Governance is a word that is often thrown around by the family business advisory community and with good reason.
However, it is often taken for granted what we mean by ‘governance’ and so to kick off this series on that very subject I thought it would be useful to provide an overview of what governance is. Why it is useful, some of the common barriers to putting governance in place and then some tips on how to get started.
You can find details of the Wates Principles mentioned in the show here: https://www.frc.org.uk/getattachment/31dfb844-6d4b-4093-9bfe-19cee2c29cda/Wates-Corporate-Governance-Principles-for-LPC-Dec-2018.pdf
You can also access the brilliant report from the IFB Research Foundation here: https://www.ifb.org.uk/media/4133/governance-in-family-businesses-evidence-and-implications_web.pdf
Transcript of Episode:
Well, hello and welcome to this week’s episode of the Family Business Podcast. This is episode one of series one and so for regular listeners, you may be thinking why it is series one, episode one when there’s already 60 odd other episodes? Well, if you haven’t already, head over to the preview episode that has also been published today and that will explain why the podcast and move into a series based approach.
And the first series is Governance. So, what I thought I’d do in this episode is discuss or chat about what governance actually is. it is a phrase that is thrown around quite a lot by, the family business advisory community.
Rightly so. It has a, a huge role to play in the successful outcomes of family businesses. But, I think a lot of times we take for granted that everybody out there understands what we’re talking about when we start rabbiting on about governance. So in this episode I’m going to cover what it is. I am also going to cover why it might be useful.
I’m then going to discuss some of the common barriers as to why families tend not to have governance in place. And then some tips as to how to get started with your own governance journey.
So, what is governance? Well, there is no universally accepted definition, so I can’t read something out that says, this is what governance is. There’s various different definitions that various different organisations, use, but none of them really are, tailored to family businesses. So here’s a go at my, summary of what governance is.
And for me, it’s the collection of rules, systems, and processes that are put in place to help set and deliver the objectives of the family and the business whilst also holding the business and its key stakeholders to account. Now that may not be the most succinct description or something that just rolls off the tongue.
If you want something like that, John Davis or Professor John Davis, I should call him did summarise it rather brilliantly by saying ‘it is bringing the right people together at the right time to discuss the right things’.
Broadly, governance can be split into family governance and business governance.
Now, as you can imagine, every business has some form of business governance, and so that’s not necessarily exclusive to family businesses. Whereas family governance really is specific to family owned businesses, and research suggests that there’s not actually a huge amount of governance in place within family businesses across the world.
Now we get into some of the reasons that might be later on. But to start off with, it’s worth just summarising what some of the pieces of family governance that can be put in place are. Now, over the course of this series, I am going to be covering this in much more detail. So this is just an overview at the moment, but on a following episodes, I will be doing a more detailed descriptions of what each of these are.
So, let’s start with family governance now, as the name suggest, this deals with the family, and we don’t just mean family members that are within the business or have ownership within the business, but generally the family overall. And they can help ensure that the voices and opinions of everybody within that family system are heard .
The implementation of good family governance helps to create the right forums for discussions to take place in the right environment with the right people. I what professor John Davis was saying. And governance could be formal or informal, legally binding or just acting as guidance. Family governance is voluntary, so it’s important to understand that this is stuff that is entered into voluntarily and therefore it’s not something that is necessarily legally binding, but perhaps morally binding on the family once it’s been implemented.
The family charter is the first piece of family governance that I’m going to mention today. And the things that are covered within this, and remember, I’m going to go into much more detail in future episodes, but in summary, the family charter can cover things such as who is family, i.e. does that include the spouses?
What is the overall purpose of the business? What are the employment policies for family members, and how can the family communicate its needs to the board? So it can cover all of those things. Plus may others, and often interlinks with something called a family assembly. Now, a family assembly is a forum for all family members to come together.
It’s a great forum for ensuring good communication and relationship building, particularly as the business and the family grows. So if you mentioned businesses going into third, fourth, and fifth generation. You’ll have groups of family, within that business who may never see each other throughout the year other than let’s say a family assembly or something along those lines.
