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So you manage your family business, but do you govern it?

I’m going to talk about “governance” in this and next week’s posts.

What is “governance”?

Governance and Management are two different things. Managing is what you think it is, where you manage the operations of your business, manage the finances, manage the staff ensuring they are given responsibilities and rewards, manage purchases and sales and quality of product and service. Managing is what gets things done in the business, in the most efficient and productive way, providing the results you want.

Governance on the other hand is about the oversight of the business, not the operations. Governance is about strategically setting the business’ direction, goals, limitation and borders. The best example of the difference I can give you is a practical example of when the business’ founder “gives up the reins.

Imagine the family business where the founder, perhaps the Parent started the business years ago. Typically he or she started on their own, doing everything from sales to purchasing and inventory. In that simple start-up he or she managed the business and the staff of one as well as set direction and decided what the business should and should not do overall. The Parent decided what markets and products they got into and what they would not and why; they started hiring staff and worked out what type of people they would hire and how they should be treated; and, in time, they worked out what were the “right things to do” in the business.

Then, as they expanded the business they brought in family members, sons and daughters, to help in the business. These offspring worked in the business to learn the ropes (even if they might have gone to university or college to learn new and more professional techniques). Eventually, sons and daughters took up management positions, they managed the sales team; or looked after the finances and investments; they hired, fired and fired and trained and rewarded staff; they looked after inventory and production and service.

Then one day the Parent decided to take their hands off the day to day business, while still being involved. The eldest daughter was appointed in charge of the business – they might have given her the title of CEO or MD or General manager, or just “Boss”.

At this point the governance of the business and the management of the business diverged. The Parent represents “governance” while the children are “managers”.

And the difference?

Can you imagine what would happen if eldest daughter decided to hire cheap labour against the business values of quality staff and quality rewards? Or decided to buy cheaper materials from overseas when the business had always worked on supporting local quality suppliers? Or how about if she decided to branch out from selling hand-crafted toys to cheap plastic toys?

Yup, Dad or Mum would be on her like a ton of bricks. She would have to provide strong arguments about why policies and direction should be changed. Anything else in the operations, the hours they opened, the (local, quality) freight contractors she chose, which (local) bank she opened an account with, even the number of (quality, properly rewarded) staff she hired would have been her domain.

This is the difference between governance and management. Governance looks after policy and direction that affects brand and vision. Governance looks after the words in the brackets above while management looked after the actions around those bracketed words.

When Mum or Dad started the business and performed the functions of both governance and management, they were able to informally decide on both because in one person governance and management go hand in hand as two sides of the same coin. As soon as different people from the founders are appointed into management, the two sides of the coin, residing in two different people, need to co-ordinate and work together for the sake of a better business.

Establishing the proper framework of governance in a family business can improve business performance. As importantly, it sets out and defines the expectations of all the family members involved in the business, whether as “Board” members, owners (shareholders), active managers, or workers in the business.

Family members don’t always agree on everything, especially as the pace of business life increases with new technology, new regulations and new ideas. Many a family business have been destroyed by family disputes. Families need to see that the business is actually separate from the family and needs to be structured professionally.

Here are ten things you should create as a framework of governance in your family business:-

  1. Establish who in the family effectively makes decision on strategy and major business policies. The family members need to represent various viewpoints, not just Mum and Dad. They need to be capable of resolving disputes and “talking through” decisions and becomes the reference group for strategy and policy. They should decide on the big things in the business – will it have a major and ongoing effect? Will it affect the future? Is it central to the brand of the business, its mission and vision?
  2. Establish a small Board that is capable of working well with the above family members and putting through their wishes and decisions professionally. It might help if there are one or two independent non-family members on the Board, expert in a field of the business or as experienced Board members.
  3. Appoint the best person to be CEO, not necessarily “the eldest”. Give consideration to a non-family member, but ensure that they, and the Board, have a very tightly drawn up description of responsibilities so that the non-family member is not put under unnecessary pressure by family members.
  4. Specifically develop governance rules defining what the Board can and cannot do, and what the CEO has full authority to do, along with appropriate measurements and guidelines. Ensure the Board or the family reference group is prohibited from encroaching on operational management.
  5. Develop a clare vision and mission that everyone understands well enough to become the charter describing the direction of the business, and how it should behave to get there.
  6. Develop a clear Risk Management Plan which identifies key business risks, their symptoms s that they can be predicted, and strategies about what to do as they occur.
  7. Hold regular Board meetings, with the CEO in attendance, run professionally to an agenda, where business decisions are made logically after all the pros and cons are discussed, and recorded. Keep to the strategic decisions!
  8. Develop system to report on business performance in a timely manner – nothing worse that family members feeling out of touch – identifying and reporting on key performance indicators for the business as well as predictive strategies to correct and improve performance.
  9. Develop a system of financial and management controls and – for everyone’s sake – appoint auditors.
  10. Hold an annual “CEO and Business Performance Review” and openly and transparently look at KPI’s, measures about performance of responsibilities and so on.

A family business is no less complicated than a public concern, why not apply similar frameworks?

Next week, I’ll be talking about whether your SME needs a Board. Your SME may be a family business as discussed here, or it might be just you as owner and manager (not unlike the “Parent” described above), or it might involve a number of unrelated partners. SME’s such as this can benefit from having an effective Board to provide governance support, even to you as sole owner-manager.

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