When is governance important?

Business Leader Post, December 3, 2014

Thomas D. Davidow, Ed.D.

Investopedia defines governance as the system of rules, practices and processes by which a company is controlled. Family owned businesses rarely develop a governance structure. Instead the rules and processes are subject to how the family member in charge manages the business. This works when a family member owns 100% of the stock and is also the CEO.  However, when the family member who currently manages the company and controls the stock is confronted with estate planning, the situation can become more complicated.

For most business owning families, the majority of wealth is tied up in the business. The demands for fairness/equality among offspring can require that the ownership/stock be transferred to all members of the next generation including those that are not working in the business. Passing stock onto more than one member of the next generation can create control issues within the company. The family dynamic then becomes vulnerable to those issues of control and they can get played over the direction/management of the company.

We all have plenty of stories about that scenario. One can split the stock between equity and control as an antidote, but that is frequently a temporary solution. That structure does not address the issues of the manager's accountability   to the stockholders, and transparency is a choice not a requirement. When the demands of the business conflict with the demands of the ownership, one is best served by having a structure in place to resolve those issues.

Governance in the form of a Board of Advisors or a Board of Directors can be the vehicle to ensure that all family owners have a voice. Quarterly or even semi-annual meetings with trusted non-family members can provide the opportunity to work through many business issues. Working through issues will help avoid and/or mitigate the family dynamic issues which almost always accompany shared ownership amongst family members.
One major issue with which governance can help is determining what decisions should remain in the hands of management, what decisions should be decided at the board level, and what decisions should be decided at the ownership level. That clarity alone can remove significant distractions from the everyday management of the business.

Life will be easier and the business will prosper.