So using it as a forum to ensure that everybody is communicated to is a great way to, as I say, build those relationships within the family. There was also something called a family council. Now this is a specific forum. For the family to discuss and agree their values, their visions, the needs and wants from the business, and can help agree policies such as education and funding for future generations, stuff like that.
So, as I say, we’re going to cover that in much more detail over the coming weeks. There’s going to be specific episodes on each of these. , so if those descriptions of peaked your interest. Stay tuned for future episodes.
Alongside family governance, there’s obviously business governance, so there’s the board of directors. There’s things like shareholders agreements, articles of association. Again, I’m going to cover those in a lot more detail, but later on in the series.
Right, moving on to why governance might be useful. Now it’s important to reiterate here that when we talk about governance, we’re talking about good, effective governance, and for it to be good and effective, it needs to be something that is bought into by the whole family. It’s not something that can be done piecemeal.
It’s not something that can be done Willy nilly. It’s something that needs the right level of attention, the right level of investment, both in time and in resource to ensure that that is something that becomes part of everyday life within the family business. Assuming that’s the case, there are a number of advantages that having this good, effective governance in place can bring to you and to your business.
So firstly, it allows you as a family business owner to both manage the business, but also to manage the relationship between the family and the business. Now, given that family businesses are more complex than non-family business governance is there to help you out. It’s not something that is there to stop you from doing stuff or from having a, putting a brake on your behaviour is something that is designed to act as an enabler to help you to achieve what you want to achieve with the business. Families are emotional systems and whenever emotions are involved, logic tends to go out the window. What governance does is to help manage the situations within which those emotions can be at play.
So. As I say, if it’s something that is bought into and adopted in a good spirit by you and your family, the benefits are huge. They are probably too many benefits to list out. I imagine you don’t want me prattling on for the next hour listing all the various benefits that can come from strong governance.
So what I’ve done is highlighted some of the key areas that it can be really beneficial to the business. And the first one I want to talk about is that it allows you to clarify roles. Now that’s not just within the business, but also within the family. So for example, creating the right forums for families to communicate and for your family to communicate, avoid people interfering.
In a form where they’re not necessarily supposed to be interfering. So a prime example here could be that there is an overexcited spouse who has a particular view on a particular thing that their spouse should or shouldn’t be doing. And rather than continually raising that at every given opportunity, there could be a foreign creative where everybody who is within the family.
Doesn’t necessarily have to work or own. The business is given a forum to communicate their concerns, and so by doing that, the business can get on with doing what the business needs to do without that interference happening. The other element in terms of role clarification is that everybody knows what their roles are.
if this isn’t the case, then the business can get confused. Individuals within that business can step beyond their remits. They may feel as if they are, able to go into a particular area of the business and wreak havoc. and that can obviously lead to complications and conflict , later on down the line.
So good governance can help to clarify what everybody’s role is within the business and clarify their responsibilities, which also means you can hold them accountable.
This. In turn helps the business to run more professionally and more responsibly. And it also ensures consistency and that consistency is important because if, for example, there is a rule that means that a NexGen can’t join the family business unless they have got five years experience doing something else and a degree, for example. It means that there is consistency amongst everybody within that next gen. It means that somebody can’t just rock up and go, I know that it’s all but give us a job because the policies are there to ensure that nobody’s April to do that.
One of the other key benefits of strong governance is that it helps to create better communication and the right communication happening in the right forums. So as I say, as well as the avoidance of interference, it means that everybody is discussing things in the right place. So better communication is generally linked to better business outcomes.
If you flip that on its head and say. Do we want worse communication or do we want poor communication within our business? The answer is probably going to be no, and therefore to help create better communication. Putting in these elements of family governance will help you to do that. This obviously helps with disputes.
There’s no amount of family governance that can be put in place that will alleviate disputes. we are humans after all. but there are things that can be done that will ensure that should any disputes come up. There is a way of dealing with those. And so that may in turn help prevent some, not always a say, but will help with dispute resolution going forward as well.
