4 Steps to Establishing Effective Governance for Your Family Business

It today’s fast paced, competitive environment, every family-owned business must prioritize establishing an effective corporate governance process.

Without a solid, effective governance, family-owned businesses stand a high chance of falling victim to unique challenges that other, non-family owned organizations don't face on a day-to-day basis.

There are three business-critical issues that hinge on effective governance, and unless parameters and strict guidelines are established, those issues may become detrimental to the success of a family-owned business. These three are:

  • Managing existing talent (both family and external)

  • Attracting and retaining best outside talent

  • Staying competitive / growing


Unique Challenges Family-Owned Businesses Face

According to a study conducted by Family Business Network International, a quarter of non-family executives interviewed for the study expressed that during their interview process, they had governance-related concerts about joining a family business.  

The concerns they expressed included issues like:

  • Levels of autonomy a non-family manager has while working for a family business

  • Hidden or competing agendas that often rival with what’s best for the business

  • Lack of dynamism and zeal

  • Nepotism and emotional decision making

  • Assuring a level playing field for advancement opportunities for non-family employees

All of the above mentioned challenges add additional layer of complexity to family-owned businesses, and because of the added layer of intricacy, owners and stakeholders of family-owned businesses should make it a priority to establish solid governing controls and systems in order to protect themselves, their businesses, and ultimately their family relationships.


4 Steps to Establishing Effective Governance

Since enormous amount of wealth in the United States is concentrated in the hands of family-owned businesses, establishing solid governance that promotes health and growth of those businesses is vital.

There are numerous concerns that an effective governance plan and process should cover, but there are four foundational issues that must absolutely be addressed.

Let’s take a look at those four crucial issues:

1. Balanced Board

Creating a balanced board can be very helpful in both protecting the wellbeing of the family business, as well as in providing solid oversight and accountability.

Business owners may consider having the following representation on their board:

  • Lawyer

  • Accountant

  • Business professionals who can bring needed skill and expertise to the table that may be missing among the family members directly involved in the business.

Some experts advise having one non-family member on the board for every family member. The board may have various responsibilities and participate including financial audits, executing succession plan, providing objective and independent counsel, and reviewing and managing risk, all the while the CEO / Owner still retains the final decision making power.

2. Clear Succession Plan

One of the biggest missing pieces among family-owned businesses is a clear succession plan that’s built early on.

Every business owner needs to realize that things happen. Illness happens. Tragedies strike. If the business is not prepared, chaos will ensue.

According to recent data, only 52% of family business owners expressed confidence that the members of the next generation can manage business on their own.  That tells us that 48% of business owners do not have that next generation leader inside of the family to take over.

Creating a clear succession plan focused on clear transition, balancing financial returns, managing interfamily disputes, managing estate and inheritance and aligning family interests with the interests of the business should be part of every solid governance plan.

3. Clear and Transparent Financial Records

Family business cannot experience healthy growth without healthy finances and without a solid financial decision-making. Effective governance process assures that financial processes are in place in order to:

  • Protect both business assets as well as family assets

  • Fulfill all legal requirements while taking advantage of all tax benefits and deductions

  • Track accurate business valuation

  • Ensure all required financial audits take place

  • Ensure adequate resources are re-invested back into the business  

4. Employment Policy for Family Members

It goes without saying that when business and family collide, there can be lots of blurred lines, especially when it comes to family members working directly for the business. Effective governance ensures that a clear employment policy exists, in writing, for all family members.

Some of the issues the employment policy should address are:

  • Defining expectations for hiring a family member (will previous work experience be required or not?)

  • Reporting structure for family members (can a family member directly report to another family member?)

  • Regular performance reviews

  • Advancement opportunities

  • Salary caps, etc.

If you want your family business to succeed, you must make establishing effective governance a priority. Without building those operating boundaries, your business will become vulnerable. There are circumstances none of us can control, like market trends or national economy. Creating internal operating guidelines is one thing we can control in order to give our family business the best chance of success.