What is Corporate Governance and how does it apply to your Family Business?
The Wates Principles are a set of Corporate Governance principles that some large businesses need to report against.
Around the world there are other Corporate Governance rules that would need to be adhered to but given the size and make up of a lot of Family Businesses, these may not apply on a mandatory basis. Does that mean that they should be adopted though?
In this episode I discuss these principles and how they can be adapted and adopted by your Family Business, irrespective of where you are in the World.
I discuss how what we have already covered in this series on Governance can be used to help encompass these principles and harness the purpose of the business to become or continue to be a force for good.
I also look at some of the legal structures that can be put in place to protect the shareholders in the business should disputes arise or deadlocks appear in your voting.
Transcript of the Episode:
Hello, welcome to this weeks show. I hope you have had a positive week, here in the UK it is half term and so we have been balancing work and trying to entertain two bored kids! Our youngest is still recovering from chicken pox and the weather has been terrible and there are only so many soft play areas you can go to. At least they will be back at school next week!
I have also had a couple of Zoom calls with family businesses that have listened to the show and have got in touch.
Technology today means that, assuming we can get the time zones to align I am happy to jump on a call and help if I can. What we have been talking about over the course of this series may well be new to you as a family and it can be difficult to know where and how to start and if I can assist with that, just get in touch.
What is Corporate Governance?
As I have mentioned, over the course of this series on Governance we have looked at what Governance is, the differences between family governance and business governance and then primarily focussed on family governance.
In recent weeks we have looked at Family Boards and Non-Executive Directors and the role that each of those can play in the functional operation of the business. We have also looked at the interaction of the family governance with this business governance and this episode is going focus a little more on the business governance and the legal side of things.
The difficulty of covering this subject is that the podcast is listened to all over the world and I am based in the UK. I am also not a lawyer and so I am not intending to go into a huge amount of detail on the legal structures themselves. However, what I am able to say is that one of the accusations often thrown at family businesses is that there is a lack of formality when it comes to things like shareholder agreements and other legal documents.
There is often a feeling as a family that the introduction of that type of document can mean that there is a lack of trust, or that people are expecting to need the legal side of things.
The reality is, things go wrong, people fall out and despite the fact that you may be thinking ‘we don’t need a shareholders agreement because we trust each other’, if you do have a falling out or disagreement with a fellow shareholder you may well wish you had put a shareholders agreement in place when things were rosy rather than having to deal with the legal costs that come when there is no such agreement in place.
It is worth pointing out at this stage that the elements of family governance that we have discussed are all non-legally binding. So you can’t rely on them from a legal perspective if things go wrong.
What is a Shareholders Agreement?
A shareholders agreement is far more reliable if things get bad enough that you require a lawyer.
The shareholders agreement is entered into by the shareholders in the business and it regulates the relationship between the shareholders, the management of the company, ownership of the shares and the protection of the shareholders.
They are a kind of insurance policy if things go wrong and are a safeguard for the shareholders of the business. It would often cover the processes to be followed should there be disagreements or deadlock between the shareholders, it may also include things like the dividend policy which may well have been discussed at family level prior to adding to the shareholders agreement.
Here in the UK a shareholders agreement would co-exist alongside the businesses articles of association.
What are Articles of Association?
Articles of Association, again are legally enforceable and are effectively a contract between the company and its members and between the members themselves. Think of them as the rule book for your business.
They outline the rules and restrictions relating to the way the company is governed, operated and owned.
They are a public document filed at Companies House and can normally only be amended if 75% of the shareholding agree.
Because they are public documents, you may not want to have your dividend policy in there, or details of who can own shares in the business as this may lead to some difficult conversations with family members who find these articles online.
However, that kind of thing can be covered by shareholders agreements and the family governance documents we have already discussed.
If you want to find out more about the actual specifics of how these legal instruments work, I would suggest speaking to a legal professional, but before doing so, have a listen to the rest of this episode as I am going to be talking now about how the legal side of things can be guided by the family governance we have already covered.
The first example of this is within the Family Charter, you can outline within this document who in the family can be considered for share ownership for example, this can then be replicated within the shareholders agreement. This serves to formalise elements of the family charter that you might consider to be important enough to need to be covered in a legally binding document.
In addition, and we’ve already mentioned it, you might want the dividend policy to be contained within a shareholders agreement
As with most things that we have spoken about in this series, the governance that is put in place for your business, be that family governance or more formal legally binding governance around the business it should always be tailored to your family, your business and your purpose.
