Business governance isn’t a topic that excites most business owners until something happens that makes them wish theirs had it. As transition strategists, however, governance excites us because it is a critical element in the success of a business as it is transitioned from one generation to the next. In this article, we look at the objection we hear most from owners: We’re doing just fine making decisions the way we do. Why bother with family business governance?
When Informal Governance Works, It’s Great!
We’ll concede the point that some family business owners do “just fine making decisions the way [they] do now.” They talk to spouses and children over dinner and/or talk through issues with one or two trusted peers, and then consider the input and make decisions. That scenario works well when one person is the source of all decision-making.
Informal governance can also work well in partnerships. Partners discuss issues, make decisions, and act. No committees, no obstacles.
What is Formal Business Governance?
Before we make our case for a more formal form of governance, let’s define our terms. We define governance as: 1) the rules and processes 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.
There is no one-size-fits-all form of governance, and the form you choose for your family reflects your values and can be as rigid or loose as you like. You decide who participates / votes, the type of issues that are discussed, and who ultimately makes decisions (i.e., the CEO, the board, or shareholders).
Imagine a classroom in which peers share perspectives, ask questions, hold healthy debates, and then vote. Everyone leaves the experience having learned something about how participants think and make decisions.
The formal governance “classroom” also provides a place to:
• Apply the brakes if new owners who lack experience take a wrong turn or move to implement their ideas without careful consideration.
• Include all owners in discussions in an organized and democratic way.
• Manage the input of owners who are not active in the business.
• Pass wisdom and insights from one generation to the next.
• Enable members of an older generation to learn from the next and allow the younger generation to be heard regarding their vision and direction.
• Provide a forum to air all perspectives before making important decisions about major issues such as the direction of the business, debt, the acquisition of another business, or the purchase or sale of shares.
Why bother with family business governance?
In addition to the benefits just listed, formal governance (such as a board of directors) offers owners in transition even more benefits. It gives them the opportunity to:
• Observe how their successors think through and react to various situations.
• Create alignment through good communication.
• Offer their successors the benefit of their experience and guidance.
Make the Move to Formal Governance
The best time to install a more formal vehicle for decision-making (a board) is before things get complicated! Between Generations 1 and 2, families may be able to sustain informal business governance, as businesses move from Generation 2 to 3 and then (we hope) to 4, there are too many people and too wide a range of priorities to rely on informal governance. By setting up governance between Generation 1 and 2, you put in place a pattern for decision-making that becomes the norm as time goes on.
Family Business Governance During Family Business Transitions?
Let’s suppose that you are preparing to turn decision-making power over to a successor. Is that person at your dinner table every night? That’s not likely if successors are adult children or members of another branch of the family. Even if your successor is at your dinner table, do you want to use meals, holidays, and other family times to focus on the business?
In our next post, we will discuss the advantages of replacing the family dinner table with the family board table.