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NewsDay

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Separating ownership and management in family-owned businesses

Opinion & Analysis
Every board can only become effective if it is organised as a collective decision-making body and if it knows its roles.  This week we will take a closer look on the roles of the board and that of management and we will also establish orderly board processes for conducting board meetings.

BY Emmanuel Zvada CLARIFYING the roles of the board and management is crucial to preventing disputes in organisations. Failure to understand and articulate these different roles invites disputes and impairs the board’s effectiveness which is in actual fact the situation in many organisations.

Every board can only become effective if it is organised as a collective decision-making body and if it knows its roles.  This week we will take a closer look on the roles of the board and that of management and we will also establish orderly board processes for conducting board meetings.

Definition of family enterprise

A family enterprise refers to a portfolio of businesses or initiatives that a family may be involved in.

There are many distinguishing characteristics of what a family business is, and the single most obvious point of difference, of course, is the ownership structure, and while this tends to take the form of direct and total family control, some firms also have non-family shareholders and/or executives, and a stock market listing for others.

More than three quarters of companies in Zimbabwe are family owned, but only about a quarter of them manage to pass the business onto the third generation. The key to solving all these issues is to neatly separate ownership and management in running such businesses.

Complexity of family business

Running family-owned business is very complex if not done with great care and diligence. The complexity of family enterprises arises from trying to balance family demands and the needs of the business, while at the same time addressing the multifaceted interaction between the two. Each of the family members in the business will have their own objectives, perspectives and goals. Working together intensifies family interactions and can exacerbate family problems. Issues of concern in running such business are of effective decision-making, management and ownership separation, conflict resolution strategies and other various issues that may arise along the way and need to be handled professionally.

Corporate governance crisis in family-owned businesses

In most family-owned businesses there are issues that always arises and these mostly determine growth and continuity of the organisation. The corporate governance problems related to family-run businesses are mostly in the light of the separation of ownership and control, lack of board independence and protection of minority shareholders, lack of independence of external auditors, lack of transparency and disclosure. At the very basic, corporate governance is about ensuring that the concerns of a company’s shareholders and stakeholders are taken into proper account, and all their interests balanced. Therefore, family businesses are supposed to offer greater transparency to the principal stakeholders, corporate governance should be achieved through main corporate governance elements such as board supervision, auditing process and financial disclosure as well as institutional and societal arrangements.

Professionalising family-owned businesses

At some point in the life of a family business, the family owners or business leaders might decide that they should professionalise their firm. As start-ups gain momentum, non-family staff are hired and assigned to various positions within the organisation and shareholders which are the owners will be in control of the business.

A family-owned business should be in a position to be transformed into an ethical organisation to ensure its survival. A company is regarded as professional when it has these same high levels of performance and ethics. Organisations achieve these standards by building cultures that emphasise performance while adhering to core values of the company, treat people like adults, are constantly learning, and striving for fairness and consistency in rewards.

Not setting up a clear hierarchy

Setting up a structure that makes sense can help you avoid many of the most common sources of conflict experienced by family-run businesses. It can be difficult to assign roles to family members, particularly if those roles disrupt your relationships or can potentially cause strife.

If you are used to being the head of the household but end up being a regular employee at the family business instead of running the company, that should be without any conflicts that may arise. It is tempting to keep things informal, but everyone within your business needs to know exactly what they are responsible for and where they fall in the business hierarchy. Failing to define the roles when the business is small could make things more difficult for your family as the business grows

Don’t mix up business and personal finances

One of the biggest challenges in running a family-owned business is separating business from personal issues. Since many family businesses start small as in running the business from home or out of the garage is easy to forget to separate your personal finances from your business finances. Mitigate this risk from the start by making sure you set up your business account and finances separately from your personal account. Doing this from the beginning will ensure you do not encounter problems later. Not having a clear structure for your income and expenses will result in a nightmare.

Separating your personal and business expenses probably feels like a tedious project but that will be crucial for the growth of your business.

Failing to have a succession plan

Succession planning is key to achieving a long-term legacy in a family business but it is often a difficult and emotional process. 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. What happens to the family business when you (or another key family member) retire or dies. Failing to have a plan for succession could backfire in the near future. Planning on how the business will run when you are not there, including plans for your own retirement or even illness and that will ensure that your business is protected.

Avoid one-man decision and nepotism

One of the most common issues in a family business is the pressure to hire a relative. The emotional aspect of family relationships can make it difficult to turn down the request. 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. Having 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.

The pros of separating ownership and management

The advantages of separating ownership and management control are numerous. Separation ensures the sustainability of the business through its management by a team of professionals with the diverse skills necessary to effectively run the company. This ensures continuity within the business, even when future heirs are not particularly interested in being part of its day-to-day operations.

As family businesses are an important component of every economy and play a critical role in promoting growth of a country’s economy, as they grow. Families and family offices that separate ownership and management through the implementation of effective governance measures can ensure not only the long-term success of their businesses but also family harmony. Such practices allow family members to not only remain actively involved, adding value through their long-held experience in a specific industry but also to circumvent the challenges that risk destroying shareholder value and the business itself.

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