So imagine you have a very controlling and dominant person or group within your business or within your family. Having the right governance in place can help manage the personalities within that group. So it can ensure consistency and fairness and also to ensure that , there’s no single voice that is more dominant than another just because they shout louder or just because they are more belligerent.
It can be something that has been used to ensure that people who might have fantastic ideas but are too scared to raise them, have that voice.
And given the lack of governance that’s in place amongst a large number of family businesses across the world, you are giving yourself a competitive advantage. So what that competitive advantage means is that if, for example, you are looking to attract staff into the business and there isn’t any governance in place, and the whole family system and the emotions are running havoc over.
the business that’s going to come across to the people that you’re looking to employ within the business, whether you know it or not, it will be apparent. And so by having this strong, effective family governance in place, that will also come across to your perspective employees and is likely to be more attractive than say, the other business down the road that doesn’t have this.
So it can help to increase staff wellbeing, it can increase the wellbeing of the family because everybody feels listened to because everybody has the form that they need in order to raise their concerns and have their views listened to. And ultimately it can help ensure the survival of the business between generations, which if that’s your aim, is obviously a very good thing to have in place.
So if it’s such a good thing, why does the evidence show that family businesses aren’t implementing this type of governance. Well, there are some common barriers, the first one being you’ve already got enough to do. You’re trying to run a business, you’re trying to manage your family, you’re trying to manage the interaction between both of those and there aren’t enough hours in a day to then sit down and go, right, okay, how can we sort this out?
However, the time spent in doing this and doing it well. Is going to have such good rewards and such positive impact on the family that it is time well spent. There is the saying you need to spend more time on the business than in the business, and this is one of those occasions where this is something that you can do when you’re spending time on the business rather than spending time in the business.
It’s not necessarily something that you personally have to take on. It can be delegated to either a professional work consultant or somebody who can come in and help you with this, or somebody within the family whose role it is to take on the implementation of this good governance. So the fact that you’ve already got enough to do it doesn’t necessarily mean it shouldn’t be done.
The second barrier is often that governance is irrelevant and that the business is either too small or that there aren’t any issues that we trust each other. We really close as a family. We don’t anticipate experiencing any challenges in the road ahead. We hear so many times when we’re working with families on a point where there is this conflict that they took that attitude that they had the view that we don’t need any of this governance because we trust each other because we are a very close knit family.
We’re not going to fall out. We’re not going to have any disputes. But that’s not to say that the discussions around governance shouldn’t be held. It. It might also be fun to, let’s pretend, let’s pretend there’s a conflict further down the line. What can we anticipate as being those future conflicts?
Could it be in the next generation, for example, where somebody doesn’t want to join the business but expects to be paid exactly the same as somebody who has drawn the business? How would you deal with that? What governance can you put in place. In order to tackle that issue. And when you start thinking about where you want the business to go and what you want it to look like, not just for you, not just for the next generation, but beyond, you can then start to imagine that actually we might need to start putting some structures in place to deal with the fact that the complexity will grow as the business and as the family grows.
If there’s only a few of you within the business at the moment and everything rosy. What happens when the number of family members double and then what happens when that happens again in the future generation, because as shareholdings get diluted amongst the next generation, what tends to happen is the emotional attachment to the business becomes less.
And so the people who are holding shares in the business that you know, somebody two, three, four generations ahead of them founded, they may just see that as an income stream. And if that’s the case, the emotional attachment to the business isn’t there. And so the likelihood of conflict can increase. So putting governance in place now to cope with that is not a bad thing.
Governance that is, if you, like the business can grow into, is still very, very worthwhile. It, it can almost help to the business to strive towards. I’m achieving that level of complexity. So size and the fact that you trust each other and that you aren’t having any challenges at the moment is no excuse for not putting in place good governance because it’s better to put it in place and not need it than not put it in place and think we should have done that.
The other argument is that it can become a break on behaviour. So if there is a dominant voice around the kitchen table or the boardroom table, and there’s no governance to control that, there’s likely to be some resistance from that dominant voice to implementing some governance. But that doesn’t mean it shouldn’t be done, actually is probably a reason for it being done.
