Recently, we were asked to provide guidance on the existing governance structures within a family-owned business. The primary goal in doing so was to find ways within its existing business model to create channels which would foster peaceful ties among the various family members, so that they can best grow professionally as well as financially.

 

Ties among these members were clearly troubled. We began by defining clearly what the family's business model was. That, as it turned out, was the easy part. The deeper we probed, the more woes we unearthed, including internal fraud, transfer pricing and related party transactions for certain family members.

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In these circumstances, we would normally discuss such findings with the company's chief executive as soon as possible. But in this instance, we found that the chief executive's spouse was the source of those corporate woes. As such, we scanned the business' board members to see who might be the best person to deal with this quandary.

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Unfortunately, the existing board members were of no help either, as they were dysfunctional, having been appointed not because they were competent but because they were friends with the company's founding chairman. Clearly, the composition of the board was the first thing we had to review, as the existing board had no check and balance on the company's existing activities and, worse, management was finding it impossible to function with such blurred reporting lines. The company's management consists of mostly outsiders, as opposed to the board members, and so the former might be in jeopardy if it chose to challenge the abuses of power that were happening; existing board members felt no need to query the chief executive on the many grave issues festering within the business. No one would tell the chief executive what was hampering the company's strategic directions.

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Adding salt to these wounds were the company's inconsistent remuneration system, and scant plans to groom the company's future leaders. It did not have a single scheme to encourage directors to train, or at least attempt to raise the board's level of expertise and experience.

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Predictably, the business' so-called independent board members had become so chummy with the family in question that they would not speak openly about the latter's inappropriate ways and friction among the siblings. This was ironic because the whole point of having independent board members in any company is to balance out competing interests which are often not in the business' best interests and also to protect the rights of minority shareholders. This was clearly not so in this company; the independent directors did not act independently at all. This was due mainly to their being too comfortable in their positions, having served the company for more than 15 years.

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Eventually, we traced this company's key problem to there being poor communication among those in the business. To be precise, the sharing and relaying of crucial information was limited to a core group of family members, namely those sitting on the board and, then again, such information would only be that which the chief executive sees fit to share with them. Those family members who were not on the board would only learn of such information through the grapevine which was, understandably, aggravating and made them very anxious.

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In such a black-box scenario, the chief executive did not act on pressing issues such as staff dissatisfaction, regulatory matters or transfer pricing until management red-flagged these problems to him. That said, management never dared raise issues revolving around the chief executive's high-handed spouse.

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If this family business is to survive, the family concerned will have to hold fast to good, strong family values. It could begin with a key philosophy, that is, how to do business ethically and according to corporate best practices, as well as do proper succession planning for key positions within the company so that it can operate smoothly even during crises.

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If any chief executive thinks that only he can solve problems, that attitude will break any business especially if the chief executive doubles up as its human resources head. Good business sense dictates that rules must be recorded and observed irrespective of how junior or senior an employee of the company may be or how close to the family they are.

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Among the key areas that the board and management must spell out as rules to avoid conflict in family-owned businesses are employment, compensation, inheritance and re-investment.

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Besides the key concerns above, family-owned businesses begin splitting at the seams when they are no longer just run by the owners but evolve into sibling partnerships or cousin consortiums. If the family business structure is to survive and thrive through generations, clear governance structures need to be firmly written down and of course, implemented.