Corporate governance issues facing family-owned businesses

Emmanuel Zvada

IT is often said that family-owned businesses usually do not survive beyond three generations.

Has anyone ever wondered why? “I suggest it’s because of poor governance practices”. The key to having a stable family-owned business is to ensure that it is managed in a way that allows it to grow, prosper and avoid paralysis. Attaining this objective is no easy road and this is where the value of governance comes into play to ensure that family business strategies are achieved and business continuity is guaranteed.

What is corporate governance?
Corporate governance is a way of governing activities of a corporation for the wellbeing of all stakeholders (not only for shareholders) that ultimately leads to better financial performance.

Some can say it is a set of processes, customs, policies, laws and institutions affecting the way a corporation (or company) is directed, administered or controlled. In actual fact corporate governance essentially involves balancing the interests of the many stakeholders in a company — these include shareholders, management, customers, suppliers, financiers, government and the community.

Why corporate governance?
Good governance is good business. Governance is an essential process through which family businesses can set and implement rules governing and regulating different aspects of the business.

Governance should ensure the attainment of the overall vision and objectives of both the family and the business and set the necessary implementation strategies, allowing the family business to succeed without fracturing family harmony.

Governance is an ongoing journey which moves with the business and adapts to its needs.

By using corporate governance procedures properly organisations can motivate all stakeholders to work towards the attainment of the corporation’s goals.

Risks that a family business may face without governance?
Family businesses controlled by the founder generation often struggle with letting go and entrusting the next generation with responsibility and control.

To clarify more, family businesses which have already been passed on to the new generation may find it difficult to cope with the differences of mindset, the involvement in the business and the need to work with other stakeholders, etc.

Proper governance practices can deliver the necessary solutions for the challenges all family businesses encounter and facilitate amicable resolution of issues family businesses face.

The following are the risk that a family business without proper governance practices can face:

Power and dominance
Family businesses are often founded by dynamic, entrepreneurial individuals with strong personalities. The drive and dominance that gave them success in the early days can sometimes become a constraint as the business develops.

Senior family members might hold a powerful position over other family members, dominate decisionmaking and constrain the contribution of other executives.

Many cultures deem it unacceptable to question or challenge senior family members.

Dominance by one or more senior family members has the potential to hamper business performance and create family conflict or resentment.

Succession planning in family businesses
While the family business may be thriving, it can’t be sustained when there are no legitimate successors to take over and continue the business legacy of the family.

If a family business leader suddenly wants to leave the business or unexpectedly becomes incapacitated or passes away, the business needs to have the ability to remain stable during such unpredictable times.

Succession planning is key to achieving a long-term legacy in a family business but it is often a difficult and emotional process.

Early planning will likely lessen some of the stress that comes with the process, as well as give the family business a greater chance at generational survival.

Problems can sometimes arise in the event of death of the original family business owners.

One-man decision and nepotism
Most family-owned businesses are often complicated by friction arising from rivalries involving a father and his son, brothers, or other family members who hold positions in the business.

Issues to do with one-man decision relates to one who purports to be a visionary is also one thing that can affect the whole organisation.

The absence of governance allows damaging nepotism. Putting in place a clear set of rules that regulates key elements such as employment, development of family members, assessment and training of family and non-family employees in a fair and transparent way can help in avoiding damaging nepotism and can contain, save and preserve the business.

Doing everything yourself syndrome
Doing everything yourself isn’t dedication — it’s bad leadership and it is found mainly in family-owned businesses.

Nobody has ever actually done anything alone. Running a small business, even if it’s a one-person business, involves so many different tasks that no one person can do them all well.

Even if each of us was perfect and had all the skills to do an outstanding job at whatever we set our hands to, each of us is still constrained by time.

Effective delegation can be one of the best ways for new small business owners to build their businesses, free up their time for business activities that require their unique expertise, and build a team positioned for future success.

Staying in your strengths and backfilling for your weaknesses will raise the level of excellence of your business as well as keep you energised all the time.

Separating personal and business matters
Business owners should not mix business and personal matters.

One of the biggest challenges in running a family-owned business is separating business from personal issues. For example, when you work with your spouse, sibling or child, it can be tough to keep your personal relationships out of your work and vice versa.

You may find it helpful to set parameters so that your personal relationship does not  affect your focus on the business.

In most cases the challenges, you will be facing are a result of failure to draw the fine line separating family from business affairs.

Family-owned enterprises are the engine of growth of many economies around the world.

Nonetheless, because of their specific nature, family-owned businesses face many challenges, especially over the long-run.

As ownership passes from one family generation to the next, the chances of survival of family-owned businesses diminish significantly.

Practising good corporate governance enables these businesses to establish robust processes and prepare for future expansion.

Good corporate governance lays the foundation for family firms to be more accountable and transparent in their operations, which leads to opportunities for raising finance, growth and improved performance.

  •  Emmanuel Zvada is a human capital consultant and international recruitment expert