Posted: 06 Jun. 2019 5 min. read

Governance: Family businesses are different

Family businesses are different, and their differences from other forms of enterprise, particularly around the issue of governance, need to be understood and accommodated, especially by chairs. Typically there is a much greater degree of emotion at play in a family enterprise and that emotion is, almost by definition, closer to the surface. While directors of PLCs and private equity houses are often dispassionate, family members feel an attachment to the business that runs deep, and this attachment extends across place, brand, product and purpose.

 

This emotional engagement can be a powerful differentiator. If harnessed positively, because customers and clients, employees and suppliers all recognise the passion owners feel about their businesses and are inspired and motivated by it. For other forms of business, it can be much harder to drive values and passion through to the day-to-day operations of the enterprise where they will be seen by stakeholders.

Famously, family businesses tend to have much longer corporate memories and are both more inclined and more empowered to take a longer-term view. There is also, unsurprisingly, a more direct link between the personal values of the business leadership and the values of the business itself. This pays dividends in areas such as employee retention, where family businesses typically fare much better than their rivals.

Family businesses often have more streamlined decision-making processes, especially where family members are directly involved in running the business. However, paradoxically, this can lead to an issue in encouraging agents – directors and managers – to behave like family members when none are present and, of more concern, to defer decisions until a family member is present or to regard decisions as only having been made when validated by a family member.

Not only can this focus on family lead to delays, but it can also stand as an obstacle to recruiting and retaining first-class management: what self-respecting, high-quality leader wants to join business where having the right name is the only real mark of authority? For this reason, some experienced chairs advise family members to set the tone, direction and goals for the business and then step back from day-to-day management.

Chairs can offer a lot in this area, and some families will even appoint a chair from outside the family, specifically to introduce a greater degree of independence and to leverage skills and experience from outside the current leadership group. However, in such instances, as well as being appropriately skilled and experienced, it is vital that the incoming non-family chair ‘gets’ the family and the business; that they understand the emotional and personal investments, the personalities and the heritage.

When the ‘fit’ is right, the independence of a non-family chair can be very powerful, both in terms of overcoming familial rivalries, jealousies and sleights and in channelling family members’ emotional engagement. Given the exposed position of a family chair and their need to speak up and when emotions threaten to damage the business, some experienced chairs argue that the best person to be chair of a family business is someone who ‘doesn’t need the job’: the capacity to deliver home truths from an independent standpoint and without fear of disfavour is essential.

The other major area of challenge for the boards of family businesses is succession and this can, of course, also become a highly emotive issue, reviving those long-standing discords mentioned previously and heightened by the unwillingness of senior family members to ever properly retire and give way to the succeeding generation.

One critical advantage that family businesses have is their capacity to be unconventional, to see how big businesses operate and decide to do things differently. This can be especially useful in looking at performance. This role often allocated to finance directors but, in truth, there are other individuals within the business who may have a better understanding of the economic drivers of the business, particularly where, for example, data management is a critical driver of success but where this lies outside the finance function. Family businesses don’t have to follow the herd and are therefore free to make their own decisions. 

So, family businesses are different, and, in an era when purpose and sustainability are increasingly coming to the fore, those differences are largely strengths that can deliver real advantage, provided the appropriate governance structures are in place and the boards and chairs are alive to them.

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Lizzie Hill

Lizzie Hill

Partner

Lizzie leads Deloitte's Private South West and Wales practice with extensive experience working with private companies across the spectrum, including start up/ scale up, PE backed and family owned businesses. Prior to moving to the Bristol in 2018, Lizzie led the Tax team in Cambridge for 8 years and before this worked for 9 years in Deloitte’s London office, specialising in advising Private business. Lizzie specialises in advising privately owned and family businesses, as well as individuals, families and business owners. Her tax capabilities span corporate, personal and shareholder tax, with particular expertise in the field of transactions, including demergers, acquisitions and reorganisations. Further areas of tax expertise include Business Property Relief and succession planning. Lizzie has significant experience in assisting companies as they prepare for IPO and is one of our specialists nationally in this area. Lizzie also sits on Deloitte’s UK Private Tax Executive.