Governance crisis in family business

robert-mandeya1.jpg

GROWING up as a child, I used to notice that some big family business enterprises were thriving remarkably.

Everyone in those communities back in the day used to marvel at such success with so much envy, admiration and respect. I grew up in such a set-up myself; although our family business was really nothing to write home about, we were however respected. Looking back, most of these family businesses have collapsed. They have failed to stand the test of time. It goes without saying that family businesses constitute the world’s oldest and most dominant form of business organisation.

Family businesses range from small and medium sized companies to large conglomerates. It is a fact that most family businesses have a very short lifespan beyond their founder’s stage and that some 95% of family businesses do not survive the third generation of ownership. What are the challenges in running family businesses?
Lack of preparation

There is often the consequence of a lack of preparation of the subsequent generations to handle the demands of a growing business and a much larger family. Family businesses can improve their odds of survival by setting the right governance structures in place and by starting the educational process of the subsequent generations in this area as soon as possible. This instalment will focus on the unique corporate governance challenges that family businesses face. I will propose structures and practices that can mitigate these challenges and ensure the viability of the business.

Governance paradigm

Family-run firms tend to believe that principles of good corporate governance do not really concern them. This is a mistaken view. The question is how to convince them. The importance that family firms have in today’s economy requires that one understands the decision making process in these types of firms, particularly the decision-making process that stem from within the family circle that controls the firm. In order to understand these processes and the relationship between the two “sub-systems of decision-making” one must separate the family’s resources from the family’s resources that have been utilised in the business.

Family business strengths

Several studies have shown that family-owned companies outperform their non-family counterparts in terms of sales, profits, and other growth measures. A Thomson Financial study for Newsweek compared family firms to rivals on the six major indices in Europe and showed that family companies outperformed their rivals on all of these indices, from London’s FTSE to Madrid’s IBEX.

Family business weaknesses

Perhaps the most cited characteristic of family businesses is that many of them fail to be sustainable in the long term. Indeed, about two-thirds to three-quarters of family businesses either collapse or are sold by the founder(s) during their own tenure. Only 5% to 15% continue into the third generation in the hands of the descendents of the founder(s). This high rate of failure among family businesses is attributed to a multitude of reasons. Some of these reasons are the same ones that could make any other business fail such as poor management, insufficient cash to fund growth, inadequate control of costs, industry and other macro conditions.

Family business growth

It is important to understand some basic stages of growth in a family business. Several models have been developed to describe and analyse the different stages that family businesses go through during their existence. These include: (i) the founder(s) stage; (ii) the sibling partnership stage; and (iii) the cousin confederation stage.

Although this model allows for a good analysis of the three basic steps of evolution of the family business, it does not mandate that all family-owned companies will necessarily go through all three stages of development.

For example, some companies will disappear during the early stages of their lifecycle because of bankruptcy or getting acquired by another firm. However, generally the evolution of ownership and management within most family businesses goes through the stages cited here.

Family business governance

In a typical non-family business, any individual involved can be an employee, a manager, an owner, a director, or some combination of these roles. In a family-owned business, however, matters become more complex as an individual can have multiple roles and responsibilities. Owners in a family business have several roles and motivations that can sometimes lead to conflicting opinions. For example, a decision to reinvest profits in the company instead of distributing them as dividends can be differently seen by the various owners depending on their other roles in the business. An owner who works in the family business might not object to such a decision since he/she is already receiving a salary from the company.

Conflicting expectations

As previously mentioned, family members can have different responsibilities, rights, and expectations from their business. This situation can sometimes lead to conflicts and issues that might jeopardise the continuity of the family business. One issue that can increase conflicts among family members is the level of access to information about the company and its activities.

This can be problematic as the members who work in the business usually have access to such information in a timely manner while those outside of the business cannot access it in the same way. Family businesses should establish the necessary communication channels and institutions to keep all family members informed about the business, strategy, challenges, and the overall direction where the company is heading.

Robert Mandeya is an executive coach, trainer in human capital development and corporate education, a certified leadership and professional development practitioner and founder of the Leadership Institute for Research and Development (LiRD). — robert@lird.co.zw, info@lird.co.zw or +263 772 466 925.

Top