Governance in family businesses: Who is the Family?

Family businesses are justly considered the backbone of our economy and are praised by many for their long-term perspective and ‘good housekeeping’ in which the family is a key driver.

A recent award-winning study of prof.dr. Valérie Denis (ICHEC Families in Businesses Chair) points out that whereas the leaders of family businesses feel responsible for transmitting the entrepreneurial spirit to their children, their children emphasise the key role of the spouse of the company’s leader.

This observation inspired us to a reflection on the notion of the ‘family’ in a governance context in view of the continuity of the family business. If the spouses of the head of the family business appear to play a pivotal role in transmitting the entrepreneurial spirit to their children, could or should they also play a role from a governance perspective?

Statistics don’t lie: a considerable amount of the baby-boom generation family businesses are in a transition phase to a next generation and several policy measures have been taken to encourage them to continue to develop as a family business (eg tax free possibility for transition of bare ownership, new company act leaving a broad range of possibilities to be creative in the distinction of ownership and voting rights…).

Parallel, many studies argue/good functioning governance structures are an important instrument for family businesses to ensure survival in the long run. GUBERNA has invested a lot of effort in supporting (family) businesses on their journey by providing governance education and services, facilitating the exchange of experience and putting ‘best practices’ into the picture.

When studying the development of family businesses from a governance perspective, we observe a rather fluctuant interpretation of the notion “family” in practice. Depending on the subject there is a rather inclusive or exclusive approach.

As is often the case in governance, there is no one size that fits all and one solution is not necessarily better than the other. Yet, we will try to identify some success factors and possible pitfalls in dealing with the concept ‘family’ in view of building a sustainable corporate and family governance.

Family business founders are often characterised as strong personalities with a clear vision, operating with a clear set of convictions, norms and values. The fact that these norms and values are taken over by a gradually growing community of other family members and non-family collaborators is praised as being one of the driving forces of the success of family businesses.  All actors highly identify with the project and the family values. Many family business owners proudly speak about their collaborators as being part of the (extended) family. Many collaborators in their turn actually feel like that.

Yet, when it comes to the core of governance i.e. shareholdership and decision making, the family is often protected and reduced to blood relatives of (a) certain generation(s).  There are thresholds where founders or families lose the psychologic comfort to consider the surrounding community as being part of the family and rely on a more restrictive notion of the concept family. This applies both to the so-called corporate governance at corporate level, as to the family governance at family level. Thresholds and scenarios may differ from family business to family business and evolve over time. 

Although there might be good reasons justifying the choices made, not being clear about the notion and the role of the “family” might cause a lot of collateral negative emotions prohibiting a proper functioning of the governance bodies.

At corporate governance level, the examples of external CEOs at family businesses who feel like a “DAF” (‘directeur administrative financier’) while the real leadership is ensured by someone of the family, are countless and a source of frustration. This applies all the more when it comes to access to the shareholdership: in family business there is a big paradox between external key people being encouraged to feel and act like a shareholder and the resistance against them becoming one. Finding your way as an external CEO in a family business is not an easy job.  

At family governance level, the same applies for the so called ‘cold’ part of the family, the family by marriage. Though they may be loved and praised as a, when it comes to access to the decision making and/or shareholdership, they are often excluded. Though there are inspiring examples of family business gems which are lead by children-in-law, in reality, many others are frustrated for not being involved or valued in one way or the other, even at family level.

Also for next gen’s at family business, the notion ‘family’ is important to be looked at from an intergenerational perspective. Although we see more and more family businesses within the family looking for an inclusive approach in trying to ensure an “affectio societatis”, some matters are restricted to the ruling generation while others are exclusively reserved for the next one. Even within branches opinions and practices might differ which impacts the level playing field among generations and could lead to misunderstandings or frustrations between branches

Governance is about defining structures, roles and responsibilities. It is equally important to have a common understanding of these structures, roles and responsibilities and to provide a regular review to adapt them whenever necessary or desirable over time. There is no ‘one-size-fits all’ recipe and every family has to do its own homework in defining the appropriate structures and roles, both at corporate and at family level, taking into account the strategy of the company and the shareholdership (‘structure follows strategy’).

From our experience with analysing family businesses, we see that it is extremely important to define in detail the concept ‘family’ that is used at the different levels in order to manage expectations right from the start. This applies both for possible roles and responsibilities at corporate governance level and those at family governance level and their interaction.

Families do not only have to define structures and roles but also have to communicate and invest in creating a common understanding on them. Too often conflicts are due to the lack of a good understanding of all parties involved of both basic family business governance principles (the so-called three circle model being the company, the ownership and the family) as well as of the concrete governance framework of their company. It is exactly on this point, that family businesses should not interpret the notion of the ‘family’ restricted to blood relatives or next gen’s. As many cases prove, it is crucial to align all key stakeholders and have a shared understanding of the different governance roles. We encourage families to invest time and effort in providing key stakeholders with internal information sessions or more formal education tracks given by external parties.

We can illustrate this recommendation with the three above cited categories of key stakeholders.

Even when excluded from playing a formal role in the family business, the impact of the family by marriage on their spouses or children is often undervalued as is confirmed by the above cited study. From our experience, it is important to take the family by marriage along in the understanding of structures, roles and responsibilities in order to ensure coherent messages and avoid inappropriate pressure from their side. Many family businesses choke in this issue as is well illustrated by a quote of a family business owner looking back at the process of preparing for the next generation: “Excluding the spouses of our children from a governance education track, is one of the biggest mistakes we could make.”

The same applies for the actors of the ruling generation when preparing for the next gen. Governance education is mainly provided for the upcoming generation whereas the actors of the ruling generation have to be supported as well in getting a clear view on their renewed role and responsibility and get acquainted with modern governance thinking. They often are a part of the problem without realising so.

Last but not least, let us not ignore the external management. As the tone is set at the top and their impact is huge, the loss of precious energy to disputes and frictions due to a different understanding on the respective roles, has to be avoided at all costs.

Starting from research findings on the impact of the spouses of family business leaders, we reflected on the notion ‘family’ from a governance perspective. Although the mapping of the position of the family in governance structures must be tailored to the needs and desires of the family business, in order to foster a sustainable family business, it is important to have clear definitions and to invest in a common understanding of all key stakeholders, both at corporate and at family level.

With the possibilities the new company act offers, this will become all the more important.