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Decisions, decisions, decisions : an introduction to governance in a family business system Halyk, Jennifer Nov 27, 2012

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Decisions, Decisions, Decisions: An Introduction to Governance in a Family Business SystemGiven the many corporate scandals we have seen  during the past decade, and the subsequent rise of investor demand for executive ?say on pay? policies, one can hardly escape the topic of corporate gov-ernance and corporate governance reform. Public perception of poor corporate governance practices  is partly responsible for motivating the Canadian  Department of Finance to update and better maintain its reports on how it is working to strengthen  regulations for corporate governance in this country  (Treasury Board of Canada Secretariat, 2005).  However, there is a notable lack of accessible, authori-tative information or research on the fundamentals  of governance for family enterprise, specifically? in both the public and private sectors. Authors Lane, Astrachan, Keyt and McMillan consider governance for family enterprise ?a critical subtext? which ?has been missing from this often searing debate? (Lane et al., 2006) in the corporate world. Many more general articles by practitioners and consultants in the main-stream media tend to emphasize ?best practices?? but they aren?t necessarily effective educational tools for the purpose of educating business families on the fundamentals of governance. In this paper, we define governance in a family business system, describe the basic tenets of governance in a family enterprise, and outline some of the academic research on governance which would be of most practical relevance to busi-ness family members. This paper aims to introduce the fundamentals of governance to business  families who may benefit from the implementation  of governance structures in their enterprise. There is little doubt about the relevance of family  enterprises to the Canadian and global economies, given that family firms create an estimated 45 to 60 per cent of Canadian GDP?nearly half of the workforce in the country is employed by a family enterprise. Inherently relevant to the success or failure of these companies, is the implementation and use of effective governance structures. While many family enterprises are public companies with mandated governance requirements, the relevance of effective governance?whether public or private? applies nonetheless: ?the matter of governance in family firms does matter in Canada? (Klein, Shapiro & Young, 2004). A founding father in the field of family enterprise studies, John A. Davis, notes that ?all types of organizations. . . benefit from having a healthy identity, a motivating direction and strong discipline? (Davis, 2007) as a result of governance, whether the organization is a business or not. Defining Governance, Corporate Governance,  and Governance StructuresAt its very base level, governance is an organizational structure which helps groups to make decisions; it is a mechanism to facilitate the decision-making process in a group, and increase communication. According  to the International Finance Corporation?s (IFC)  BY JENNIFERHALYKNOV 27, 2012Research Matters is made possible through the generous support of CIBC1?There is little less trouble governing a private family   than a whole kingdom.? - MICHEL DE MONTAIGNE, Renaissance Scholar And WriterResearchMattersBUSINESS FAMILIES CENTRE?S WHITE PAPER SERIESFamily Business Governance Handbook, governance  is defined as:? the structures and processes for the direction  and control of companiesAnd according to John A. Davis, governance is: ? . . . defin[ing] and maintain[ing] the basic  direction of the organization through certain  processes, structures, plans and policies, rules  and agreements (Davis, 2007) When authors, practitioners and business family  members talk about governance in a family enter-prise, the term ?governance? can sometimes refer to overall governance of the family business system, or it could refer to any of the three specific types of governance for each of the three subsystems in a family business system (see Figure 1). Davis, creator of the widely accepted and referenced three-circle model and a leading expert on family firm governance, describes the three types of governance structures within a family business system as one structure for each of the subsystems: the family, the owners and the business. The ?family business system? refers to the interdependence and overlapping nature of the three subsystems (groups). This three-circle model  is widely used amongst scholars, practitioners and  instructors in the field as a tool and frame of refer-ence in order to identify and differentiate between  the three subsystems of the family business system. Here, we will refer frequently