Good Governance for Sustainability
The number one desire for most family business owners is to see their business last for many generations. Unfortunately statistics do not support desires. Family businesses are the prevalent form of business world over and most family businesses do not go past the third generation.
An entrepreneur with an idea starts the business. As the business grows it makes room for the second generation. Till the founder is at the helm of affairs, it is smooth sailing. Conflict doesn't surface as the owner is the final decision making authority. Depending on the leadership style of the owner conflict can either be brushed under the carpet or a forced consensus emerges.
The business vision is synonymous with founder's vision. And the business grows to the point of what can be termed as " Entrepreneurial exhaustion". Most Founders delay succession and think no one not even their own progeny understand the business as they do. Although there is truth to this , delaying succession planning does more damage to the business than good. Research suggests as time passes and with increasing life spans it becomes even more difficult to let go of the business.
Most SME Family Managed businesses feels that owing to their scale they can do without Governance. On the other hand good governance structures can really help avoid the problems inherent with the family business DNA. One tool of the Governance in the family business context is a creation of the Board of Directors. Although each family member born into the family considers it as a birthright to add the designation of Director to his or her Business card. Most often shareholder and director are used interchangeably at the detriment of the business .Having too many Directors with symbolic functions and no real contribution to the business can provide a false sense of comfort the business is best advised to do without.
It is imperative for a family business with multiple generations to constitute a Board of Directors as mapped out in the code of corporate governance. The Board of Directors functions as the steward of the business. Not only providing stewardship but also oversight. It is the right forum where the direction of the business and not just operations are reviewed.
Good governance can only be a reality if Board effectiveness is ensured. There is a plethora of research on board effectiveness. The most important being a board should not function as a rubber stamp. The role of the independent director gains even more weightage in family business governance. The Independent Director is expected to bring forth diversity of perspective and best practices from industries they have worked for. Family business is reluctant to bring in outsiders to the board however trusted. And have their fair share of horror stories of outsider intervention. While it is true that no one can understand the business model as well as the owner. Another reality is the rate of disruption within the business environment. Only those survive who are well aware of the environment outside the core business.
Setting up a board inclusive of Independent Directors is a tall order. Issues of transparency or business secrets are commonly cited reasons for not engaging outsiders. Family business must realize that they without outsider perspective they will grow and scale only to the point of their own vision for the business.
The process of inducting independent directors may begin with creating up a board of advisors. Most family businesses operate in inertia and any change is met with stiff resistance. At times the old guard, afraid of displacement contributes to the resistance. Any intervention that is not implemented without complete support can backfire or present less than desired results. Performance may sky dive and the notion that we know our business better than outsiders is reinforced.
Creating a board of advisors can be the first step to improved Governance. These may be subject experts from academia or respected practitioners from industry willing and able to invest time and effort into the business. The mandate of the board can be jointly decided by the family business with a trajectory that moves from operations to strategy.
Too often management is unable to resolve recurring systemic failures. These "operational irritants" may be referred to the board as a starting point. With the evolution of the business model the transformation of the board of advisors to independent directors on the family board becomes easier.
"The best time to plant a tree was 20 years ago. The second best time is now." Chinese Proverb
It is never too late to think of and implement governance mechanisms.