Corporate governance expert Robert Tricker once said 'management is about running the business, governance is about seeing that it is running properly'.
Indeed, for family business owners, ensuring the business is running properly is perhaps even more of a priority than for large businesses, as it can have direct consequences for the family regardless of whether they work in the business or not.
Governance can generally be defined as the rules and processes by which a business is operated and controlled.
The Australian Stock Exchange has developed eight corporate governance principles and recommendations. While these have been drafted with listed companies in mind, they are relevant for all businesses.
1. Management and oversight
This relates to establishing the roles and responsibilities of the management and the board and how their performance is monitored and evaluated.
Separating ownership and management is a significant change for many family businesses as they grow, and may include the appointment of non-family members to key management roles.
Ensuring the responsibilities of each role are clear will add value, strength and transparency to the business.
By delegating responsibility of the day-to-day running of the business to managers, both owners and the board can have more time to work ‘on’ the business rather than ‘in’ it.
2. Board structure
The board should be of an appropriate size, composition, skills and commitment to be able to effectively discharge its duties. There is no “one size fits all” approach to governance.
Some families may want to set up a formal board of directors, whereas other families may wish to start with a family council. Families often see value in having non-family directors to provide additional expertise and perspectives.
Whether the approach to governance starts out small, or takes a more formalised approach, it is important that the size and composition of leaders and advisers is right for the business.
3. Act responsibly
All businesses have a responsibility to their stakeholders for ethical and responsible decision making. Stakeholders include owners, employees, customers, suppliers, lenders, and the community, whether family members or not.
4. Corporate reporting
Family businesses have some family members working in the business, and others who do not. Those involved in management are accountable to those who are not, to ensure that the financial reporting is properly resourced and independently verified to avoid conflict within the family.
5. Make timely disclosure
The timeliness of reporting of material matters to all relevant parties is imperative to the success of all businesses.
6. Rights of shareholders
In many family businesses, the shareholders are involved in the management of the business. Shareholders, as the ultimate owners of the business, must always be considered.
Family businesses may have shareholders not involved in the business, and/or non-family shareholders, and their rights must not be ignored.
7. Manage risk
All businesses should establish systems to reduce risk. Larger businesses have formal risk minimisation processes while smaller businesses should regularly review the business risks.
Most small business failures come from not recognising and addressing the risks of the business.
Systems to tighten internal controls will increase transparency and can reduce the abuse of 'family privileges'. A business adviser can assist with review and implementation of risk management and internal control systems.
8. Remunerate fairly
Many families in business have a policy, formal or not, regarding family members working in the business.
Family members who are employed in the business may expect to be remunerated at commercial rates, however an excess of what is reasonable may cause conflict with family members who are not employees.
It is important remuneration is clearly linked to performance to provide transparency and credibility to family members not employed, and non-family shareholders and employees.
Many family business owners don’t do anything about governance due to fear: of losing control, of the unknown, of the additional work involved. But this should be outweighed by the fear of not doing anything.
By not addressing governance, business owners may be lessening the value of their business, falling behind competitors or leaving behind problems for the next generation.
A business adviser can assist with the steps to establish governance procedures, incorporating:
- Ambitions for the business and the family
- Developing a business plan outlining goals and strategies to achieve those ambitions
- Implementation of strategies
- Reflection and review
Governance of a business is an ongoing process; it is not a project that will have a start and end date. Business owners will need to face their fears and embrace the changes that will be involved with implementing governance procedures within their organisation.
It’s all about creating value in the business for the long-term wealth of the family.
Kirstin Stewart is a partner at HLB Mann Judd Perth