Private Company Director

Establishing and Refining Family Business Governance

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Three questions family enterprises should ask when putting a governance model in place.

Family enterprises bear the unique challenge of building enduring entities while sharing the bonds of kinship. As these organizations pursue their growth objectives, they also work to safeguard family relationships and provide a legacy for future generations.

A strong governance program can provide the guardrails to keep both objectives on track. Governance offers a framework within which the family enterprise can address key issues, such as capital needs, innovation gaps and leadership transitions. This structure also helps provide greater clarity of purpose for the business. 

Here are three questions family enterprises should consider when building a governance agenda.

What are the basic requirements family enterprises need to have in place when establishing a governance model? The fundamental requirement for a strong governance model is trust. This concept is especially important for family enterprises. With a foundation of trust, the governance model can take different forms, and there is no single “right path.” The structure may begin with an advisory board designed to get different perspectives; it may include a family council, designed to formally represent the interests of the family; or it may involve the creation of a partially or fully independent board of directors.

Whatever the structure, there should be a level of trust that the interests of all parties are being represented fairly and that the framework for good governance — providing input and oversight — is well-defined and strong.

While an advisory board may focus on providing strategic input, a formal board’s scope is greater, and includes responsibility for overseeing financial performance. Depending upon the nature of the organization, this duty might fall to an audit committee or a similar group with financial acumen and objectivity.  

Building upon trust, the board charter is an important document for effective governance. This agreement should outline a set of clear delegations of authority, including thresholds for spending, investments or acquisitions requiring board approval. This document may also outline governance processes (committees, meeting frequency, etc.) and other responsibilities, such as the parties’ respective roles in CEO succession. 

Finally, the governance model should have a focus on risk and culture. Risk issues may be identified through the work of the audit committee, independent advisors or ongoing discussions about the strategy of the organization. Culture is often considered the lifeblood of the organization; it’s reflected in the company brand and shaped by the founder and successive leaders. The board should understand the culture and challenge management to ensure it is a fundamental aspect of the organization’s talent development efforts and every customer interaction.

How can the structure and composition of the board help anticipate and identify change? For some family enterprises, a relatively foundational governance structure can be very effective. There is a risk of creating unwieldy bureaucratic governance structures, so organizations need to determine whether implementing them is worth the cost and the time to maintain them. For example, multiple committees can result in unclear lines of authority or other forms of bureaucracy, which can hamper responsiveness. The fundamental trade-off, and one where family enterprises have time and again proven themselves, is balancing the need for controls and structure with agility. 

Diversity within the board is also fundamental to anticipating trends and various response options. Diversity — whether in gender, race, experience or expertise — provides different perspectives and can break through potential confirmation bias or groupthink. A board with the requisite skills and knowledge that operates with the appropriate levels of attitude, behavior and candor — armed with proper information and following clearly defined processes — can become a valuable asset for addressing changing conditions.

How can family enterprise governance set up employees, investors and other stakeholders for success? Privately owned family enterprises have the inherent advantage of a long-term view since they’re not beholden to quarterly reporting. But there may be tension in other areas, such as compensation for family member executives or reinvesting in the business versus making distributions to family members. Someone might look at an investment in an enterprise resource planning (ERP) system and ask, “How does that benefit me?” These are examples of issues where a board of directors can add value. A key factor, as with any relationship, is communication. There should be transparent discussion between owners, family and management, such that all parties understand how decisions are made and the context for the decision. With proper structure and robust dialogue, stakeholders have greater trust that the board is objectively considering their respective interests, providing input regarding strategy and monitoring how management is executing that strategy. Investing the time and resources to establish or refine a governance structure can be foundational to building agility, addressing unanticipated disruptions and capitalizing on opportunities.

Wendy Diamond is a partner with Deloitte Tax LLP, serving as the U.S. Family Enterprise leader. 

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. 


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