of goods, and inheritance;
Monitoring the preparation of family members for succession in the organization, considering vocational aspects, the professional future, and continuing education;
The definition of criteria for the appointment, if applicable, of family members to act as collaborators or administrators.
Corporate governance in family businesses has in its structure the Family Office, which serves to support family governance and provide services to family members. Generally, it is subordinated to the family council, with a more tactical-operational role, based on the proposals, principles, and values of the family. May or may not include family members.
There is a relationship between corporate governance in family businesses and the actions of the partners. The committee is a body without a deliberative role, in which the controlling group discusses, through its representatives, typically corporate issues or those that concern exclusively the partners. The committee’s recommendations are taken to the shareholders’ meeting (of the holding company or the main company), which approves and formalizes them. In this way, the body has the role of preparing and guiding the performance in the company’s general meeting”.
Like any organization, a family business needs to adopt governance to ensure business strategies are achieved. In fact, because of the blood ties involved, family businesses probably need tighter control than other businesses if they are to survive for generations.
Corporate governance protects the business from the normal and foreseeable challenges that family involvement brings. We hope you were able to understand the importance of Corporate Governance in family businesses. The subject generates many discussions and it is possible to address the advantages of corporate governance on several fronts, but we believe we have given a good overview of the subject.