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Why to adopt governance mechanisms?
PERFORMANCE
THERE is an increasing global trend for
family owned businesses to take on a
more formal governance. According to
KPMG Australia Family Business survey
2015:
• 52% of companies have a formal
board of directors (39% in 2011).
• 51% of companies have a formal
policy in place when it comes to the
selection, remuneration and promotion
of family employees (26% in
2013).
• 43% of companies have a shareholder’s
agreement in place (36% in
2013).
• 31% of companies have a Family
Constitution or code of conduct
(20% on 2011).
The latter, in particular, is a sign of the
serious intent of family-owned concerns to
develop a shared vision of their company.
It is also an excellent way to side step major
conflict.
Better governance –
better performance!
Good governance and formal governance
mechanisms have a positive effect on the
performance of the company, as they enable
the owner to keep his finger on the pulse of
the business progress.
A deeper look in the governance structures
of high-performing family businesses confirms
this statement. Specifically, the analyzed highperforming
family businesses:
• Had a formal board of directors, usually
with a non-family non-executive
director;
• Adopted already the governance
mechanisms that lay out the expectations
of the company and individuals
and facilitate agreement and better
communication between all parties
involved (business / family / owners).
These included adopting a Family
Constitution, shareholder meetings,
shareholder agreements, and
policies for family and non-family
employees, as well as a succession
plan outlining strategically the future
of the family in the business.
• Used business management practices
that observe what goes on outside of
the business. These involved benchmarking,
competitor analysis, annually
reviewed strategic plans, and
progress reports.
Unique company – unique approach
There is no cookie-cutter, one-size-fits-all
method to establish governance mechanisms.
One of the best ways is to let the governance
evolve as your business progresses and goes
through its necessary ownership and family
lifecycles.
For example, while not all firms will benefit
from implementing a formal board of directors,
establishing one will become increasingly
important and valuable as they grow. It helps
lead to better management of risks, a more
professional work culture, a higher calibre of
management, and makes it easier to procure
outside investments.
Another example is a Family Constitution
or Code of conduct, which is usually
established by companies when the business is
transitioned from a founder-controlled institution
to a sibling partnership
Outside VS inside nonexecutive
director
Choosing a non-executive director from
outside of your family offers the potential
benefit of a more objective, fresh perspective
on the business and can lead to a superior
business performance.
Despite this, more and more familyowned
businesses are doing the opposite,
putting a family member in the position of a
non-executive director of the board. Some of
the reasons for such decision are:
• a family member wanting to continue
to be involved in the business, transitioning
from managing the family
“
There is no cookie-cutter,
one-size-fits-all method
to establish governance
mechanisms.”
- Bill Noye
concern to sitting on the board;
• a family member wanting to participate
in family business governance;
• family battling to find the right outside
non-executive director to take
on the role.
Trust is paramount in this decision, and
lack of trust to someone outside of the family
is often why businesses tend to appoint a
family member as the executive director rather
than an outsider.
Often business members are reluctant to
employ non-family executive directors as they
feel the outsider won’t understand how their
business operates, they don’t want someone
else meddling in how they work, and they are
reticent to share confidential information with
a non-family member.
However, with the increasing complexity
of a growing business and broadening number
of family stakeholders, formalising governance
is invaluable. Particularly as a family-owned
business transitions from a founder-controlled
business to a sibling partnership.
This is when it is especially advantageous
to have a non-executive director who can better
observe the development of the business,
help develop leadership and management approaches,
and also mentor the younger family
directors.
Aligning family and business needs
Family governance is critical for aligning
the needs of both family and the family business,
and for developing a shared vision for
the future of the business.
Creating a family council or code of conduct
is imperative as it significantly decreases
the likelihood of conflict between family
members. It is also the perfect forum for family
members to discuss any issues of concern
and to clarify their expectations of each other.
A formalized governance is definitely an
increasing trend within the family business
community. That said, as a family business
owner/director, you still need to continually
examine how you can make the various governance
mechanisms more effective.
Board roles should be abundantly clear.
You may also need to formalise the way you
and your family evaluate the board performance.
Whatever the case, by instituting family
governance mechanisms, you are definitely
moving in the right direction.
THIS ARTICLE WAS FIRST PUBLISHED BY BILL NOYE,
KPMG PARTNER-ENTERPRISE, AUSTRALIAN PRACTICE.
What it takes to get to NEXT GEN
SUCCESSION
NOT every family business makes it to
the second generation of ownership, let
alone the third. In fact, the odds aren’t in
the favour of the majority at all.
So how do the lucky few make it successfully
through the other side of succession?
It starts with the family values
becoming the company’s
When the business is purely the financial
arm of the family then it’s difficult for the family
members to invest much more in the business
than what they need to for a simple profit.
It’s when you give the business a backbone
of meaning with core values that you enable
the family to see deeper purpose in their role
in the business.
A mission statement allows the family and
employees to always be fundamentally working
towards a commonly cherished goal that
the business allows them to fulfill.
Not only is this a strong motivator to produce
the best work, but also allows a strong
culture to be built around core values in the
business – ensuring that not just family members,
but every employee wants to come to
work every day, as they feel part of something
unique and good. A culture built on values allows
a business to be different to “just another
job”, ensuring loyalty.
Communication holds
everything together
In order to make your family business as
strong as possible, you have to start with your
family. Personal relationships are an integral
part of such a company, and it’s important
to ensure that any issue that arises between
family members is treated professionally and
as well as possible – not only so no knock on
effects are felt in the business, but also because
sometimes we can learn a little something
from professional conflict resolution steps on
how to treat those closest to us better when
our feelings are hurt.
When you handle your personal relationships
with a little more professional courtesy
then you’ll notice your communication will
naturally increase – you can schedule in family
meetings to keep everyone up to date with
each other and about business matters, and
polish those conflict resolution skills.
After good communication comes
increased understanding
Good day-to-day communication can
make a written out succession plan a mere
formality, but still an important one.
When there’s no formal succession plan
then the event will hold too much mystery
and far too many questions to smoothly
change from one generation to the next.
Succession planning is also not just about
finding the next CEO of the business – one generation
is handing over to every level of the next,
from managers to owners and costs including
the older generation’s retirement and estate
taxes need to be taken into account in the plan.
A family business that continuously plans
for succession strategically, no matter how
near or far in the future it is, is likely to make a
seamless transfer that has the next generation’s
complete buy in.
Mentor the next generation
into their best positions
Whether your child’s skills are perfect for
the business, or are better suited for a career
outside of the family business, a strong base
for the family and the business is built when
people are encouraged to develop the talents
that come naturally to them.
Taking this tact will also ward against the
“successor’s curse”, where the next generation
feels pushed into their parents’ roles and the
employees don’t see skills, but rather just a
last name. When the successor is allowed to
develop into their own business person before
taking over, then they have a chance at effective
leadership.
THIS ARTICLE WAS FIRST PUBLISHED BY CHRISTOPHE BERNARD,
KPMG PARTNER, PARIS PRACTICE.
20 WESTERN SYDNEY BUSINESS ACCESS SEPTEMBER 2016