Because should that person have that dominant voice, should that person be the only one that is able to have any input on the business? If it is a family business and everybody is in it together, then the likelihood is that everybody should have a voice. If not, it’s not likely to last beyond that current generation.
So again, I wouldn’t see it as a break on behaviour in some circumstances that we’ve worked with. It’s actually become an enabler. It’s actually enabled people to fulfil their role better. It’s allowed them to grow personally. It’s allowed them to feel filled their own potential far better than had it not been in place.
So don’t see it as a break on behaviour. At the end of the day, that governance that’s put in place is bespoke to your family and to your business. It’s not a one size fits all. So it’s not as if somebody’s going to come in and go, right, this is what you have to do. It is much more, how can we be more effective as a family in order to make the business more successful?
Another argument is that it makes the business to corporate, and I think my previous point kind of knocked that one out of the park as well because the governance can be bespoke to your business. It can match whatever you want to happen. Within your family, whatever you want to happen within the business.
So it’s not something that turns you into this corporate, faceless entity that is driven by process, but it does help put the right processes in place that reflect the values of your family. So again, I would argue that it’s a way of enhancing the values that you bring as a family to the business.
But putting in place this governance, going back to the issue around, we already trust each other. Well, no points I should have mentioned at that point, is suggesting to a family who. Get on really well. Who are effective in the running of the business that, Hey guys, we need to put some governance in place.
Might start people thinking that, hang on, does this go and not trust me? Why are they asking for governors to put in place if we trust each other? And again, the answer to that is we’re doing this because we trust each other. Because we can have the conversations about, well, what situations do we want to avoid in the future?
What do we want to not have to deal with? And what do we want to, remove from the, potential for conflict, for example? And because you trust each other, you’re able to have that conversation. So it shouldn’t be seen as something that’s being bought in because you don’t trust each other. It should be something that’s seen as, because we trust each other.
We can have these conversations. So again, that’s something that comes up quite often, is best not to do anything, but in case people feel like we don’t trust them. Actually, it’s a way of highlighting that you do trust them because you can have those conversations and again, time and cost comes into it.
And yes, it is something that takes time. And it is, if you want somebody to come in and facilitate it and help you with the, governance journey is something that costs money, but it is also something that has a very high return on investment. And I don’t mean in terms of a financial game to the business, but, but from an emotional perspective and the peace of mind that comes from knowing that.
The all the correct forms are in place to protect the family system, to enable the business to do what the business needs to do in order to deliver the objectives of the family. That has a huge amount of value. And so although it takes time and does cost money, I would argue that it is a very useful way to spend that time and that money.
And again, it is time that is spent on the business. It’s, I don’t really like the phrase, but it is something where people refer to it as professionalizing the business. And that is something that I believe is very, very worthwhile, and again, so that, that’s perhaps not, a barrier. If there are any other barriers or any other reasons that you’re sat there thinking, actually, I like to do this, but get in touch, let me know.
we can jump on a call for half an hour, whatever you want to do. And we can run through, ways to perhaps raise it as a family meeting, going forward.
so now we know what it is and we understand what the different types of governance are and the benefits of putting that governance in place, and we’ve removed some of those barriers that could be in place as to why this hasn’t been done already within your own business. It’s worth spending a couple of minutes just having a chat around how to get started.
And it’s a bit of a cliche to say this, but it’s, it’s best to do this when things are good, I. E now. So if there is no conflict within the family, there’s nothing going on the causing any concern within the business or within the family, now’s the time to go. Right. Okay. What can we put in place to ensure that this remains as it is.
Because economic cycles will change. Business cycles will change. There’s likely to be more family members and then might be different needs of those family members. So understanding what you can put in place now is a great way to start. Even if things are going great. If you are dealing with a specific issue at the moment and there is a challenge that you’re facing within your business.
Again, taking a step back and go, okay, what governance could we put in place? What systems or processes or controls could we have put in place to have avoided this? And is this something we now want to look at? And if it is, that’s the starting point. And if there is a conflict, you can perhaps address that by going, look, this is what’s going on.
