How to apply formal corporate governance principles in family business

While this might sound daunting for some family businesses who think agility will be disrupted, the benefits of having formal documentation and processes in place seem to outweigh the challenges to develop it.

Where to start

The Australian Stock Exchange is on version four of its Corporate Governance Principles and Recommendations for publicly listed companies. Released in February 2019, it lists eight principles for public companies to follow. If the idea of governance and formal documentation such as a Family Charter or Family Constitution is the type of structure you are looking to implement in your business, but you’re struggling to know where to start, looking to the Corporate Governance Principles and Recommendations can help. While they are not all relevant or necessary for family businesses, they are a good foundation to begin developing your own internal processes. We’ve cherry-picked the most relevant recommendations to consider implementing in your family business.

Lay solid foundations for management and oversight

Like a listed entity, a family business should strive to define roles and responsibilities for each family member, meeting schedules, and reporting along with a structured approach to managing risk and planning. This can sometimes be challenging because family businesses are usually based on a foundation of trust and passed along to family members without any formal documentation around ethics. It may seem hard to shift your mindset from a position of trust within the family to formal rules but implementing this change will only strengthen the business and ensure strong planning for the future.

Structure the Board to be effective and add value

According to the Family Business Survey, only 36 per cent of family businesses have a formal Board of Directors – for these respondents, it’s important to consider the best way to structure it. Most importantly, there needs be a long-term perspective in mind. Implementing non-family members can be a good solution to ensure the long-term future of the business is always considered. While the Board can be made up of family members, we recommend having a mixture of family and non-family stakeholders to ensure diverse opinions.

Recognise and manage risk

While there are various types of risk, currently cyber risk should be at the forefront for family businesses. There should be dedication to embracing technology and changes to improve efficiency, but this comes with higher technology risks – especially for family businesses where only 9 per cent of respondents to the Family Business Survey considered cyber security and loss of data as a major risk to business. The first step is understanding what risks are relevant for your business and then periodically reviewing their effectiveness once they’re implemented.

Remunerate fairly and responsibly

Strong culture around accountability and rigor on delivery of planned results should be reinforced in the family business. This includes remunerating fairly and assigning responsibility is done effectively – especially when it comes to family members working within the business. According to the Family Business Survey, education in this area has resulted in an improvement in the family business, but 17 per cent respondents still see discussions around remuneration as a source of family conflict.

And remember to consider future generations

While operations and day-to-day of the business may seem to be going well as they currently are, it’s important to plan for the future and that means for future generations. Implementing a governance structure can help to plan – whether that be plans for expansion, growth, or diversification.

Understanding where the family business wants to go by following a framework of governance to achieve that, will assist the next generation when it comes to running the business beyond their parents’ reign. It’s also important to remember practices around adaptability and speed of change shouldn’t be forgotten as creating governance structure can sometimes take years, so setting expectations around the length of time can be the first step to success.

We’re here to help

While we understand that one of the benefits of having a family business is being agile and able to make decisions without multiple layers of approval, implementing some formal structure can have many positive outcomes – especially in the long run when we consider future generations. While publicly listed companies shouldn’t be what family businesses always aspire to, it’s often a great place to start for guidance when implementing structures and processes. To start the process, we recommend engaging a third-party facilitator who can help with planning the formal governance structure. 

Our Board is predominately family members, and it is refreshing to have an outside person’s experiences and professional views applied to our business.” – Grant Thornton client  

Want to read more about how our service offering can help you? Reach out to your Family Business Consulting representative to ensure your business benefits from implementing a formal governance structure.