• Systematically Prudent

    The corporate setting, in all its glory, is a shiny thing to behold. It is overwhelmingly bright and beautiful. They seem to know and have it all—the processes, the structures, and the incredibly long list of positions in the organizational chart. More often than not, smaller and less professionalized family organizations strive to achieve that same shine. While there are several ways to approach the transition to bright and beautiful, family firms must approach this systematically and prudently.

    Change does not happen overnight and for some organizations, it may take longer than expected, but fine wine comes with age and a fine organization comes with prudence and patience. Let us take the issue of business boards. Business boards are not about the long conference table, leather seats, and poker-face interrogation. That particular image, while possibly accurate, is a cliché made for the movies. They may seem intimidating, but business boards are a vital part of an organization’s governance and its secret to long-term success. How then does a family business achieve this?

    The Family Business Structure

    family-business-system

    Figure 1: The Family Business System

    The structure of the family business (see figure 1) requires effective communication and decision making within the family, the business, and the ownership groups. According to Davis (2001), family businesses resort to shortsighted and dysfunctional means to deal with the issues across the three groups, such as:

    1. Exclusion and secrecy: keeping some family members out of the conversations and keeping too many secrets from employees, owners, or family members
    2. Divide and conquer: relying on the support of some allies and excluding others from information and decision making
    3. Bribery: hiring relatives who do not deserve jobs, paying relatives more than they deserve, distributing more funds from the company than is responsible for the sake of preserving family harmony or maintaining certain individual’s power.

    Family Business Governance

    However, these methods are a sure way of eventually destroying the organization.  The ideal way by which a family organization can deal with this is in developing a governance system structure (See figure 2).

    Figure 2

    Figure 2

    The Family Business Governance Structure

    The clear delineation between the board of directors and family council allows a more functional means by which a family firm can address issues of family, business, and ownership. This ensures that family issues do not pollute business and ownership issues, and vice versa. An effective governing structure, according to Davis, is able to establish good governance in a family organization that allows:

    1. Clarity on roles, rights, and responsibilities for all members of the three circles.
    2. Encouraging family members, business employees, and owners to act responsibly.
    3. Regulating appropriate family and owner inclusion in business discussion.

    The governance structure, however, does not advocate family firms to jump into hiring and creating a board of directors. Again, everything must be systematic and prudent.  The system of governance evolves along with the organization and for first generation family business it is best to start with an advisory board rather than a board of directors.

    The Advisory Board

    Owners select the members of the advisory board and because they cost less, it is more appropriate for a smaller and first-generation family organization. A good advisory board is able to provide (1) supplemental knowledge and experience, (2) strategic thinking and, (3) a broader perspective.

    Supplemental Knowledge and Experience. While family businesses thrive, like any organization, it has its weaknesses and it is in this area that the advisory board comes in. Since it is in the power of the owner to select the members of the advisory board, it is important for the family to recognize their weaknesses and seek someone who can complement them in that area. If the family business is great in sales, but bad in managing their finances, a financial expert in the advisory board is necessary.

    Strategic Thinking. Unlike the family-owners/ manager, advisors do not immerse themselves in the day-to-day of the business. Hence are able to look past the present concerns and force the family-owners/ managers to look at the opportunities up ahead.

    Broader Perspective. The focus on the present leaves most family-owners/ managers myopic. Discussion on opportunities amongst the owners and family can be incestuous at some point. An advisory board brings in a fresh perspective and challenges the current preoccupations and concerns of the family business.

    The advisory board helps the organization deal with governance issues while it’s growing and transitioning into a more professionalized organization. It is important that the organization consider whom they choose for the advisory board.

    Choosing Your Advisory Board Members

    While the advisory board is not the exact replica of a board of directors, its function in a smaller enterprise of a first-generation family firm is similar. Hence, the composition of the board is critical. In choosing the members of the advisory board, family owners must first list their organization’s capabilities and weaknesses, list the attributes they want from a member of an advisory board member, and then commence recruitment. More than anything, prudence and patience is vital in this area. It is important to find board members who are committed to being part of the advisory board and who are their own voices. Do not seek someone who simply agrees; find someone that brings to the table their expertise, strategic thinking and a broader perspective.

    The advisory board is most useful as the business grows and transitions to a more professionalized organization. A professionalized organization, according to Donald Jonovic, must have:

    1. Adequate, formalized shareholders agreements.
    2. Agreements on goals and objectives for the business as an investment.
    3. Timely, accurate accounting information in a form that facilitates planning, operational decision making and performance review.
    4. Strong, coordinated middle management, motivated by an incentive compensation plan that is geared to achieving performance goals.

    Achieving these milestones will take time and the advisory board will be able to help your organization achieve these milestones. When your organization finds itself meeting the milestones, commence establishing the board of directors.

    Change does not happen overnight, but baby steps are steps nonetheless. Approach the creation of a family business board systematically and prudently and reap the rewards.

    Written by: Mary Iphigene Daradar

    Posted on: September 5th, 2014 by READS Web Admin