Family businesses are vital to the UK economy and contribute hundreds of billions to the UK GDP . They have unique advantages including shared values, enduring trust, and a central commitment to the long term future of the business. However, like any other business they must also consider the challenges that confront them, and for a family run business, clear and sustainable governance can sometimes be a key challenge.
There are of course two types of governance relevant to a family in business – corporate governance of the business itself, and family governance. This article focuses on the corporate governance, although in many families there will be cross over between the two and many of the principles discussed below will equally be relevant to family governance.
Governance is central to ensuring the long-term profitability and sustainability of a family business. In this article, we'll look at some tips for family businesses on how to conduct themselves in a way that fosters professionalism, openness and collaboration and allows the family to develop their business in harmony.
The structure of a business is crucial. The directors must know of and understand their legal duties to the company, and particularly where there is a group of companies, how to balance their duties when sitting on the boards of more than one company in the group. Attention must be paid to conflicts of interest, which must be managed appropriately, and the company should have appropriate constitutional documents which clearly lay out the rights and responsibilities of both the shareholders and the directors.
Define clear roles and responsibilities
Establishing clear duties and responsibilities is one of the key components of successful governance in any business, but particularly so where a business has both family members and non-family employees and executives. People, at whatever level, need to know what is expected of them, who is supervising them and what the chain of command is. Confusion over areas of responsibility can easily breed resentment and cause longer term difficulties. Businesses need their people motivated and working together, whether shareholders with executive roles, employees or directors. Having clearly defined responsibilities encourages professionalism, accountability and transparency, which then feeds into the bigger business picture by reducing the risk of tension between those with overlapping roles and promoting organisational efficiency. Having clearly defined roles will also assist in the legal sense– both the company and the relevant individuals will know whether they have legal directors' duties and to which company, because their role is clearly defined and they have a good understanding of which elements of the company they are responsible for.
Consider the value of independence in your governance structures
Independent directors or an independent advisory function such as an advisory board are both governance structures that family firms can use to their advantage. Including outside experts with a range of specialties and experiences ensures objective decision making as well as offering new insights and a diversity of thought. Independent directors can offer direction, question presumptions, and even sometimes mediate during contentious conversations, minimising potential conflicts and being a great resource for growth. Again, the legal structure is crucial here – any director, particularly those who are new or non-family, must be clear on the board's powers and responsibilities, what decisions the board is empowered by the company's articles to take and what decisions are reserved to the shareholders. Without sufficient clarity on the legal constitution of the company, mistakes can be made and disputes may arise.
Professionalise management and operations
In some family businesses where governance has evolved over time, some thought might need to be given to the processes currently in place and how those might be strengthened or modernised to reflect the current duties of the directors, as well as the markets the business is operating in. Clear management structures with high expectations for performance, robust decision making procedures, and fostering a meritocratic culture are all signs of a professional, results focussed environment. Family members seeking to join the family firm may wish to pursue education and experience outside the business first in order to bring in new perspectives and best practices. The business becomes more competitive, versatile, and better positioned for long-term growth by professionalising its management and operations.
Promote open communication and transparency
Any business must have effective communication, but this is particularly true of a family business . Transparency and communication is most effective when led from the top, and communication between family members as well as between family and non-family executives should be encouraged. Regular family gatherings, management reviews, and open lines of communication help to foster mutual respect and informed decision-making. Again, clear corporate documents, so that everyone is clear what decisions the board is empowered to take and what role the shareholders must play, is key in building transparency throughout the company.
Planning for the future
Implement succession planning
Planning for succession is a crucial part of effective management in family businesses. The more preparation and effective management of the succession question that a company can invest in, the more likely it is to guarantee a smooth transfer, maintain continuity, and prevent potential disputes. The future leaders of the company should be prepared for the role and supported in taking it, with their skills already matched with the demands of the company. Succession planning can be complicated, but the earlier the conversations start and the more open board/family members are about their expectations and the process, the more likely the company will benefit from a smooth and well managed transition.
In order to formalise processes around big decisions such as board members and succession one option is to consider a family constitution document, which can outline the goals and governing principles of the family business and serves as a compass for the family throughout generations as well as at key moments such as generational handover. A constitution can help to develop a family's a common understanding of their collective objectives, plans for the family's and business's future, methods for resolving disputes, and more general decision-making procedures. Whilst often a family will wish to keep as much flexibility as possible, and not be tied down by very prescriptive rules, a family constitution can be as flexible as the family requires, whilst still assisting by formalising certain rules or processes and encouraging accountability, fairness, and transparency which can help to guard the long-term stability of the company.
Family businesses are often entirely individual in the way that their governance structures and internal procedures evolve, and while of course each business's governance systems are as unique as the business itself it is useful to think about how decisions get made, making sure the directors properly fulfil their duties to the company and that there is a clear division of responsibility and chain of command. This will stand the business in good stead for the challenges that may lie ahead.