Family Governance: What, When, Why and Why Not ?

July 21, 2017

 

Could one imagine a prosperous nation or even a successful corporation without good governance? No. But, when it comes to families owning those businesses, the notion of governance seems to have few takers. Whereas, the reality is that if you are a member of a business family, you cannot afford not to think of governance from family perspective. After all, a family, just like a nation or a business, has its stakeholders, their needs, challenges, and a future to be worked towards. It also has stated or unstated vision and a set of values. While, a nation or a business ensure stakeholder welfare and achievement of goals through policies, processes, laws and various bodies, a business family also needs to put in place Family Governance.

 

What is Family Governance?

 

The growth of a family, and its business invariably means a change in family members’ circumstances, requirements and expectations with time-giving rise to a separate set of complexities. While the founder is around, he is usually the sole decision maker and everyone’s interests are more or less aligned. However, with the growth of business and its transition across generations, not only the decision makers may increase, but different family members would have varied stake in the business. For e.g. aspirations and needs of family members working in the family business are quite likely to be different from those not working therein.  Their interests, understandings, life stages and hence needs may be really varied. It is only natural that such a situation would lead to disagreements, arguments, and in several cases - disputes and splits.

 

Family Governance can be understood as a three step process.

  1. Understanding various stakeholders’ requirements: Different family members would have different needs, and all of them may or may be aligned with the business and its needs. It is crucial that the process includes taking into account all members’ concerns and requirements and arriving at a collaborative decision.

  2. Building cohesive policies, processes and decision-mechanisms with oversight and accountability: This would also include establishing how family would deal and further the common vested interest- the family business.  The degree to which each family may want to formalise their inter-se rules would be different. There are instance of families such as that of the Murugappa group following an unwritten code for decades. But, in most instances families would prefer a written down charter.

  3. Continuous monitoring: A governance process without an oversight mechanism would be like a toothless tiger.

As good corporate governance increases the chance of success of a company, timely family governance increases the chances of enhancing the prosperity and viability of the of the family business.

 

At its heart, governance is about trust, fairness, communication and accountability. After all, almost five in every six family businesses fail during transition due to a lack of communication, trust or next generation competency.

 

 

Why is it important for business families to have governance?

 

If a good government is the major differentiator between a developed and an undeveloped nation, Family Governance is the differentiator between the 3% family businesses that survive to the fourth generation and the 97% that do not. Though many of the three percent might not put that name to what they do, they follow one or the other form of governance.

 

The fundamentals that Family Governance seeks to put in place are well defined authority and responsibility, efficient communication and decision making, aligned family and business visions, proper succession planning, family welfare and sustainable and continued family income. Howsoever, basic these fundamentals might seem to be, most of the family businesses are found wanting on these fronts. 

 

Another way of understanding the importance of Family Governance is by looking at consequences of its absence. Apart from the impact on business continuity, there are several outcomes such as lower income per member, less bright and secure future, improper fulfilment of stakeholder needs, increased conflicts, etc. These outcomes themselves contribute continuity related issues. Thus, Family Governance is not only important from the long-term view but also the short-term.

 

What are the challenges in achieving Family Governance?

 

It is perceived as a complex issue: A wrong yet widely prevalent perception about Family Governance is that of complexity. Many business families feel that family governance is very complex and difficult to handle. It is true that family governance requires a lot of investment in terms of time, money and energy. But, the objective of family governance is to reduce the complexity that creeps in because of expanding businesses and owner families. Many farsighted business families such as Godrej or Burmans (Dabur) have extensively invested in family governance in order to avoid complexity arising from conflicts, bad communication, improper transition, etc.

 

Family leaders or members delay initiation: Another common mistake committed by many business families is to procrastinate establishing family governance. Some feel it is too early, others feel their families are too small to warrant any sort of governance. They would rather make do with their own solutions based on experience and intuition. No matter how big or small your family might be or which stage it might be at, there is always need for family governance. The form and extent of governance will depend on size of the family, involvement of members, number of generations, ownership model, etc. If there is any right time to usher in Family Governance then it is now. One needs to understand that establishing Family Governance might take a lot of time. Moreover, it is not a onetime exercise, rather it is an ongoing process. Hence, it is wise to begin today. 

 

Current situation is too convenient to think of change: It might also happen so that the current situation of the business and the family is under control. And the leader and the others find it too convenient to not work towards any sort of change, howsoever promising it might be. They might not even see any promise in the change because the going is good. But, they need to see beyond the rosy present and brace themselves for the future contingencies. And that is where Family Governance comes to rescue.

 

Difficult to get all Family members on board: Many a times, the family leader would identify the need for governance but finds due to varies interests and generational gaps, finds it tough to get all family members on board to agree to a certain mechanism and process.

 

Failure to implement: In many other cases, families do establish Governance but there is no proper implementation. The common reasons for this lack of implementation involve lack of involvement of family members, incongruence between family requirement and form of governance or bad advisors. But, this should not be mistaken as the failure of Family Governance but as a failure of those responsible for implementation. The solution to this does not lay in abandoning Family Governance but in finding the weak link and fixing it.

 

Do you want to begin organizing Governance in your family but want to learn more about how to go about it? For our readers, In the next edition of the Private Client Realm, we shall take you through the steps of initiating Family Governance.

 

 

Sources:

Williams and Preisser, 2003

 

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