He’s obviously not great for everybody. How do we then go about making sure that this doesn’t happen again? Again, thinking about it from the perspective of a way you want to look in for the business to go rather than where you are right now. Here’s again, a good starting point for your governance structure.
So as I mentioned earlier, building something that allows the business and the family to grow into it is going to be more beneficial. Then building something that deals with right now, because if the family are going to grow, the business is going to grow, is better to have something to grow into than something you’re going to outgrow.
And as I say, this is something that needs to be done on purpose is something that needs to be discussed and agreed upon within the overall family rather than something that one person thinks, right. I am going to implement a family charter. Here it is, guys, sign here because you’re not going to get the buy in.
So perhaps a good way to get started is if you currently have any sort of forum where the family comes together, be that round the kitchen table, be there at Christmas. I know we’ve just gone past Christmas. I don’t wait till the next Christmas, but if there are any family gatherings where you are having some discussions around the business.
Start mentioning the fact that governance might help in the future. There is no one size fits all solution. Every family is different. Every business is different, and that can be reflected within the governance. That’s a really exciting thing because it’s not something where you can go and Google family charter, print it off.
There we go. We’ve got one is something that. That takes effort. And I think that’s something that should be embraced because if it takes effort, it must be worth having. It shouldn’t be something that is just picked up, as I said earlier, changed her business. Same on top. And there you go. You’ve got it. it’s something that should reflect the personalities.
It should reflect the visions, the value, and the purpose of your business and your family. And that I think is something really exciting and something that can help bring everybody to the same place on the same page to push the business forward. Having said that, it’s not one off. It is something that will adapt and evolve over time, but again, that should mean that they are living documents that are part of the family.
They’re part of the business. They’re not something that sits on the shelf gathering dust. If your current governance structure is weighted more towards the business side and kind of ignores the family side, now’s a good time as well to just start having those conversations around what governance structures could you bring in that would help the family relationship with the business?
What could you do that creates the forums or ensures everybody is heard. What could you do to ensure that the values of the founder or the, next generation, whoever is driving this business, what can you do to make sure their values are captured and communicated to everybody?
There’s a couple of really good resources. Out there. and the first one is a shameless plug for episode 46 of the family business podcast, which deals with the corporate governance standards that came into place a year ago. And they, focus on the weights principles,, such as purpose, remuneration, risk responsibilities, that kind of thing.
I’ll provide a link in the show notes, but if you just Google the weights PR principles and that’s waits w a T E S principles, and that will come up and you can have a read through those to see, what the kind of best practice guide is on those. Governance standards. That’s more for the business side of things.
There’s also brilliant report that’s just been released by the IFB research foundation. Again, the link to this is in the show notes, but it looks at some of the evidence and implications of governance within family businesses and it’s well worth a read .
I would also suggest getting some help. If anything within today’s episode has resonated and you think actually we do need something in place to help improve communication amongst the family or to help any future generations with. Some of the challenges that they may face in growing a business. Please get in touch.
I am a family business consultant. This is what I do for a living, so if I can help in any way, please do let me know. You can drop me an email or head over to LinkedIn or Twitter. You’ll find me on there as well. or any other family business consultant who’s able to, help with these things because we understand the complexity that comes along with working with your family.
And we’re agnostic of the outcome. We’re not there to sell a particular thing. We’re there to help deliver success, whatever that looks like to you. So if we could be of any help, do get in touch, happy to have her. Chat over the phone or over zoom or Skype, to, to see if I can give you some pointers there.
So, to summarise, governance is the collections of rules, systems or processes put in place to help set and deliver the objectives of the family. And the business was also holding everybody to account. It’s split into family and business governance. We focus primarily on family governance in today’s episode, and there’s a huge amount of benefit that can come from implementing a good governance structure.
The best way to get started is to start having these conversations, start raising them at whatever forum there is in place at the moment. If you have governance structures that perhaps you’ve done before and they haven’t really been as effective as you would have liked, dig them out and start that conversation again because they really are very beneficial to you as a family and to a business.
And as I say, if we can be of any help at all, do get in touch. On next week’s episode, we’re going to be covering much more about what a family charter is and why it might be useful. Until then, take care.