Governance in Flemish family businesses

Jozef Lievens is Managing Director of the Family Business Institute in Belgium and a Partner at Eubelius Lawyers.

Recently, a research project was executed for the Flemish Institute for Family Businesses, with support of the Flemish Government. It investigated governance practices in Flemish family businesses, focusing on the functioning of boards of directors and aspects related to governance of the family. Data was collected from a random sample of more than 3,000 Flemish family businesses, each of which employed more than five employees. The written survey resulted in a response of 295 answers, a response rate of 9%.

The results
The study found that boards of directors in Flemish family businesses consist on average of 3.58 members. In slightly more than 50% of these family firms, the board consists of only three members, the legal minimum in Belgium. Furthermore, family directors have a dominant presence whereas outside directors are rather underrepresented. And CEO duality is found in almost 80% of the firms in the sample.

The research also revealed that the most important tasks of the board are:

- improving the firm's reputation;
- advising the management team;
- supporting strategic decision making; and
- developing networks.

Additionally, the board clearly has an important task to fulfil in guiding the succession process.

In terms of board meeting frequency, the results showed that Flemish boards meet on average 2.91 times a year, with an average of two hours a meeting. The frequency of these meetings is significantly related to the size of the firm; boards in medium and large family firms seem to be more active than those in smaller family businesses.

Attracting new, effective board members can often be tricky work. The study found that for Flemish family businesses, new board members are mostly selected through personal networks of the directors in charge. In Belgium, the average annual compensation for an outside director is €3,292 a year. However, this amount fluctuates between €0 to €10,000 a year and seems to be significantly related to the number and the duration of board meetings. Evaluations of both the functioning of the board and individual directors are rare.

Unaware of added value
The results, which related to the composition, the roles and the processes of the board of directors, suggest that entrepreneurs in Flemish family businesses are not fully aware of the potential added value of a well-functioning board. Almost half of the firms in the sample have a 'paper board', indicating that they have less than two formal meetings a year or meet less than two hours a year. These boards seem only to be installed in order to fulfil the legal requirements. The main task of these boards is the approval of the annual account of the family firm. Moreover, research results reveal that only 16% of the firms in the sample have at least one outside director.

In practice, a well-functioning board of directors has an added value for Flemish family firms. In the survey, respondents were asked to evaluate the overall usefulness of their board of directors on a Likert-scale ranging from 1 to 5 (1 equaled not useful/waste of time; 5 equalled extremely useful). For the total sample, the average score on this question equals 2.66. When making a distinction between those family businesses with a 'paper board' and those with a well-functioning board, these scores become respectively 2.33 and 3.66. Obviously, entrepreneurs of family businesses with a well-functioning board of directors are more satisfied with their usefulness. However, the difference in perception of usefulness becomes even bigger when making a distinction between firms having a board with or without external directors: boards incorporating external directors received a substantial higher average score (3.52 for boards with external directors versus 2.53 for boards without external directors).

Sharing control
In order to understand the different aspects of governance of the family, some information was requested on the share-holding structure of the firm. In 85% of the businesses, family managers own a majority of the shares (50.1-100%). Non-management members of the family often do not own shares (in 67% of the firms); in 25% of the family firms they have a minority of the shares. To a large extent, family managers control the family business.

Nevertheless, in only 44% of the family firms one person owns more than 50% of the shares. These research results indicate that in Flemish family firms, control is often shared amongst several family members.

Developing governance
Family governance seems poorly developed. Only a small part of the family firms in the sample (11%) do have a family forum or panel, and even less firms developed a family charter. Family forums and charters are mainly used in larger family businesses. Important responsibilities for the forum are:

- organising ownership rights;
- controlling the family-firm relationship and
- determining family values.

Topics stipulated in the charter are family values, ownership and leadership issues.

In conclusion, results showed that several aspects of governance are still too unfamiliar and too unknown for the Flemish family business. Boards of directors are often looked at as being an accounting instrument and governance of the family is an unfamiliar concept.

Flemish family businesses should be better informed about the potential advantages of a well-functioning governance structure. This is an important task for accountants, consultants and organisations closely related to and concerned in Flemish family businesses.