to Davis? teachings  on governance. We must therefore be careful to clarify which part of the family business system we are referring to when speaking about governance. While the terms used for each of these subsystems are almost always consis-tently called ?family,? ?owners,? and ?business? among different sources of literature in the field, the terms used for the types of governance systems for each of these subsystems is not. For the purposes of clarity and simplicity, we will refer to the specific types of governance structures as: family governance for the family group, ownership governance for the group of owners, and business governance or board gov-ernance for the business (and which can include an elected board of directors, board of advisors, or both). Characteristics and Benefits In a business family enterprise, these three groups could potentially benefit from representation in  different ways. Overall, governance structures are in-tended to provide each member of each group with an opportunity to express their voice, and subsequently increase communication between all members.While governance structures do not guarantee each member a formal vote in the affairs of the business, they create a mechanism in which everyone is able to participate in some way. It is intended to create more inclusivity within each group of the family business system, to select or elect representatives or spokes-people for each group, to facilitate the process of decision-making, and to create paths toward  long-term success. Governance is intended to create avenues to increase trust and respect between its members, to help plan strategically for the future, and to ensure the long-term success of an organization. Successful and effective governance can have a huge impact on the long-term identity, direction, motives and commitment of the family members, owners and business representatives in the family business system. Without governance, a family business system can be fraught with problems, including concentrated decision-making to the exclusion of relevant parties, miscommunication or lack of communication between members, a risk of being overrun by emotion or  problematic family dynamics, and a host of other problems that could result in failure of the operating business and/or the entire family enterprise. ?Good governance creates the structure and dis-cipline to ensure the right people are given the right  information to make the right decision,? says Ruth Steverlynck, principal of RES Consulting Group Inc. ?Without governance there is a risk that confusion reins, creating the potential for conflicts, misunder-standings and ultimately poor decision-making.  As a family enterprise moves from a unilateral deci-sion making system (the owner-founder) to a more 2? all types of organizations benefit from having a healthy identity, a motivating direction and strong discipline?  (John A. Davis)Decisions, Decisions, Decisions: An Introduction to Governance in a Family Business System(cont.)complex decision making body (siblings and/or  cousins) a proper structure supported by good  process, such as good governance, becomes  increasingly important.?Timing and DevelopmentThe three types of governance do not necessarily need to be in place all at once, nor do they necessarily need to operate simultaneously in one family  enterprise. The type of governance structure that a family firm needs at any one point will depend on the developmental life stage of the business: inception, growth, harvest; and the stage of family ownership: owner-founder, sibling partnership, cousin consortium (Neubauer & Lank, 1998). The best governance  structure for a family enterprise is the right type of governance for one family at one time?and it will likely continue to evolve with the family?s?and the business??changing needs. Co-author of Building a Successful Family Business Board Dr. Stephanie Pendergast cautions against the use of so-called best governance practices for all family enterprises.?We?re really hesitant to [use that term],? she said in an interview, ?because it implies that there is one solution that is best for everybody. We came up  with the notion of calling something an ?exemplary  practice,? which may be a good thing for [one family] but isn?t going to be the right thing for everyone.?  