Improving The Quality Of Family Business Decision Making

The MGI Australian Family and Private Business Survey 2010 (The MGI Survey) provided a number of valuable insights into the main issues that confront families in business, and the suggested ways to address them. One of these issues is the vexed question of the establishment of Boards of Directors with an independent chairperson and a suitable number of independent directors.

Board of Directors

An active Board of outside directors can serve a number of functions, including assisting family business owners to deal with feelings of isolation in their daily struggle to survive and excel, heightening accountability of the business, and improving quality of corporate decision making and planning without significant loss of privacy. And yet, 58% of family businesses do NOT have a Board of Directors.

Of the 42% of family enterprises that have a Board of Directors, 46% indicate that the board meets once a month, 19% that the board meets quarterly, 12% that it meets six monthly, and 16% that it meets only once a year. Most family business Boards, 46%, have two directors; 24% have three directors; 17% four directors; and 10% five or more directors.

A finding of particular significance is that 85% of family businesses do NOT have non-family executive directors on their Boards, and 86% do NOT have non-family, non-executive directors on their Boards. The main reason provided for the lack of non-family, non-executive directors on the Board were: desire to retain privacy; and skills required at Board level exist in-house (28.6%) (Refer to the table below).

Reasons for Absence of Non-family, Non-executive Directors

Professionalising the family business

Given that the main purpose of any business is profit generation for its owners, the gradual professionalisation of the family business as it evolves and grows is designed to move the business from the initially entrepreneurial/informal management style of the founder(s) to a more professional/formal management style so that its stakeholders can consistently rely on it to operate successfully and continuously.

This is an understandable and necessary, progression for any business growing in size and complexity. The challenge for families in business is to handle the process progressively and judiciously so as to ensure the continued involvement and participation of family members in the business.

Suggestions for the gradual professionalisation of the growing family business

The MGI Survey identified a number of governance and management practices designed to assist families in business with the professionalisation of their growing family businesses:

• Planning for ongoing growth, transitions, and foreseeable contingencies
• Establishing policies to deal with predictable family-in-business issues before the need arises
• Establishing processes to govern the family-business interaction for continued family ownership/control
• Setting rules to strengthen interpersonal relationships and manage the expectations of family members
• Establishing a formal dividend policy that pays out according to business profitability
• Establishing family employment/career planning policies based on qualifications and experience
• Establishing merit-based policies for the compensation and promotion of family members
• Defining clear family member roles, responsibilities, accountabilities and interpersonal boundaries
• Benchmarking business practices and performance against the best businesses in Australia
• Making timely use of outside resources/assistance (e.g. advisory boards and professional advisers)
• Hiring key non-family executives and assuring career growth opportunities for them

Developing family business protocols, constitutions, and succession plans.

To help and support families in business to anticipate and manage their critical issues and challenges MGI has focused on assisting family businesses prepare family business protocols or constitutions and succession plans. Ms Sue Prestney, MGI Australia's National Chairperson whose special focus is proactive family business advising, has developed her own specialist approach to these important processes which she has outlined in detail in her recently published book "Family Business Succession Guide"¹.

The book facilitates the development of family business succession and estate plans within the broader context of a family business constitution so as to establish rules and principles to deal with family business issues both before and after succession, as well as the underlying interpersonal and emotional issues that invariably accompany the process. Of particular interest in this context are Chapter 4 and Appendix 6 in the book that deal with family business Boards of Directors in which Sue makes a number of comments and suggestions for the composition and deliberations of the board.

Sue observes that many family businesses operate without a formal board with Dad and/or Mum as the only directors making decisions on an as-needs basis, and suggests that succession planning is an opportunity to implement a more professional level of corporate governance. According to Sue, a board with independent directors with the requisite skills and experience can be of enormous value to a family business, including:

• Giving the business access to skills and experience that it may not otherwise have
• Providing access to new networks
• Acting as ambassadors for the business
• Providing mentoring and other support for successors, and
• Putting a greater level of objectivity into decisions affecting family members such as: hiring and, when appropriate, terminating the employment of family members; identifying successors, determining compensation and assessing performance of family members.

One of the key challenges of family business governance is the separation of management decisions and board decisions. The Board's primary responsibilities include: strategic planning and risk management, providing feedback on performance to the CEO, and ensuring that the interests of all shareholders are looked after. Board meeting agendas should focus on these issues. The role of chairperson of the board is critical in that respect.

When it comes to Boards of Directors for family businesses, it is important to remember that one size does not fit all. Different family firms will have different governance requirements based on their history, size, culture, ownership structure, life-cycle or stage of development, etc. Accordingly, the specific governance needs, as well as the different board configurations, in different family firm types, need to be identified and assessed before decisions are made and structures or processes are introduced.

The ultimate criterion is the effectiveness for the business and the family of respective governance and board structures. Sue Prestney notes that it is important there are not too many directors, just enough (between 5 and 8 directors) to provide the expertise and balanced deliberation of issues that the business needs as it develops and grows. Sue suggests that boards that are composed solely of family members ought to be avoided. At the very least, family business boards ought appoint an independent and experienced chairperson who will ensure that meetings are conducted in an orderly and effective fashion, issues are fully discussed, and reasoned decisions are made and properly recorded in the minutes.

Advisory Boards

One approach to the challenges of attracting and appointing skilled independent people to the board of a family business is to appoint an advisory board. An advisory board is a panel of skilled and experienced external advisers who act solely in an advisory capacity to the directors, and not act in the position of directors.

¹ Copies of Sue Prestney's book can be obtained from the publishers Thomson Reuters by ringing 1300 304 195 or by visiting www.thompsonreuters.com.au , alternatively you can contact Sue Prestney at MGI.