Corporate vs Family Governance In A Post Covid World

Choosing the right family and corporate governance structure is closely linked to how strongly the family members identify with the business and is one of the keys to long-term success for many of these firms.

In the Successful Transgenerational Entrepreneurship Practices (STEP) 2019 Global Family Business Survey , planned and developed through a strategic alliance with KPMG Private Enterprise survey, participants were asked about family and corporate governance structures, the number of governance tools used in their family businesses, and the relationship between the use of governance tools and the entrepreneurial orientation and performance of their firms. A full 88 percent of family business CEOs surveyed have a medium- to high-level of identification with their business.

The European Family Business Office ( EFB ) at their most recent general assembly, released a position paper on how the virus will effect family businesses across Europe and how this will affect the performance and governance of the individual family businesses and gave suggestions as to what member states should do in order to provide positive policies for business owners. The proposal sets out how Europe’s family businesses can play a key part and help in this recovery. Family Businesses have long been standard setters in their communities and regional champions of businesses. In July 2020, EFB collated a best practice map of actions undertaken by family businesses across Europe.

Dialogue with stakeholders is essential, as it enables companies to better understand the expectations of the ecosystem in which they operate and to take into account stakeholders’ interests in their decision-making. Taking into consideration various interests is indeed a natural part of directors’ duties.

Most shareholders have a long-term vision, whether it concerns the shareholding of family businesses, private equity or end-investors (i.e. the EU citizens as individual investors and long term and pension savers who are bearing most of the risks and rewards of share ownership of EU listed companies, either as direct or as indirect investors). One focus of strengthening sustainable corporate governance should therefore be to facilitate and strengthen the long term engagement of shareholders and investors, including individual shareholders.

In recent months, the family/business kinship has perhaps become even more profound as business families confront the new reality. Many are taking this time of momentous change to reflect on the purpose of their firms and a renewed vision of the roles that the business and the family can play in broader society. The importance of the non-financial priorities of a family business, or its socio-emotional wealth, are one of its key differentiators and long-term competitive advantages. It is not surprising then, that many family firms are reflecting on their business purpose and family roles.

Decisions about the path forward, with family values as the foundation, are important and complex. At their heart, family governance structures should be seen as critical tools to help families communicate, solve problems, and make decisions such as this about how the family will affect the business, and the business will affect the family.

Business families generally prefer family governance structures over corporate governance structures that tend to emphasize the role of the board more than that of the owner and family. North America was the only region where family business leaders preferred using corporate governance structures. 

There is also a connection between family business size, maturity, and type of governance structure. Family businesses run by the founder or the second generation are more likely to rely on family governance structures, while family businesses that have been successful over several generations tend to adopt governance structures closer to those seen in publicly held corporations. Likewise, research has shown that smaller family businesses are more likely to have shareholder agreements, while larger family businesses (those employing more than 250 people) tended to make use of boards of directors in their governance structures.

Because the success or failure of a family business is often associated with the strength of the relationships between family members, it should not be surprising that this highlights the beneficial effects of socio-emotional wealth of running a family business, referenced earlier. Family businesses that placed more importance on structural aspects tended to have lower levels of entrepreneurial orientation and performance. As well, family businesses with autocratic leadership and a top-down management style are actually less likely to have a structured business governance and succession plan, perhaps due to the dominant leadership typical in the family’s and business’s lifecycle.

Globally, KPMG Private Enterprise Research has shown that only 50 percent of family business leaders are satisfied with their current governance structure. The remaining half believe that change is needed to achieve greater growth. Family businesses in North America and Europe & Central Asia are the least likely to see the need for change in the way they govern their family businesses. North America was also the region where family businesses were most likely to use three or more family governance tools.

The connection between family governance tools, the degree to which family members identify with the business, and family business success and growth cannot be denied. The research clearly shows that using more than one family governance tool is ideal; it also leads to higher levels of entrepreneurial orientation and, ultimately, improved business performance.

With the right structure and tools in place, it is a powerful way to strengthen family ties and boost performance. For many family businesses, it appears that the current governance structures simply are not adequate and may need closer scrutiny based on what the world has learned in response to COVID-19.

( *All Statistical information presented in this blog has been obtained from the KPMG Blog Family business Governance written by  Partner Dominic Pelligana as well as European Family Business General Assembly dated 5thMay 2021 )

At the Family Business Office we can offer you assistance in dealing with family business issues through incentives supporting advisory and mediation services. Contact us today on [email protected] or visit our website at https://familybusiness.org.mt  for further information.