Using Family Business Governance as a Transition Tool 

Using Family Business Governance as a Transition Tool 
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As a family business owner, if you could create a training ground that could: 

  • Preserve family relationships, 
  • Give your successor the opportunity to learn new skills, 
  • Give you the opportunity to learn to mentor, 
  • Protect your business, 
  • Alleviate the worry of losing control, and 
  • Minimize miscommunication, would you jump on it? 

For most owners, the answer is an emphatic “yes!” And yet, when we suggest to these same owners that, in anticipation of a transition of ownership to the next generation, they implement some form of formal governance for their companies, the answer is usually a polite, but firm, “No thank, you. We really don’t need that.” 

Somehow, formal governance, especially in family businesses, has gotten a bad rap. Owners think of governance as an added (and unnecessary) layer of bureaucracy that will put a wrench in the decision-making machine that has worked so well for them for years. 

Well, there’s two problems with that argument. First, in most cases, there is no “decision-making machine.” Instead, there is an owner who makes decisions alone or who gives trusted employees the power to make decisions within clear, owner-set boundaries (e.g., budget limits or restricted to certain issues). 

Second, while the decision-making process has worked well for the current owner prior to any transition, that process is not going to work effectively during a transition. 

Family Business Governance Defined 

Before we look at how formal business governance can increase the odds of a successful transition from one generation to the next, let’s define it. 

Family business governance is simply (1) the rules and process that control both how decisions are made for and within the company and by whom, and (2) the types of decisions people in various positions are authorized to make. 

In this article, we’ll use a board of directors as an example of formal governance, keeping in mind that there is no one-size fits all form of governance. 

Formal Business Governance Case Study 

Jill was the (fictional) owner of a successful commercial landscaping business. Her son, Jeff, had been involved with the company for two decades; first as a laborer during school vacations then, after college, as a salesperson. Jeff had not only proved himself to be successful in sales, but it had been his idea to generate revenue during the company’s off season by adding indoor plant design and maintenance to the company’s service list. 

Jill and Jeff agreed that Jeff would one day take over the company, yet the two had not established a timetable. As is usually the case, Jill felt that Jeff still had a lot to learn, and Jeff felt ready to spread his wings and lead. 

One afternoon, Jeff, his wife, and two kids were at Jill’s house, sitting around the pool. Jill and Jeff were discussing business as they always did when Jeff suggested to his mother that the company should go after public sector work by hiring someone experienced in government contracting. 

“This is neither the time nor the place, to talk about this,” Jill said. “And, honestly, I’d rather you focus your energy on finally making your indoor plant division profitable.” 

“So, when and where is the right place, Mom?” Jeff countered. 

Jill’s conversation-ending response was to turn to Jeff’s oldest daughter and ask about soccer practice. 

Several weeks later, Jill called Jeff’s wife and invited them the family over to swim. The kids were grabbing their beach towels when Jeff, for the third time in as many weeks, told his wife, “Today just isn’t a good day.” 

Jill naturally missed her granddaughters and didn’t know why she wasn’t seeing them as much as she wanted. Just as naturally, Jeff was still upset about a conversation that had left him feeling dismissed. He felt that his mother had added insult to injury when she told him where she thought he “should focus his energy.” 

Jeff wasn’t keeping his children from seeing their grandmother: He just was not ready to revisit the conversation, and he didn’t want to wrangle with her. His attitude was a perfect illustration of Patrick Lencioni’s Number Two cause of dysfunctional teams: the fear of conflict.  

Family Business Governance as a Transition Tool 

Business Governance Preserves Family Relationships. 

The Jill-Jeff dynamic is all too common. First, owners and successors monopolize what should be fun and relaxing family time by talking about business, excluding everyone else. Second, since these conversations happen outside the business, parent and child don’t interact with each other as owner and successor, much less as peers.  

When a board of directors is in place, there’s a time and a venue for high-level business discussions. Board members—even those without ownership and despite any age differences—operate as peers. And it’s that diversity that creates “the magic:” new ideas and perspectives, renewed energy, and a fresh look at the market and future. 

Business Governance Provides the Opportunity to Learn. 

Jill had been the ultimate decision maker for her business since before Jeff was born, yet she’d never taught someone else how to do make decisions and knew very little about mentoring. On the other hand, Jeff had succeeded in sales and had taken a new product to market, yet he’d never negotiated a loan, done any financial forecasting, or led a management team. He had a lot to learn. 

Board meetings can be the perfect place for owners and successors to learn the skills that come with their new roles as mentor and future leader.  

 Business Governance Protects a Business 

Successors don’t begin the transition process knowing how to analyze risk, identify growth opportunities, or assess company vulnerabilities. They’ve got to learn these (and other) skills that are critical to protecting and growing a business. 

Some of the most common items on a board’s agenda, in one form or another, are risk management, finance, and strategic planning. 

Business Governance Alleviates the Worry of Losing Control 

Let’s face it, for most founders, their businesses are their babies. They don’t just hand them to successors and hope everything goes well. Instead, they worry about all the bad things that could possibly happen. 

Formal governance gives owners the time and the tools to install guardrails that protect a business, its clients, employees, a family and even successors themselves from the most serious consequences of a successor’s inevitable mistakes. 

Business Governance Minimizes Miscommunication. 

Miscommunication happens in all relationships and the owner-successor relationship is no exception. George Bernard Shaw wrote that “The single biggest problem in communication is the illusion that it has taken place.” Maybe, but in our opinion, the biggest problem is that people don’t assume that the other party has the best of intentions. 

Let’s look at another fictional owner-successor situation. 

Mike had been preparing his daughter, Mindy, for ownership of his chain of car dealerships for years when she told him that she was going to work from home from noon to close of business at least three days a week. 

Mike’s response was immediate, “That’s not happening.” 

Mindy shot back, “Why not? I can be just as—maybe even more—productive away from the ringing phones and constant interruptions.”  

Mindy, wearing her “Job Hat,” was explaining to her boss why working from home would improve her productivity.  

Mike had on his “Owner Hat,” so he had a load of concerns. Among them: 

  • How would Mindy’s work-from-home plan affect the morale of other employees? 
  • Would they see her work-from-home arrangement as special treatment? 
  • How could working from home be fair to all employees when it wasn’t an option for some—like those in the sales and service departments? 

Had Mike created a board of directors as part of his transition, he could have used that forum to show Mindy how to think beyond her current role. Together, the two could have brainstormed how they could make a work-at-home option (1) fair to all employee and (2) operate for the good of the company.

The advantages of formal business governance are many, and its value far outweighs the time and effort it takes to institute it. We strongly recommend that you set up some form formal business governance before you need it and before the transition process begins. 

If you’d like input on how to set up governance that suits your business and promotes your goals, give us a call. We’re here to help. 

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