A family business may choose any one of a number of governance models such as an all-family board, a partially independent board, or an independent board, or even an advisory board.
Whichever style of board is used, three elements serve as enabling forces: clarity of roles, responsibilities, and how decisions are made; understanding of the culture - the vision and values - and how that impacts decision making and implementation; and communication - transparency and information flow that enables the board to fully understand the challenges and opportunities facing the business and add real value as the company refines its strategy, grooms new leaders, and continues to grow. Today we look at clarity as a governance enabler.
Clarity of roles and responsibilities: In a family business, there are family members, owners, members of management, and a board. In small businesses, these roles are likely to be filled by the same people, and decisions ranging from geographic expansion to estate planning to family vacation plans move fluidly.
However, businesses that endure generations eventually grow to a point where they can no longer operate that way. Directors need to know what decisions they can make and which ones must be made by the shareholders.
Family: When the family grows large enough, a family council can be helpful. The family council can be a good forum for developing policies regarding employment of family members.
It should be clear, however, that the council is providing input and recommendations on this subject rather than making final decisions.
Owners: The family council group and the owners group will usually have significant overlap in membership; however, they may not be identical.
In light of the high level of membership overlap and the informal nature of many family businesses, extra care may be needed to avoid the frequent confusion that arises between the role of the family council and the role of the owners.
Binding decisions about the company are the purview of the owners and not the family council - it is the owners who elect the board and approve major decisions such as whether to make an acquisition or sell the company.
Board: The board governs the business on behalf of the owners. Boards operate through committees as well as through the full board.
Management: Management runs the company under the leadership of the CEO, who reports to the board and/or owners.
The writer is a certified public accountant and manager audit at KPMG. You can reach him with questions on: email@example.com.
To be continued next week.