April 17, 2018
Good governance framework is essential to survival of any business enterprise. The best-known companies who have been in business for decades have evolved through well thought-out governance structures that outlived the promoters of such companies. The need for a good governance framework becomes more important in a family business construct, as another layer of consideration is thrown into the mix with family ownership. The issues to consider may not be so apparent at the early stage of a family business since the family head is still typically in charge of most business decisions at that stage. As the business grows and the family welcomes more extended members, ensuring sustainability of the business while at the same time keeping the big family unified may be a herculean task. At this stage in the family business development, the need for a solid family governance framework becomes pivotal for the survival of the family business.
Successful family business stories are majorly attributable to good family governance practice in place. For example, the Walmart Stores in the United States of America was founded by Sam Walton in 1962 and is currently owned by the Walton family; Porsche Automobile was founded in 1931 by Ferdinand Porsche and is currently owned by the Porsche family in Germany; and Toyota Motor Corporation was founded in Japan in 1937 by Kiichiro Toyoda and is currently owned by the Toyoda family. A good family governance structure embodies the values, principles and guidelines on which the family is built. It forms the bedrock of the family business and provides a foundation that establishes the family business concept and its operations. A research conducted by the International Finance Corporation (IFC) shows that an estimated 95% of family businesses do not survive the third generation of ownership due to lack of proper family governance structure.
Family Governance has been described by various experts as consisting of 3 pillars, which are family assembly, family council and family constitution. We will be laying the foundation for an in-depth expository on these 3 pillars of good family governance structure in this article. Subsequent articles in this series will expand on the subject and other important issues relating to family governance and business governance.
The family assembly is simply a periodic gathering of all family members where issues surrounding the family and family business are discussed. The assembly serves as a knowledge-sharing session, where the family values, family vision, business dealings, current operations, future expansion plans, etc. are communicated. The forum assists to instil a sense of ownership and responsibility in the family members. It, however, goes beyond the founder or family head dictating how the family and family business should be run. Each family member present at the assembly expresses his/her mind on his/her views or opinions on the family and the family business.
Family assembly may be held once or twice in a year and could last a day or two. Some families prefer to set some form of membership requirements for attendance of family assemblies. Minimum age limit is a common requirement. Others include ability to vote at the family assembly, attendance by inlaws, extent of involvement of in-laws, etc.
Decision making in the family assembly should be all-inclusive to ensure everyone is valued and to keep the family united. Valued family members make for a closely-knit and focused family assembly. Trust is key in any family and business setting. Creating an all-inclusive atmosphere promotes trust, making it easier for the family and family business to grow in the right direction.
As one will imagine, the picture painted above appears dandy where the family is at the nuclear phase or early extended family phase. As the family becomes bigger, with in-laws and grandchildren making the numbers, having thorough discussions or even holding meaningful family assemblies may not be feasible. A leaner forum, consisting of a representative group of the entire extended family, has to be put in place. This is usually in the form of a family council.