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Governance essentials in Family and Private Business

Family business owners hear about the need for good corporate governance but for many it’s not clear what is meant by that or why it is really necessary.

Corporate governance is essentially about the control and direction of the business, exercised by those holding power and authority; and any decision making in all those matters which affects the vision, performance and sustainability of the business. Primarily it is concerned with the internal structures and processes for decision making, accountability, control and behaviour of those in authority.

Reasons to have good corporate governance are best illustrated in a case study. The Australian ran an article on Darrell Lea Chocolates, the Brittle Empire, that commenced business in Sydney in the 1920’s, but before being sold to outside parties went into voluntary administration in July 2012.  According to the article, “In the 1970’s the business was thriving, with almost 100 stores across Sydney, Melbourne, Newcastle, Brisbane and Adelaide. It was a household name."

“The story of the rise and fall of Darrell Lea is a reminder that family run empires are a double edged sword, with the brilliance and dedication of the first and second generations so often dulled by the apathy or ill-discipline of those who follow.”

The theme of the article illustrates two significant challenges in family business:

  • Managing the business (through decisions and business governance) ; and
  • Managing family relationships or more broadly, family governance.
In particular, the challenges for family businesses include:
  • Nepotism and family conflict
  • Succession planning
  • Different shareholders with varying aspirations
  • Making sound business decisions
  • The makeup and role of the board (including consideration of any outside Directors)

Family owned businesses dominate Australia’s commercial landscape, accounting for around two thirds of all businesses operating in this country. Research also indicates that on average they out perform their publicly owned counterparts. However, balancing the interests of family and interests of the business is a critical element of high performance.
Governance practices should therefore incorporate both Family Governance and Business Governance principles.
Good Family Governance will include provision for business education of family members, a mechanism for revealing family expectations and internal structures such as a Family Council for family stakeholders to voice objectives and concerns to be considered by those holding the delegated authority.
The family business owners have responsibility to set the business direction. This will include:

  • Defining the values that shape the company’s culture
  • Setting the vision
  • Specifying the financial targets (goals for growth, risk, liquidity and profitability) and
  • Elect the Directors

Good Business Governance on the other hand involves establishing a board/advisory board responsible to determine and implement the strategies to fulfil the vision set in the family governance process. An effective board/advisory board will be active, include some independence of thought and have a complementary skill set incorporating all the necessary expertise to set and guide the strategic direction of the business. Where family members do not possess the necessary skills then appointing an external party should be considered.

 

Hanrick Curran has over 30 years of business advisory experience across a broad range of industries to draw upon when providing strategic guidance and support for business owners to develop, grow and transition their business. We are pleased to be a part of the event Governance Evolution Future Trends designed for Family and Private Business. Please register to attend the event on 19 May 2016, or contact your usual Hanrick Curran Adviser or ask for Tim Taylor, Tony Hunt, John Kotzur, Kim Hanrick or Matthew Beasley on 07 3218 3900 to discuss how we can support you establishing good Governance for your business.

Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.