Family businesses are a prominent feature of the New Zealand economy and an estimated 50% of businesses are family owned [i].
These businesses can develop over many generations, but with growth can come uncertainty – this is where governance can help. Along with our partner, the Institute of Directors, we’ve put together some tips for ensuring your family business is in the best shape for the future.
Speaking with ASB Head of Capital Solutions, Fergus Lee, he mentions that “while a family business is often influenced by generational thinking, it should still be thought of as its own entity.” With this in mind, succession planning should be viewed in the same light as proper business planning and there needs to be clear alignment between the interests of family members and the interests of the business.
The 5 Cs of Family Business
Here are 5 things to consider when thinking about the future of your family business.
- Capital - The ownership structure of a business can influence what the long term outlook for the organisation is. In many cases, parents might own the business and have certain expectations which can put strain on family relationships when it comes time to retire. Often family ownership of a business can allow success to be defined on their own terms – what this means to the business should be considered when planning for the future. Is success simply passing the business on, or does it mean growth?
- Control – Are decisions made for the benefit of the business itself or are there family members with their own interests influencing decisions? Alignment is the key for success and governance can help define shared goals and vision for the organisation and ensure that these are being met.
- Careers - Often succession planning for a family business may be at odds with the career goals of family members and others involved in the organisation. The ability to retain specialist knowledge can be very important and this needs to be considered when roles are being appointed or family members promoted.
- Conflict - Decisions are not always balanced. There can be conflicting views about company goals, or the need to change. Growth can be stifled when family interests are not aligned with the interests of the business.
- Culture - The strength of family businesses can be their adaptability, ingenuity and passion. The cultural values of the business, often built up over generations, are the core principles that have guided the business from day one. Good governance practice ensures that culture continues to drive aligned decision making and planning.
The importance of governance
It’s clear that alignment is the key to successful growth and the long term sustainability of a family business. Governance takes the emotion out of this, and can also help provide a clear direction for the business, and ensure that its best interests are being met.
Some family members may want to actively develop the business, but some may just want to keep the status quo. As well as this, there is a need to consider the individual needs of family members to ensure these are balanced by the needs of the business – everyone needs to be engaged and it’s important that clear roles are defined early on.
While a family board might be the first step towards good governance practices, having independent directors can be very beneficial. Independent directors bring outside perspective which can often provide the thinking needed to do what’s best for the business in itself. The board has the added benefit of holding the senior management team accountable to the business, something that can hugely influence how smoothly it operates. Where there are complicated family relationships affecting the decision making capability of the business, the board can help mitigate these issues and start to shift entrenched thinking.
To find out more, refer to the IoD’s guide to setting up an advisory board.
With an effective board in place, succession planning for the future of a family company can be a much smoother process. A structure in place to provide for the best interests of the business will help to balance the needs of the family members and make a sometimes complex process much easier.
This process can take a long time, and often it’s put to the side because of a perceived lack of time, emotional attachment or fear. This is where a board can help in making this less emotional, and more strategic. While this process can be seen as something to think about in the future, the best time to start thinking about it is now. Read the IoD’s plan for succession guide to find out more.
For more information about managing relationships and succession planning for family businesses, visit the Institute of Directors website, get in touch with your ASB Relationship Manager, or for large organisations considering succession planning, speak to Fergus Lee, Head of Capital Solutions.