I greatly enjoy working for family-owned businesses, both operationally and as a board member. There are many positives to family-owned companies, not least the long-term perspective, dedication and commitment to values.
Through my nearly 20 years of board experience from both publicly traded and privately owned businesses, I have observed various situations where good corporate governance was instrumental for the company’s development and value creation. Corporate governance is about clarifying and allocating roles between owners, the board, and management. In good corporate governance, the board plays a central role, being responsible for strategic direction and oversight. The board should ensure that the business is properly organised, has clear lines of responsibility, and qualified personnel. Furthermore, the board should stay informed about the company’s financial situation, make strategic decisions, and ensure the company’s compliance with legal and ethical obligations.
Although the rules for good corporate governance are essentially the same for all companies, I can’t help to observe that private ownership, and especially family ownership, adds an extra dimension of complexity that the board, executive management, and the owners themselves have to consider. This complexity can arise both when selecting candidates for various roles, and when these roles are executed (read more about the relationship between the board and the CEO here).
In this article, I will focus on board work in family-owned businesses, which often involves unique challenges and dynamics that the board should be aware of. I will particularly address the following topics:
- Role allocation
- Conflict of interest
- Equal treatment
- Competence
The family as a whole must decide how actively they want to execute their ownership. One can choose to manage the family business through the General Assembly as an owner, take a board position, or assume the role of CEO or another management role. Every option has its advantages and disadvantages that need to be considered to help owners build awareness and make wise decisions.
In my experience it is usually an advantage to have the majority owner represented on the board, that ideally being the owner themselves. Among other things, having the final decision maker in the room allows the board to read the signals and adjust the course early on. At the same time, the exploration of possibilities can stop too early if being met with limiting assumptions, rigid viewpoints, or emotional attachment.
Having the owner/-s represented on the board or in the management roles can add another challenge in the form of conflict of interest. In such cases, the owners can be considered ineligible, and it then falls to the external board members to handle and decide the case with regard to all the company’s shareholders. This is not an optimal situation since it misses out on the board’s collective competence in challenging cases, but it’s understandable that it can happen from time to time.
The majority shareholder in privately owned businesses is usually the family, but there are often minority shareholders to consider as well. Equal treatment of shareholders will then be a central consideration in board work. This means, for example, that in transactions or changes in the company’s structure, the board must ensure that shareholders are treated in a way that does not favour any shareholder at the expense of others. This can often receive too little attention when the main owner participates on the board. Equal treatment of shareholders contributes to trust, and it is an important principle to protect the interests of all shareholders.
Having the majority owner on the board can present some challenges, but in my experience the advantages still outweigh the disadvantages.
For the business’s sake, we must always ensure that the owners who are willing to take on a role, have the competence and abilities this role requires.
It’s also very important that the other shareholders who are not engaged have both trust and respect for those who choose to engage. There are plenty of examples of unqualified management based on family ownership, and there are many examples where leadership and ownership roles should not have been combined from an external perspective. I have also experienced from the board’s standpoint how unfortunate this can be for the business if the right qualifications are not present. To ensure this does not happen, it is advisable to use external consulting in the selection process. Furthermore, to get access to specific expertise and bring in new insights, it can be beneficial to set up an Advisory Board with external experts that both the Board of Directors and the CEO can consult with, as long as the roles are clearly defined.
The owners who choose active ownership, would sometimes want to take on multiple roles. It often means they are passionate about the business and the family’s legacy. At the same time, combining different roles can create more challenges than benefits for the business. However, I have seen it performed professionally and elegantly. When combining several roles, clarification and definition of roles are particularly crucial, as well as the owner’s ability to take off one hat when putting on another. This requires both wisdom and clear awareness of the various roles’ nature and implications. Although it is possible to execute this in a good way, it is often challenging and unfortunate, and thus best to avoid.
Corporate governance gains a new dimension of complexity in family-owned businesses, starting with awareness and wise choices regarding roles and responsibilities. Understanding and being aware of the various dynamics that occur in privately owned businesses is a prerequisite for good collaboration. While the board has the final mandate to ensure that the principles of good corporate management are upheld, there is also an individual responsibility lying on each owner, board member, and leader to ensure that their roles are exercised within the set frameworks, and the various dynamics that can affect them are considered at all times. It can sometimes be challenging, and many find it useful to engage a good mentor to help them navigate and perform at their best.
Read more about Board work: