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Family governance as the key to success

Fidel S Ftöhlker is managing partner of Klaus J Stöhlker, a public relations company based in Zollikon, Switzerland.
Franziska Muller Tiberini is the owner of familienunternehmen.ch, a consultancy in Zurich for family-owned companies.

In the difficult business environment following the stock market boom, family businesses often found themselves more adaptable than other companies. The key to their success: good family governance, argues Fidel Stöhlker and Franzika Müller Tiberini

For quite some time, family businesses were considered somewhat old-fashioned in Europe. The owners had a reputation for inflexibility, stubbornness and greed. They were accused of only thinking of themselves while being unable to keep up with modern times. This hostile conception has now abated considerably. Through their responsibility and their personal capital investment, family business entrepreneurs are much more flexible and goal-oriented than external managers. The owners' obligations are manifold – towards the company, the other co-owners and, last but not least, the family.

Emotional perception
In a family business, leadership is perceived in a highly emotional way. The emotional involvement of family business entrepreneurs gives them the edge over external top managers. The company may well represent their lifework. When it stops functioning, the responsible parties fight with much more vigour than in many other companies. The personal future of the family and its descendants is at stake. The heirs should be proud of their company and its employees.

Family quarrels paralyse the company
The emotionality of the family business contains risks which are often underestimated. The family quarrel escalating to a long-standing family dispute can quickly slow down or even block the decision-making ability of the family business. Some big private banks as well as some industrial enterprises have experienced such rows. However, the biggest problem lies elsewhere. A German survey carried out by the Bonn Intes Academy for Family Business, JPMorgan Private Bank and the European Business School (Oestrich-Winkel) has shown that in half of the 185 observed family businesses the majority of the capital investment was held by family members who were not actively working in the company. Therein lies the greatest potential for conflict.

When family members cannot agree on strategies and decisions, this often leads to arguments. The passive co-owners show little interest in the development of the company, while at the same time they demand high payouts. It becomes dangerous when the personal interests of the passive co-owners start overriding those of the company.

A current example of an impending conflict situation is the Versace family clan. What happens when the heir doesn't agree? Since Allegra Versace Beck has reached maturity, her uncle Santos (with a share of 30%) and Donatella (with a share of 20%) are thinking about the future of the ailing company. The family quarrels will probably start when Allegra's personal plans are not found to be feasible.

How good leadership and governance actually are becomes clear in moments of crisis as well as with a trouble-free succession. With companies quoted in the stock exchange, changes in leadership are often met with an immediate fluctuation in the stock market price and a re-evaluation of the company. A governance structure would help to ensure the company's continuing attractiveness for the market, the clients, the investors and the banks.

Clear rules in the company
A well-functioning organisation with a clear division of duties – both within the company and within the family – is especially important. What we can learn from companies that have survived over several generations is that not only their leadership, but also their families, are clearly structured.

A capable board of directors enhances the competence at the top of the company and therefore the company's potential. Smaller firms can take advantage of this system as the professional competence increases considerably when taking an expert on board. This leads to better decisions and diminishes the risks.

Who belongs in this committee? Smart minds!
Besides professional competence, the good qualities of a board of directors are a healthy mix of vision, objectivity, loyalty, availability, wisdom and courage. Professor Neubauer of IMD Lausanne warns of well-meaning friends, pensioners and people who already belong to many other boards of directors.

A good balance between trust and bias is decisive. If the members of the board are too close to each other there is not much room for criticism. If their relationship is distant or even hostile it becomes difficult to build trust. An additional complication arises, when the   different needs of several family branches have to be taken into consideration. It is indispensable that clear rules and criteria about the composition of the board be defined beforehand, as well as the limitation of the term of office (about three years) and retirement clause.

Planning and communication
Many roads lead to Rome, but few are navigable. Family business entrepreneurs have to educate and prepare their successors well, so that the understanding for the processes within the company, the social responsibility and the drive for excellence can grow. Planning should therefore be prepared in the long term. It is important for an early handing over to take place, so the senior can help his or her successor to take over the processes step by step.

Every family business should have a person representing the company on the outside. Often the owners shy away from the public even though they are the ones to determine the direction of the company. This is wrong as a company needs identification. The world-renowned brand Swatch is a good example: the figurehead of this successful company is still Mr Hayek Sr. A certain conservatism keeps the successors from imprudently heading for tempting opportunities, because the risks need to stay controllable.

Clear rules are indispensable for any family business. For a well-functioning management of a family business there needs to be – besides corporate governance – a systematic management of the family, a family governance structure.

Advantages of family businesses
The structures within family businesses are quite simple. According to a survey by the Swiss Institute for Small and Medium-sized Businesses at the University of St Gallen, "Meaning and Structure of Family Businesses in Switzerland", three out of four family businesses own 100% of the shares.

The advantages of family businesses keep being underestimated or misconceived:

- Planning is based on long-term and strategic considerations
- Owners finance extended dry spells
- Stable ownership safeguards against hostile take-overs
- Continuity in management creates trust with clients and employees
- Flat hierarchies lead to quicker decision-making processes and  higher flexibility

Further, family businesses don't have to succumb to the pressure of quarter results in the same way as quoted companies.

The family
The family can exert a lot of influence on the company. This can happen both in a formal or informal way. The family council is the ideal instrument to successfully implement a family governance. Discussions within the family council should be held in a neutral setting and according to clear structures. All members get a chance to express themselves in an equal manner. The family council can therefore also serve as an ideal integration tool for new family members.

Key to a successful family and environment is good communication, both towards the inside and the outside. Internal communication is at the base of the long-term survival of a family and a family business. When a family communicates well, solutions can be found more easily. The needs of all participants have to be heard in order for a win-win situation to develop. Good communication in a family starts from birth. Children should enjoy a good education and learn to deal with each other from the beginning.

The family council
The goal of the family council is to establish a platform where information can be exchanged, opinions formed, strategies elaborated and where professional development can take place. The family council supports and complements the board of directors. The emotions of the family members are vented and dealt with in a closed family circle instead of taking place in a board meeting. A clear stance of the family in front of the board of directors is very valuable, efficient and cost-saving.

Family coaching
The emotional factors involved in the management of a family business have proved to be very influential. The coaching of individual family members as well as group coaching has proven to be very valuable in this area. It is not only useful for bridging the generation gap and supporting the succession process, but also for large families who manage and invest in jointly owned assets and shares.

Lack of moral values in top managers
The problem of many companies is that the CEO doesn't feel immediately involved. Even though he feels the pressure of the public or the shareholders, he can rest easy as long as it is not his own money at stake.

Many top managers of companies quoted in the stock exchange have lost the virtues of the respectable businessman. The only thing that counts is their own income. As a consequence, the employees lose confidence when the managers amass fortunes in a way which has no relation to the income of the other employees.

The economy will eventually be divided into solidly managed and healthy companies, and those in which health and earning power is only simulated while they're using up their own substance. The blueprint for a manager is thus newly defined – a real leader will have to take on more personal responsibility in the future.

adaptable, fbn, governance
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