A generational shift in family business ownership is a pivotal moment that comes with equal parts peril and opportunity. Professor Christine Blondel, Lecturer of Family Business at INSEAD and KDVI Associate, shares with us how tailored governance can help solve some typical family business issues.
When Margaret was appointed CEO of the family business, taking over from her uncle, she felt that the supervisory board was not challenging her enough. Composed of family members who transmitted their seats from one generation to the next – with family proximity as the main criteria for nomination – plus two old friends of the family who had been there for a very long time, the situation gave her a critical challenge. How could she professionalise the board and get more value to support and challenge her, while preserving family harmony?
When family businesses move from first to second generation, the Board of Directors – appointed by the shareholders to oversee and steer the business, support and control management – is often composed entirely of members of the second generation. When generations go by, shareholders tend to appoint a member of their ‘branch’ to the Board (a branch is usually made of the descendants of one of the second-generation siblings). Moreover, few family businesses are aware of the benefits of having independent directors. As a result, the diversity and experience of the board is limited, business competence is not guaranteed, and the family may start reasoning in branches instead of one single group of shareholders.
The dilemma: how can family businesses move from this spontaneous representation to include business competence on the Board of Directors? Here’s five ideas to help governance evolve:
- Propose training to family members on business and governance.
- Organise additional shareholders’ meetings.Theoretically, shareholders meet at least once a year to approve resolutions at the Annual General Meeting. However, this meeting is either quite formal or replaced by the circulation of documents. Adding a more informal forum, organised once or twice a year, creates additional opportunities to connect, engage, and share information.
- Create an Owners’ Council to prepare the decisions and discussions of the forum(when the shareholder group is small, there is not a distinction between the forum and the council). The Owners’ Council can be nominated based on representation (branches, generations, gender, etc.) as well as relevant competences.
- Discuss and document the role of each structure, and implement the changes.Defining each structure’s activities, criteria for joining (knowledge, skills, attitude), and appointment process allows family members to better realise what makes a good board member and accept a selective appointment process – which can include, for instance, an outside assessment.
- Organise family meetings.Regular connection with shareholders and other family members fosters cohesion, enables the sharing of information, and, crucially, gives people the opportunity to listen.
Involving family members in the development of this new governance is a key factor for its acceptance. Documenting it in a family charter will bring clarity and allow the principles to be consistently applied over time and between people – while keeping the flexibility to change. These are all principles of what we term ‘Fair Process’.
Find out more about our popular Family Business Advisor Masterclass. Contact Lidy Hopman-Fuller to register your interest.