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Instituting Corporate Governance in Emerging Giants and Diversified
Family Business Groups
Establishing a clear, shared understanding of the separate functions
of the ownership, board, and management is vital to effective
corporate governance in diversified family business groups of
companies - all the more so because family members often wear
multiple hats, functioning as owners, directors, and managers.
While
the direct involvement of the family on multiple levels complicates
the system, it also provides an important link between the different
areas of governance. This built-in link, combined with a positive
development of family ties and relationships, can fundamentally
change the dynamic of trust that pervades the governance system. A
well-functioning system helps build trust within the family, and a
good family dynamic, in turn, becomes an asset to the business
because it enables each separate piece of governance to function
better and add more value while remaining aligned with the other
components of the governance system.
The
extent to which trust is cultivated directly between the controlling
owners and the non-family management will determine how formal
governance practice becomes and whether the family can continue to
create effective agency in governance.
Many
prominent family business groups face five special challenges which
have to be addressed not only from the Family Governance side but
also from the Corporate Governance side. These are:
1.
Succession: Due to the diversified nature of many family business
groups and the quantity and variety of business units that they own,
it can become increasingly difficult to find next generation family
members who are sufficiently able and well trained, and at the same
time willing and sufficiently patient to take over the leadership of
the numerous business units which such large groups possess at a
time that is suitable to the current generation. Careful planning
for succession even from the Corporate Governance side will prove
valuable.
2.
Diverging interests: It is common for family considerations to
diverge from company interests particularly as future generations
move in. As future generations take over dilution of family loyalty
takes place as second and third cousins become the norm. At that
point there is no place for incompetent family members and no place
for compromising family loyalty with bad performance. It is prudent
to identify possible points of divergence and to deal with them
before they become damaging. If implemented correctly, Corporate
Governance will help to improve transparency, create clearer
performance parameters, reduce conflicts of interest and improve
objectiveness in decision making.
3.
Non-family executives: The growing importance of specialist skills
requires the recruitment of non-family executives who frequently are
reluctant to be subordinate to less competent family members. Well
thought out and credible personnel policies are important. As family
loyalty dilutes and non-family executives become more prevalent in
the management of business units, Corporate Governance will ensure
the right checks and balances between ownership and management.
4.
Narrow perspectives: In a fast changing competitive environment it
is valuable to introduce broad outside and objective perspectives
into the decision making process for Family Business Groups. This
sometimes tests the flexibility of family entrepreneurs. However, it
enables top management to engage more in constructive conflict by
offering informed but differing points of view. It also improves
decision comprehensiveness by adding richness to discussions and
gets owners to think outside the box. It also helps top family
members to see the business from a neutral unbiased and balanced
perspective which does not give advantage to any particular family
member who has an intrinsic interest in the Group It also extends
the family’s informal strategic networks.
5.
Shortage of capital: Sometime it may prove difficult to provide
sufficient capital to take advantage of technical, process or
operational improvement without diluting family control. Careful
financial planning is vital.
Prudent and early consideration of the appropriate governance
structures and mechanisms will contribute substantially to the
satisfactory resolution of these issues.
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What are the Benefit of Corporate Governance to Emerging Giants and
diversified Family Business Groups of Companies?
Instituting Corporate Governance will:
1.
Enhance overall Group performance, including profitability,
preparing for further growth, and so helping to secure new business
opportunities when they arise.
2.
Gain better access to outside capital than other poorly governed
peers. Being more attractive to local and foreign investors and
lenders would enable faster growth and reduce vulnerability to
financial crises. According to a recent global investor opinion
survey, investors are ready to pay a premium of as much as 25% for
companies exhibiting high governance standards.
3.
Strengthen boards through appointment of more skilled independent
directors or advisory boards.
4.
Curb on techniques that protect failing management teams
5.
Increase the Group's ability to identify and mitigate risks, manage
crises and respond to changing market trends.
6.
Command higher valuations,
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In this Knowledge Area you will find a list of
useful published knowledge and
insights from GEGN about Corporate Governance with special
references given to Family Businesses and Emerging Giants. You can browse through the material and
choose knowledge according to your area of interest:
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Nobel Mantrich Global Emerging Giants Network.....
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