Viewpoint: Family businesses and the dangers of stretching for low hanging fruit

Photo: Pixabay

Photo: Pixabay

Many family firms are characterised as entrepreneurial. They make more rapid decision than their more widely held counterparts and are prepared to take greater risks than these corporations that pursue risk reduction strategies.

Typically, this entrepreneurial decision making prevails in terms of their central business operations but understandably does not extend to embracing investments in what would be overheads. When the need comes for these firms to embrace more professionalism in their management they tend to be tardier in their decision making to the extent that it can often verge on inertia.

When exhorted by advisers, commentators, and business peers to professionalise their firms these entrepreneurial families often only stretch for the low hanging fruit: they appoint an outside director to their board. Often these directors are not sourced from an extensive, or even comprehensive search but rather are identified from a convenience sample.

Family decision making can often verge on inertia

Perhaps they served as the company’s external accountant or legal counsel or are a contemporary of the incumbent family business leader. Such appointees can bring benefits to the operation of the family company but will such a limited stretch optimise the benefits of this initial step into professionalism?

Convenient business governance appointees will often be chosen for their business acumen but in the absence of robust family governance structures and processes these directors will typically resort to their default option in governing the business: they will monitor the financial outcomes to ensure the owners earn a fair return on their investment.

For family dominated boards the discipline these independent directors inject into business governance deliberations is often seen as enlightening thereby justifying the choice to appoint such directors. These appointments move the family company along the path of professionalism by making it more like a non-family business. However, does this run the risk of sacrificing the inherent familiness the business?

Stretching beyond these easy (low hanging) appointments requires that families install robust family governance processes and then to appoint business directors who respect and understand the need to integrate both family and business governance thereby preserving the nature of family business difference.

Installing family governance processes entails regular family meetings that educate and communicate to all owners and owners-in-waiting the core values that serve to define a shared vision for the business. From these bases, the owners then articulate their expectations for the business. Some of these expectations are grounded in financial/economic considerations but others often extend to non-economic objectives the family are keen to achieve.

Stretching beyond these easy (low hanging) appointments requires that families install robust family governance processes

Interestingly, developing the structures to develop, monitor, and revise these core elements is arguably more difficult than establishing a functional business board of directors. Yet frequently families do not stretch to go beyond initial facilitation of family meetings by the appointment of ongoing independent “directors” to ensure the functionality and productivity of family meetings.

Ideally, in the interests of the best practice family business governance, families need to ensure robust family governance processes and to do so with the intervention of a trusted external adviser is highly recommended. Failing that at least maintaining regular family meetings to ensure the currency of expectations that serve to guide the deliberations of all family business directors is absolutely necessary. Furthermore, these directors need to be selected on grounds that they fully understand and respect the full gamut of family owner expectations.

 

Ken Moores is an emeritus professor of Bond University, Australia where he served in various capacities including vice-chancellor and president, and as founding director of the Australian Centre for Family Business. He is now executive chair of knowledge-sharing consultancy firm Moores Family Enterprise and an independent director. He recently published Leading a Family Business: Best Practices for Long-term Stewardship with Justin Craig.