Good governance helps family enterprises thrive in short term, endure in long term

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Good governance is sometimes thought of as a vague, nice-to-have frill that a family enterprise will get around to eventually setting up – once it has put out today’s urgent fires of dealing with financing and customers, increasing revenue, controlling costs, hiring and firing employees, and buying and selling new businesses.

But good governance makes for good business and should be on a family enterprise’s to-do list today.

Governance is a very broad term, but at its core, it’s about how people in an enterprise make decisions. In particular, governance relates to the higher levels of decision making – the structures and roles people have to oversee and make decisions; the ways those people get the information and advice on which to carry out that oversight and make those decisions; the interests and perspectives considered when making decisions; and the systems in place to monitor the enterprise, its internal operations and its external risks, opportunities and relationships with the broader market and community.

Good governance can then lead to better decisions, which help a family enterprise thrive in the short term and endure in the long term. Good governance means ways of making decisions that are legally compliant, foster a culture where those governance structures are known and accepted by everyone involved; and serve the mission of the enterprise.

On a practical level, good governance is about two main things: people and processes. In other words, the right people doing the right things. A family enterprise needs the right people in the right roles – who is a director, including holding positions of leadership on any board; who is an owner; and who is an employee working within the enterprise. Often in family enterprises, people play multiple roles. For there to be good governance, everyone needs to also understand their roles through training and onboarding for each role, and continuing education.

To be useful, governance documents need to be living instruments rather than dead documents that sit in drawers.

A succession plan, both for short term emergencies and long term generation-over-generation change, is also an important part of carefully planning who plays what role over time.

Having the right processes starts with having proper constating documents such as articles, by-law, partnership agreement and board policies and codes of conduct that are both up-to-date, including in accordance with legal requirements. Reducing processes to writing can also help depersonalize some topics and set clear expectations, particularly around how people are compensated for the roles they play. This is especially true where members are similarly situated in the family (e.g., siblings) but play very different roles in the family enterprise (e.g., one sibling may be an employee, director and shareholder, while another sibling is only an owner, or where one sibling works in the revenue generating side of a family enterprise and another works for a family foundation).

Governance documents should also reflect and inform the actual governance practices of the enterprise. To be useful, governance documents need to be living instruments rather than dead documents that sit in drawers and have nothing to do with how things actually happen.

There are many myths and reasons for feelings of reluctance toward investing in governance. A founder may have started a family enterprise from scratch, with the bare minimum of formalities, and sees no need to change anything as the enterprise expands. A family enterprise may have grown organically over many years without any governance structures keeping pace. Governance may be seen as unnecessary bureaucracy that stifles the growth and is contrary to the informal relationships between family members on which the business is built. There may also be a reluctance to involve outsiders who are often associated with governance, whether these are external advisors or directors who are not family members.

The business case for good governance is often made by the reverse – the harms of poor governance. Poor governance can lead to value-destroying conflicts, reputational damage and inefficiencies. That said, good governance is good for business, and family enterprises should not wait until they have experienced a crisis before implementing good governance.

A few characteristics of good governance

• Good governance can improve communication between and among family members and individuals outside the family working in the business. This can be especially important where the family members no longer play any role as employees in the enterprise, including where the family enterprise consists solely of financial assets, often if the generations are removed from the founding of the original enterprise that has produced the family’s wealth.
• Good governance can also improve the quality of decision making, as people have access to all the information they need and feel safe and secure in their positions making decisions that are in the enterprise’s best interests.
• Good governance can help people work productively and cooperatively in their respective roles. The issue of independent directors is one that many family enterprises face. Independent directors can add a degree of disinterested, impartial oversight to the enterprise, but they are most effective if their views are trusted by family members. Similar issues can arise with external advisors. For these relationships to be productive, everyone should be clear on who the advisor is working for. There is a big difference between a lawyer working for the family corporation and a lawyer working for an individual family member to advise them of their personal rights and responsibilities.
• Good governance can also bring greater clarity to the family members’ roles and responsibilities. This can lead to greater satisfaction and retention, as individuals know exactly what is expected of them and what is outside their lanes, even when they play multiple roles such as being both shareholders and directors of the family enterprise.
• Good governance can foster a greater sense of trust. A significant advantage for family enterprises is the degree of trust between family members. With good governance, members can feel more secure in their positions within the family such that they are more loyal and conscientious in their efforts.

Families also need to consider the degree to which they have formal governance structures over the family as a unit, separate from the legal entities that carry out the family’s business. These structures can take the form of family charters, advisory councils or simply more informal traditions.

However, creating these structures can result in risk and confusion when they look like legal structures but are not legally required and may conflict with the legally required structures – for example a family company’s article or a board of directors.

In the end, good governance is not just a way to put out today’s fires but also prevent future fires as the processes and people within a family enterprise work more harmoniously and successfully together.

Eric Morgan is a partner at Kushneryk Morgan LLP, a law firm specializing in corporate governance and dispute resolution (www.kmcounsel.ca).