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Family Corporate Governance for Families in Business

This article is provided by Institute For Family Business (IFFB) 


Family-owned businesses, are the oldest form of business organization. In todays’ business world, family-owned businesses can be understood as any business, in which two or more family members, related by blood or marriage, have a majority ownership, and control of the business is within the family.  Notably, a vast majority of Small and Medium Enterprises (SMEs) in Kenya are family-owned. Considering, 17 million SMEs are registered in Kenya, employing 50 % of the workforce and 98 % of whom contribute 25 % of the countrys’ economic return. This important role of family-owned businesses in the economy cannot be underestimated.

 

Important Role – Generational Continuity

The crucial role played by family-owned businesses, is however often compromised by their high failure rate. It is widely acknowledged, that the family-owned businesses that survive the founder, and transition to the second generation are as few as 30%.  While only 4% progress to the third generation. John Ward a family-owned business scholar, at Kellogg business school, applauds family business as key in creation of wealth, and well-being in families and societies. These figures are a concern, as the continuity of family-owned businesses across generations, has significant bearing on the quality of life of current and future generations.  Their importance is further enhanced by the fact, that family-owned businesses form the backbone of the Kenyan economy, a trend replicated in national economies world-over.

 

Various explanations have been provided regarding the low incidence of continuity for family-owned business. The failure of these entities has been attributed, especially, to the failure by the business-owning families to embrace best practice in corporate (and family) governance. In addition, the general lack of appreciation, among business-owning families, that these entities, have certain unique dynamics, which ought to be understood, in the context of the specific family and the business. Such an appreciation is important, and enables the management of family-owned businesses assisted by existing tried and tested growing set of family-owned business management tools, and skills.  Such an effort would invariably immunize family-owned businesses ensuring continuity from generation-to-generation.  This is an opportunity many family-owned businesses are losing, resulting in the high failure rate.

 

In addition, some of the current conventional management practices applied by entrepreneurial owners, and their families, in managing and governing their business enterprises, do not address the inherently unique challenges presented by family-owned businesses. This is mainly because, family-owned businesses tend to retain elements of “familiness” in every layer of their organizations. 

 

Familiness”, is the set of dynamics which arise from the interaction between the family system, as a whole, the individual family members and the business.  It is the hallmark of a business as a result of the involvement of the owning family, and is a key ingredient in understanding family businesses. Familiness is a major differentiator between family and Non-family businesses.  An important ingredient in ensuring family-owned business success, familiness can spur the family business on, instilling a competitive advantage, it also has a downside. Family-owned business owners are therefore advised to embrace family business corporate governance to reap the benefits.

 

Paul Ouma a leading family business consultant at Institute For Family Business (IFFB) encourages Family-owned businesses to embrace Family Corporate governance.  He cites that it assists family-owned business, in ensuring longevity and harmony. The Strathmore Business School, faculty, states that adopting family business corporate governance enhances the quality of decisions in the various scenarios facing such businesses. The decisions which often have progressively huge implications both for the future, and unity of the family and the business, are then managed and put into perspective. The increasing incidence of family feuds, wrangles and even court battles noted recently in the media could be averted if good governance was adopted he says.

Family Charter

A Founder (or principal) in a family-owned business, who intends on having the family-owned business endure and prosper over generations, may wish to consider starting the governance journey. He may do this by instituting a Family Charter (a Constitution).  This is a recommended tool to support the delicate interphase of business and family. It would be a good starting point to master the challenges intrinsic to this form of ownership – family-business ownership.

 

The Family Charter are written principles and guidelines/rules that regulate and govern the relationship of the family with the business. It ensures the preservation and growth of co-owned family wealth.  The Family Charter guides and supports family-owned business continuity, management, ownership and transition from one generation to the next. As the family grows, from founder generation to sibling partnership to cousin confederation, and beyond growing into diversifying business conglomerate.

 

The Family Charter is a key family-owned governance tool that provides stability and differentiates the typical family-owned business from the likes of Cargill and Ford in the United States, Tata in India, Samsung in Korea, BATA and the Philip Ndegwa and Chandaria families in Kenya.  

 

Reasons for adopting family charters

  • To keep family ownership united and to forge a broad, strong and collegial family commitment to the future of the family`s business and family welfare.
  • To give the family business a strong foundation, foster the companies’ successful development, preserve the wealth and value created by earlier generations.  In the process build the confidence of non-family managers and business partners.
  • To keep the family together and reinforce family strength as family, preventing and managing conflicts over unnecessary misunderstandings.
  • To shape next-generation expectations for their roles in the business and make them future responsible owners-managers and leaders. 

Copyright © 2016 Institute For Family Business (IFB). All Rights Reserved.

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