As we enter the post-recession world, family businesses are attempting to understand the "new normal" and how to stay competitive in the changing world.
According to Randel Carlock, director of the Wendel International Centre for Family Entreprise Center at INSEAD, in order to adapt to the new business environment directors need to have "quality information about the business, where it's headed and the risks it faces, as well as the ability and willingness to challenge management. That may mean shaking things up in the boardroom."
Baron Buysse, chairman of Bekaert, global market leader in drawn steel wire products, agrees that the world is going through a transformational process.
"Not only is the shift in economic power irreversible, but the negative results of the financial crisis will influence the economy for at least another five years. While all experienced business people expected a downturn, nobody was prepared for the financial consequences of misconduct at the big banks.
"The fact that huge risks were taken, mostly without a clear warning to the various boards of directors, illustrates that, although corporate governance protects the value of a free market capitalistic system, it was not functioning properly in this instance. Had it done so, there is not a shadow of doubt that the depth of the crisis would have been reduced. We should all be asking for more stringent corporate governance, not less," says Baron Buysse.
It is no coincidence that Baron Buysse has such a strong view on the subject. He published a corporate governance document for non-listed enterprises in Belgium, called "Code Buysse", in September 2005. Code Buysse, which offers a practical manual that business leaders can use to bring about profitable and sustainable growth, was unique at that time as it was the first in the world to have specific recommendations for family businesses.
Good governance aims at establishing a framework of company processes and attitudes that add value to the business and help ensure its long-term continuity and success as well as the fair treatment of all stakeholders. The Code Buysse offers a framework for unlisted companies – particularly family businesses – to help them build fair process that protect all categories of shareholders without the heavy legal constraints that apply to listed companies.
In family businesses where ownership is spread among multiple generations and whose family members live in different places, families must develop their own governance structure as the role of family members shifts from owners/managers to that of "responsible shareholders".
In reality, corporate governance is needed before differences in opinion between active and non-active family members arise and as soon as non-family professionals replace family members in management and on boards.
The importance of Code Buysse has become even more apparent during the volatile and difficult economic climate of the last 18 months and there was a clear need to update it in light of the recent upheaval. The Code Buysse has, therefore, been revised to take into account various new dynamics, to include a more detailed approach towards entreprise risk management, to offer vitally important ethical standards and to include corporate social responsibility.
Even before the crisis hit the world economy, it was clear that the Code had to focus more on enterprise risk management and help companies to control and adapt themselves better in the face of both expected and unexpected risks. As such, the revised Code should help family managers to evaluate the risk profile of their business.
The board of directors should see that the management develops and regularly evaluates a thorough system of internal controls and risk management. The main risks, including risks related to compliance with existing legislation and regulation, should be properly managed. They should be brought to the attention of the board with an internal audit function equipped with the resources and the know-how appropriate for the size of the firm and/or with a statutory auditor whose independence should be beyond question.
The Code has also been revised to take into account the strong need of more ethical standards. "Ethical entrepreneurship isn't a luxury for starry-eyed idealists, but a day-to-day reality," says Baron Buysse. In concrete terms this means:
Overall, unlisted companies can be viewed with greater suspicion due to their lower levels of transparency in comparison to publicly-listed entities. Effective corporate governance is therefore even more critical in family businesses where family ownership could shield poorly performing management from the market pressures facing their listed counterparts and where family disagreements could threaten the company survival.
On the other hand, academic research confirms that family ownership also brings great advantages such as the transmission of strong family values and the long-term view needed that will help an efficient management to concentrate on the strategic and operational issues. Baron Buysse believes that family businesses have their own dynamics, based on a tradition and in most cases a very rich culture.
This often translates into a high sense of responsibility, not only for the current stakeholders but also for the future generations, as well as a medium- or long-term view. If the families have established a Code for their business, including a vision, values and a family charter, it is obvious that all instruments are in place to steer the business even through a tough recessionary period.
The Code Buysse has four parts: sound entrepreneurship, the advisory council, the active board of directors and the continued expansion of governance instruments. It also includes a self-regulatory dimension that is an essential part of the Code's character.
"The spirit of recommendations should take priority over the form (…) The best way is to integrate the recommendations into existing business procedures, avoiding additional bureaucracy and without stifling the entrepreneurial dynamic," says Baron Buysse. It is adaptable to the specific needs of the different sizes of businesses, but as such calls for a high level of responsibility from everybody who is involved in creating sustainable profitable growth for the enterprise.
Baron Buysse adds: "As most of the Code's instrumentation is available to outsiders, there is a controlling element in the transparency of the Code's development. Financial institutions for instance, will find most of their questions about how to evaluate the management and financial strength of their clients answered within the Code."
In the 1990s, shares and share options became a regular feature of performance-related pay, particularly in the US. Behind this strategy lay the idea that the ultimate purpose of a business is to add value for shareholders. And the best way to do that is to turn managers into shareholders by rewarding them with options.
Management remuneration will continue to be a matter of speculation, comment and criticism. Baron Buysse is of the opinion that the Anglo-Saxon system proved to be efficient in publishing remuneration in its full transparency. "It is up to the chairman and the board to explain their decisions at the family meeting or the AGM. However, the Code Buysse states that management remuneration should be competitive and stimulating, but management decisions based on short-term gains should never be allowed to lead the company into danger."
It is also vital to stress the importance of integrity and of recruiting quality managers more motivated in the pursuit of the general interest of the company than by their own short-term financial interest.
The Code Buysse is obviously not an exhaustive guide. Areas such as improving gender diversity on the company board and education of the management, shareholders and the next generation are all noticeable lacking.
Nevertheless, the Code Buysse is a good basis for a discussion and an exchange of views amongst family shareholders that can help develop projects that are fundamentally important for the growth of a family business, but which are not necessarily part of the corporate governance discussion.