Any one type of governance structure, therefore, does not work for any or all types of family enterprises; arguably, the most difficult task for family firms is to initiate and develop a governance structure unique to their own family enterprise, which is most effective for them. Family Governance: the Council or Assembly The relevance of family governance was perhaps best described by John L. Ward when he said that a strong family can build a strong business, but a strong  business cannot build a strong family. ?Families are complex,? Steverlynck says. ?In a  family enterprise, you need to be comfortable with  complexity and to manage complexity. Structure is  important which is what governance does. The most commonly seen structure for families is the family meeting; and the goal of family meetings is to  improve the effectiveness of the family at advancing shared goals.?Family governance is a way of managing long and short-term plans; decisions, rules, policies and values; and of managing conflict between themselves. It is also a way of building consensus and unity in the group regarding the direction and goals of the family enterprise. The family could choose to form a family council, and elect members to be on the council, or hold family assemblies and include all members of the family. Depending on the choices of the family, assemblies or the council could focus time and energy on articulating a vision, a legacy, bonding exercises, team building, or formal meetings. The family council or assembly would represent the entire group of  family members when communicating with the  owners? council, so that they can make clear their collective desires?and even concrete decisions?which are then subsequently evaluated and potentially relayed to the board. Policies that the family council would create or address could include a mission or values statement, a code of conduct or a constitution, or decisions about philanthropic endeavours. Steverlynck says that James Hughes, philosopher  and author of Family Wealth?Keeping it in the  Family, recommends that the very first family meeting could include the elder members of a family sharing the family?s stories, to help other family members  to understand their past and envision their future. Such stories help family members understand what  it took to create what the family will steward together, moving forward.In describing family governance, we must avoid over-simplifying it. It can entail a complicated web of relationships and dynamics that simply would not exist in a non-family firm: ?family firms [can be] rife with personal rivalries and self-control problems that are not easily resolved within the context of family governance? (as cited in Carney, 2005). One of the Decisions, Decisions, Decisions: An Introduction to Governance in a Family Business System(cont.)3? governance is an organizational structure which helps groups to make decisions; it is a mechanism to facilitate the decision-making process in a group, and increase communication?many advantages of a family council is that, with an opportunity to crystallize a vision, values and goals, the ensuing decision making process for the members of the family becomes simpler. Ownership governance: the Owner?s Council  The governance structure for the ownership  subsystem is an owner?s council or shareholders?  assembly, which consists of representatives elected  by the group of owners. While the purpose of an  ownership council is significantly different from a  family council, a business family member could poten-tially be a member on both councils. This council is the foundation of the governance system for the  business. It is the responsibility of the group of  owners to choose or elect which members of its group would be on the council. The ownership council has the ultimate authority to choose members of a board of directors or a board of advisors, as well as the chairperson of a board. If the business is still in the  inception or owner-founder stage, an ownership  council could even include family members who  are not technically ?owners? but would prevent decision-making to be concentrated onto a single owner-founder. The ownership council would address anything related to ownership of the company: decisions on behalf  of all shareholders, liquidity issues, generational,  succession and transition issues, and how to execute the family?s long-term vision. Shareholders? meetings, including all shareholders, would be held as a method of communication and would inform the council of  its decisions.Professor and leading author in family enterprise field, Dr. Ivan Lansberg, likens the owners? council to the owners of a jet plane: they decide the purpose and destination of the plane, but unless they happen to be qualified, experienced pilots, they would never get into the cockpit. The formal, technical skills of the piloting the plane would fall under the purview of  the board. Business Governance or Board Governance:  a Board of Directors or a Board of AdvisorsThe governance structure for the group within the operating business can be either a board of direc-tors or a board of advisors, or both, in some cases. The board of an operating business can include the owners, managers, and/or other non-family members, including professionals chosen based on the specific and strategic needs of the business. It would be at the discretion of the family council and/or the owners? council to