What are the Wates Principles?
And this brings me on to something we covered in episode one of this series when we were looking at an overview of governance and I mentioned in that episode the Wates Principles.
These principles have been created as a set of ‘best practice’ principles following extensive work by a coalition group again here in the UK and they apply on a mandatory basis for some larger businesses but given that they are seen as best practice for larger businesses I think it is worth spending a bit of time looking at these principles and how they might apply to your own business and importantly how you can incorporate them into your family governance.
There are six principles, and I will look at each one in turn.
The first principle is ‘Purpose and Leadership’ and the headline for this principle is “an effective board develops and promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose.
If you change a couple of the words in that sentence to ‘An effective business owning family develops and promotes the purpose of a company, and ensures that their values, strategy and culture align with that purpose” you can start to see where having discussions about the purpose of your family business can have an impact throughout it.
This purpose can be used when putting your family charter together. The purpose can be the north star that guides your business and all those within it, having that discussion with your family as to why the business exists can be hugely valuable and aligns really well with this first principle.
Understanding the purpose of the business helps with the discussions around the values and culture that you want to exist within the business and what behaviours should be demonstrated by everyone in the business and the family. It helps the board to create the strategy required to deliver what the family are looking for.
Principle 2 relates to the make up of the board and states that ‘Effective board composition requires an effective chair and a balance of skills, background, experience and knowledge, with individual directors having sufficient capacity to make a valuable contribution. The size of the board should be guided by the scale and complexity of the business”
This echoes what we discussed in the episode about how to create your first board. The intention of any form of governance must be to improve the chances of a business being successful and if the purpose of your family business is to provide for future generations or to give back to your community, having an effective board gives you a better chance of achieving these goals.
Principle 3 stays with a focus on the board but looks more at the accountability of that Board. It states “The board and individual directors should have a clear understanding of their accountability and responsibilities. The board’s policies and procedures should support effective decision-making and independent challenge”
If you have discussed as a family the purpose of your business and you have introduced the right and relevant forums within your governance you can cover this principle. A family Council can be a fantastic conduit between the board and the family and provide a degree of accountability of the board to the wider family. Giving your board clear direction as to what you want to achieve as a business owning family helps them to create a strategy that can deliver that. If that isn’t the case it can be discussed at family meetings, and fed back via the family council.
Principle 4 states “A board should promote the long-term sustainable success of the company by identifying opportunities to create and preserve value, and establishing oversight for the identification and mitigation of risks”
This again can be driven from your family charter, identifying opportunities to create and preserve value could easily relate to the opportunities for future generations. Being clear on the purpose of the business and your attitudes towards ownership and employment opportunities will help drive the long-term sustainable success of the business.
Principle 5 starts to look at remuneration and states “A board should promote executive remuneration structures aligned to the long-term sustainable success of a company, taking into account pay and conditions elsewhere in the company.”
An equivalent statement within the family charter around dividend policy and pay structures for family owners can ensure fairness within the family business. It can help avoid family members taking on roles of seniority just by virtue of their name and ensure that they are also given the best possible opportunity to succeed within the family business.
And finally, Principle 6 “Directors should foster effective stakeholder relationships aligned to the company’s purpose. The board is responsible for overseeing meaningful engagement with stakeholders, including the workforce, and having regard to their views when taking decisions.”
Again, change the wording of that to ‘The business owning family are responsible for overseeing meaningful engagement with stakeholders, including the workforce and having regard to their views when taking decisions” and it is immediately applicable to every family business, irrespective of your size and complexity.
The point I am trying to make when highlighting these principles is that whilst they are compulsory for some large businesses here in the UK, I believe that they are applicable and relevant to all family businesses, wherever you are around the world. Perhaps, slightly amended and tailored to your own business and obviously embraced in the spirit of giving your business and your family the best opportunity to thrive. But the combination of these combined with your own drive and purpose as a family can help to create a force for good.
The principles have been designed to be adopted by as many businesses as possible and my view is that when these are combined with the right family governance structures, the right legal structures and agreements and have the buy in of your family through effective and meaningful discussion your business will have a fantastic foundation from which to prosper.
I will provide a link to the principles in the show notes so that you can read more about them if you wish, and as I have said already if you want to discuss how to apply the family governance structures and forums to your own family business, drop me an email and I will be happy to help.
In next weeks show I will be summarising the series and covering the subject of values in a bit more detail.
If you have found this episode useful, please share and until next time, take care.