Celebrating the success of family-controlled businesses.
In a 2010 study of 4,000 family and non-family controlled companies, Harvard Business School found that family-held companies outperformed their counterparts by 6% in market returns, and 10% in profits. This is a significant difference. The researchers attributed these superior results to three distinct competitive advantages found within the family-controlled companies in the study:
Introducing formalized governance processes can help enterprising families to sustain these competitive advantages over the long-term, particularly when multiple generations and/or non-active family shareholders are involved.
What makes enterprising families so unique?
As we’ve covered in several articles before, enterprising families are unique and often complex because they face a range of issues relating to family, business and ownership. These three realms almost always overlap and are intertwined in ways that affect every aspect of the lives, relationships and business operations involved.
Examples of situations that are unique to enterprising families:
- Siblings who reject (and avoid reporting-to) their brother/sister/cousin as the leader
- Critical senior generation concerned about younger generation ‘getting a free ride’
- Compensation negotiations between parent/child or uncle/aunt/niece/nephew
- Addressing poor performance with an underperforming family member working in the business
- Non-active spouses/in-laws that may only hear one side of the story after difficult days
- Decisions regarding who will have opportunities to become a shareholder and who will not
With so many different people, personality types, power structures and emotions involved within a typical enterprising family, it isn’t hard to see how things can become complicated when common situations like the ones above are encountered.
Back to basics: what is governance?
The Family Business Governance Handbook defines governance as “the structures and processes for the direction and control of companies” or, put more simply, a process for open communication and transparent decision-making.
What is Family Governance, and how does it apply to Enterprising Families?
The ‘three circles’ that apply to every family business are the family, the business and ownership. In a typical family enterprise, these three circles always overlap.
The best practice governance structures that lead to increased communication and trust within each of the three circles are as follows:
Board of Directors (or Advisors)
Formalized governance structures give everyone a voice, but not necessarily a vote.
One of the challenges faced by enterprising families is the far-reaching impact of decisions that are made; decisions made for the family affect the business, and decisions made for the business affect the family. By adopting formalized governance processes within a family business, a mechanism is created for family members to participate and have their voices heard, so their input can be factored before decisions are made by those in control. Often what matters most to family members is not the decision that was made, but understanding the reasons for why the decision was made. Having governance processes in place creates a forum for open and honest communication, which improves the effectiveness of the business while also making family dinners more enjoyable!
How should a process for Family Governance be introduced, and how might it evolve over time within your Enterprising Family?
Jennifer Halyk explains in her 2012 article titled “Decisions, Decisions, Decisions: An Introduction to Governance in a Family Business System”, how the type of family governance structures a family chooses to implement will evolve over time to meet the changing needs of the family, the business and the ownership group. Halyk highlights two factors that typically help to determine the best governance structures to adopt:
If looking for a starting point, structured family meetings are the simplest things you can introduce that will often yield the biggest benefit to everyone involved.
If you wish to learn more about considerations for timing and development of different governance structures for your own enterprising family, I highly recommend reading “Decisions, Decisions, Decisions: An introduction to Governance in a Family Business System” by Jennifer Halyk (2012).
We would also welcome the opportunity to connect with you directly to answer any questions you might have about introducing family meetings and other governance structures to help drive the success of your business while also making family dinners more enjoyable.