Corporate governance in a family business face multiple challenges, from the lack of independence to succession planning, among others. Here is a non-exhaustive list of challenges that arise in these settings and which family businesses must stay wary of.
A ‘family business’ is defined here as any company in which a family is the principal shareholder and/or exerts a decisive influence on the strategy and/or operations of the company due to its position within the management or the board of directors1.
1. The Complexity of Family Dynamics
Managing a family business often involves an overlap between family and professional roles. Family members may simultaneously hold multiple roles, such as owner, manager, and employee, which can lead to conflicts of interest and internal tensions. Addressing and agreeing on strategic decisions can be complex and even contentious, particularly when they involve the discontinuation of business activities, investment in international distribution, or the need for a holding company. These decisions must therefore be approached and discussed with transparency.
2. The Lack of Formalised Practices
In the early generations, family businesses often operate informally, with unstructured practices and procedures. This can lead to inefficiencies and internal conflicts as the business and the family grow. The absence of clear policies on succession, family member employment, and compensation, for example, can create tensions and uncertainties.
3. Maintaining Family Harmony
Maintaining harmony and cohesion within the family is crucial for the stability of the family business. Unresolved family conflicts can negatively impact the business, affecting decision-making and the motivation of family members. Implementing conflict resolution mechanisms and transparent communication can help prevent and manage these tensions.
4. Balancing Family and Business Interests
Family businesses must constantly balance the interests of the family with the professional demands of the business. This includes managing expectations regarding dividends, reinvestment of profits, and compensation of family members involved in the business. Effective governance requires clear and fair policies to manage these aspects.
Independence and Autonomy
Ensuring independence and autonomy within family governance is essential. This involves a clear separation between operational management and family interests, which can be challenging in a context where the family is heavily involved in the business.
Managing Diverse Expectations
Family businesses sit at the intersection of family, business, and environment. Intelligent management of diverse expectations is necessary to sustain success and defuse potential conflicts. It is crucial to establish clear priorities, whether for the business (“Business First”), the family (“Family First”), or, in some cases, the individual (“Me First”), an attitude often observed in company founders. An intermediate solution is also possible, but the family must be aware of the consequences of its choice for itself and the business.
5. The Need for Formal Governance
To overcome the unique challenges of family businesses, it is essential to establish a formal governance structure. This includes clearly defining the roles and responsibilities of shareholders, board members, and management. Formal governance helps create effective communication channels, align the interests of different stakeholders, and ensure consistent decision-making.
6. The Importance of an Independent Board of Directors
An independent and competent board of directors is crucial for the governance of family businesses. Independent directors bring an objective perspective and essential professional skills to oversee management and define the company’s strategy. Their independence also helps reduce conflicts of interest and strengthens the credibility of governance.
7. Managing Family Conflicts
Family conflicts can be destructive for family businesses if not managed effectively. It is important to establish conflict resolution mechanisms, such as family councils or external mediators, to resolve disputes in a constructive manner. This helps preserve family harmony and maintain focus on the company’s strategic objectives.
8. Communication and Transparency
Transparent communication and information disclosure are essential for the governance of family businesses. They help maintain trust within the family and with external stakeholders. This includes effectively communicating the company’s performance, strategic decisions made, and family policies to all family members. Transparency helps build trust, align expectations, and prevent misunderstandings.
9. Succession Planning
Succession is one of the most critical challenges for family businesses. The transition of leadership from one generation to the next is often marked by conflicts over the choice of successor, especially when several family members aspire to leadership positions. Clear and early succession planning is essential to ensure a smooth transition and maintain business continuity.
Ensuring the longevity of the family business requires preparing the next generations to take over. This includes their education and training for future roles, as well as their gradual involvement in the management of the business. A structured talent development process and mentorship opportunities are essential for preparing future leaders.
Read our article on succession planning here.
To conclude
The governance challenges in a family business are numerous and complex. However, with an adequate governance structure, effective communication, and strategic planning, these challenges can be overcome. By adopting formal governance practices and preparing future generations, family businesses can not only survive but thrive in the long term.
The information presented in this article is based on specialised documents and manuals on family business governance.
- Guide de gouvernance pour les entreprises familiales ↩︎