John L Ward is the Co-Director of the Center for Family Enterprises at Kellogg Graduate School of Management (USA) and the Wild Group Professor of Family Business at IMD (Switzerland). He serves on the boards of four family companies in Europe and the USA.
There is no single governance system. The key to effective governance depends on the adaptability of the roles of the owner, board and senior management, and its alignment with the stategic environment of the business
Families and their roles in business governance have been in the news recently. Debate is raging at Bertelsmann about whether the non-employed family is too involved in management affairs. On the other hand, many were surprised at Reckitt Benckiser when the non-family CEO said, "There is no family involvement in running the company, I see these people once or twice a year at most". Last year, Families in Business presented the Murugappa Group case, which showed four family members leaving their CEO positions to become full-time board members and supervising owners. Two issues ago, the SC Johnson family provided an example where the descendants each took personal responsibility for a different business, while maintaining collective ownership.
All of these examples raise the question: what should the proper roles and responsibilities for family owners be?
Different types of owners
Family businesses have many different kinds of owners, ranging from founding entrepreneurs to distant, disinterested family members with small stock holdings. Understanding the different types of owners is the first step in articulating their appropriate roles. The following list is in declining order of engagement.
- Operating owners: work in executive capacity and take day-to-day leadership of business management;
- Governing owners: employed by the business to lead governance and monitor operations;
- Active owners: are those not employed by the business, but who seek to add value to the business by remaining knowledgeable, engaged and committed;
- Investing owners: are focused on the financial performance of the company, and whether to buy, hold or sell their stock;
- Passive owners: pay little attention to their investments or the company.
Most family businesses are founded by operating owners who hold a controlling share of ownership. Family growth and ownership succession, however, often cause a shift in the percentage of ownership held by different types of owners. With each generation, the percentage of ownership held by management tends to grow smaller, and controlling ownership usually becomes increasingly dispersed. Rapid growth in business operations can also cause ownership to move out of direct line management and take on increasing oversight functions. Regardless, the most successful older family firms assure that the majority of owners are at least 'active owners', not just investing or passive owners. The special advantage of family firms is that ownership can remain active over time and continue to add value.
Too frequently as a family grows and the business passes through the generations, large numbers of family owners become merely investing owners or passive owners. The business loses its special culture. A vacuum of engaged ownership permits the possibility of management abuses. Then, reawakened, the remote, ill-prepared family owners re-seize operating or governing control of the business. That is likely to chase away the best management and then the downward spiral amplifies.
On the other hand, if most family owners stay at least active, the business benefits from a stronger culture, more confidence in continuity and more commitment by the owners. What's most important, however, is to be sure that the roles owners take are consistent with the choice of ownership type they assume.
Active owners add value to the family enterprise in several ways. They do this by cultivating a clear, shared vision of both ownership and the business.
Effective owners understand their company, its industry and customers. They have a realistic vision of the future of their business and knowledgeably support the strategic initiatives necessary to achieve business goals. They get to know their CEO and other key managers, and develop relationships of trust with their management team.
Effective owners also create a shared vision of ownership. They understand how ownership will be held, voted and transmitted, whether the company will be public or private, and what the financial benefits of ownership will be. Active owners primarily add value by assuring the on-going alignment of business and ownership visions.
Owners also add value by understanding the strengths of their business culture, and by living and transmitting the family's collective values. Articulated values can help clarify business decisions and help define the roles and purpose of ownership. When values are not clearly transmitted, the business culture tends to become shallow and ownership's commitment weak. Families take pride in ownership when they see their values reflected in the strengths of the business culture. This pride is an intangible asset, which keeps family capital invested and patient.
Active owners also need to articulate clear financial goals that correspond to the family's values and vision. These goals need to both secure ownership's commitment and reflect reasonable expectations for business performance. Owners should have clear goals in four financial areas: growth, risk, profitability and liquidity. These areas are all interrelated and effective owners will understand the necessary trade-offs among them. By setting realistic financial goals, ownership creates clear performance expectations for management and helps assure the future alignment of business strategy and family commitment.
Active family owners also add value to the enterprise by taking responsibility for certain, key policy areas. As they grow larger, many family ownership groups articulate policies for family employment, shareholder relations, ownership succession, and governance succession. Policy in these key areas helps define the relationship of the ownership family to the business. Effective ownership groups recognise that the process of generating family business policies helps clarify many of the issues that can lead to misunderstandings and ownership conflict.
Alignment and governance
The single, most important family business policy area is governance. Owners can never abdicate their governance responsibility. Active owners determine the structures of governance. They decide what type of board they want and the composition of that board. Effective owners also determine the relationship of voting trusts and family governance structures to the board, and they clarify roles and decision-rights across the governance system. Active ownership should be involved in the selection of the Chair and in the on-going process of governance development
Family business governance works best when there is alignment between the type of ownership and the type of board selected. The role that ownership takes in governance should reflect its level of involvement in the business. The level of family involvement will also impact the locus of power in business leadership and the types of strategy that can be effectively pursued. The strategic environment of the business can also be a determining element, as important as ownership type.
There is no single governance system that works best. Effective governance depends upon the appropriate adaptation of roles for the owners, boards and senior managers of a given business. The key to effective governance is the alignment of these roles with the type of ownership and the strategic environment of the business. Active owners can add considerable value to their enterprise by assuring the proper alignment of governance roles and clarifying decision-making processes.
The more concentrated ownership groups of family businesses provide a special opportunity for competitive advantage. When ownership is active and engaged it assures the alignment of business and ownership interests and goals. As families and their businesses grow, the roles and responsibilities of ownership often change. Family ownership groups remain effective by adapting policies and governance structures to changes in the type of ownership. Matching these adaptations with historically embedded business culture and values is often critical to their success. When this happens, roles are clearly understood, and decision-making processes are effective.