determine how the members of the board are chosen, elected or removed. Board members may be known by the family or chosen because they are independent and external to the business. The board?at least theoretically?holds regular  meetings and focusses on:? Overall strategic direction of the company? Oversight of management and implementation  of strategy? Relationship among the governing bodies, including  communication between all parties; clarity of role,  duties, rights and expectations of each of the  governing bodies In reality, there are many instances of so-called  ?paper boards,? which are boards that are just a formality and never actually meet or make decisions regarding the business. This kind of board is intended to circumvent the laws around corporate governance for publicly traded companies. Since we have already established that family firms can include anything from a single controlling owner to a wide shareholder base, recommendations on how to best assemble a board can vary widely. Most experts, academics and family business advisors  who recommend that family firms use boards of  directors or boards of advisors emphasize the need for independent or external members on those boards. Certainly, the vast majority of academic  research focusses on these boards. While there is some evidence that governance  mechanisms have positive influences on the long- term success of family firms, ?the vast majority of 4 ? in a family enterprise, the owners, family members and business could potentially benefit from representation in different ways?Decisions, Decisions, Decisions: An Introduction to Governance in a Family Business System(cont.)work tends to offer family firms the agency [theory]-based prescriptions of having increasingly large,  external, diverse and active boards? (Corbetta & Salvato, 2004). Ward writes that ?an essential [and] powerful truth [is] that an active, independent board of directors is a most valuable tool for family busi-nesses of all types? (Pendergast, Ward & Brun de Pontet, 2011). The authors of Building a  Successful Family Business Board say:? an active board is a very valuable tool for   managing complexity in a family business? boards with independent directors are viewed as  being more effective than boards comprised only   of family members?  nonemployed family directors play a pivotal role  on family business boards and should receive formal  preparation to fulfill this role? despite the perceived value of an active board,  particularly one with independent directors, boards  are still underused by most family businesses          (Pendergast et al., 2011)Davis says that in his two decades of working with family enterprises of all kinds, ?it has been clear that every business able to improve governance reaped lasting benefits? (Davis, 2001). But governance is not the only part of a successful organization, he says:?It?s helpful to think of governance as a necessary ingredient in a well-functioning organization,  but not a sufficient one. Even when these three  governance [structures] are done well, they are  generally not sufficient to keep an organization  pointed in the ?right? direction and performing strongly? (Davis, 2007). He adds that competent  management, inspiring leadership, and members  with the right skills and values also contribute;  good governance of an organization complements these other organizational resources (Davis, 2007).Here, we have only just begun to explore the vast  subject of governance in the family business system: we have defined it and described its basic tenets,  and pointed out several relevant authors and  researchers who work in the field. We have aimed to increase awareness and education about governance structures in a family enterprise, and we endeavour to inform those business family members, advisors and other professionals who may benefit from the implementation and use of governance structures in a family enterprise. We will further address overall governance of the entire family business system in order to examine its potential pitfalls and degrees of effectiveness in our next issue of Research Matters. 5Decisions, Decisions, Decisions: An Introduction to Governance in a Family Business System(cont.)? Successful and effective governance can have a huge impact on the long-term identity, direction, motives and commitment of the family members, owners and business representatives in the family business system?WHAT ARE YOUR EXPERIENCES LIKE WITH GOVERNANCE IN ANY OF THE THREE SUB-SYSTEMS? CLICK ON  THE ICONS TO JOIN THE CONVERSATION ON TWITTER, FACEBOOK OR LINKEDIN.6Figure 1Basic governance structures of the family business system, (Davis, 2001).OnnershipFamily BusinessJ_Xi\_fc[\ijD\\k`e^=Xd`cp:fleZ`cXe[=Xd`cp8jj\dYcpKfgDXeX^\d\ek9fXi[f];`i\ZkfijReferencesAnderson, R. C., & Reeb, D. M. (2004). Board composition: Balancing family influence in S&P 500 firms.  