Family businesses often have short life spans, specifically due to the family relationship between the executives and accordingly, a lack of formalities in the operational and corporate governance of such businesses. It is of utmost importance for family businesses, due to specifically the relationship between the individuals in the business, to set up proper governance structures, including establishing a well-structured board, a professional management team, proper control functions, and proper shareholder and disclosure practices.
Proper governance will ensure that family businesses function better through decision-making, stronger risk management and efficiency management. Being transparent with a proper governance model in place, will ensure higher confidence levels from clients as well as possible business partners. This will accordingly lead to higher profits and easier access to development capital.
Family businesses should of course not only concentrate on the incorporation of proper governance models, but also on the execution thereof.
The main reasons why proper governance models are not incorporated in the day-to-day running of the company, are the following –
- Boards mostly comprise of family and friends;
- Boards do not meet frequently and decisions are made informally without proper recording thereof;
- Informal management structures have ill-defined policies and processes;
- Nepotistic employment practices are rife.
- Key-decisions are usually made by the matriarch or patriarch and are not democratic; and
- There is a lack of transparency outside the parameters of the family structure.
One of the biggest challenges is when operations are transferred from one generation to the next. A proper governance model should therefore include a proper succession model as well.
Every company and business is unique and the role players should therefore ensure that the right model is used for the specific needs of the specific business. Such a model should however make provision for future inclusion of third party role players in the business. Once a family business brings in outside investors, improving governance will become imperative. Such investors, while placing faith in the family by investing in the business, will want a sense of comfort that their interests are properly balanced with that of the family.
Although putting such a model in place may seem daunting for the family, it will ensure a long productive “life” for the business for generations to come.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)