Mon 2 Oct 2017
News - Corporate governance of family owned SMEs by David Barth
Corporate governance of family owned SMEs

Not only regulated businesses need governance. Family owned SMEs can also make use of the advantage of a good governance. But what is good governance about and how could it look like for family owned SMEs?

Regulated businesses with a broad diffused panel of share holders dispose on Governance Codex focused on access to information, transparency, aiming to reinforce the duties and rights of the Board of Directors in his supervisory function.

A study realised in Luxembourg by the ILA working group on Family Owned Companies, which conclusions have been revealed in spring 2017, showed that around one-third of the family owned SMEs are led by the founder of the business, the second third are in the 2nd to 4th generation, the rest older than the 4th generation. This study also reveals that although ca. 70% of family owners consider the principles of good governance as very important, although they are reluctant to their implementation, considering that they might lose flexibility, adaptability, decision speed. ILA, under the guidance of A. Kyprianou, organised in May 2017 an advanced course about the Practice of Governance for SMEs and Family owned businesses. This article presents the most important outcomes, stressing on the very specifics of Governance for Family Businesses.

It’s about governing the family

Very often, the family business is run by the owner. The owner is implicated in the daily operations as well as sitting in the supervising instances. She/He is confronted with expectations of the family members, which tend to be contradictory, very diverse and possibly conflictual, as the number of family stake holders increases, as the family grows. To mitigate this conflicts, it is of advantage to convene the totality of the family shareholders in the so named Family Board. It’s a forum, where all family shareholders and members can share their fears and expectations related to the business. The behavioural rules of the Family Board can be documented in a Family Charter, which can be written with the help of a Family Office, consulting the members of the Family Board.

The Family Charter might also fix the rules for the family members who seek for roles in the company: which qualifications are necessary, which internships to be done for which function, who will rule the assessments of the family candidates, etc. This will be of importance when managing the succession process.

The Family Board nominates the members of the Family Council. The Family Council then represents the interests and the role of the family in the most important business decisions by delegating one or more of its members to the Supervisory Board. The Supervisory Board deals only with the topics related to the business (strategy, investments, divestments, risks, succession plan). By this way, one avoids the interferences between family and business topics, and the necessary transparency and information flow between the Business and the Family is insured.

It’s about assessing the risks and challenging the strategy of the company

The role of the Supervisory Board is to assess the business risks, look for mitigation plans, challenge, fix the strategy, and supervise its implementation. The major shareholder, business owner and manager might struggle with simultaneously fulfilling the missions of Shareholder, President of the Supervisory Board and CEO. She/He might enter conflicts of interests, lose his neutrality as well as his ability to decide and act unbiased and well informed, and by the way oversee risks and needs for strategic reassessment. Time might come to think about her/his position in the Supervisory Board, in the operational Management of the company.

It’s about challenging and supporting the management

Not only family members should be part of the supervisory board. The composition of the Supervisory Board is of first importance. It offers the opportunity to access to expertise and experience, which are necessary when the competitive and technological environment moves rapidly. The nomination of independent directors can fulfil this goal, and by the way can support the management in its strategical moves. There should be given enough place for a kind and well balanced challenge of the Management, very often composed by family members.

It’s about generational sustainability and succession

The sustainability of the family business assets over generations is a challenge. It is not only about the continuity of the business, it’s also about the continuity of values, mission and family culture. Some very delicate questions may rise, which might be emotional as well: is the next generation able, ready and willing to lead the company? If not, is the next generation ready to hear and accept it? Is it time to think about alternatives: open the capital, enter a joint venture, sell the company, hire a professional CEO to manage the company…

In other words, succession, if not thoroughly planned and organised, can reveal as a stumbling stone for the family business and endanger its continuity. A professional Supervisory Board, well linked to the Family Council, can help implementing a fair succession process. The role of Independent Directors, Members of the Supervisory Board, is key in this process: the nomination of a successor is not only under the responsibility of the founder, actual CEO and owner of the family business.

To conclude

Corporate Governance for Family Business commonly establishes a governance structure for the family and for the family business. It aims to improve strategy and control mechanisms of the family business and, to organise the communication and relationship between family owners and business executives, which very often might be family members. A good family governance and a professional board of directors have a positive impact on a family company's performance.

David Barth
Independent Director and Member of the ILA Board of Directrors