Administrative Science Quarterly, 49(2), pp. 209-237.Benavides-Velasco, Carlos A., Quintana-Garc?a, Cristina, Guzm?n-Parra, Vanesa F. (2011).  Trends in family business research. Small Business Economics. DOI: 10.1007/s11187-011-9362-3Brunninge, O., Nordqvist, M., & Wiklund, J. (2007). Corporate governance and strategic change in SMEs:  The effects of ownership, board composition and top management teams. Small Business Economics, 29(3), 295-308. doi: http://dx.doi.org/10.1007/s11187-006-9021-2Carney, M. (2005). Corporate Governance and Competitive Advantage in Family-Controlled Firms.  Entrepreneurship Theory and Practice, 29: 249?265. doi: 10.1111/j.1540-6520.2005.00081.xCorbetta, G., & Salvato, Carlo A. (2004). The board of directors in family firms: One size fits all?  Family Business Review, 17(2), 119-134. Retrieved from http://ezproxy.library.ubc.ca/login?url=http://search.proquest.com/docview/211133464?accountid=14656Cote, Marcel. (2009, December). Who is being served? CA Magazine. Retrieved from http://www.camagazine.com/archives/print-edition/2009/dec/columns/camagazine31682.aspxDavis, John A. (2007). Fundamentals of Family Business System Governance. (9-807-019). Harvard Business School, Cambridge, MA.Davis, John A. (2001). The Three Components of Family Governance. Research & Ideas: HBS Working  Knowledge. Retrieved from Harvard Business School, Research and Ideas website: http://hbswk.hbs.edu/item/2630.html.Davis, John A. (2001). Governing the Family-run Business. Research & Ideas: HBS Working Knowledge.  Retrieved from Harvard Business School, Research and Ideas website: http://hbswk.hbs.edu/item/2469.htmlGedajlovic, E., Lubatkin, M. H. and Schulze, W. S. (2004), Crossing the Threshold from Founder Management to Professional Management: A Governance Perspective. Journal of Management Studies, 41: 899?912. doi: 10.1111/j.1467-6486.2004.00459.xHughes, James. (2004). Family Wealth ? Keeping it in the Family. New York: Bloomberg.International Finance Corporation. (2008) IFC Family Business Governance Handbook. Retrieved from http://www1.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/corporate+governance/ publications/guidelines_reviews+and+case+studies/ifc+family+business+governance+handbookKlein, P., Shapiro, D., & Young, J. (2004). Board independence AND THE FAMILY-OWNED FIRM. Canadian Investment Review, 17(3), 8-16. Retrieved from http://ezproxy.library.ubc.ca/login?url=http://search.proquest.com/docview/205832176?accountid=14656KPMG Enterprise, & Canadian Association of Family Enterprise. (2012). Family Ties: Canadian Business in the Family Way. Retrieved from http://www.kpmg.com/Ca/en/services/KPMG-Enterprise/Centre-for-Family- Business/Documents/6530-KPMG-Enterprise-Canadian-Family-Business-Report-v6-web.pdfLane, S., Astrachan, J., Keyt, A., & McMillan, K. (2006). Guidelines for family business boards of directors. Family Business Review, 19(2), 147-167. Retrieved from http://ezproxy.library.ubc.ca/login?url=http://search.proquest.com/docview/211112428?accountid=146567Le Breton-Miller, I. and Miller, D. (2006), Why Do Some Family Businesses Out-Compete? Governance,  Long-Term Orientations, and Sustainable Capability. Entrepreneurship Theory and Practice, 30: 731?746. doi: 10.1111/j.1540-6520.2006.00147.xPendergast, J., Ward, John L., Brun de Pontet, Stephanie. (2011). Building A Successful Family Business Board. New York: Palgrave Macmillan. Schulze, W. S., Lubatkin, M. H., & Dino, R. N. (2003). Toward a Theory of Agency and Altruism in Family Firms. Journal of Business Venturing, 18(4), 473-490. doi: 10.1016/S0883-9026(03)000545Tagiuri, R., & Davis, J. (1996). Bivalent attributes of the family firm. Family Business Review, 9(2), 199-208. doi: 10.1111/j.1741-6248.1996.00199.xTreasury Board of Canada Secretariat, Treasury Board of Canada. (2005). Review of the Governance  Framework for Canada?s Crown Corporations (Catalogue No. BT 33-4/1-2005). Retrieved from http://www.tbs-sct.gc.ca/report/rev-exa/gfcc-cgse-eng.pdf8References(cont.)The Business Families Centre at the University of British Columbia?s Sauder School of Business provides internation-ally renowned education programs, resources and research to business families, professional advisors and executives in the field of family enterprise. Leading the way with research and innovation at the intersection of family enter-prise and business acumen, the Business Families Centre advocates education as the central path to success for all enterprising families. The BFC?s partnership with the Institute of Family Enterprise Advisors (IFEA) has successfully established the first and only family enterprise advisor designation in the world.Distribution and replication of the material appearing in these white papers is strictly forbidden ?Business Families Centre, Sauder School of Business, UBC

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