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  • Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 6/25/2013

The Risks of Improper Family Business Governance 

Running a family business can be a challenging task. While corporate governance can be a tough job, things can get even more tricky when the board of directors are your brothers, sisters, or cousins.

A family-run business will mean unique governance issues that can have a drastic effect on the future and success of your business. A lack of governance will inevitably lead to major organisational problems therefore it’s important to understand the risks of improper family governance and prevent them from happening in your family business.

Effective governance means:

  1. A board of directors and a management team where each member understands their role within the organisation.
  2. A clear vision and related business policies that tell individuals within an organisation how to behave.
  3. Formalised interactions between governance bodies and key stakeholders
  4. The opportunity for open dialogue amongst key stakeholders (including employees) to discuss and tackle organisational concerns.

The risks of improper governance

In a family business, family concerns and emotions often overlap with business concerns and goals, creating tensions and disagreement. Improper governance can arise from or be a result of these tensions and, because of family bonds, these tensions can be difficult to resolve.


Improper governance is linked to a lack of proper leadership and management processes which can leave a business vulnerable to a number of risks. These risks include:


  1. Favouritism: The improper selection and support of board members and employees, including bribery of key players and placing family members in key but unsuitable positions
  2. Exclusion: The exclusion of certain groups from discussions about the business, on purpose or because of lack of consideration
  3. Uniformity: A lack of independent voices, including those representing external shareholders and internal employees
  4. Division: A lack of alignment between key shareholders, based on personal issues rather than business goals
  5. Secrecy: Private agreements between members of the governance team, leading to a lack of disclosure that excludes others from decision-making processes
  6. Mismanagement: The lack of or improper running of decision-making and review committees

These risks can have a serious impact on the daily operation and overall success of a family business.

Governance structures needed no matter your size

No matter how small your family business, to avoid the risks outlined above and ensure good governance, your board and management team should ensure that there is:


  1. Clarity on the roles, rights, and responsibilities of each member of the team
  2. Encourage all family members to behave responsibly as business players rather than solely family members
  3. Regulate proper family involvement in business discussions, decisions, and operations (consider outside help from a business consultant if necessary to get this balance right).

It’s important to remember that the governance structures of a business will change over time as the business grows and key individuals develop within or leave the organisation. A small five member family business may be able to have informal meetings and discussions while a third generation, multiple member family organisation, involving founding members and outside shareholders, will require more structure.


Whatever the size or shape of your family business, proper governance should always be a key consideration. Ensure that there is a governance structure in place to meet your current needs and implement changes as and when required so that these structures remain relevant and effective.

Christophe Bernard

Christophe Bernard
I am a KPMG partner based in the French firm’s Paris office, responsible for encouraging the growth of our firms’ middle markets practice across Europe, Middle East and Africa, a majority of that market comprises of family businesses.
 

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