I recently attended an interesting symposium on family business and research and education organised by Family Business Australia. Many of the papers presented at that symposium concerned family business governance. This is clearly a hot topic, where the disparity between accepted best business practice and what family businesses actually do (and want to do) is very evident. Family business attitudes to boards of directors is a good example.
The MGI Australian Family and Private Business Survey 2010 conducted by RMIT University found that only 42% of family businesses responding to the survey had a board of directors. A 2011 survey by KPMG and Family Business Australia also found that more than half of the surveyed firms did not have a board or governing body.
We know from working with family businesses that many appoint just the one mandatory director, after ensuring as far as possible that asset protection measures are in place for that person. This leaves other family members protected from the potential application of the Corporations Act, particularly in respect of insolvent trading, and the need to provide personal guarantees to financiers. They understand that the directors’ obligations under the Corporation Act extend to people who, although not appointed directors, act as directors. So it is no surprise that families in business go out of their way not to have boards of directors, or indeed, have any governing body or gathering other than management meetings. For families in business, protecting family assets is critical bearing in mind that many have already mortgaged their homes to support funding for the business and cannot afford further exposure.
The MGI survey also found that, of those family businesses that did have boards, 46% were composed or just two persons. It is probably safe to assume that many of these were Mum and Dad boards.
Very few (15%) of the respondents to the MGI Survey that did have boards had non-family board members. The main reason given for this was privacy – families are generally inherently private about their financial position (even between each other) and this extends to their business.
We know the benefits that outside directors can provide to a family business. It is a way the business can gain access to new skills and fill in gaps in the knowledge base and experience of family members, including knowledge of governance issues. Just having an experienced external board member can ensure the board pays attention to big picture issues, such as strategy and risk management, rather than focus on operational issues. They can also provide access to new networks, giving the business entrée to new customers, new markets and people of influence.
Non-family directors give a family business board a degree of objectivity in relation to family-in-business issues. Decisions such as the employment of family members, their remuneration and performance, entitlements and dividend policy can then be made on an apparently more objective basis, taking the pressure from the owner/managers, who will most often be Dad and/or Mum. Such decisions are then more likely to be accepted by family members with less ‘kitchen-table lobbying’. A suitably experienced non-family board member can also provide a valuable sounding board for an often isolated owner/manager, and a mentor to successors.
While there were other factors contributing to the lack of external directors, privacy was by far the main reason, given by 53% of respondents to the MGI survey,. Given the advantages that external directors can provide, foregoing these is a big price to pay for privacy. Yet that is the decision that many family business owner/managers have made.
The KPMG survey found that family business participants to their focus groups were concerned about the cultural distillation that may result from having non-family directors and senior executives. As family businesses are often an extension of the personality and values of the owners it is not difficult to understand how important and personal cultural preservation is to them, even if preserving it means the business is less than optimally managed.
The MGI survey found that 72.5% of respondents had not fully implemented the practice of planning for the ongoing growth of the business. Indeed many family businesses eschew growth maximisation, preferring to keep gearing and risk to a minimum. This may not ultimately be in the best interests of the economy in general, where employment and taxation revenue benefit from businesses maximising their full potential. In the trade off between the desire for growth maximisation and maintaining the privacy, security and culture of the family, it is the financial ambition that is frequently sacrificed. In recognising the enormous contribution family businesses make to our economy and our culture, we need to acknowledge that there are other valid reasons for being in business than purely financial gain.
There is no doubt that much can, and should, be done to improve governance and management of family businesses without it impinging on their autonomy or culture, through family business constitutions, real boards and strategic planning.
However if family businesses fail to adopt best business practices it is often because they have values and culture that they feel are more important to protect. For those of us who are their suppliers, customers and employees this is often hard to argue against.