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Corporate governance is especially important for family businesses, which navigate unique challenges arising from their intertwined ownership structures and family dynamics. Effective corporate governance enables family businesses to balance these complexities, fostering stability, growth and harmony. We set out some salient themes to consider.
19 February 25
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Defining Leadership and Clear Roles
Establishing clear leadership structures and role definitions is critical in avoiding leadership struggles or power vacuums. Family businesses should develop transparent criteria and processes for selecting, evaluating and rewarding leaders, whether they are family members or external professionals. For example, being the patriarch or the elder in the family does not necessarily translate to being an effective leader. Other family members may have better leadership qualities. Communicating clear expectations and responsibilities for each role ensures that employees, regardless of familial ties, understand their contributions to the business’s success. Additionally, fostering a culture of accountability and continuous learning encourages all members, including senior family leaders, to take responsibility for their actions and outcomes. This approach not only promotes fairness but also drives performance and innovation.
Separation of Ownership and Management
Separating ownership from management is a cornerstone of effective corporate governance in family businesses. This separation ensures that decision-making remains objective and prioritises the company’s best interests. Implementing a robust governance structure with clearly defined lines of authority allows for balanced oversight. For instance, having an independent board of directors who are duly empowered and selected for their strengths and ability to add value, including non-family members, can provide impartial scrutiny and guidance to management. This structure is particularly crucial when family members hold key leadership positions, such as the CEO role. In situations where performance issues arise, an independent authority—rather than familial loyalty—can ensure that necessary actions, including leadership transitions, are taken to preserve the business’s integrity and viability.
Financial Hygiene
Agreeing on financial guardrails and a decision-making matrix is critical. Financial guardrails can include issues such as leverage, industry concentration, geographical concentration, businesses subject to excessive regulation and exchange control, and other financial and business risks. Implementing such a matrix will ensure democracy in decision-making for financial goals and outcomes will be beneficial.
Establishing Formal Family Structures
Formal family structures are pivotal in regulating relationships between family members and the business. These structures provide platforms for communication, decision-making and dispute resolution, minimising potential conflicts. Common approaches include:
- Family Councils
A family council is a representative body of family members from various branches and generations. This council addresses family-specific matters such as shared vision, values, policies, philanthropy and conflict resolution. It ensures that diverse perspectives are considered while maintaining alignment on core principles. - Family Constitutions or Agreements
These documents articulate the family’s shared vision, mission, values and goals. They outline family members’ roles, rights and responsibilities as business owners, managers and employees, along with governance, succession, ownership, employment and dispute resolution rules. Regularly reviewing and updating these documents ensures their relevance and effectiveness. - Family Meetings
Regularly scheduled meetings, held annually or semi-annually, provide an open forum for communication and strategic planning. These meetings should promote transparency and alignment to help families stay engaged and informed about business priorities and challenges.
Implementing these formal structures aligns the family’s goals with the business’s objectives, fostering engagement and commitment while minimising potential tensions.
Should you have any questions regarding this article series, please do not hesitate to contact Atiq Anjarwalla, Mona Doshi or Devvrat Periwal.
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Contributors
1. Kajal Patel – Senior Associate
2. Purity Wachira – Associate
3. Stephen Deche – Associate
4. Emmah Wakoli – Associate