This figure is however an improvement on the 2011 survey, and moreover 37% of all the family businesses surveyed this year said they consider ‘family based issues’ to have an equal or greater influence over family business performance than do purely business matters. This suggests that family firms as a group are becoming increasingly aware of the importance of having formalised governance mechanisms in play within their companies to improve performance.
In the survey, family firms were asked what governance structures and practices they have in place to assist them with balancing the priorities of both the family and the business. Interestingly, just over half the respondents said they consider governance structures to be ‘very’ or ‘extremely important’, and also more than half said they consider their current governance structures to be ‘mostly’ or completely adequate’.
The value of governance structures
With regard to the future, it’s unlikely that there will be any significant changes to current governance structures; respondents indicated their general view that the next generation is likely to place more emphasis on changing the business’s vision and strategy than on changing its governance structure. As a firm grows, it needs to adopt governance systems and practices to manage the new complexities.
It’s therefore not surprising that the presence of a formal board of directors is greater (72%) in larger firms than in smaller firms (31%). Smaller firms might understandably find it difficult to conceptualise the value of governance structures, yet it would be beneficial for them to establish these before the family business grows and becomes more complex, with multi-generations and an increased number of stakeholders.
What’s in the best interests of the business?
Of particular interest is the fact that of those businesses surveyed who said they don’t have a formal board of directors, 19% reported having a formal advisory board where a fixed group of advisors meet regularly to talk shop. Of those firms with no formal board of directors or formal advisory board, 50% said they have an informal advisory board where advisors come together on an ad hoc basis.
The survey also revealed that family firms are more likely to have a policy for the selection, remuneration and promotion of non-family employees than for family employees, and 46% said their companies undertake formal reporting to all shareholders about business matters.
The value of instituting some steps of effective governance, such as developing a policy for employing family members, may help facilitate the alignment of the best interests of the ‘business’ with the best interests of the ‘family shareholders’, thereby encouraging debate and better understanding.
How can you know which governance mechanisms are appropriate for your business?
What also became clear upon analysis of the survey data was that firms with formal advisory boards have performed better (both in terms of business performance and the achievement of family-oriented goals) than did those without any formal advisory boards. This suggests that family businesses that can incorporate the family’s vision and priorities into their business plans will perform better overall.
Governance in a family business relates to:
- having a forum specifically for the development of family harmony;
- having pre-established rules as to how the family will participate in and be recognised by the company (i.e. a family constitution or charter); and
- having a forum (i.e. a business board) that focuses on business strategy, risk, the accessing of outside perspectives, and the developing of future business leaders.
Current vs. future state – what are your needs?
A family constitution is a document that outlines the family’s values and pre-established rules for family member involvement in the company. Only 16% of the surveyed companies said they have such a document. Ideally, the family constitution reflects the unique characteristics of both the business and the family.
A family business advisor can assist family firms in deciding what business governance structures are most appropriate for their current and future needs. The advisor can also help guide families on appropriate board composition as well as on how meetings should be conducted in order to maximise their value.
The survey results showed that as family firms grow there is a significant change in the composition of their management teams. Smaller family businesses reported that 37% of their managers are family members, compared with only 5% in larger firms.
Continuing the family business vision
Family businesses clearly recognise the valuable contribution that non-family managers can make to their operations. That being said, we at KPMG feel that family businesses should consider placing additional emphasis on developing family members as responsible future directors and owners, not only as good managers, because ideally the company’s top leaders remain within the family and continue the family’s founding vision and ethos.
Such a focus would also promote better decision making, continuity, leadership, and longevity.