Family Governance and the Sustainability of Family Business
Fiona Geng and Martin Kemp, Family Business Research Foundation
17th January 2024
Research shows that a large proportion of businesses are family-controlled. For example, in an early paper, Beckhard and Gibb Dyer Jr (1983) reported that 96 per cent (14.4 million out of 15 million) of businesses in the U.S. are family-controlled.[1] In the UK today, around 86 per cent of businesses are family-owned (IFB Research Foundation, 2021)[2]. And many of the longest surviving businesses are family-owned and make a vital contribution to national and regional economic development in the UK and across the world. For example, in his recent study of 100 centennial business families, family business researcher, Dennis Jaffe has shown how family values drive sustainability through philanthropy, impact investing, and corporate social responsibility.[3]
Family firms face challenges which have been the subject of much research over recent decades in fields as diverse as management and business studies, economics, sociology, anthropology, law, and finance. The Three-Circle Model of the family-business system developed by Tagiuri and Davis[4] is widely used to understand and analyse such systems (see Figure 1).
Figure 1 The Three-Circle Model of the Family Business System[5]
The family-business system consists of three overlapping groups: family members; owners; and non-family members of the system - for example, employees and managers. Ownership and management are clearly separated in publicly held and large corporations. But this separation is less clear in family-owned firms of any size and in most closely held small and medium-sized enterprises.[6]
Definitions of corporate governance have tended to focus on the business segment of the diagram above.[7] According to the Cambridge Dictionary, governance is defined as the way in which an organisation is managed at the highest level and the systems that are in place for doing this.[8] The Cadbury Committee (1992) defined corporate governance as “the system by which companies are directed and controlled”[9] and the G20/OECD Principles of Corporate Governance characterize it as follows:
“Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of a company are set, and the means of attaining those objectives and monitoring performance are determined.”[10]
By contrast, family governance relates to the family element in the Tagiuri and Davis’ three-circle diagram. According to Astracan and Botero (2021), it refers to
“…the making, monitoring, and adjudicating of rules for family members’ internal and external interactions and is exercised through a variety of decision-making bodies such as family assemblies or family councils”.[11]
The development of family governance structures and practices can help to manage or mitigate intra-family conflicts which can benefit for the business. A Family Business Research Foundation report published in 2019 highlighted a lack of systematic research on family-governance.[12] The Foundation subsequently commissioned Professor Isabel Botero, University of Louisville, and Dr. Claudia Binz Astrachan, Head of the Family & Business Program at Lucerne School of Business, to carry out new research on family governance with a central focus on the UK. The study included an international survey of 114 representatives of business families, 64 per cent of whom were based in the UK. Around half (51 per cent) had 500 or fewer employees and had been operating for an average of 131 years. The survey found that formal family governance mechanisms were widely applied, with 62 per cent and 65 per cent of respondents reporting that their family business had, respectively, a family council and a family constitution.
The study also included a series of in-depth case studies of large established family firms in the UK, Switzerland, U.S., and Mexico and other regions. Based on this evidence, the authors argued that a strong foundation of shared values, a common purpose, and trust-based family relationships facilitate the design and implementation of effective and sustainable family governance systems. The success and continuity of the this system hinges on the next generation’s involvement in family governance. Ownership competence allows family owners and stewards to make informed decisions that align family and business values and objectives. The family can play a key role in supporting family members in acquiring these competencies. While family governance journeys can look very different, they take time - ensuring that every family member’s voice is heard in the process is crucial in securing buy-in for the family governance system can be a lengthy process that can sometimes require outside help.
As well as sharing findings from their research, the report includes detailed guidance for family business owners, managers, and advisors to help them develop such arrangements and identify what works in different circumstances. The guidance is organised around six principles for good family governance (see Figure 2).
Figure 2 Six principles for good family governance
Source: Astrachan and Botero (2021)
1. Identify your objective(s)
This task is the first step in designing a holistic family governance system as it provides the clarity and the purpose of the governance mechanisms.
2. Make it holistic
This is to ensure the formal mechanisms and other elements are all aligned to serve the family governance system sustainably and effectively.
3. Refrain from using structural solutions for emotional issues
This helps to look at varied issues from a deeper level of the cause then to identify the key issues and find solutions that would truly solve the conflicts.
4. Assure Fit
Maintain the direction and ensure the systems align with the family’s shared values and goals as well as the level of family maturity.
5. Leverage the Process
The process of implementing family governance systems needs to be reviewed, revised, and evaluated to identify what best fits the family’s needs and context. It also needs to be explained to family members that are involved and affected, and everyone’s voice needs to be heard.
6. Involve and Educate Future Generations
The long-term sustainability of a family enterprise depends on successfully engaging future generations; business families with a transgenerational vision need to consider how they will educate and involve current and future generations of owners in the enterprise.
In summary, the report shows how developing a sound family governance system can benefit both the business family and the family business. One size does not fit all: business families introduce formal and informal family governance mechanisms for different reasons, at different points in time, and this heterogeneity means that governance arrangements need to be tailored to each business family’s particular needs.
The Family Business Research Foundation report, Business Family Governance 2.0: Leveraging Business Family Governance for Family Business Continuity, by Isabel Botero and Dr. Claudia Binz Astrachan, can be downloaded here.
REFERENCES
[1] Beckhard, R. and Dyer, W G Jr. (1984). “Managing Continuity in the Family-Owned Business”, Organizational Dynamics, summer, 12 (1); 5-12.
[2] IFB Research Foundation (2021). The State of the Nation: The UK Family Business Sector 2020-21. London: IFB Research Foundation. Available at: www.fbrf.org.uk/reports/state-of-the-nation-21
[3] Dennis T. Jaffe, Isabelle Lescent-Giles, Jamie Traeger-Muney, J. (2019). Social Impact in Hundred-Year Family Businesses: How Family Values Drive Sustainability Through Philanthropy, Impact Investing, and CSR.
[4] Davis, J.A. and Tagiuri, R. (1989).“The Influence of Life Stage on Father-Son Work Relationships in Family Companies”. Family Business Review; 2(1):47-74. doi:10.1111/j.1741-6248.1989.00047.x; and Tagiuri, R. and Davis, J. (1996). “Bivalent Attributes of the Family Firm”. Family Business Review; 9(2):199-208. doi:10.1111/j.1741-6248.1996.00199.x
[5] Source: johndavis.com/three-circle-model-family-business-system
[6] Cowling, M. (2003). “Productivity and Corporate Governance in Smaller Firms”; Small Business Economics; 20 (4); 335-344; Schulze W S, Lubatkin M H, Dino R N and Buchholtz A K, (2001). “Agency Relationships in Family Firms: Theory and Evidence”, Organization Science; 12 (2); 99-116.
[7] Howorth, C. and Kemp, M., (2019). Governance in Family Business Evidence and Implications. Available at: www.fbrf.org.uk/reports/governance-implications-evidence
[8] Cambridge Dictionary. Available at: dictionary.cambridge.org/dictionary/english/governance [accessed 23 October 2021].
[9] Cadbury Committee (1992). Report on Financial Aspects of Corporate Governance. London: Gee and Company Ltd.
[10] Financial Stability Board (2015). G20/OECD Principles of Corporate Governance. 5 September 2015. Available at: www.fsb.org/2015/09/cos_040401
[11] Astrachan, C. and Botero, I. (2021). Business Family Governance 2.0: Leveraging Business Family Governance for Family Continuity. London: IFB Research Foundation; p.5. Available here: www.fbrf.org.uk/reports/business-family-governance-2
[12] See note 7
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