Family Business Governance

Family businesses range from small and medium-sized companies to large conglomerates that operate in multiple industries and countries.

 

Family businesses constitute the world’s oldest and most dominant form of business organisations. In many countries, family businesses represent more than 70 per cent of the overall businesses and play a key role in the economy growth and workforce employment. In Spain, for example, about 75 per cent of the businesses are family-owned and contribute to 65 per cent of the country’s GNP on average. Similarly, family businesses contribute to about 60 per cent of the aggregate GNP in Latin America.

Family businesses range from small and medium-sized companies to large conglomerates that operate in multiple industries and countries. Some of the well-known family businesses include: Salvatore Ferragamo, Benetton, and Fiat Group in Italy; L’Oreal, Carrefour Group, LVMH, and Michelin in France; Samsung, Hyundai Motor, and LG Group in South Korea; BMW, and Siemens in Germany; Kikkoman, and Ito-Yokado in Japan; and finally Ford Motors Co, and Wal-Mart Stores in the United States.

It is also a fact that most family businesses have a very short life span beyond their founder’s stage and that some 95 per cent of family businesses do not survive the third generation of ownership. This is often the consequence of a lack of preparation of the subsequent generations to handle the demands of a growing business and a much larger family. Family businesses can improve their odds of survival by setting the right governance structures in place and by starting the educational process of the subsequent generations in this area as soon as possible.

Stages of Growth in a Family Business

Several models have been developed to describe and analyse the different stages that family businesses go through during their existence. In this Handbook, we will use the basic three-stage model that summarises the family business lifecycle as: (i) the Founder(s) Stage; (ii) the Sibling Partnership Stage; and (iii) the Cousin Confederation Stage. Although this model allows for a good analysis of the three basic steps of evolution of the family business, it does not mandate that all family-owned companies will necessarily go through all three stages of development. For example, some companies will disappear during the early stages of their lifecycle because of bankruptcy or getting acquired by another firm.

The evolution of ownership and management within most family businesses goes through the following stages:

Stage 1: The Founder(s) (Controlling Owner(s))

This is the initial step of the family business’ existence. The business is entirely owned and managed by the founder(s). Most founders might seek advice from a small number of outside advisors and/or business associates but they will make the majority of the key decisions themselves. This stage is usually characterised by a strong commitment of the founder(s) to the success of their company and a relatively simple governance structure. Overall, this stage contains limited corporate governance issues compared to the next two stages since both the control and ownership of the company are still in the hands of the same person(s): the founder(s). Perhaps the most important issue that will need to be addressed during the life of the founder(s) is succession planning. For the family business to survive into its next stage, the founder(s) should make the necessary efforts to plan for their succession and start grooming the next leader(s) of the company.

Stage 2: The Sibling Partnership

This is the stage where management and ownership have been transferred to the children of the founder(s). As more family members are now involved in the company, governance issues tend to become relatively more complex than those observed during the initial stage of the business’ existence. Some of the common challenges of the sibling partnership stage are: maintaining siblings’ harmony, formalising business processes and procedures, establishing efficient communication channels between family members, and ensuring succession planning for key management positions.

Stage 3: The Cousin Confederation (Cousin Consortium or Family Dynasty)

At this stage, the business’ governance becomes more complex as more family members are directly or indirectly involved in the business, including children of the siblings, cousins, and in-laws. Since many of these members belong to different generations and different branches of the family, they might have diverse ideas on how the company should be run and how the overall strategy should be set. In addition, any conflicts that existed among the siblings in the previous stage would most likely be carried to the cousin generation as well. As a consequence, this stage involves most family governance issues. Some of the most common issues that family businesses face at this stage are: family member employment; family shareholding rights; shareholding liquidity; dividend policy; family member role in the business; family conflict resolution; and family vision and mission.